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Thelen Reid Brown Raysman & Steiner LLP
J&S
Insulation, Inc. was a subcontractor on a construction project
at Logan Airport in Boston. During the project, a dispute
arose between J&S and the general contractor. The dispute
ultimately went to trial and resulted in a jury verdict
in favor of J&S on its claim that the general contractor
had wrongfully withheld $203,867 in payments due under the
subcontract. Immediately afterward, J&S made a demand
on United States Fidelity & Guaranty ("USF&G"),
the general contractor's payment bond surety, for payment
consistent with the jury verdict.
USF&G
failed to make payment on the jury verdict or to offer a
settlement within a reasonable time. As a result, J&S
pursued a bond claim and a claim for unfair or deceptive
practices against USF&G. The bond claim was resolved
first and resulted in a judgment of $410,246 in favor of
J&S, equal to the jury verdict awarded against the general
contractor, plus interest and attorney fees. USF&G paid
the judgment. Several years later, J&S's unfair or deceptive
practices action against USF&G went to trial, resulting
in a judgment of $966,285 against USF&G. Pursuant to
Massachusetts law, the trial court awarded J&S punitive
damages equal to two times the amount of its judgment on
the bond claim. Also awarded were interest and attorney
fees. USF&G challenged the award, but on appeal the
Supreme Judicial Court of Massachusetts upheld the award
of punitive damages. R.W. Granger & Sons, Inc. v.
J&S Insulation, Inc., 435 Mass. 66, 754 N.E.2d 668
(2001).
Massachusetts
General Laws Chapter 93A, §11, the unfair or deceptive
practices statute, provides that "any person who engages
in the conduct of any trade or commerce and who suffers
any loss of money... as a result of the use or employment
by another person who engages in any trade or commerce of...
an unfair or deceptive act or practice... may... bring an
action... for damages and such equitable relief... as the
court deems to be necessary and proper." The unfair
or deceptive practices statute provided that "if the
court finds for the [party asserting the claim], recovery
shall be in the amount of actual damages; or up to three,
but not less than two, times such amount if the court finds
that the use or employment of the method of competition
or the act or practice was a willful and knowing violation."
On
appeal, USF&G argued that there was insufficient evidence
to support a finding that its conduct supported a claim
under the unfair or deceptive practices statute. The court
disagreed.
First,
the court found that USF&G had a statutory duty as an
insurer to "effectuate a prompt, fair and equitable
settlement" once its liability as a surety became reasonably
clear. The court determined that USF&G's liability became
reasonably clear once the jury verdict against the general
contractor was rendered. At that point, USF&G had an
obligation to effectuate a prompt, fair and equitable settlement
with J&S.
The
court ruled that USF&G failed to effectuate either a
"prompt" settlement or a "fair and equitable"
one. The court noted that USF&G made its first settlement
offer to J&S more than four months after the jury verdict
and after J&S had first made its demand on the payment
bond. The court also found that USF&G delayed for almost
an entire year before actually paying J&S and then,
at the same time, offered no explanation for the delay.
In
determining that USF&G failed to effectuate a "fair
and equitable" settlement, the court noted that USF&G's
initial offer of $230,000 to settle all claims was wholly
inadequate and unrealistic given the amount of the jury
verdict. The court also found it important that once J&S
had rejected USF&G's low-ball offer, USF&G made
no further attempts to settle the claim.
As
a second basis for affirming the judgment, the court found
that USF&G, by first failing to respond to the demand
by J&S and then by offering a low-ball settlement, engaged
in unfair and deceptive practices. The court looked to a
Massachusetts statute prohibiting insurers from forcing
insureds to sue to recover amounts due them by offering
substantially less than the amounts ultimately recovered.
The court found that USF&G's conduct violated this statute.
Moreover, the court found, once the unfair and deceptive
practices claim was filed, USF&G failed to come forward
with any basis for contesting liability under the payment
bond.
In
sum, the court looked to the totality of USF&G's post-jury
verdict conduct -- that USF&G denied payment on the
bond, interposed a groundless denial of liability and then
offered a substantially reduced settlement amount because
it sought to leverage a favorable settlement from J&S
-- and determined that the evidence warranted a finding
that USF&G's conduct was unfair and deceptive. J&S
was forced to litigate a valid claim against USF&G even
though USF&G knew that it was liable under the payment
bond.
USF&G
also argued that the trial court erred in awarding punitive
damages because its conduct was neither willful nor knowing.
The court held the same conduct that supported a claim under
the statute established USF&G had acted willfully and
knowingly by proceeding in bad faith in denying reasonable
settlement of J&S's underlying bond claim. The court
also reasoned that the award was consistent with the important
public policy of encouraging fair and efficient resolution
of business disputes. The punitive damages provide a disincentive
to sureties that seek to avoid liability on their bonds.
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©2001
Thelen Reid Brown Raysman & Steiner LLP
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