This article was originally published in the Boston Bar Association’s Financial Services Section Newsletter.

Insurers frequently encounter a dilemma when faced with a complaint that describes the claim in a manner that would trigger a duty to defend, when the insurer also has information that strongly suggests that the actual facts of the case would not be covered under the policy.  As a general rule, the insurer has a duty to defend even frivolous claims until it has been affirmatively determined as a matter of fact that there is no basis for coverage.  In order to obtain that determination, insurers have been forced to file and litigate a declaratory judgment action, thereby incurring substantial expenses in the coverage action while also paying for the defense in the underlying action.  The burden on the insurer is especially great when it defends a case in which coverage is disputed because it may be required to pay the more expensive rates charged by independent counsel.

A recent decision by the Massachusetts Supreme Judicial Court suggests that Massachusetts may diverge from the national trend in dealing with this common situation by allowing the insurer to stay the underlying action until the coverage issue is resolved.  In Metropolitan Property and Cas. Ins. Co. v. Morrison,¹ the underlying complaint alleged that Brian Langlier, a police officer, broke his ankle when he attempted to prevent the insured, Robert Morrison, from avoiding arrest in the course of a drug stakeout.  The complaint described Morrison’s conduct as “negligent and reckless.”  However, the insurer was aware that Morrison had pleaded guilty to charges of assault and battery on a public employee, resisting arrest, and disorderly conduct.  With this knowledge in hand, Morrison’s insurer refused to defend its insured, and, instead, filed a declaratory judgment action, arguing that coverage was precluded for several reasons, including an exclusion for injuries “expected or intended by an insured or which is the result of an insured’s intentional and criminal acts or omissions.”  However, while the declaratory judgment was pending, the judge in the personal injury action entered a default judgment because the defendant had not filed an answer.  Following an assessment of damages hearing, the court awarded $84,391.79 to Officer Langlier, and $10,000 to his wife.

In ruling on the coverage action, the Supreme Judicial Court held that the insurer could not avoid the consequences of the default judgment by relying upon the undisputed evidence of Morrison’s guilty pleas for assault and resisting arrest.  This is because, unlike a conviction that is the result of a trial, a guilty plea does not prevent the defendant from re-litigating an issue that was decided in the criminal action.  Thus, a guilty plea would be admissible in a subsequent civil action but it would not be conclusive.  Because the complaint did not allege intentional or criminal conduct, the insurer had a duty to defend and its failure to do so meant that it was bound by the default judgment.

However, the Court pointed out that the insurer had an alternative to simply refusing to defend while awaiting the result of the declaratory judgment action:

Where there is uncertainty as to whether an insurer owes a duty to defend, the insurer has the option of providing the insured with a defense under a reservation of rights, filing a declaratory judgment action to resolve whether it owes a duty to defend or to indemnify, moving to stay the underlying action until a declaratory judgment enters, and withdrawing from the defense if it obtains a declaration that it owes no duty to the insured.²

By taking this path, the insurer is only required to pay for the cost of the declaratory judgment litigation and not run the risk of being bound by the outcome of the underlying action.  If, as was likely in Morrison, the court were to hold that the exclusion precluded coverage, the insurer could then withdraw from the defense of the underlying action.

The Court’s explicit recommendation to stay the tort action is somewhat surprising given the prevailing trend in other states.  For example, in Hughes v. Kore of Indiana Enterprise, Inc.,³ the U.S. District Court for the Southern District of Indiana denied an insurer’s motion to intervene for the purpose of seeking a stay in a class action dispute involving ATM fees.  Citing Fed. R. Civ. P. 24(b) and (c), the court held that the motion would unduly delay resolution of the underlying action.  More generally, courts have held that pursuing a declaratory judgment action that involves factual issues in dispute in the underlying action would be prejudicial to the insured.⁴

Although the Supreme Judicial Court did not grapple with these concerns, the decision appears to reflect some dissatisfaction with the attempts of claimants to game the system by drafting pleadings in a manner designed to trigger insurance coverage, or, at least, a duty to defend.  By outlining a process in which the insurer can be relieved of such an obligation at a time when the determination of the duty to defend is meaningful, the Court may be attempting to discourage further efforts at creative pleading.  At the least, it would appear that when an insured has plead guilty to a crime, the insurer could be relieved of the necessity of providing a defense while the coverage issue is resolved in a declaratory judgment action.

¹ 460 Mass. 352 (2011)

² 460 Mass. at 358-59.

³ 2013 WL 312868 (S.D. Ind. 2013).

⁴ Windt, Insurance Claims and Disputes, §8:4 (Sixth Ed.).