Superior Court of Massachusetts,Suffolk County.
Marcia RHODES, Harold Rhodes, and Rebecca Rhodes, Plaintiffs
v.
AIG DOMESTIC CLAIMS, INC. f/k/a AIG Technical Services, National Union Fire Insurance Company of Pittsburgh, PA, and Zurich American Insurance Company, Defendants.
N
June 3, 2008.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER
RALPH D. GANTS, Justice.
The plaintiffs, Marcia Rhodes, Harold Rhodes, and Rebecca Rhodes (collectively, “the Rhodes”), have filed this action against the defendants AIG Domestic Claims, Inc., formerly known as AIG Technical Services (“AIGDC”), National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), and Zurich American Insurance Company (“Zurich”), alleging that these insurers violated G.L. c. 176D, § 3(9)(f) (and, in turn, G.L. c. 93A) by failing to effectuate a prompt, fair, and equitable settlement of a tort claim in which liability was reasonably clear. This Court conducted a 16-day bench trial between February 5, 2007 and March 31, 2007, followed by extensive briefing. Based on the testimony at trial and the exhibits admitted into evidence, viewed in light of the governing law, this Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
In the early afternoon of January 9, 2002, Professional Tree Service was grinding tree stumps off Route 109 in Medway and had retained a Medway patrolman on paid detail to stop one lane of traffic at a time to protect the safety of its tree service truck and employee. The police officer stopped a Toyota driven by Marcia Rhodes, then 46 years old. After she came to a full stop, an 18-wheel trailer truck driven by Carlo Zalewski struck the rear of Ms. Rhodes car and pushed it off the road down an embankment. The tractor-trailer had struck her car with such force that the trunk had been pushed into the back seat of the vehicle. Ms. Rhodes was conscious when the police officer ran over to her aid, but she had lost all feeling below her waist. As a result of the traffic accident, she suffered, among other injuries, a fractured spinal cord at T-12 and broken ribs. The accident left her a paraplegic, unable to walk.
Zalewski at the time of the accident was employed by Driver Logistic Services (“DLS”), and had been assigned by DLS to drive the truck for GAF Building Corp. (“GAF”). GAF had leased the truck from its owner, Penske Truck Leasing Co. (“Penske”).
At the time of the accident, GAF had a $2 million primary automobile insurance policy with Zurich, and a $50 million excess umbrella policy with National Union. Under the Zurich Policy, GAF had a self-insured retention of $250,000 per claim, including defense costs, and retained the authority to approve payments up to that amount. Zurich had to approve any settlement of a claim that involved payment of more than $100,000. GAF had retained Crawford & Company (“Crawford”) as its Third Party Administrator (“TPA”) to adjust its claims and Zurich also entered into a Third Party Administrator Agreement with Crawford to adjust its GAF claims. As Zurich’s TPA for GAF claims, Crawford provided various adjustment services, including accepting and acknowledging proofs of loss, maintaining claims files, investigating all reported claims and evaluating their merits, proposing Claim Reserve guidelines, and retaining attorneys approved by Zurich to defend claims.
Crawford received notice of the claim arising from the January 9, 2002 accident involving Ms. Rhodes that same day. On January 30, 2002, John Chaney, a Senior Liability Adjuster for Crawford, issued what he characterized as his First Full Formal Report regarding the accident. Chaney classified the claim as “catastrophic,” and therefore declared that it will be reportable to both GAF and Zurich. Chaney had interviewed Zalewski by telephone on January 10, 2002, and reported that Zalewski said that he was descending a long gradual hill on Route 109, traveling roughly at the speed limit of 35 miles per hour when a car “popped out” of an intersecting street, causing him to go to his brake “vigorously.” When he saw that this car had passed, he put his foot to the gas pedal, returned his eyes from that car to the road ahead, and saw Rhodes’ car only 20-30 feet ahead. He put on his brakes, but they locked and he had too little space to stop. He said he saw no warning signs of work being done near the area of the accident. He was cited criminally for Operating Negligently to Endanger, and taken for drug and alcohol tests. The alcohol test was negative. The drug test had yet to be processed, but Zalewski denied that drugs or alcohol played any role in the accident. He said he was unaware of any defects in his truck. The police report confirmed his account, but noted that a truck traveling downhill in Zalewski’s direction on Route 109 to the accident scene would have had 800 feet of straight, clear visibility. The police report also noted that the truck had one inoperative brake, but this was not deemed a factor in the accident.
As to damages, Chaney wrote that he was not fully aware of the extent of Ms. Rhodes’ injuries, “except that we know she remains in life threatening condition at UMass Medical Center, is paralyzed, [and] suffers currently from pneumonia and pancreatic infection.”He opined that the case “will carry a high value” but that it was premature to estimate the ultimate exposure.
Chaney noted that Ms. Rhodes had retained counsel, attorney Frederick Pritzker of the law firm of Brown Rudnick Freed & Gesmer, PC. At GAF’s suggestion, Crawford retained the law firm of Nixon Peabody, LLP to represent GAF. Chaney asked GAF to notify the excess carrier (National Union), which it did. Chaney provided a copy of this report to the Vice President for Risk Management at GAF, the attorney at Nixon Peabody representing GAF, and Zurich at its corporate headquarters in Shaumberg, Illinois.
While this Court has no doubt that Chaney indeed did send his First Full Formal Report to Zurich’s headquarters, the Report appears not to have found its way to any of Zurich’s claims representatives, probably because Zurich had not earlier been notified of the claim and had established no claims file to which it could be sent. AIGDC, which served as the claims administrator for National Union and, for all practical purposes, managed National Union’s excess insurance claims, received a copy of this Report on February 4, 2002 because GAF’s broker gave written notice to AIGDC of the claim on that date, enclosing both the Report and the police report.
Since AIGDC served as National Union’s claims administrator and managed the Rhodes’ excess insurance claim, this Court will simply refer to AIGDC when speaking of the excess insurer. There is no dispute that, if AIGDC is liable here, National Union is equally liable.
Chaney’s next transmittal to GAF was on April 8, 2002, with copies sent to AIGDC and Zurich’s postal box.Chaney noted that Zalewski was clearly liable for Ms. Rhodes’ injuries due to his lack of attention and he opined that Zalewski’s liability may be imputed to GAF.He foresaw the possibility of contribution from Penske for faulty maintenance (although he noted that this did not cause the accident), and from Professional Tree Service and the Town of Medway for not having placed warning signs and for poorly managing traffic. He awaited the legal opinion of defense counsel as to the potential for contribution from other possible tortfeasors. He recommended that the policy limits of $2 million be put in reserve. However, no reserve was yet put in place because only Zurich had the authority to set a reserve of greater than $100,000, and no one at Zurich yet knew of this claim.
Since AIGDC had earlier been notified of the claim and established a claim number, it received this transmittal; Zurich still had no claim number so this transmittal, too, was lost in its paperwork limbo.
Chaney apparently mistakenly believed that Zalewski was employed by GAF; Zalewski was actually employed by DLS. GAF had retained DLS as an independent contractor to provide drivers for the trucks GAF leased from Penske.
The next day, on April 9, 2002, Tracey Kelley, whose unusual title at AIGDC was “Complex Director” (which at AIGDC effectively meant that she was assigned complex claims, defined as claims with a potential value of more then one million dollars), wrote Chaney to inform him that she was handling the excess claim on behalf of AIGDC. She asked for copies of “all pleadings, investigative materials regarding the accident and/or damages claimed, a synopsis of any medical records received and reviewed, deposition summaries, dispositive motions and all analysis of liability and/or damages prepared by defense counsel.”
On April 16, 2002, Ms. Rhodes, for the first time since the accident, returned home. She had undergone spinal fusion surgery at the University of Massachusetts Medical Center following the accident and remained there for a month. She was then released to Fairlawn Rehabilitation Hospital, where she had remained for two months before being allowed to return home. At home, she was confined to a wheelchair and dependent on others to move her from her wheelchair to her bed or to the toilet. In May 2002, she was hospitalized again, this time at Milford-Whitinsville Regional Hospital, for emergency surgery to remove a gangrenous gall bladder. After a week of recovery, she was transferred to Whittier Rehabilitation Hospital, where she remained for two weeks before coming home in June 2002. Shortly thereafter, because of her intensive physical therapy, she developed tendonitis and bursitis in her arms and shoulders and had to stop all physical therapy to allow them time to heal.
On July 3, 2002, GAF’s law firm-Nixon Peabody-informed Penske by letter that, under their Lease & Service Agreement dated May 18, 1992, Penske was an additional insured on the GAF liability policies. Consequently, by this time, GAF understood that its liability policies with Zurich and National Union covered Zalewski, GAF, DLS, and Penske with respect to the Rhodes accident.
On July 12, 2002, Ms. Rhodes, Mr. Rhodes, and their daughter, Rebecca Rhodes, who was then 14 years old, filed a civil complaint in Norfolk County Superior Court against Zalewski, DLS, Penske, and GAF. Ms. Rhodes sought damages for her injuries; Mr. Rhodes and Rebecca sought loss of consortium damages. The claim against Zalewski was premised on his negligence in causing the accident. The claim against DLS was premised on its vicarious liability for Zalewski’s negligence, since he was a DLS employee acting within the scope of his employment at the time. The claim against GAF alleged that it was negligent in failing to exercise control over the independent contractor to whom it entrusted its leased trucks. The claims against Penske alleged two distinct legal theories: (1) that it was negligent in failing to exercise control over the the independent contractor to whom it entrusted the trucks it owned and (2) that it was legally responsible under G.L. c. 231, § 85A for the conduct of the driver who drove the truck it owned.
Under G.L. c. 231, § 85A, once the plaintiffs prove that the truck was registered in the name of Penske as owner at the time of the accident, it is “presumed” that the truck was “operated, maintained, controlled or used by and under the control of a person for whose conduct [Penske] was legally responsible, and absence of such responsibility shall be an affirmative defence to be set up in the answer and proved by the defendant.”G.L. c. 231, § 85A. This means that ownership of the truck is prima facie evidence of control, sufficient to defeat any motion for summary judgement or directed verdict, but rebuttable with evidence to the contrary.
Although Chaney’s notes reflect that he sent a copy of the Rhodes complaint to Zurich at its Illinois headquarters on or about August 1, 2002, Zurich only learned of the case when it was asked to resolve a dispute that had arisen between GAF and Penske. Although GAF’s attorney had informed Penske by letter on July 3 that Penske was an additional insured on GAF’s policies, GAF changed its position after suit was brought and told Penske that it would neither defend nor indemnify Penske as to the claim. GAF also contended that there would be a conflict if Nixon Peabody were to represent Penske, and that Penske needed to retain separate counsel. On August 7, 2002, Chaney sent a “formal letter of notification” to Zurich and, perhaps most importantly, telephoned David McIntosh, a claims director at Zurich, to inform him of the coverage dispute with Penske. With personal contact finally having been made with a Zurich claims director, Chaney faxed to McIntosh various papers in his claim file (but omitted his First Full Formal Report and April 8, 2002 transmittal) and Zurich belatedly opened a claim file on August 21, 2002.
Zurich did not immediately take any action as to the Rhodes claim apart from resolving questions of coverage. McIntosh referred the matter to Zurich’s coverage counsel to determine who was covered under the GAF policy. Zurich agreed to pay for Penske’s separate counsel under a reservation of rights.
On August 30, 2002, the Rhodes filed an amended complaint which added a negligent maintenance claim against Penske. On September 27, 2002, the Rhodes served their first set of requests for the production of documents to all defendants. Little new transpired as discovery proceeded. Although Crawford appears to have obtained no new information of consequence and had not received any of Rhodes’ medical records, its view of the value of the case appeared to solidify. Chaney’s transmittal letter of September 25, 2002, which was sent directly to McIntosh at Zurich, estimated the potential case value as between $5 million and $10 million. He also continued to recommend that the case be reserved at the policy limits of $2 million.
On November 21, 2002, Zalewski admitted to sufficient facts to support a finding of guilt as to his criminal charge in District Court and apologized for what he had done. Ms. Rhodes prepared a detailed written victim impact statement for his sentencing.
On May 6, 2003, Jody Mills, who had taken over as adjuster of the Rhodes file at Crawford, prepared a transmittal letter which noted that GAF’s attorney in the Rhodes case had said that he did not expect the case to run its usual litigation course because of the severity of Ms. Rhodes’ injuries. Counsel said that Ms. Rhodes’ medical expenses would approach $1 million, but no demand had yet been made by Rhodes’ counsel. Mills, like Chaney before her, continued to estimate the potential case value as between $5 million and $10 million.
In early June 2003, McIntosh of Zurich asked Mills for a full formal report, which she provided to him on June 4, 2003. Her report noted that Rhodes’ attorney had yet to submit a demand or provide medical records. She also noted that she did not yet have a copy of Rhodes’ medical records, although she understood that they had been provided in discovery to GAF’s counsel.
In a transmittal letter dated July 22, 2003, Mills wrote that she had been advised by GAF’s counsel that Rhodes’ attorney had made an oral settlement demand of $18.5 million, with incurred medical expenses estimated at $1.3 million and future medical expenses estimated at $2 million. He also told her that Rhodes’ attorney would be providing a more detailed written demand, along with a “day in the life” videotape. Mills at this time had yet to obtain the medical records from GAF’s counsel, even though Zurich had asked for a copy, but she hoped they would be included with the written demand.
The written demand, along with the “day in the life” videotape, was provided to GAF’s counsel on August 13, 2003, but the amount of incurred medical expenses ($413,977.68) was less than half of what orally had been represented. Perhaps as a consequence, the amount of the written demand ($16.5 million) was below the oral demand. This demand included special damages totaling $2,817,419.42, comprised of:
