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Rawan v. Continental Casualty Co.

Supreme Judicial Court of Massachusetts, Worcester

December 16, 2019

DOUGLAS M. RAWAN & another [1]

          Heard: September 6, 2019.

         Civil action commenced in the Superior Court Department on August 16, 2011.

          The case was heard by J. Gavin Reardon, Jr., J., on motions for summary judgment. The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Daniel J. Lyne (Andrea L. Maclver also present) for the plaintiffs.

          Regina E. Roman (Jessica H. Park & John G. O'Neill also present) for the defendant.

         The following submitted briefs for amici curiae:

          David J. Hatem, Patricia B. Gary, Paul T. Muniz, Jon C. Cowen, & Katherine L. Connolly for American Council of Engineering Companies of Massachusetts & another.

          John J. Barter for Professional Liability Foundation, Ltd.

          Allen N. David, Maureen Mulligan, & Steven E. DiCairano for Boston Bar Association.

          Steven L. Schreckinger & Harvey Nosowitz for American Property and Casualty Insurance Association & others.

          Kristen M. Whittle, Alexandra L. Rotondo, & Derek M. Gillis for Massachusetts Defense Lawyers Association.

          Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

          KAFKER, J.

         The defendant, Continental Casualty Company (Continental), issued a professional liability policy to its insured, Kanayo Lala, an engineer, that contained a consent-to-settle clause. After the plaintiff homeowners, Douglas M. Rawan and Kristen A. Rawan, sued Lala for engineering design errors, he refused to consent to settle as recommended by the insurer. Eventually, the homeowners commenced an action under G. L. c. 93A against Continental for its failure to effectuate a prompt, fair, and equitable settlement once liability had become reasonably clear, as required by G. L. c. 176D, § 3 (9) (f) . The motion judge allowed summary judgment for Continental on all counts, finding that the consent-to-settle clause in Lala's policy limited Continental's ability to engage in further settlement practices with the plaintiffs once Lala refused to give Continental consent to settle the claims against him.

         The dispositive question at issue in this appeal is whether consent-to-settle clauses in professional liability policies violate G. L. c. 176D, § 3 (9) (f) . We conclude that they do not as a matter of law, but we hold that an insurer still owes residual duties to a third-party claimant under G. L. c. 176D, even when an insured refuses to settle. In this case, Continental made good faith efforts to investigate the claim and encourage its insured to settle. Furthermore, given the insured's obstinacy, the particular shortcomings of Continental identified by the plaintiffs did not proximately cause harm to the plaintiffs. For these reasons, we affirm the decision of the Superior Court allowing Continental's motion for summary judgment.

         1. Background.

         The following facts from the record are summarized in the light most favorable to the plaintiffs, the unsuccessful opposing party on the parties' cross-motions for summary judgment. See Dzung Duy Nguyen v. Massachusetts Inst, of Tech., 479 Mass. 436, 448 (2018). In 2005, the plaintiffs hired Lala, a registered professional engineer, to design structural members for their new home. Lala signed and stamped a construction control agreement with the town of Westborough (town). Lala significantly underestimated the building loads and stresses in his calculations for the design. He filed eleven construction control reports with the town's building commissioner over the course of the project, which falsely certified that the project complied with the State building code. After the construction was completed, its beams and joists began to crack. When the design errors became apparent, Douglas Rawan raised the issues directly with Lala in an electronic mail (e-mail) message dated December 3, 2010. That message confirmed a prior conversation the plaintiffs had had with Lala in which he admitted his miscalculations in designing the home.

         In August 2011, the plaintiffs commenced an action against Lala in Superior Court for professional negligence, negligent supervision, breach of contract, breach of the covenant of good faith and fair dealing, breach of the implied warranty of fitness, and violations of G. L. c. 93A. The plaintiffs' claims against Lala relied on the professional opinion of Neal Mitchell, a structural engineer they hired, who reviewed Lala's work. At the time of the underlying acts of negligence and at the time of the lawsuit, Continental insured Lala under a professional liability policy (policy).

         a. The policy.

         The policy provided that Continental would "not settle any claim without the informed consent" of Lala. The consent-to-settle clause in Lala's policy did not contain a so-called "hammer clause" found in other insurance policies. A "hammer clause" generally requires an insurer to obtain the insured's approval before settling a claim for a certain amount -- however, a hammer clause "allows the insurer to limit its liability to that amount if the insured rejects the settlement." Mutual Ins. Co. v. Murphy, 630 F.Supp.2d 158, 166 n.2 (D. Mass. 2009).[2] This clause puts pressure on the insured's right to refuse consent to settle and thereby increases an insurer's ability to effectuate a settlement. See Freedman vs. United Nat'l Ins. Co., U.S. Dist. Ct., No. CV09-5959 AHM (CTx) (CD. Cal. Mar. 1, 2010) (under terms of plaintiff's policy, insurer was able to invoke "hammer clause" if policyholder unreasonably refused to consent, thus allowing insurer to limit its liability under particular circumstances); J. Kesselman, A. Fox, & R. Sattler, Professional Liability Insurance Issues, in Massachusetts Liability Insurance Manual § 5.6.3 (Mass. Cont. Legal Educ. 3d ed. 2017) (Massachusetts Liability Insurance Manual) (defining "hammer clause" as "common provision in professional liability insurance policies [that] exposes the insured to liability for eventual judgments that exceed a reasonable settlement offer," somewhat tempering insured's right to consent to settlement).

         b. Factual background of the action against Continental.

         Lala contacted Jack Donovan, a claims representative for Continental, in late November 2011 for assistance in resolving the plaintiffs' lawsuit against him. Donovan opened the matter as a "pre-claim" assistance file in January 2012, as Lala did not yet wish to invoke his coverage and elected to defend himself pro se. Continental retained a law firm to represent Lala in January 2012, and attorneys Thomas K. McCraw and Jeff Alitz of that firm informally advised Lala until officially appearing on his behalf after Lala invoked his coverage under the policy in August 2012.

         Lala's policy stated that Continental had "the right and duty to defend any claim against [Lala] seeking amounts that are payable under the terms of this Policy, even if any of the allegations of the claim are groundless, false, or fraudulent. We will designate or, at our option, approve counsel to defend the claim. We are not obligated to defend any claim or pay any amounts after the applicable Limit of Liability has been exhausted." Continental exercised its duty to defend here when the attorneys appointed by Continental filed appearances on Lala's behalf in September 2012.

         Mitchell, the plaintiffs' consulting engineer, met with Donovan in April 2012 to discuss and review Lala's work. Mitchell concluded that Lala had made serious computational errors based on erroneous engineering assumptions. Mitchell questioned "all of the loading that was used in Mr. Lala's initial computations," and stated that Lala's "revised computations illustrate a complete lack of understanding of structural design."

         In May 2012, Donovan suggested engaging a third-party engineer to review Lala's engineering work and Mitchell's assessment with the hope of "reach[ing] an accord." Donovan also suggested selecting a third-party mediator if the parties could not agree on the extent of Lala's liability after meeting with the third-party engineer. More specifically, on June 1, 2012, Donovan wrote:

"I will reach out to [Mitchell] ... to set up a meeting in which I will also invite a third engineer so we may have a frank and exhaustive discussion of the issues. ... I think [at] the same time we may think about a mediation in an effort to get this matter into a forum where each side can express its side of the issues."

         Counsel for the plaintiffs agreed to have Thomas Heger act as the third-party engineering expert and to have Heger meet with Lala and Mitchell. Donovan also indicated he was reaching out to separate mediators at the same time that he was arranging for the third-party engineer.

         In June 2012, Donovan wrote to Lala and Alitz, stating: "I think we could agree that the case may be six figures," and suggested pursuing mediation. Alitz responded, telling Donovan and Lala that "[t]here is [zero] chance at settling this [case] for under $100, 000. "

         On August 4, 2012, Mitchell wrote an e-mail message to Donovan summarizing his review of Lala's engineering work. In that message, Mitchell concluded that "this was the worst example of improper engineering that I have seen in my 45 years of professional practice." Mitchell identified multiple structural design errors, and concluded that the home lacked the proper professional structural engineering required by the State building code and the town.

         In September 2012, the plaintiffs' counsel reached out to Heger to ask whether he had come to any conclusions. Heger responded that he was currently putting together a summary of his findings, but "need[ed] to defer to Mr. Donovan on whether this information can be shared with the various parties." In summarizing his findings, Heger agreed with Mitchell's conclusions and concerns about the structural adequacy of the plaintiffs' house: "Bottom line; I found the same serious design errors as Neal Mitchell and some additional ones as well as overstresses in the repaired beams that Neal did not get involved with." Heger independently reviewed six of the nineteen structural issues that Mitchell identified, and found that, of those six issues, five failed to meet the minimum strength and deflection ...

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