Even when an insurer receives very belated notice of a suit against its insured, it can face harsh consequences if it does not take action to provide a defense.

Despite a policy limit of only $50,000 and notice of suit received by the insurer only after an entry of default against the insured in the underlying tort action, the Massachusetts Supreme Judicial Court (SJC) recently upheld a $3,574,357 judgment against an insurer for breaching its duty to defend. 

In Boyle, a tire exploded inside a garage owned by C&N, severely injuring plaintiff. C&N notified its insurer of the accident, but did not notify the insurer when plaintiff later filed the lawsuit because C&N had ceased operations. Therefore, the insurer did not defend the underlying suit, the court entered a default, and awarded a $2.25 million judgment by default after a damages hearing. Prior to the hearing, plaintiff's lawyer sent notice to the insurer about the hearing, but the insurer did not intervene. 

C&N later assigned its rights to the injured plaintiff, who sued the insurer for breach of its duty to defend. Plaintiff and the insurer settled the underlying tort suit for $1,324,357 before trial. In the suit over C&N's assigned breach of duty to defend claim, the court found the insurer liable for the $2.25 million judgment by default, minus the settlement amount. The SJC affirmed, but remanded for entry of a modified judgment holding the insurer liable for both the judgment by default and the settlement. 

The SJC reasoned that an insurer still has a broad duty to defend and to settle when liability is clear despite very belated notice of the suit. Noting that the insurer had the opportunity to intervene upon its eventual receipt of notice, the SJC concluded that the insurer had not been prejudiced. The SJC also concluded that the insurer did not offer to settle for the policy limit at any point, which plaintiff would have accepted. Fortunately, the insurer escaped additional damages because the SJC found the insurer's actions merely negligent, and not willful.

This decision imposes an extraordinary burden on insurers to defend claims even when the insurer is provided with belated notice very late in the litigation process. Indeed, here the court declined to conclude the insurer was prejudiced despite it receiving notice of the suit after default had already been entered. In light of this harsh result, it is unclear what the court would conclude was prejudice sufficient to deprive the insurer of an opportunity to mount an effective defense. 

Boyle v. Zurich American Insurance Company, 472 Mass. 649 (2015)

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