EDITOR’S NOTE

 This is the first in a three- part article that will be published in the Standard in three consecutive editions. The author, John D. Boyle, is the managing shareholder of the firm of Boyle, Morrissey and Campo, P.C., an insurance defense firm, with offices in Boston, MA and Manchester, NH.

THE EXPANSION OF ATTORNEY’S FEES AWARDS IN MASSACHUSETTS  DECLARATORY JUDGMENT ACTIONS  

John D. Boyle

The Massachusetts Supreme Judicial Court has encouraged insurers to file declaratory judgments actions as an “efficient” method to resolve insurance coverage issues,[1] but the advantages of using declaratory judgment actions has been significantly undermined by recent Massachusetts appellate decisions awarding attorney’s fees to insureds. This article will review the developing caselaw in the context of the statutory provisions for auto insurance and declaratory judgment actions. Finally, the article comments on the issue of judicial law-making and the adverse consequences of awarding attorney’s fees that contradict the statement by the Supreme Judicial Court that declaratory judgment actions can be used to “quickly and efficiently” resolve insurance coverage issues.   

I. The Evolving Case Law

In the most recent case, Safety Insurance Company v. Day,[2] the Massachusetts Appeals Court awarded attorney’s fees against an auto insurer based on an “estoppel” even though the insurer had proved in the declaratory judgment action that there was no liability coverage for the accident.

In Safety, the insured’s roommate borrowed the insured car and was involved in a serious accident. The accident vehicle’s insurer, Trust Insurance Company, defended the suit for fourteen months until it paid its entire $100,000 policy limits and tendered the defense to Safety Insurance Company which insured the driver’s own car.  Safety defended the resulting suit for over a year before recognizing that, because of the “regular use” exclusion, there was no optional liability coverage.[3]

Safety continued to defend the tort action but filed a declaratory judgment action to have its coverage duties adjudicated. In the declaratory judgment action, Safety argued the its optional bodily injury coverage did not apply because of the insured’s “regular use” of the accident car, and that the insured’s excess insurer, Andover Companies, should drop down to provide coverage for damages in excess of the $100,000 Hanover policy. The tort case was subsequently settled by Safety and Andover for $700,000 under an agreement that required Andover to reimburse Safety if it prevailed in the declaratory judgment action. At no time was the insured required to pay any money for the defense of the tort action, or for the settlement of that action.[4]  

The trial judge in the declaratory judgment action ruled that the insured’s use of her roommate’s car was not sufficient to trigger the regular use exclusion and entered a declaratory judgment that there was coverage under the Safety policy.  On appeal, the Massachusetts Appeals Court agreed with Safety that the regular use exclusion did apply because of the frequent and consistent use of the accident car.[5] But, notwithstanding that Safety had defended the insured to the conclusion of the tort action, had provisionally paid its policy limits for the settlement of that action, and was correct in its position that there was no coverage based on the terms of its policy, the Appeals Court ruled that Safety was “estopped” to deny coverage, and, therefore, owed the insured attorney’s fees in the declaratory judgment action.

The Appeals Court correctly noted than an estoppel should apply only where there has been reliance and detriment caused by that reliance.[6] The delay by Safety in asserting its coverage position gave rise to reliance by the insured who, theretofore, had been defended for over a year without reservation. The Appeals Court, however, failed to explain how the detriment element of estoppel had been established. First, the Court noted that the insured had incurred attorney’s fees in defending the declaratory judgment action. But those fees did not increase because of Safety’s delay in asserting the coverage issue or because of Safety’s handling of the defense of the tort case. The insured’s attorney’s fees were solely to litigate the issue of the regular use exclusion, an issue that the insured lost. On this point, the Court ironically stated “the observation that she suffered no damages is not entirely accurate. Day was compelled to defend at her own expense a declaratory judgment action in which she would ultimately prevail.” That statement is erroneous for two reasons. First, as noted above, attorney’s fees incurred in the litigation of the declaratory judgment action were not damages or detriment caused by Safety’s defense of the tort action. And, second, it is bootstrapping of the most egregious kind to state that the insured “prevailed” in the declaratory judgment action where she lost the coverage issue and “prevailed” only because the court credits her losing coverage defense as “damages.”    

The other factor cited by the Safety Court as evidence of detriment by the insured is also demonstrably erroneous. The Court acknowledged that the insured lost no money by Safety’s conduct in the defense of the tort action. The insured paid nothing toward the defense and settlement of the tort case.  But the court cited as a relevant factor for the insured’s detriment the excess insurer’s detriment in paying a higher settlement because of Safety’s alleged mistake in giving the plaintiff’s attorney a confidential defense communication.  This is illogical because the contractual rights and remedies of the insured against Safety are entirely separate from the rights of the excess insurer against Safety. The insured suffered no prejudice because the excess insurer paid more than it should have to settle the case.  In other words, the Court justified an estoppel against Safety based on a detriment suffered by a party other than the insured who was asserting the estoppel, and then used the borrowed detriment as a basis for the award of attorney’s fees in favor of the losing party in the coverage litigation. The Court thereby created coverage-not provided by the policy terms-by an estoppel based on damages caused by the insurer to a party other than the insured.

The application of an estoppel against Safety on these facts was clearly wrong and the award of attorney’s fees in favor of the losing party on the coverage question was an unjustified expansion of the evolving caselaw on this issue. The Safety case was an expansion of a line of declaratory judgment/attorney’s fees cases starting in 1997 with the case of Preferred Mutual Insurance Company v. Gamache.[7]  The Gamache Court awarded attorney’s fees to an insured where the insurer refused to defend a suit covered by the policy.[8]  In 1999 the reasoning of Gamache was expanded in the case of Rubenstein v. Royal Insurance Company of America to apply to commercial policies and to declaratory judgment suits brought by either the insurer or the insured.[9] Both the Gamache and Rubenstein cases awarded attorney’s fees based on the insurer’s breach of the contractual duty to defend. In 2004, however, the Gamache/Rubenstein contractual breach principle was abandoned in Hanover Insurance Co. v. Golden.[10] In the Golden case, the Court imposed attorney’s fees against an insurer that had acted in good faith and had not breached any duty owed under the contract.

In the Golden case, the insurer had filed a declaratory judgment action to determine whether there was a duty to continue to defend the insured after the coverage limits on a standard form auto policy had been tendered to the plaintiff.[11]  At the time, this was an open question in Massachusetts which had been answered inconsistently by several Superior Court judges.[12]  Indeed, the insurer, Hanover, had previously obtained a declaratory judgment in a similar case that there was no continuing duty to defend after the tender of policy limits.[13]  At the trial court level in Golden, however, a Superior Court judge ruled that Hanover could not terminate the defense unless the case was settled.  Accordingly, Hanover continued to provide defense counsel to the insured until the tort action was finally settled.

Following the conclusion of the tort action, Hanover successfully defended the 93A claim which had been asserted by the insured as a counterclaim in the declaratory judgment action.  Following a trial, the 93A trial judge ruled that Hanover had not breached the insurance contract and had not violated any statutory duty owed to the insured.[14]   

On appeal, the Supreme Judicial Court affirmed the ruling that Hanover had not violated any contractual, common law or statutory duty owed to the insured by filing a declaratory judgment action to determine coverage. Notwithstanding the complete exoneration of Hanover, however, a divided Court ruled that the insured was still entitled to attorney’s fees incurred in responding to the declaratory judgment action.  In the majority opinion, Justice Spina opined that the auto liability policy provided “litigation insurance” that provides for the reimbursement of litigation expenses of the insured.[15]  Justice Spina further stated that the insured “deserves reimbursement” of attorney’s fees irrespective of the absence of any wrongful conduct by the insurer.[16]   

The expansion of the right to attorney’s fees to cases where the insurer successfully proves that there is no coverage under the policy terms, as in the Safety case and to cases where the insurer, while wrong on the coverage issue, has complied with all its statutory and contractual duties, as in the Golden case, makes the potential costs of using declaratory judgment greater than the benefits for insurers. Furthermore, in addition to the pragmatic considerations, from an analytical standpoint, it is difficult to justify the judicially created expansion of the right to attorney’s fees. The caselaw precedent on the award of attorney’s fees and on the application of the estoppel principle does not support the Safety and Golden decisions. Moreover, these decisions create contractual rights in an area closely regulated by other branches of state government and outside of the traditional limits of judicial jurisdiction.

The legal basis for expanding the right to attorney’s fees in declaratory judgment actions to coverage by estoppel and to law abiding insurers, does not have support in the mandated insurance policy form, the declaratory judgment statute or the case law on the award of attorney’s fees in Massachusetts.[17]

EDITORS NOTE: this article will continue in next week’s edition of the Standard. The next part will address the award of attorney’s fees against insurers in the context of the highly regulated Massachusetts auto policy, and the history of the Massachusetts Declaratory Judgment Statute.  

EDITORS NOTE: This is the second part of a three part article:

In last week’s edition of the Standard, the author reviewed the evolving caselaw by Massachusetts appellate courts in awarding attorney’s fees against Massachusetts insurers even when there had been no breach of the insurance contract and no bad faith conduct. In this part the author discusses this issue in the context of the highly regulated Massachusetts auto policy and the Massachusetts Declaratory Judgment statute. 

 The author, John D. Boyle, is the managing shareholder in the insurance defense firm, Boyle, Morrissey and Campo, P.C.

II. The Massachusetts Auto Policy

The starting point to examine the rights of the insured against the insurer is the insurance contract.  The auto insurance policy in Massachusetts is the product of numerous executive and legislative branch mandates.  The auto policy form is mandated by the Massachusetts Division of Insurance pursuant to statutory authority.  All Massachusetts auto insurers must issue the policy form approved by the Division of Insurance.[18] The rates that the auto insurer can charge for the mandated policy is likewise mandated by the Division of Insurance after the Attorney General participates in rate hearings.[19] A violation of the statutory provisions in regard to rate setting hearings subjects the auto insurer to civil and criminal penalties.[20]

The auto insurer’s marketing of the mandated auto policy with the mandated rates is the subject of numerous statutes and administrative regulations.  The policy must be sold to minors and high risk insured’s involuntarily.[21]  The minimum coverage amounts are mandated for bodily injury and property damage liability as well as for Personal Injury Protection and uninsured motorist coverage.[22]  For each of these four mandatory coverages there are comprehensive statutory provisions.[23]  The auto insurer must also sell mandatory additional coverage amounts if requested.[24]  There are similar regulatory statutes for most of the other eight optional coverage parts.[25]

After the insurer issues the mandated auto policy form for the mandated price to the mandated insured, the insurer is subject to other statutes and regulations on renewing or canceling the policy.[26]

In dealing with claims under the policy the auto insurer is subject to many other statutes and regulations by both the Division of Insurance and the Attorney General.[27]  The auto insurer must promptly disclose coverage limits to claimants or be liable for a statutory penalty and attorney’s fees.  The insurer is not allowed to deny compulsory coverage even if the insured made material misrepresentations in applying for the policy that increased the risk exposure.[28]  The insurer is prohibited from denying compulsory coverage even if the insured refuses to cooperate in the defense of the claim.[29]  The insurer cannot deny coverage based on the insured’s failure to provide timely notice of an accident without proof of prejudice.[30]  The insurer has the burden of proof to show lack of consent, and permissive use by someone other than the named insured is presumed.[31]

The violation of prescribed rules for handling claims subjects the auto insurer to extra-contractual liabilities.  The Legislature has provided a detailed statute describing and defining unfair claims practices for insurers.[32] The Attorney General, acting under legislative authority, has prescribed that these unfair claims practices are per se unfair and deceptive trade practices under the Consumer Protection Act, G.L.ch. 93A.[33]

In addition to liability claims from insureds[34] and third party claimants, the auto insurer also is subject to liability to medical providers and other vendors. For example, medical providers have a direct right of action against the auto insurer when the patient’s medical bill covered by PIP is unpaid.[35]

After the auto insurer settles a claim, it must comply with other lien and notice statutes or face additional extra-contractual liability.[36]  

The cradle to grave regulation of the Massachusetts auto policy leaves no room for meaningful negotiation of terms or price with the insured. Traditional notions of freedom of contract are absent. Indeed, the auto policy is the antithesis of the adhesion contract. There is no contact that is more comprehensively regulated in Massachusetts. 

Nowhere in the mandated policy form or in any of the numerous statutes or administrative regulations governing auto insurance is there any provision for the creation of coverage based on estoppel or for the award of attorney fees against an insurer that had honored its agreement under the contract and complied with all statutes and regulations.

There is, likewise, no basis in common law contact principles for the recognition of an attorney’s fees obligation not found in the text of the contract or in recognized damages for breach of contract.  The question becomes, therefore, whether authority for the creation of this attorney’s fee duty exists under some statute or case law precedent.

III. THE DECLARATORY JUDGMENT STATUTE

The Massachusetts Declaratory Judgment Act, G.L. c. 231A, was enacted in 1945 and was modeled after the Uniform Declaratory Judgment Act.[37] Section 1 of the Act permits courts to “make binding declarations of right, duty status and other legal relations.”[38]  Section 2 specifically allows the Act to be used to “secure determinations of rights, duty status under…written contracts.”[39]  This provision was construed to allow insurers to obtain declarations of rights with respect to the duty to defend under liability policies.[40]  The purpose of the Act is “remedial” to remove uncertainty and insecurity with respect to rights.[41] In several cases, the Massachusetts Appellate Courts have instructed that the declaratory judgment procedure is the correct method to resolve insurance coverage disputes.[42]

The procedures for declaratory judgment actions are set out in Massachusetts Rule of Civil Procedure 57.[43] The reporter’s notes for Rule 57 state that the declaratory judgment action “does not effect any essential change in Mass practice.”[44]

The Act makes no provision for the recovery of attorney’s fees by the parties to a declaratory judgment action.  Section 7 allows for “costs” to be awarded in the discretion of the court.[45]  This section has been construed to not authorize the award of attorney’s fees.[46]

The declaratory judgment action in Massachusetts is subject to the control of the legislature and, indeed, was unknown at common law.  It is entirely a creation of statute both in Massachusetts and in most other states. Massachusetts Courts have no constitutional power to create a process for declaring the legal rights of persons who have no common law cause of action.  Likewise, courts have no power to change or abolish the declaratory judgment process provided by legislation.

An appellate court’s role in a declaratory judgment action should be limited to construing the statute or reconciling ambiguities in the text of the statute.  There is no authority for a court to modify or amend the declaratory judgment procedure created by the legislature. 

EDITOR’S NOTE; THIS ARTICLE WILL CONTINUE IN THE NEXT EDITION OF THE STANDARD. IN THE NEXT PART THE AUTHOR WILL REVIEW THE TRADITIONAL RULE FOR AWARDING ATTORNEY’S FEES IN MASSACHUSETTS AND THE  CONCERNS THAT ARISE WHEN COURTS MAKE POLICY CHOICES IN THE  HIGHLY REGULATED AREA OF AUTO INSURANCE.

EDITOR’S NOTE: This is the third and last part of a three part article:

The two previous parts discussed the evolving  Massachusetts caselaw in the award of attorney’s fees against insurers in the context of the highly regulated Massachusetts auto policy and the Declaratory Judgment statute.

 The author, John D Boyle, is the managing shareholder in the insurance defense  firm of Boyle , Morrissey and Campo. PC.

IV.  THE AWARD OF ATTORNEY’S FEES IN MASSACHUSETTS

Massachusetts courts have long adhered to the “American” rule that, absent statutory authority, litigants bear their own costs for attorney’s fees.[47]  The legislature has provided for attorney’s fees in some statutes that apply to auto insurers.  For example, the most common claim against insurers is for the attorney fees provided in the Consumer Protection Act, G.L. c. 93A, Sect 9.  The trigger for attorney’s fees under this statute is unfair or deceptive trade practices.[48]  The Legislature and the Attorney General have specifically identified the conduct that constitutes unfair or deceptive trade practices for insurers.[49]

The insurer that fails to timely reveal liability coverage limits to a claimant is liable for a penalty and attorney’s fees.[50]  An insurer that fails to pay a medical bill covered by the compulsory Personal Injury Protection is liable to the vendor for attorney’s fees.[51]  The insurer must pay auto repair shops within ten days or is liable for penalties and attorney fees.[52]  The insurer is similarly liable for attorney’s fees for failing to obtain a timely repair appraisal.[53]  The insurer is liable to pay attorney’s fees for failing to make a reasonable payment on property damage claims.[54]  Finally, the insurer that fails to advise the insured of the use of replacement parts is liable for a per se unfair and deceptive trade practice under G.L. c 93A.[55]

In all the cases where the legislature has provided for the recovery of attorney fees against auto insurers, there is either unfair conduct or a breach of a statutory duty.  In no area has the legislature provided for an award of attorney’s fees against an insurer that - like Hanover in the Golden case - complied with all its contractual and statutory duties.[56] 

V.   PUBLIC POLICY ISSUES

A review of the Massachusetts automobile insurance contract, the declaratory judgment statute and the legislative policies for the award of attorney’s fees, reveals no basis for the award of attorney’s fees against an insurer that has complied with its contractual and statutory duties. 

The rational for the Court’s decision in Golden was not based on an interpretation of the auto policy or the declaratory judgment statute.  The Court, instead, cited several foreign cases and Insurance Law treatises.[57]  These foreign cases, however, involved factually distinguishable situations where insurers had failed to comply with their contractual obligations under liability policies.[58] 

In the Golden case, the Court reasoned that the insured “deserves” an award of attorney’s fees even where the insurer has acted fairly and in accordance with its duties under the policy.[59]  The insured “deserves” this monetary award not because of any policy of the Commissioner of Insurance or because of any legislative intention, but rather because a “special relationship” exists between the auto insurer and the insured.[60]  This is a vague phrase with no statutory pedigree.  The citation for the source of this “special relationship” is not the insurance policy or the Declaratory Judgment Act but rather two insurance treatises.[61]

The Court in the Golden case repeatedly cited the costs to the insured in litigating coverage disputes; “the focus is exclusively on the bottom line”; the “cost of compelling his insurer to honor the benefit of his bargain”; “reimbursement for his reasonable outlay”; “forced to defend Hanover’s action and incur legal fees.”[62]  This cost, however, is present in every declaratory judgment litigation to determine contract rights. Almost every party to a declaratory judgment action will be represented by an attorney. Since the determination of contractual rights is one of the specified purposes of the declaratory judgment act,[63] there is no rationale to award attorney’s fees in some, but not all, declaratory judgment actions.    

The legislature and the Division of Insurance must consider costs to the insurer together with benefits to the insured in formulating insurance laws.  Attorney’s fees that are not for the defense of the insured under the policy represent an extra-contractual cost that must be paid for outside of the insurer’s liability loss reserves. There is no basis to conclude that the legislature and the Commissioner of Insurance had not factored the costs of litigating coverage disputes into the premium paid for the policy.  Indeed, since the legislature has oversight over both the auto policy and the declaratory judgment procedure, it is better positioned to allocate costs. Likewise, the Commissioner of Insurance was presumably not ignorant of the history of coverage litigation under the Declaratory Judgment Act for the decades preceding the Golden opinion.  In view of this legislative and administrative oversight, the law of auto insurance is particularly appropriate for judicial restraint and deference. 

The probable consequence of the Safety and Golden decisions will be  a diminished incentive for insurers to file declaratory judgment actions to establish coverage rights.  In both the Safety and Golden cases the insurers would have saved money by simply denying coverage rather than filing a declaratory judgment action. Safety could have denied coverage and tendered the defense to the excess insurer without placing the insured at risk for either defense or indemnity costs. Similarly, the insurer in Golden had a good faith basis, supported by the advice of counsel, and prior trial court decisions, to simply tender its policy limits and deny further coverage.  The appellate cases are clear that under those circumstances, there would have been no 93A violation.

In most other cases, as long as the insurer has a good faith coverage position, the insurer might be better off to deny coverage and let the insured assume the defense, rather than to file a declaratory judgment action under the present attorney’s fees rule. Even if the insurer has to later pay the insured’s attorney’s fees incurred in defending a case, that exposure will almost always be no less than the fees that would be paid by the insurer for three attorneys-the tort defense attorney, the insurer’s coverage attorney, and the insured’s coverage attorney. And there would be cases where the insured would not litigate the coverage denial, and others where the coverage denial would drive down the settlement value of the case. In addition, the amount of the insured’s fees would almost always be less in the context of the discipline imposed when the actual client pays real market rate fees. When the attorney’s fees will be paid by the opponent, the rates, and the amount of work activity, are likely to be substantially higher than if the client is paying. Unfortunately, in many cases judicial review of fees is difficult and, therefore,  affords a minimal protection against excessive fee awards .

VI. CONCLUSION

 Policy choices in the area of  auto insurance law should be left to the legislature and to the Division of Insurance which can consider  the interests of both the insured and insurer and can better weigh costs and benefits. The heavily regulated area of auto insurance is a particularly inappropriate area for appellate courts to make policy choices.  In the absence of subject matter expertise, judicial policy making is inevitably inadequate.[64] 

The award of attorney’s fees against insurers that comply with their contractual duties may cause many insurers and their attorneys to reconsider the use of declaratory judgment actions when coverage disputes arise. As a perverse consequence of the costs imposed by the judicial expansion of attorney’s fees in declaratory judgment actions, the recommended use of such actions by the Massachusetts  Supreme Judicial Court, has been undermined.