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Massachusetts’ top court affirmed summary judgment Monday in favor of a CNA Financial Corp. unit in a professional liability case in which its policyholder had refused to agree to a settlement.
The unanimous ruling by the Supreme Judicial Court of Massachusetts also held in Douglas M. Rawan and another vs. Continental Casualty Co. that consent-to-settle clauses in professional liability policies do not violate state statute.
In 2005, Mr. Rawan and Kristen A. Rowan hired Kanayo Lala to design structural members for their new home, but Mr. Lala significantly underestimated the building loads and stresses in his design calculations, and after construction the home’s beams and joists began to crack, according to the ruling.
CNA unit Continental Casualty had issued a professional liability policy to Mr. Lala that contained a consent-to settle clause. But the coverage did not contain the “hammer clause” found in other policies, according to the ruling.
This 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,’” said the ruling, in citing another case.
The insurer had provided coverage of $500,000 per claim and $1 million per policy year for the relevant period, according to the ruling.
After Mr. Lala refused to settle the case as recommended by CNA, the homeowners filed suit against the insurer for “its failure to effectuate a prompt, fair and equitable settlement once liability had become reasonably clear,” as required by state law.
A lower court granted Continental summary judgment in the case, which was affirmed by the Supreme Court ruling. “A consent-to-settle provision in an insurance policy does not violate an insurer’s duty to effectuate a prompt, fair and equitable settlement,” said the ruling.
However, such a clause “is not a carte blanche for an insurer to engage in unfair or depictive conduct with a third-party claimant merely because the insured declines to reach a settlement.
“An insurer still owes a duty to conduct a reasonable investigation and engage in good faith settlement attempts consistent with its duty to both its insured and the claimant,” it said.
“In this case, Continental did make good faith efforts to investigate the claim and effectuate a settlement, particularly in light of its insured’s stubborn refusal to settle…The proximate cause of the plaintiffs’ harm was the insured’s refusal to settle, and not any conduct attributable to
Continental,” said the ruling, in affirming the lower court’s decision.
Attorneys in the case could not be reached for comment.
In October, a federal appeals court reversed a lower court ruling and decided in favor of Continental Casualty in long-running, complex asbestos litigation involving a coverage allocation method.
A CNA Financial Corp. unit is not obligated to cover an Oklahoma wastewater treatment firm under an “insured v. insured” exclusion in its directors and officers liability insurance policy, says a federal district court in a ruling Monday.