The 1st U.S. Circuit Court of Appeals in Boston Thursday reversed a ruling allowing an insurer to recover the costs of settling and defending a personal injury suit, finding the trial court judge’s decision contradicted Massachusetts law. 

A unanimous three-judge panel said in Berkley National Insurance Co. v. Atlantic-Newport Realty LLC et al. that the trial court judge’s ruling in favor of the insurer was at odds with the Supreme Judicial Court of Massachusetts’ decision in Med. Malpractice Joint Underwriting Ass’n of Mass. Goldberg, which limits when an insurer can seek reimbursement of settlement costs from an insured.

In that case, Massachusetts’ highest court said an insurer can only seek reimbursement of settlement costs if it agrees to commit its own funds to a reasonable settlement before seeking to recover the amount from the insured, or if the insurer “secures specific authority to reach a particular settlement which the insurer agrees to pay.” The insurer must also notify the insured of the reasonable settlement offer, and the insured must be given an opportunity to either accept the offer or resume its own defense.

Stephen Papsis was working as a chef in a building owned by Atlantic-Newport and leased by Granite Telecommunications when he developed a bacterial infection in his foot after standing in water from a sewage backup, court records say. He later sued Atlantic-Newport and Granite in Massachusetts state court.

Atlantic-Newport and Granite sought coverage from Berkley, which denied it based on a pollution exclusion but agreed to provide a defense under a reservation of rights. While defending against Mr. Papsis’ lawsuit, Berkley sued Atlantic-Newport and Granite in federal court in Boston, seeking a ruling that it had no defense obligations.

Mr. Papsis eventually resolved his lawsuit, and Berkley funded the settlement. The insurer amended its suit against Atlantic-Newport and Granite to seek recovery of the settlement amount as well as the cost it spent defending against Mr. Papsis’ suit.    

The court granted Berkley’s motion for summary judgment, finding the insurer could seek recovery of the settlement and defense costs. The ruling said Goldberg was not controlling because Atlantic-Newport and Granite had participated in the settlement negotiations with Mr. Papsis and had urged the insurer to resolve the suit.

The appeals court found Goldberg remained the controlling law in Massachusetts and that Berkley did not meet any of the requirements established in the decision that would entitle it to the recovery of the settlement or defense costs. 

Representatives for the parties did not respond to requests for comment.