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August 25, 2017

Legal Update
John G. O'Neill

Insurer’s “Result-Oriented” Coverage Investigation Violated Chapter 93A

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A federal court in Massachusetts has held that an insurer’s “result-oriented” coverage investigation, which occurred only after a claims representative’s premature decision that an insured plumber had made misrepresentations on his policy application, constituted unfair and deceptive conduct in violation of the state’s business-practices statute, Chapter 93A. See Continental Western Ins. Co., Inc. v. Preferred Mut. Ins. Co., C.A. No. 3:14-cv-14226 (D. Mass. Aug. 10, 2017) (Mastroianni, J.).

The insured plumber, Leonard Lodigiani, had been sued for causing a fire at a construction site. He initially told his defense counsel (assigned by the insurer, Preferred Mutual) and said in a recorded statement that he and another plumber had agreed to perform work on the project as “partners.” This was ostensibly contrary to Lodigiani’s policy application, in which he had said his business was a sole proprietorship.

The court found that the Preferred Mutual claims representative assigned to the matter, Raymond Kagels, unfairly seized on Lodigiani’s statements, without fully exploring the context in which they were made (including the fact that Lodigiani was 84 and suffered from unspecified “cognitive impairments”), and concluded prematurely that a legal partnership existed—and, therefore, a misrepresentation on the application had occurred.

While Preferred Mutual later retained coverage counsel to investigate the issue, the court found, Kagels sought to influence the investigation, resisted coverage counsel’s opinion that proving a partnership between the plumbers would be difficult, and repeatedly provided what Kagels characterized as “additional” and “new” evidence (which the court found was neither new nor additional) in an effort to pressure counsel into changing his opinion. Preferred Mutual’s ultimate decision to seek rescission of the policy based on misrepresentation of the “partnership” issue was made by a group that included several other executives as well as Kagels, but this did not insulate the insurer from liability, because the group did not, the court found, discuss or evaluate the evidence before adopting Kagels’s recommendation. The rescission issue was later litigated, and a jury found that there was no partnership, and thus no misrepresentation.

Adding to what it regarded as objectionable in the claims-handling process at Preferred Mutual, the federal court found that appointed defense counsel breached his ethical obligations to Lodigiani by simply passing along to the insurer the plumber’s reference to a partnership, without carefully discussing with Lodigiani what counsel must have known would be the coverage implications of the statement. This breach tainted Preferred Mutual’s subsequent reliance on the statement in seeking rescission. Overall, the court detected throughout the underlying matter an atmosphere of hostility to the insured, including an undercurrent of ageism.

The Preferred Mutual decision—which may yet be appealed—serves as a reminder of the importance of an insurer’s maintaining impartiality in coverage investigations. Claims representatives obviously have the right (indeed, the duty) to raise appropriate questions about coverage. But they may not leap hastily to conclusions, without a fair and considered review of the evidence.