Insurers, Issues and Indemnification: The New Cost of Delayed Reimbursement

Massachusetts General Law Chapters 93A and 176D, long a compelling and formidable mechanism for consumers, has been extended beyond its usual confines to become a further source of consternation in the insurance industry. The Consumer Protection Act and the Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance are dual sides of the same coin, often acting as the other’s counterpart when allegations of deceptive practices arise in the context of trade. A recent ruling by the Massachusetts Appellate Court affirms the influence of these two laws.

An employee for a subcontractor sustained injuries in a fall on a project site and sued the general contractor of the project for negligence. The insurance carrier of the general contractor agreed to indemnify the general contractor subject to a reservation of rights that included reimbursement of defense costs in the litigation. Instead, however, the insurance carrier waited eight months before paying any of the general contractor’s defense costs and only did so after the general contractor sued the insurance carrier for breach of contract, as well as violations of Chapter 93A and Chapter 176D.

The trial court found that the insurance carrier fulfilled its contractual obligations by acknowledging its obligations to pay defense costs at the outset of the litigation. The Massachusetts Appeals Court, however, disagreed. The Appellate Court determined that an unnecessary and unreasonable delay in payment can constitute a violation of both Chapters 93A and 176D. Although the Court refused to define unreasonable delay, the delay of seven months in this litigation was long enough for the insurance carrier to be liable for any penalties imposed by Chapters 93A and 176D.

The decision serves as a grave warning to insurance carriers that delay reimbursement as courts may find that the insured may still have damages, even if the legal fees are eventually paid, because it may alter the manner in which an insured defends a litigation. Certainly, the threat of suffering the penalties of Chapters 93A and 176D may be enough to limit the number of disputes between insurance carriers and their insured.