Salvati v. American Insurance Co.
2017 U.S. App. LEXIS 7366, 2017 WL 1488238, 855 F.3d 40 (2017)
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Rule of Law:
An excess insurance policy's duty to indemnify is triggered when the insured becomes legally obligated to pay damages in excess of primary coverage, an obligation which can arise from a court judgment or a settlement agreement, provided the settlement itself creates a concrete legal obligation on the insured to pay the specific excess amount.
Facts:
- On June 17, 2010, Gerardo Salvati died from injuries sustained while doing maintenance work at the Lovejoy Wharf building in Boston when a large piece of brickwork came loose and fell, causing him to fall to his death.
- The Lovejoy Wharf building had been in a state of disrepair for years, and its owners were aware of the loose and decaying brickwork needing repair.
- The Underlying Defendants, including Robert Easton (Salvati's supervisor) and the building owners, held a primary insurance policy through Western World Insurance Company for $1 million and an excess policy through American Insurance Company (AIC) for $9 million.
- In October 2012, AIC informed the Underlying Defendants that it would not defend them against, or indemnify them for damages from, Salvati’s suit.
- Despite AIC's refusal to defend the Underlying Defendants, a representative and an attorney from AIC were present during mediation sessions where Salvati requested damages in excess of the primary insurance coverage.
- In December 2014, Salvati and the Underlying Defendants reached a $6 million Settlement Agreement.
- The Settlement Agreement stipulated that Western World would pay its full $1 million primary policy limit, in exchange for which both Western World and the Underlying Defendants were released from any further liability.
- The Agreement assigned all rights previously held by the Underlying Defendants against AIC to Salvati for the remaining $5 million, but it also specified that the settlement was not contingent on the ultimate availability of excess coverage and that the Underlying Defendants expressly disclaimed wrongdoing.
Procedural Posture:
- In September 2011, Lucia Salvati (Salvati), individually and as executrix of her husband's estate, filed a lawsuit in Suffolk County Superior Court against Robert Easton and the building owners (Underlying Defendants) seeking damages for wrongful death and loss of consortium.
- In April 2015, Salvati, as assignee of the Underlying Defendants, filed a two-count complaint against AIC in Suffolk County Superior Court alleging breach of contract and seeking declaratory judgment.
- AIC removed the case to federal court.
- Salvati filed an amended complaint, adding claims under Massachusetts General Laws chapter 93A (consumer protection), chapter 176D (unfair and deceptive acts in insurance), and two counts of professional negligence.
- AIC responded with a second motion to dismiss.
- The district court granted AIC's motion to dismiss, holding that AIC's duty to indemnify was not triggered because no judgment had entered against the Underlying Defendants and the Underlying Action was dismissed with prejudice. It also dismissed the other counts because AIC's obligation to pay was a precondition, and Count III for no private cause of action. Salvati then appealed the district court's dismissal to the First Circuit.
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Issue:
Does an excess insurance policy's duty to indemnify an insured for damages exceeding primary coverage become triggered by a settlement agreement between the plaintiff and the insured if that agreement releases the insured from liability and does not impose a direct legal obligation on the insured to pay the excess amount?
Opinions:
Majority - Lipez, Circuit Judge
No, an excess insurance policy's duty to indemnify is not triggered by a settlement agreement if that agreement releases the insured from liability and does not impose a direct legal obligation on the insured to pay the excess amount. The First Circuit affirmed the district court's dismissal, but on different grounds. While the district court incorrectly concluded that only a court judgment could trigger AIC's duty, the First Circuit clarified that an excess insurer's duty to indemnify can arise from a settlement agreement, not just a judgment. The policy language, particularly the definition of 'Suit' including alternative dispute resolution, the use of 'judgments or settlements' as alternatives, and the requirement for prior authorization for settlements, indicates that 'legally obligated to pay as damages' does not strictly require a judgment. However, in this specific case, the Settlement Agreement did not create a 'legal obligation to pay' on the part of the Underlying Defendants for the $5 million excess. The agreement explicitly released the Underlying Defendants from liability and only required Western World to pay its $1 million primary policy limit. The remaining $5 million was structured as an assignment of rights to Salvati to pursue AIC directly, rather than an obligation for the Underlying Defendants to pay Salvati. Thus, because the Underlying Defendants were never legally obligated to pay Salvati the amount in excess of the primary policy, the Excess Policy's indemnification provision was not triggered. The court distinguished this from arrangements like those in Campione v. Wilson, where a judgment was entered contemporaneously with a release, creating a legal obligation that could be pursued against the insurer. The court also affirmed the dismissal of Salvati's other claims (declaratory judgment, consumer protection, and professional negligence) because they hinged on AIC's obligation to pay, and the Chapter 176D claim because it provides no private cause of action.
Concurring - Stahl, Circuit Judge
Yes, an excess insurance policy's duty to indemnify is not triggered by a settlement agreement if that agreement releases the insured from liability and does not impose a direct legal obligation on the insured to pay the excess amount, but the court should acknowledge the troubling practical consequences of this decision. While Justice Stahl concurred with the majority's legal analysis based on the contract language and limited Massachusetts precedent, he expressed concern about the potential ramifications. He noted that insureds and plaintiffs reasonably expect excess insurance to cover catastrophic liabilities, especially when the excess carrier is involved in settlement discussions. The strict interpretation of the settlement agreement's terms, particularly requiring a direct 'legal obligation to pay' from the insured even when the insured is released from liability, could discourage future settlements. This outcome runs counter to public policy favoring settlement and could lead to more trials, higher costs, and less effective excess insurance coverage. Justice Stahl highlighted that in other jurisdictions, courts often impose a broader duty to defend on excess carriers and may find insurers waive their right to rely on limiting policy language if they breach their duty to defend. He regretted that Massachusetts law offers limited guidance on these issues and that Salvati did not raise arguments such as waiver. He hoped that Massachusetts courts would consider the practical effects of such decisions in future cases.
Analysis:
This case provides important clarification on the trigger for an excess insurer's duty to indemnify in Massachusetts, establishing that a judgment is not strictly required, but a settlement must concretely obligate the insured to pay the excess amount. It emphasizes strict contractual interpretation, even when it leads to outcomes that appear to frustrate the reasonable expectations of insured parties and could disincentivize settlement. The decision underscores the critical importance of carefully structuring settlement agreements involving excess insurance to ensure the insured's 'legal obligation to pay' the excess amount is clearly established, even if accompanied by a release or covenant not to execute. This ruling may prompt more nuanced settlement strategies to ensure excess coverage is triggered, potentially leading to increased litigation in complex insurance disputes if not carefully navigated.
