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P. Gioioso & Sons, Inc. v. Liberty Mutual Insurance Co.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

August 24, 2016

P. Gioioso & Sons, Inc.
Liberty Mutual Insurance Company No. 134656

         Filed August 27, 2016


          Mitchell H. Kaplan, Justice of the Superior Court.

         The plaintiff, P. Gioioso & Sons, Inc. (Gioioso) is a construction company based in the Hyde Park section of Boston that provides excavation and other services related to underground water lines and sewers. Between 2001 and 2010, Gioioso purchased general liability, workers' compensation and automobile insurance policies from the defendant, Liberty Mutual Insurance Company (Liberty). For policies years ending in 2005 through 2010, Gioioso elected to purchase so-called high deductible policies, in which it was responsible to pay the first $300, 000 of each covered loss and Liberty provided coverage for all losses in excess of that amount. Under the terms of the policies, Liberty initially paid all covered claims and then sought payment from Gioioso for losses within the deductible amount. As a condition to issuing these policies, Liberty required Gioioso to enter into an Agreement for Guarantee of Financial Obligations (Security Agreement) and provide a letter of credit securing payment for the self-insured losses and premiums anticipated to be due Liberty under this insurance program. In this action, Gioioso asserts that after it stopped purchasing insurance from Liberty, Liberty set the amount of the letter of credit required by the Security Agreement at an unreasonably high amount and this financial obligation caused Gioioso to lose business and suffer economic loss. Gioioso pleads its complaint in four counts: Count I--Breach of Contract; Count II--Breach of the Covenant of Good Faith and Fair Dealing; Count III--Breach of Fiduciary Duty; and Count IV--Violation of G.L.c. 93A, § 11.[1]

         Liberty has asserted a counterclaim against Gioioso. Count I of the counterclaim is for breach of contract. Here, Liberty asserts that it paid a judgment as a result of a claim covered by the policy it issued Gioioso for the policy year ending in 2005. That was a retrospectively rated policy, and, under the terms of that policy, as a result of payment of the judgment, Gioioso owes Liberty $112, 997, which it has refused to pay. In Count II, Liberty asserts that, under the terms of the 2009 Security Agreement, it is due its attorneys fees incurred in defending this action and prosecuting the counterclaim.

         For the reasons that follow, Liberty's motion for summary judgment is ALLOWED as it relates to the complaint, and ALLOWED, in part, and DENIED, in part, as it relates to its counterclaim.


         Facts Relating to High Deductible Policies

         In recent years, Gioioso's gross revenues have been in the range of $35 million to $63 million. At all times relevant to this action, Gioioso was assisted in purchasing its insurance program by an insurance broker, Kevin Racine, a Senior Vice President of USI New England, a Goldman Sachs portfolio company. In 2005, Gioioso opted to switch from retrospectively rated policies to the high deductible policies described above. These policies covered losses arising from incidents that occurred during the policy period regardless of when a claim was asserted, i.e., they were " occurrence" policies, as opposed to " claims made" policies.

         As a condition to purchasing this type of policy, each year Liberty required Gioioso to enter into a new Security Agreement, or amend an existing one. The last such Security Agreement was executed in 2009 in connection with the insurance policy providing coverage for the policy year ending October 30, 2010.

         The Security Agreement secured all of Gioioso's payment obligations " in connection with any and all insurance policies issued to [it]." (The Obligations.) The amount of the required security was specifically " subject to upward or downward adjustment in amount by [Liberty] at least annually to reflect then-current estimated loss reimbursement Obligations." Security for payment of these Obligations, both existing Obligations and those arising thereafter, was to be by means of " a clean, irrevocable letter of credit." The Security Agreement also expressly stated that: " The letter . . . of credit [is] subject to upward or downward adjustment in amount by [Liberty] at least annually to secure all Obligations relating to the [Policies] . . . [Liberty] may, at its sole discretion determine that the estimated amount of unpaid Obligations is greater than the amount of the existing letter of credit, and, if so, [Liberty] shall have the option to require [Gioioso] to deliver . . . an amendment to the existing letter of credit or an additional letter of credit."

         The Security Agreement had attached to it a Security Schedule (Schedule) that was " incorporated into and made a part of the [Security Agreement]." The Schedule also provided that: " It is expressly understood and agreed that the amount of collateral . . . referenced on this Schedule may be adjusted at the sole discretion of [Liberty] to reflect then-current obligations." The amount of the security stated on this final, 2009 Schedule was $2.2 million. The manner by which Liberty was to determine the amount of the " then-current Obligations" is not set out in the Security Agreement or the Schedule.

         The Security Agreement further provided that Gioioso " will pay . . . any and all reasonable expenses, including without limitation, reasonable legal fees and expenses . . . which [Liberty] may incur in connection with (a) the exercise or enforcement of any of the rights or remedies of [Liberty] hereunder and/or; (b) the failure of [Gioioso] to perform or observe any of the provisions hereof."

         Although not directly relevant to any material fact necessary to resolve the pending motion, it appears that Gioioso was unhappy with the amount of the letters of credit that it had to post after it began purchasing high deductible policies. At the end of the 2010 policy year, Gioioso, with the assistance of its insurance broker, purchased insurance from another carrier. Gioioso apparently thought that not renewing insurance with Liberty would cause the amount of his letter of credit to be immediately reduced. In an email exchange with Gioioso's broker, Liberty advised that this was likely not the case:

Former customers do not receive liquidation credit[2] in the security calculation the way that current policyholders with reasonably good credit scores do. I think this reflects a perspective that we need to be more conservative about security when we no longer have an ongoing relationship with the other party . . . The liquidation credit makes the assumption that we will continue to be reimbursed for paid losses and Variable Expense through the coming year. The more conservative approach makes no such assumption. From our perspective, the current policyholder with good credit gets a break in the security calculation. The former customer does not get that break . . . Normally, in such cases, I haven't seen a reduction [in the amount of the letter of credit] in the first year.

         In fact, the amount of the letter of credit required by Liberty in the Fall of 2010 was the same as the Fall of 2009: $2.2 million.

         The amount of the letters of credit required under the Security Agreement were actuarially determined based on the insured's, in this case Gioioso's, claims history, by year and line of insurance, but limited to $300, 000 for each loss, the deductible amount--as Liberty would be responsible for claims in excess of that amount. The sums so determined were multiplied by " loss development factors" (LDFs).[3] These LDFs are developed by Liberty's actuaries based on claims experience generated over many years by many Liberty insureds across the United States.[4] The amount of the actuarially predicted loss falling within the deductible amount was then reduced by the sum that the insured had already paid to Liberty. The purpose of these calculations was to provide a statistically supported approximation of the amount that an insured would pay to Liberty from the date of the estimate until the last payment was due from any open policy, having in mind that there may have been occurrences during the years the policies were in force that have not yet resulted in claims and closed claims that may reopen.

         The predicted sums that Gioioso would owe to Liberty over the life the policies were calculated in the Fall of 2011 and 2012, and then twice annually during the period running from 2013 through the Fall of 2015 (the last calculation completed prior to the filing of the pending motion for summary judgment). The amounts so calculated ranged from a high of $7.6 million in 2012 to a low of $7.1 million in the Fall of 2015. The amount of the required letter of credit, however, was reduced at each interval as Gioioso regularly paid Liberty amounts due under the policies for sums that Liberty was paying to claimants. As of the Fall of 2015, Gioioso had paid Liberty a total of $6.91 million, [5] and Liberty's actuaries anticipated that it would pay another $223, 000[6] before all claims on all policies were closed.[7]

         Facts Relating to the Retrospectively Rated Policy

         Under the terms of the commercial general liability policy in effect for 2004-2005, " [Liberty] will have the right and duty to defend the insured against any suits seeking damages." Further, Liberty " may at [its] discretion, investigate any occurrence and settle any claim or suit that may result." A claim was made against Liberty by the First Baptist Church apparently in connection with excavating work performed by Gioioso. Liberty assumed the defense of that suit which went to trial. (The First Baptist Litigation.) A jury returned a verdict against Gioioso and judgment entered against it for $354, 000, and a notice of appeal was filed. Liberty sent the claim file and trial record to another law firm, i.e., lawyers independent from the lawyer that represented Gioioso at trial, for an opinion concerning the likelihood that a successful appeal could be pursued. That firm opined that the likelihood of success on appeal was between 5% and 10%. Liberty then settled the claim, while the appeal was pending, over ...

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