SJC Holds Consent-to-Settle Clauses in Professional Liability Insurance Policies Valid

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The Supreme Judicial Court recently issued a decision that confirms the legality of consent-to-settle clauses in professional liability insurance policies. In Rawan v. Continental Casualty Company, the SJC held that the refusal of an insured party to settle an underlying tort claim limits the insurance company's exposure to claims of unfair claim settlement practices as long as the company operates in good faith.

In Rawan, Continental had issued a professional liability policy to engineer Kanayo Lala that contained a consent-to-settle clause. The plaintiff homeowners, the Rawans, sued Lala for engineering design errors. In the course of that tort litigation, Continental engaged attorneys to represent Lala. After both plaintiffs' expert and a neutral third-party engineering expert opined that there were serious design errors and concerns about the structural integrity of the plaintiffs' house, Continental recommended that Lala settle the case, but Lala refused to consent to a settlement with the Rawans. The Rawans ultimately prevailed at trial and obtained a judgment against Lala. Continental paid a portion of the judgment up to the policy limit after subtracting the substantial costs and attorneys' fees expended in defending the action, and Lala paid the rest of the judgment.

The Rawans then pursued claims against Continental under the Massachusetts Unfair Business Practices Act, M.G.L. c. 93A and c. 176D, both of which prohibit unfair business practices, alleging among other things that Continental had engaged in unfair claim settlement practices by failing to settle their claims against Lala even after his liability was reasonably clear. Continental moved to dismiss the Rawans' claims on grounds that the consent-to-settle clause in the policy prevented them from settling the case over Lala's objection. The Superior Court agreed with Continental and issued summary judgment in its favor, finding that the consent-to-settle clause in the policy limited the company's ability to engage in further settlement practices with the plaintiffs once Lala refused to give the company consent to settle the claims against him.

On appeal, the Supreme Judicial Court affirmed the grant of summary judgment, and held, as a matter of law, that consent-to-settle clauses in professional liability polices do not violate M.G.L. c. 176D, § 3(9)(f). The Court went on to hold that an insurer still owes residual duties to a third-party claimant under M.G.L. c. 176D even when an insured refuses to settle, but concluded that, under the particular circumstances in that case, "Continental made good faith efforts to investigate the claim and encourage its insured to settle."

Importantly, the Court held that the existence of a consent-to-settle clause "does not mean that an insurer . . . is otherwise exonerated from the duties imposed by G.L. c. 176D." The SJC confirmed that the insurer's duty to its insured can be in tension with its duty to act in good faith towards a third-party claimant. The Court explained: "The determination whether an insurer has complied with its dual obligations, despite the existence of a consent-to-settle clause, is a factual one to be measured in terms of the insurer's good faith efforts and transparency toward both its insured and a third-party claimant. These efforts would include a thorough investigation of the facts, a careful attempt to determine the value of a claim, good faith efforts to convince the insured to settle for such an amount, and the absence of misleading, improper, or 'extortionate' conduct towards the third-party claimant."

Rawan is an important clarification for insurers and holders of professional liability policies that consent-to-settle clauses are valid under applicable statutory law. However, the case also underscores that insurers must take care to exercise good faith in analyzing and disposing of claims by third party claimants, and ensure that they comply with dual duties to insureds and third party claimants.

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