First Circuit Weighs In On Insurer’s Duty To Defend In Pollution Case

Decades ago, a substantial oil spill occurred in the Salem, Massachusetts area on property owned by a museum.  the pollution eventually migrated to the land of a down gradient neighbor, who brought a private claim against the museum.  The Massachusetts Department of Environmental Protection issued a Notice of Responsibility to the museum.  The museum made a demand on its insurer of both the public and private claim.  The insurer accepted defense for the public claim with a reservation of rights but the insurer denied its duty to defend the private claim.

The insurer, however, did not pay the environmental consultant bills that the museum submitted to it and the museum then filed a four-count complaint against the insurer alleging it breached its duty to investigate the pollution claims and to defend and indemnify the museum in connection with both the private and public claims, and that it violated the Massachusetts consumer protection laws.  The district court determined that the insurer had breached its duties to the museum and ordered it to pay $1.5 million, including punitive damages for violating the state’s consumer protection laws.

The First Circuit concluded earlier today that the insurer had in fact breached its duty to defend.  Specifically, the insurer had agreed in 2004 to defend the public claim with a reservation of rights but then paid nothing to its insured until cornered by the museum through a 2007 motion for summary judgment.  The court explained that the insurer’s persistent failure to make any payment toward defense costs despite having nominally accepted the duty to defend may be treated as a wrongful refusal to defend upon receipt of notice of a claim.  The insurer’s disagreement with the rates being charged was immaterial:  “[the insurer’s] breach of its duty to defend does not rest on calculations, but on its wholesale apathy towards its contractual defense obligation that it owed to its insured — and that it affirmatively accepted.”

The First Circuit, however, remanded the case for a recalculation of damages because it reversed the district court’s finding that the insurer also breached the Massachusetts consumer protection laws. Specifically, the court explained that the record did not display the type of egregious settlement malfeasance that would be actionable in a business-to-business context to subject it to punitive damages under these laws.