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SJC-12655 SJC-12656
COMMERCE INSURANCE COMPANY vs. JUSTINA M. SZAFAROWICZ, special representative,1 & others.2
JUSTINA M. SZAFAROWICZ, special representative,3 vs. MATTHEW S. PADOVANO & others.4
Worcester. March 7, 2019. - October 1, 2019.
Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.
Motor Vehicle, Insurance. Insurance, Motor vehicle insurance, Insurer's obligation to defend, Interest. Practice, Civil, Wrongful death, Declaratory proceeding, Interest. Negligence, Wrongful death. Declaratory Relief. Interest. Escrow.
Civil action commenced in the Superior Court Department on January 21, 2014.
1 Of the estate of David M. Szafarowicz.
2 Matthew Padovano; Stephen Padovano; and Damion Szafarowicz and Alysha Szafarowicz, by their mother and next friend, Justina M. Szafarowicz.
3 Of the estate of David M. Szafarowicz.
4 Stephen Padovano and Kona Enterprises, Inc. 2
A motion to deposit money with the court or in an interest- bearing account was heard by Richard T. Tucker, J.
An application for leave to prosecute an interlocutory appeal was allowed by Ariane D. Vuono, J., in the Appeals Court, and the appeal was reported by her to a panel of that court. The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
Civil action commenced in the Superior Court Department on August 23, 2013.
Motions to stay were heard by David Ricciardone, J., and the case was heard by him.
The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
John P. Graceffa (Lawrence M. Slotnick also present) for Commerce Insurance Company. David R. Bikofsky & Michael K. Gillis (Joseph I. Rogers also present) for Justina M. Szafarowicz & others. Stephanie V. Corrao & Laura A. Foggan, of the District of Columbia, Richard J. Riley, & Peter C. Kober, for Complex Insurance Claims Litigation Association & another, amici curiae, submitted a brief. Kim V. Marrkand & Mathilda S. McGee-Tubb, for Massachusetts Insurance and Reinsurance Bar Association, amicus curiae, submitted a brief.
GANTS, C.J. These appeals present three issues that arise
where a motor vehicle insurer recognizes its duty to defend its
insureds in a wrongful death action, but does so under a
reservation of rights, and then brings a separate action seeking
a declaratory judgment that it owes no duty to indemnify its
insureds for damages arising from the wrongful death action
under the "Optional Bodily Injury To Others" provision of the
insurance policy. 3
As to these three issues, we conclude, first, that there
was no abuse of discretion in the judge's denial of the
insurer's motions to stay trial in the wrongful death action
until the question of coverage had been determined in the
declaratory judgment action.
Second, over the insurer's objection, the parties settled
the wrongful death action before trial through agreements in
which the defendants admitted to negligence, agreed that the
amount of damages would be determined through a damages
assessment hearing, and assigned all their rights under the
insurance policy to the plaintiff.5 In return, the plaintiff
agreed to release the defendants from liability and seek damages
only from the insurer. Because of the amount of damages
assessed (more than $5 million, plus prejudgment interest) and
because the policy obligated the insurer to pay postjudgment
interest, the insurer moved to deposit with the court the policy
limits and the accrued postjudgment interest under Mass. R. Civ.
P. 67, 365 Mass. 835 (1974), in an attempt to prevent the
continued accrual of postjudgment interest pending resolution of
the declaratory judgment action and the insurer's appeal in the
wrongful death action. We conclude that the judge did not abuse
5 We refer to these agreements as "settlement/assignment agreements" throughout this opinion. 4
his discretion in denying the insurer's motion to deposit these
funds.
Third, we conclude that, where the insurer timely objected
to the settlement/assignment agreements, and where it is
obligated to pay the accrued postjudgment interest on the
wrongful death judgment, the insurer may be bound by the amount
of that judgment only where a judge determines that the
settlement/assignment agreements were reasonable under the
circumstances. Here, the settlements were executed with no
determination of reasonableness. We therefore vacate the
wrongful death judgment and remand the case to the Superior
Court for a hearing on the reasonableness of the
settlement/assignment agreements.6
Background. The relevant factual and procedural background
is not materially in dispute. On August 3, 2013, shortly after
a verbal altercation at a bar in Leominster, David M.
Szafarowicz was struck and killed by a vehicle operated by
Matthew Padovano, who later pleaded guilty to voluntary
manslaughter in connection with the fatal incident. The vehicle
was owned by Matthew's father, Stephen Padovano, who had
6 We acknowledge the amicus briefs submitted by the Complex Insurance Claims Litigation Association and the American Property Casualty Insurance Association, and by the Massachusetts Insurance and Reinsurance Bar Association. 5
purchased an automobile insurance policy from Commerce Insurance
Company (Commerce).7
Justina M. Szafarowicz, David's mother, in her capacity as
special representative of David's estate (estate), brought a
wrongful death action against the Padovanos in the Superior
Court, claiming that David's death was caused by Matthew's gross
negligence in operating a motor vehicle that was negligently
entrusted to him by Stephen.8 Under the Commerce insurance
policy, Stephen was covered for bodily injury to others by
compulsory insurance in the amount of $20,000 per person, and by
optional insurance in the additional amount of $480,000 per
person.
Commerce acknowledged its duty to defend the Padovanos in
the wrongful death action under its policy.9 See Metropolitan
7 We refer individually to members of the Padovano and Szafarowicz families by their first names to avoid confusion, but we refer collectively to the Padovanos.
8 Justina, as special representative of her son's estate (estate), also claimed that Kona Enterprises, Inc. (Kona), which operated the bar where the incident took place, was negligent in failing to provide adequate supervision and security to David at its premises. The estate reached a settlement with Kona, and it is not a party to this appeal.
9 The Commerce Insurance Company (Commerce) motor vehicle policy at issue states:
"We [(Commerce)] have the right to defend any lawsuit brought against anyone covered under this policy for damages which might be payable under this policy. We also 6
Prop. & Cas. Ins. Co. v. Morrison, 460 Mass. 352, 357 (2011)
(Morrison), quoting Billings v. Commerce Ins. Co., 458 Mass.
194, 200-201 (2010) ("An insurer has a duty to defend an insured
when the allegations in a complaint are reasonably susceptible
of an interpretation that states or roughly sketches a claim
covered by the policy terms").
As to its duty to indemnify for damages, Commerce
acknowledged its duty to pay the $20,000 in compulsory insurance
(and ultimately paid the estate this amount) but issued a
reservation of rights regarding the $480,000 in optional
insurance. By doing so, Commerce effectively reserved its right
to refuse to indemnify the Padovanos beyond $20,000 for damages
arising from the wrongful death action if it were determined
that David's death was caused by Matthew's intentional act, and
was therefore not an "accident" covered by the terms of the
policy.10 See Morrison, 460 Mass. at 357, quoting A.W.
have a duty to defend any such lawsuit, even if it is without merit, but our duty to defend ends when we tender, or pay to any claimant or to a court of competent jurisdiction, with the court's permission, the maximum limits of coverage under this policy. We may end our duty to defend at any time during the course of the lawsuit, by tendering, or paying the maximum limits of coverage under the policy, without the need for a judgment or settlement of the lawsuit or a release by the claimant."
10Commerce also reserved its rights to refuse to indemnify on the ground that Matthew was not identified as a designated driver on the policy. 7
Chesterton Co. v. Massachusetts Insurers Insolvency Fund, 445
Mass. 502, 527 (2005) (duty to defend "is independent from, and
broader than, [the] duty to indemnify"); Three Sons, Inc. v.
Phoenix Ins. Co., 357 Mass. 271, 276 (1970) ("A reservation of
rights . . . notifies the insured that the insurer's [defense]
is subject to the later right to disclaim liability").
On January 21, 2014, approximately five months after the
estate initiated the wrongful death action, Commerce brought a
separate declaratory judgment action against the Padovanos and
the estate, seeking a declaration from the court that Commerce
had no obligation under its optional insurance coverage to
indemnify the Padovanos for the damages arising from the fatal
incident. The wrongful death action and the declaratory
judgment action were consolidated for discovery purposes only.
On April 21, 2016, less than three weeks before the trial
in the wrongful death case was scheduled to begin, Commerce
filed an emergency motion to intervene and participate in that
case pursuant to Mass. R. Civ. P. 24, 365 Mass. 769 (1974).
Commerce noted that, based on the summary of evidence proffered
by the prosecutor at Matthew's plea hearing, on the night of
David's death, Matthew and his girlfriend got into a dispute
with David at a bar and the staff asked the three to leave.
Matthew and his girlfriend went out the back door, where
Matthew's vehicle was parked, and David left through the front 8
door and walked into the bar's parking lot. Rather than depart,
Matthew returned in his vehicle to the bar's parking lot, where
he saw David and drove near him. David gestured toward Matthew,
who then accelerated his vehicle and ran over David, dragging
him for forty to fifty feet, killing him.
Commerce noted that, in the wrongful death action, the
estate's attorneys had presented a quite different description
of events that was consistent with their theory of negligence.
The estate's attorneys contend that when Matthew returned in his
vehicle to the bar's parking lot, he was frightened by unknown
persons who came from the bar with knives, and did not see David
when he ran over him.
Commerce argued that it should be permitted to intervene
because neither the estate nor the Padovanos had any incentive
to offer evidence tending to show that the incident was not an
accident, because all parties to the action "would prefer that
insurance coverage exist for this loss." Commerce wished to
ensure that, if a judgment were to issue in the wrongful death
action premised on the finding that David's death was caused by
Matthew's negligence rather than by his intentional conduct, it
would not be procedurally foreclosed in the declaratory judgment
action from litigating the dispositive issue whether David's
death arose from an accident. 9
The judge ordered that the wrongful death trial be
continued, and conducted a hearing on Commerce's motion to
intervene on May 4, 2016. In his decision denying the motion to
intervene, issued on August 22, 2016, the judge acknowledged
that Commerce had reason to be concerned about the risk of
"underlitigation" in the wrongful death suit -- which he
defined, quoting Pryor, W. Page Keeton Symposium on Tort Law,
The Stories We Tell: Intentional Harm and the Quest for
Insurance Funding, 75 Tex. L. Rev. 1721, 1722 (1997), as "a
plaintiff's choice to plead and prove negligence rather than or
in addition to intentional tort theories when, absent insurance
considerations, the plaintiff would either frame the case solely
as an intentional tort claim or emphasize the intentional tort
claim." The judge noted the "legitimate interest" of a
liability insurer in preventing improper underlitigation of tort
claims, and recognized that it would be "patently unfair" to
require Commerce to be bound by a jury's negligence finding in
the wrongful death action if it were denied the means to
challenge the validity of that finding.
But the judge also recognized the need to balance the
rights of the insurer with those of the insured. He noted,
first, that the Padovanos would be "severely compromised" in
their ability to defend themselves if their insurer were
permitted to actively participate in the trial and offer 10
evidence that Matthew intentionally struck David. Second,
citing concerns raised in Goldstein v. Gontarz, 364 Mass. 800
(1974), the judge noted that Commerce's participation would
alert the jury to the possible existence of insurance coverage
for the automobile that caused David's death, and to the
possibility that an insurer may therefore be responsible to pay
some or all of the damages if liability were found. Id. at 808
("Exposing juries to [evidence of insurance coverage] is
condemned because it is not itself probative of any relevant
proposition and is taken to lead to undeserved verdicts for
plaintiffs and exaggerated awards which jurors will readily load
on faceless insurance companies supposedly paid for taking the
risk").
Seeking to balance these considerations, the judge chose to
adopt a "carefully balanced procedural solution" crafted by the
Court of Appeals of Maryland in Allstate Ins. Co. v. Atwood, 319
Md. 247 (1990) (Atwood). The Atwood court concluded that, where
there is a risk of underlitigation, it is not appropriate to
allow the "insurer to intervene in the trial of the tort suit
against its insured," id. at 258, but leaving an insurer with no
legal avenue to challenge a potentially collusive damages award
would be contrary to "considerations of public policy and
fairness." Id. at 262. Therefore, the court ruled that "the
insurer should be able to bring a post-tort trial declaratory 11
judgment action" where the judge "would first determine, as a
legal matter, whether the issue, which was resolved in the tort
trial and which determines insurance coverage, was fairly
litigated in the tort trial." Id. If the judge were to
determine that it was fairly litigated, then there would be no
relitigation of the issue in the declaratory judgment action.
However, if the judge were to determine that it was not fairly
litigated, "then the insurer should be permitted to relitigate
the matter in the declaratory judgment action." Id. The motion
judge declared that this procedure would be consistent with our
holding in Blais v. Quincy Mut. Fire Ins. Co., 361 Mass. 68, 70-
71 (1972) -- that an insurer is bound by an underlying judgment
as to insurance coverage, so long as there is no "fraud or
collusion" -- with the declaratory judgment action determining
whether the tort action was indeed tainted by fraud or
collusion.11
After the denial of its motion to intervene, Commerce moved
to stay the wrongful death trial until after the question of
insurance coverage was resolved in the declaratory judgment
action. Another judge denied the motion.12
11Commerce does not appeal from the denial of its motion to intervene in the wrongful death action.
12Commerce filed another emergency motion on December 13, 2016, to stay proceedings of the wrongful death action until the 12
Shortly before the wrongful death trial was scheduled to
begin, the estate and the Padovanos entered into agreements to
settle the wrongful death suit. Under the agreements, Matthew
agreed that he "grossly negligently" caused David's injuries,
and Stephen admitted liability for negligent entrustment of the
vehicle. The parties agreed that damages would be determined in
a jury-waived proceeding. The estate agreed that it would not
seek to collect or enforce any judgment against the Padovanos
beyond the amount payable under their insurance policy, and the
Padovanos agreed both to assign to the estate all their rights
with respect to insurance coverage and to cooperate with the
estate in litigation related to insurance coverage.
Commerce timely objected in writing to the proposed
settlements, arguing that this type of settlement/assignment
agreement should not be permitted. Among the objections it
lodged were objections to the assignment of rights by its
insureds against the insurer; to consent to judgment in excess
of policy limits; and to the court's role in assessing damages,
if the estate were to request that a judgment enter as to the
amount assessed. Commerce also renewed its objection to the
denial of its motions to stay the wrongful death case until the
declaratory judgment action was tried.
declaratory judgment action had been fully litigated. That motion was also denied. 13
The same judge who had denied Commerce's motions to stay
overruled Commerce's objections to the settlement and to the
assessment of damages hearing, and conducted a hearing to assess
the amount of damages in the wrongful death action. On December
28, 2016, the judge ordered that judgment enter in favor of the
estate in the amount of $5,617,510. The judge later agreed to
reduce the judgment by $150,000, to reflect the $150,000
received in settlement from Kona Enterprises, Inc. (see note 8,
supra), and judgment ultimately entered, nunc pro tunc to
December 28, in the amount of $7,669,254.41 (damages in the
amount of $5,467,510 plus prejudgment interest in the amount of
$2,201,744.41).
Commerce filed a notice of appeal on January 26, 2017,
challenging the denial of its motions to stay the wrongful death
action so that the declaratory judgment action could be
adjudicated first, and the overruling of its objections to the
settlement.
On February 15, 2017, Commerce paid the estate $20,000, the
limit of its compulsory bodily injury coverage. On April 21,
2017, in an attempt to stop the accrual of postjudgment interest
on the wrongful death judgment during the pendency of the
declaratory judgment action and its appeal from the wrongful
death judgment, Commerce filed a motion asking the court's
permission to deposit with the court -- or, in the alternative, 14
to deposit in an interest bearing account -- the policy limit of
its optional bodily injury coverage ($480,000), plus already
accrued postjudgment interest, pursuant to Mass. R. Civ. P. 67.
Rule 67 provides in relevant part:
"In an action in which any part of the relief sought is a judgment for a sum of money or the disposition of a sum of money or the disposition of any other thing capable of delivery, a party, upon notice to every other party, and by leave of court, may deposit with the court all or any part of such sum or thing."
Commerce's obligation to pay postjudgment interest derives
from the provision in the policy where the insurer agrees:
"We will pay, in addition to the limits shown for Compulsory and Optional Bodily Injury to Others . . . [i]nterest that accrues after judgment is entered in any suit we defend. We will not pay interest that accrues after we have offered to pay up to the limits you selected."13
Given the amount of the wrongful death judgment, Commerce
alleges that, unless allowed to deposit these funds, it would be
obliged to pay postjudgment interest, at the twelve percent
annual rate of interest established by statute, see G. L.
c. 231, § 6B, accruing at a rate of over $920,000 per year from
the date of the judgment.
13 The policy language at issue is found in the standard Massachusetts automobile insurance policy, which is "prescribed by statute and controlled by the Division of Insurance." Ramirez v. Commerce Ins. Co., 91 Mass. App. Ct. 144, 147 (2017). As discussed infra, this provision of the standard policy was later amended, but the amendment has no effect on these cases. 15
Another judge denied Commerce's motion to deposit these
funds. The judge noted that in Davis v. Allstate Ins. Co., 434
Mass. 174, 183, 186 (2001), we held that, to stop the accrual of
postjudgment interest, the insurer must make an unconditional
offer of payment of the full policy limit, plus the accrued
postjudgment interest. Here, the offer of payment of the
optional bodily injury coverage limit was not unconditional;
Commerce would seek its return if it prevailed in the
declaratory judgment action. The judge, while acknowledging our
observation in Davis that an insurer "may be able to control its
postjudgment interest obligations by paying the policy limits
(with accrued interest) into court," id. at 187 n.13, concluded
that accepting a deposit reflecting a conditional offer to pay
would be inconsistent with the requirement that Commerce first
make an unconditional offer to pay the policy limits.
Commerce petitioned for relief from the judge's
interlocutory order pursuant to G. L. c. 231, § 118. A single
justice of the Appeals Court allowed Commerce's petition,
concluding that the issue "presents extraordinary circumstances
warranting an interlocutory appeal." We transferred both
appeals to this court on our own motion.
On February 21, 2019, during the pendency of these appeals,
another Superior Court judge resolved the declaratory judgment
action. After a jury-waived trial, the judge ruled that 16
Commerce has no duty to indemnify the Padovanos for any claims
arising from the optional bodily injury coverage of its
automobile policy because Matthew "decided to hit the
accelerator of the vehicle knowing to a substantial certainty
that the vehicle would strike David," and therefore David's
"injuries and death did not arise out of an accident under the
policy."14 As a result of that declaratory judgment, Commerce
has no obligation to pay any amount of the $7.7 million judgment
in the wrongful death action beyond the $20,000 it already paid
under its compulsory bodily injury coverage. But under the
terms of the policy, Commerce still has an obligation to pay
postjudgment interest on the judgment. The focus of these
appeals is now on the scope of that obligation -- that is, how
much in postjudgment interest Commerce must pay under the
policy.
Discussion. We address Commerce's three claims of error on
appeal.
1. Motions to stay. Commerce claims that the judge abused
his discretion in denying its motions to stay the proceedings of
the wrongful death suit action until its parallel declaratory
14The judge also ruled that Steven did not provide false information on his application for insurance by failing to list Matthew as a "customary operator." Because the judge found that David's death did not arise from an "accident," this ruling did not affect the grant of declaratory judgment to Commerce as to the issue of coverage for the events at issue. 17
judgment action could be tried and the issue of coverage
resolved. See Travenol Lab., Inc. v. Zotal, Ltd., 394 Mass. 95,
97 (1985) ("a motion to stay proceedings is ordinarily a matter
addressed to the sound discretion of the trial judge"). We
conclude that the judge did not abuse his discretion in denying
the stay.
"Where there is uncertainty as to whether an insurer owes a
duty to defend, the insurer has the option of providing the
insured with a defense under a reservation of rights, filing a
declaratory judgment action to resolve whether it owes a duty to
defend or to indemnify, moving to stay the underlying action
until a declaratory judgment enters, and withdrawing from the
defense if it obtains a declaration that it owes no duty to the
insured." Morrison, 460 Mass. at 358-359. An insurer who
provides its insured with a defense under a reservation of
rights is not entitled as a matter of law to a stay of the
underlying action so that the issue of coverage can be resolved
first in a declaratory judgment action. See 16 L.R. Russ & T.F.
Segalla, Couch on Insurance 3d § 232:65, at 232-90 (2005)
(Couch) ("An insurer suing for a declaratory judgment to
determine its obligation to defend a suit pending against the
insured does not, however, have the right to obtain a stay of
the pending suit"). 18
A judge deciding an insurer's motion to stay may properly
consider, among other matters, whether a stay will delay the
final resolution of the underlying tort action, initially by
proceeding first with the trial in the declaratory judgment
action and then, if the insurer were to prevail, by the need for
the insured to retain its own counsel if the insurer were then
to withdraw its defense. See Parking Concepts, Inc. v. Tenney,
207 Ariz. 19, 24 (2004) (en banc) (fundamentally unfair to
claimant to "be compelled to await the outcome of satellite
coverage litigation before seeking redress for his [or her]
injuries").15
It is also proper to consider whether disposition of the
tort action may be expedited, rather than delayed, by first
resolving whether an insurer would be responsible for paying all
or part of any settlement or judgment. See O'Bannon v.
Friedman's, Inc., 437 F. Supp. 2d 490, 496 (D. Md. 2006) (prompt
resolution of coverage issue in declaratory judgment action can
15It may also be relevant whether all parties to the underlying action are also parties to the declaratory judgment action and thus able to adequately represent their interests. See G. L. c. 231A, § 8 ("When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceeding"); 16 L.R. Russ & T.F. Segalla, Couch on Insurance 3d § 232:67, at 232-93 (2005) (observing that "concerns for stepping on the factual issues in the underlying action are, of course, lessened when all the parties to that action are parties to the declaratory judgment and able to litigate the point"). 19
"dispel doubt among the parties, . . . allow[] them to move
forward with settlement talks," and may, at times, "expedite the
resolution of the underlying complaint").
A judge may also consider whether trying the tort action
first might render the declaratory judgment action moot if the
insured were to prevail. See, e.g., Guaranty Nat'l Ins. Co. v.
Beeline Stores, Inc., 945 F. Supp. 1510, 1515 (M.D. Ala. 1996)
(where insured "could prevail in the underlying lawsuit . . .
the issue of whether [insurer] must indemnify [insured] would be
moot"; "[t]he time and effort the court and the parties would
have put toward resolving the issue would be wasted"); LabMD,
Inc. v. Admiral Ins. Co., 323 Ga. App. 906, 908 (2013) ("a
declaratory judgment action regarding an insurer's duty to
defend can be rendered moot where the underlying liability
lawsuit has proceeded to judgment").
In addition, a judge may consider whether the insurer would
be unfairly prejudiced in the adjudication of the declaratory
judgment action if it were to be bound by a finding made in the
adjudication of the underlying tort case. See North Star Mut.
Ins. Co. v. Kneen, 484 N.W.2d 908, 911 (S.D. 1992).
Here, the judge who denied Commerce's motion to intervene
protected Commerce from the risk that it would be unfairly
prejudiced by a finding of negligence in the wrongful death
action by allowing Commerce to ask a court for a determination 20
whether that issue was fairly litigated in the wrongful death
action. And, in fact, we know now that Commerce was not
prejudiced in the declaratory judgment action by the parties'
stipulation to negligence because the judge in that action
independently determined that David's injuries and death were
caused by Matthew's intentional conduct, not an accident,
without making any mention of the stipulation in the settlement
or giving any apparent weight to it. Where Commerce was
protected from prejudice and where a stay would have delayed a
wrongful death trial that had already been continued because of
Commerce's emergency motion to intervene, the judge did not
abuse his discretion by denying the motions to stay.
2. Motion to deposit funds. A motion to deposit a sum of
money with the court pursuant to Mass. R. Civ. P. 67 is
generally left to the sound discretion of the judge. See
Augustine v. Rogers, 47 Mass. App. Ct. 901, 903 (1999). Where
Commerce's offer to deposit its policy limit for optional bodily
injury coverage was conditional, that is, Commerce wanted
$480,000 of the deposit returned if it prevailed in the
declaratory judgment action, we conclude that the judge did not
abuse his discretion in denying Commerce's motion to deposit
these funds with the court (or, in the alternative, to deposit
them in an interest-bearing account) for the purpose of stopping
the accrual of postjudgment interest. 21
In Davis, 434 Mass. at 175, 178 n.7, the vehicle that
struck and injured the plaintiff was insured by Allstate
Insurance Company (Allstate) under the standard Massachusetts
automobile insurance policy, which contained the same provision
as the Commerce policy regarding the payment of postjudgment
interest. Allstate defended its insured at trial in accordance
with its duty to defend under the policy. Id. at 175. Before
trial, Allstate offered the plaintiff payment of the $25,000
policy limits in exchange for a release of its insured from all
liability relating to the accident. Id. The plaintiff
declined. Id. After a jury trial, judgment entered against the
insured in an amount slightly greater than $400,000 on October
18, 1990, well in excess of the $25,000 policy limit for bodily
injury to another person. Id. at 175-176.
On July 1, 1996, after the Appeals Court affirmed the
judgment and Allstate did not seek further appellate review,
Allstate made an unconditional payment to the plaintiff of the
$25,000 policy limits. Id. at 176-177. The plaintiff claimed
that Allstate was liable under the policy for postjudgment
interest accrued from the date of judgment to the date that
Allstate tendered the unconditional payment of the policy
limits. Id. at 177. Allstate claimed that it was not required
to pay any postjudgment interest because it had offered its
policy limits before trial, albeit on the condition that the 22
plaintiff release its insured from all liability. Id. at 177-
178.
We held that, under the postjudgment interest provision of
the policy, where Allstate owed its insured a duty to defend him
in the lawsuit, Allstate was required to pay the interest that
accrued after judgment was entered until it "offered to pay" the
policy limits. Id. at 183. Interpreting the insurance policy
at issue "according to the 'fair meaning of the language used,
as applied to the subject matter,'" id. at 179, quoting Bilodeau
v. Lumbermens Mut. Cas. Co., 392 Mass. 537, 541 (1984), we
concluded that "offered to pay" did not mean "offered to settle"
Davis, supra at 183. Rather, "Allstate was required to make an
unconditional offer to pay the policy limits in order to
terminate its express obligation to pay postjudgment interest."
Id. Where it made only a conditional offer until it
unconditionally paid the policy limits on July 1, 1996, we held
that Allstate was required to pay postjudgment interest from the
date of judgment through that date. Id. at 183-184.
In Davis, we observed that "[t]he clear majority of courts,
interpreting a standard interest clause in a motor vehicle
liability insurance policy, have held insurers liable for
postjudgment interest on the entire amount of the judgment,
notwithstanding the fact that the policy limits may cover only a
portion of the judgment." Id. at 181. We explained that this 23
rule serves to protect injured plaintiffs from unreasonable
delays by insurers or, where delay arises from an appeal, to
compensate the plaintiffs for that delay. Id. at 182. And we
further observed that, while interpreting the policy in
accordance with its plain language imposes a burden on insurers,
it is not an "unfair burden," where the insurer "remain[s] in
control of both the tolling of interest and the litigation" and
can toll the accrual of interest at any time by offering to pay
the policy limit. Id., quoting Fratus v. Republic W. Ins. Co.,
147 F.3d 25, 29 (1st Cir. 1998).
Citing the dissenting opinion in Davis, Commerce argues
that we should revisit Davis to the extent that it unfairly
penalizes an insurer for pursuing a meritorious appeal on behalf
of the insured, where "the interest that mounts on the judgment
during an appeal will soon eclipse the policy limit." Davis,
supra at 193 (Sosman, J., concurring in part and dissenting in
part). We decline to revisit the Davis court's interpretation
of the language of the standard automobile policy regarding
postjudgment interest. Although "[t]he principle of stare
decisis is not absolute . . . adhering to precedent is our
'preferred course because it promotes the evenhanded,
predictable, and consistent development of legal principles,
fosters reliance on judicial decisions, and contributes to the
actual and perceived integrity of the judicial process.'" Shiel 24
v. Rowell, 480 Mass. 106, 108 (2018), quoting Payne v.
Tennessee, 501 U.S. 808, 827 (1991).
The principle of adhering to long-standing precedent is
particularly pronounced where "the Legislature has declined to
exercise its authority to overturn the court's interpretation of
a statute." Commonwealth v. Rivera, 445 Mass. 119, 128 (2005).
In 2016, the standard Massachusetts automobile insurance policy,
which is prescribed by statute, was amended to reduce the scope
of postjudgment interest that an insurer is required to pay. It
now provides that interest will accrue only "on that part of a
judgment or arbitration award that is within [the insurer's]
limits of liability which accrues after the judgment or award in
any matter [it] defend[s]." Notably, the Legislature did
nothing to change the provision stating that the insurer "will
not pay interest that accrues after [it has] offered to pay up
to the limits" of the policy. Specifically, it did not amend
"offered to pay" to read "offered to settle," and therefore
implicitly left intact our interpretation of "offered to pay" as
an unconditional offer.
Commerce claims that the motion judge's ruling was an abuse
of discretion because we noted in a footnote in Davis, 434 Mass.
at 187 n.13, that an insurer "may be able to control its
postjudgment interest obligations by paying the policy limits
(with accrued interest) into court." We disagree. First, this 25
was not a holding of the court; we "[left] the availability of
this procedure for another day because it [was] not involved in
[that] case." Id. Second, under our holding in Davis, the rule
67 deposit offered by Commerce, even if accepted by the court,
would not stop the accrual of postjudgment interest because it
was not an unconditional offer to pay the full policy limits.16
Id. at 183. Lastly, unlike some other jurisdictions, rule 67 in
Massachusetts does not expressly provide for abatement of
postjudgment interest when money is deposited with the court.
Compare JTX Tax, Inc. v. Flowers, 311 Ga. App. 495, 496-497
(2011) (Georgia equivalent to rule 67 provides that "[w]here the
thing deposited is money, interest thereupon shall abate"
[citation omitted]). Where the proffered rule 67 deposit was
not mandated by Davis and would not have stopped the accrual of
postjudgment interest, the motion judge did not abuse his
discretion in denying Commerce's rule 67 motion.
3. Settlement/assignment agreements. Having concluded
that Commerce remains obligated to pay accrued postjudgment
interest, the next issue we must confront is whether Commerce
16In contrast, it might be an abuse of discretion for a judge to decline to accept a rule 67 deposit to stop the accrual of postjudgment interest where the deposit was an unconditional offer to pay the policy limits, and the plaintiff refused to accept payment directly, causing postjudgment interest to continue to accrue. We need not decide the issue because those are not the facts present before us in these appeals. 26
may challenge the validity or amount of that judgment, where its
objection to the settlement agreement was overruled and where
there was a substantial risk of underlitigation in the
negotiation of that agreement.
Commerce, supported by the amici, claims that it is not
bound by the settlement because of the provision in the policy
that states, "If any person covered under this policy settles a
claim without our consent, we will not be bound by that
settlement." Where an insurer acknowledges its duty to
indemnify the insured for damages arising from a claim, and
thereby agrees to pay a judgment arising from a settlement
within the policy limits, the insurer will not be bound by a
settlement entered into without its consent where material,
actual prejudice is shown. See Augat, Inc. v. Liberty Mut. Ins.
Co., 410 Mass. 117, 123 (1991) (recognizing that "consent-to-
settlement . . . and cooperation provisions . . . give an
insurer the opportunity to protect its interests," and where
insured commits breach of one of these provisions, insurer may
disclaim liability where it proves actual prejudice from
breach); MacInnis v. Aetna Life & Cas. Co., 403 Mass. 220, 223
(1988) ("an insurer must prove material prejudice resulting from
its policyholder's violation of a consent-to-settlement
provision in order to rely on that violation as an affirmative 27
defense to a claim for underinsured motorist coverage
benefits").
But where, as here, the insurer agrees to pay for the
defense of a claim against an insured under a reservation of
rights, and thereby reserves its right to seek a declaration
from a court that it owes no obligation to indemnify the insured
for damages arising from the claim, the insurer has no right to
control the defense with respect to the settlement of the claim.
See Three Sons, Inc. v. Phoenix Ins. Co., 357 Mass. 271, 276-277
(1970). See also Herbert A. Sullivan, Inc. v. Utica Mut. Ins.
Co., 439 Mass. 387, 406 (2003) (recognizing that insurer may not
"reserve its rights to disclaim liability while also insisting
on retaining control of the insured's defense"); Travelers
Indem. Co. v. Dingwell, 884 F.2d 629, 639 (1st Cir. 1989)
("well-established policy that an insurer who reserves the right
to deny coverage cannot control the defense of a lawsuit brought
against its insured by an injured party").
Where an insurer reserves its right to indemnify, the
insured faces the risk that he or she alone will be responsible
to pay the judgment. The insured is entitled to mitigate that
risk by entering into a settlement that will either protect him
or her from liability or diminish the amount of a judgment that
he or she might be obligated to pay. See Three Sons, Inc., 357
Mass. at 276 ("If liability is established, or a settlement 28
reached, and the insurer has a valid ground for disclaimer, the
insured is left with a liability which, had he been able to
defend or settle on other terms, might never have existed").
Where the insurer has not agreed to pay a judgment, it
cannot prevent its insured from protecting his or her financial
interests through a settlement. See United Servs. Auto. Ass'n
v. Morris, 154 Ariz. 113, 119 (1987) (en banc) (Morris) ("[a]n
insurer that performs the duty to defend but reserves the right
to deny the duty to pay should not be allowed to control the
conditions of payment"; insured must not be left without
recourse "to take reasonable measures to protect himself [or
herself] against the danger of personal liability"). See also
Miller v. Shugart, 316 N.W.2d 729, 734 (Minn. 1982) ("insurer
who is disputing coverage [may not] compel the insureds to
[forgo] a settlement which is in their best interests").
Therefore, an insured does not commit a breach of this provision
of its policy by settling a case without the insurer's consent
where the insurer is defending the claim under a reservation of
rights.
Such a settlement, if enforceable, would certainly bind the
parties to the settlement; it is quite a separate issue whether
it would bind the insurer where the insurer is not a party to
the settlement and did not consent to it. Commerce contends
that it should not in any way be bound by the 29
settlement/assignment agreements executed by the estate and the
Padovanos, which provided that
the insured defendants agreed to admit liability for
negligence, to have the amount of damages determined by the
judge at an assessment of damages hearing, and to assign
all rights arising from their insurance coverage to the
plaintiff; and
the plaintiff agreed to release the defendants from all
liability arising from the incident.
Here, Commerce was not bound by the parties' stipulation of
negligence; the judge who granted Commerce declaratory judgment
made a de novo determination that Stephen's death arose from
Matthew's intentional act and was not an accident. See 14
Couch, supra at § 199:48, at 199-93, citing Morris, 154 Ariz. at
120-121 ("upon entry of a settlement agreement between the
claimant and [insureds] who were being defended under a
reservation of rights . . . , the liability insurer was not
bound by the settlement stipulations that the actions giving
rise to the claim were either negligent or intentional, and the
insurer could litigate the issue of intentional acts"). Nor
will it be bound, under its optional bodily injury coverage, to
pay the damages determined at the assessment hearing, because it
obtained a declaratory judgment that it was not obligated to pay
these damages. 30
But where Commerce recognized its duty to defend, and paid
the compulsory bodily injury coverage of $20,000, it does owe a
duty under its policy to pay "[i]nterest that accrues after
judgment." Therefore, the issue we confront is whether it is
bound to pay such interest on the judgment arising from the
settlement. If so, its liability to pay postjudgment interest
would well exceed $2 million, far more than the $480,000 limit
of liability for optional bodily injury coverage under the
policy, which it has no obligation to pay following the
declaratory judgment.
We have yet to decide whether the amount of a prejudgment
settlement/assignment agreement is enforceable against the
insurer. We have recognized that, where an insured tortfeasor
defendant enters into a prejudgment settlement with an injured
plaintiff in which the defendant assigns his or her rights to
the plaintiff in return for a release from personal liability,
there is the risk that "collusion may exist between the injured
party and the tortfeasor." Campione v. Wilson, 422 Mass. 185,
193 (1996). This is because, as a result of such a settlement,
"the insured . . . loses the incentive to contest his liability
or the extent of the injured party's damages either in
negotiations or at trial." Id. at 191, quoting Freeman v.
Schmidt Real Estate & Ins., Inc., 755 F.2d 135, 139 (8th Cir.
1985). See Spellman v. Shawmut Woodworking & Supply, Inc., 445 31
Mass. 675, 681 (2006) (where there is agreement for judgment,
assignment of rights, and covenant in assignment not to pursue
satisfaction of agreement against defendant, "we do not overlook
the possibility of collusion or fraud").
But we do not join the minority of States that, because of
the risk of collusion, declare such settlement/assignment
agreements to be unenforceable where an insurer has honored its
duty to defend. See, e.g., Associated Wholesale Grocers, Inc.
v. Americold Corp., 261 Kan. 806, 846 (1997) ("an insurance
company should not be required to settle a claim when there is a
good faith question as to whether there is coverage under its
insurance policy"); State Farm Fire & Cas. Co. v. Gandy, 925
S.W.2d 696, 713-714 (Tex. 1996) (concluding that prejudgment
settlement/assignment agreement "confuse[s] and distort[s]"
positions of parties, and prohibiting such agreements under
certain circumstances where defendant's insurer has made good
faith effort to adjudicate coverage issues prior to adjudication
of plaintiff's claim). See also State Farm Mut. Auto. Ins. Co.
v. Freyer, 2013 MT 301, ¶¶ 36-38 (stipulated settlement that
relieves insured of any financial stake in outcome of case gives
insured "little incentive to minimize the settlement amount"
and, if permitted, "would allow insureds to unilaterally inflate
policy limits anytime an insurer tests coverage through a
declaratory action"). 32
If we were to declare such settlement/assignment agreements
always to be unenforceable, we would effectively prevent
defendants whose insurer has offered a defense under a
reservation of rights from being able to protect themselves from
the risk that they will be held personally responsible to pay a
judgment that they could ill afford. See Morris, 154 Ariz. at
118 (insured party, if prohibited from entering into settlement
while defended under reservation of rights, "risk[s] financial
catastrophe"). Moreover, the risk of collusion must be balanced
against policy considerations that encourage settlement
agreements, and "by settled law that most contract claims are
assignable" and that "contracts not to sue . . . are usually
valid." Spellman, 445 Mass. at 681-682.
Balancing these risks and benefits, we conclude that an
insurer who defends a claim under a reservation of rights is
bound by the amount of a judgment arising from a prejudgment
settlement/assignment agreement where (1) the insurer is given
notice of the settlement/assignment agreement and an opportunity
to be heard by the court before judgment enters; (2) the insurer
contests the judgment; and (3) the insured, after hearing, meets
his or her burden of showing that the settlement is reasonable
in amount. See Patrons Oxford Ins. Co. v. Harris, 2006 ME 72,
¶ 18, quoting Morris, 154 Ariz. at 120 (settlement/assignment
agreements are valid where "the insured or claimant can show 33
that the settlement was reasonable and prudent"); Miller, 316
N.W.2d at 735 ("The burden of proof is on the claimant . . . to
show that the settlement is reasonable and prudent").
In deciding whether a settlement/assignment agreement is
reasonable, a judge, examining the totality of the circumstances
at a reasonableness hearing, should determine whether the amount
of the settlement is reasonable in light of "the facts bearing
on the liability and damage aspects of plaintiff's claim, as
well as the risks of going to trial." Miller, 316 N.W.2d at
735. See Patrons Oxford Ins. Co., 905 A.2d at 827 (in
determining reasonableness of settlement, judge should consider
"the possibility of the insured's liability, risk of an adverse
verdict, and the damages portion of the claimant's case").
Because the consequence of a settlement/assignment agreement is
that the plaintiff may collect damages only from the insurer,
having released the insured defendants from personal liability,
a reasonable settlement amount may not exceed the limits of the
insured's potential insurance coverage, because the plaintiff
may recover in damages no more than that from the insurer. See
Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637, 644-645 & n.6 (Iowa
2000) (noting that insurer has "no obligation" to pay settlement
amount "in excess of its [policy] limits"). See also Babcock &
Wilcox Co. v. American Nuclear Insurers, 635 Pa. 1, 30 n.18
(2015) (unless insurer acts in bad faith, reasonable settlement 34
"confined to the previously contracted policy limits"). And
where optional bodily injury coverage, as here, requires a
finding that the plaintiff's injuries were caused by an accident
rather than by intentional conduct, the probability of such a
finding may also be considered in determining the amount of a
reasonable settlement. See Miller, supra (highlighting
importance of considering risk of adverse verdict); Patrons
Oxford Ins. Co., supra (same).
Binding an insurer to the amount in a settlement/assignment
agreement that meets a reasonableness test is consistent with
the approach of the majority of courts, which allow such
agreements if they meet certain conditions. See Great Divide
Ins. Co. v. Carpenter, 79 P.3d 599, 610 (Alaska 2003) (approach
declaring settlement/assignment agreements void as against
public policy contrary to Alaska case law and "contrary to the
decisions of most of the other states whose courts have ruled on
the validity" of such agreements); Harris, Judicial Approaches
to Stipulated Judgments, Assignments of Rights, and Covenants
not to Execute in Insurance Litigation, 47 Drake L. Rev. 853,
859 & n.31 (1999) (collecting cases where "[m]ost courts" have
permitted settlement/assignment agreements). The majority
approach allows unauthorized settlements with stipulated
liability to be enforced "so long as such agreements are made
fairly, with notice to the insurer, and without fraud or 35
collusion on the insurer, and the settlement is reasonable and
prudent" (footnote omitted). 14 Couch, supra at § 199:48, at
199-92.
We focus only on reasonableness, rather than "collusion,"
because every settlement/assignment agreement risks being
characterized as "collusive" simply because the parties have
negotiated a settlement where only the insurer is at risk of
paying the plaintiff's damages and the defendant will be
released from liability. But if this is enough to defeat a
settlement/assignment agreement, then all judgments arising from
such agreements will be deemed unenforceable against the
insurer, regardless of the amount. Where the insurer expresses
concern that the plaintiff and the insured defendant have
colluded to improperly inflate the judgment, that concern may be
considered in evaluating the reasonableness of the settlement
amount.
In the wrongful death action, Commerce objected on the
record to the settlement/assignment agreements between the
estate and the Padovanos. We conclude that, in doing so, it
preserved its right to be heard on the question whether the
amount of the settlement was reasonable in the manner we have
now described. The settlement/assignment agreements here are
not immune from a reasonableness review simply because the
parties elected to have the amount of damages determined by a 36
judge at an assessment of damages hearing. For all practical
purposes, by agreeing that damages will be so calculated, the
parties essentially agreed that the settlement amount is the
amount of damages that would have been awarded had liability
been found at a bench trial, without any compromise of the
amount based on the risk of a finding that the defendants were
not negligent.
Because no reasonableness review was conducted, we vacate
the judgment and remand the case to the Superior Court for a
hearing on the reasonableness of the settlement/assignment
agreements. Where the amount of the judgment arising from the
settlement/assignment agreements was greater than $500,000, the
limits of the insured's combined mandatory and optional bodily
injury coverage, we conclude that the amount obtained through
the settlement is per se unreasonable. But a reasonableness
hearing is needed to allow the judge to determine what would
have been a reasonable settlement amount under the
circumstances, and a new judgment in that amount shall enter.
Postjudgment interest will accrue nunc pro tunc from the date of
the original judgment, December 29, 2016, on the judgment amount
that the court deems reasonable.
We note that the procedure we direct on remand is different
from what we expect to happen in the future where an insurer
successfully challenges a settlement/assignment agreement before 37
judgment. Where the challenge is made before judgment enters, a
judge who decides that the amount set forth in (or determined
by) the settlement/assignment agreement is not reasonable may
decline to enter a judgment in that amount, and invite the
parties to renegotiate an agreement that might prove reasonable
in amount. Here, where so much time has passed since the
judgment entered, we do not believe that to be a reasonable
alternative under the circumstances. We therefore direct the
judge instead to make his or her own determination of a
reasonable settlement amount so that postjudgment interest may
be paid on that amount.
Conclusion. The orders denying Commerce's motions to stay
the wrongful death action and denying Commerce's rule 67 motion
are affirmed. The entry of judgment in the wrongful death
action is vacated, and the matter is remanded for a
reasonableness hearing to be conducted in a manner consistent
with this opinion.
So ordered.