Bad Faith Insurance Practices

Ken Margolin

Contributor

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Massachusetts law requires insurance companies to make "prompt, fair and equitable settlements of claims in which liability has become reasonably clear." M.G.L. c. 176D, §3(f). An insurer's failure to do so is an unfair trade practice, theoretically exposing the insurer to double or treble damages plus the plaintiff's attorneys fees. It is also an unfair insurance practice for an insurer to offer substantially less than a claim is worth and to thus force an insured or injured party to file a lawsuit to obtain a fair settlement.

While the unfair insurance practices law can be an important tool for plaintiffs' attorneys, it will not aid settlement in the majority of cases. The Massachusetts appellate courts have given a narrow interpretation to "chapter 176D." Rather than viewing it as a law designed to encourage settlements in most cases, the courts have seen the law as requiring settlement efforts by insurers only in cases in which the insurer's liability is almost certainly clear, as opposed to the "reasonably clear" language of the statute. In most cases, it is relatively easy for an insurer to conduct a modest investigation and declare that fault or the precise cause of plaintiff's injuries are in doubt. With such modest effort, the insurer will have no duty to attempt a settlement. Nevertheless, in any case in which the defense is weak or the defendant appears to have altered records or hidden or destroyed evidence, an unfair insurance practices letter should be written once sufficient facts have been gathered. A well documented demand letter may result in a greater willingness by the insurer to talk settlement. In the exceptional case, a demand letter, if ignored, may result in multiple damages if the plaintiff obtains a jury verdict in its favor, on a case the defendant's insurer should have settled.