Consent to Settle Clauses Are Not Against Public Policy and Are Enforceable

The Massachusetts Supreme Court, applying Massachusetts law, upheld the trial court’s ruling and held that consent to settle clauses in professional liability policies are not against public policy and are enforceable.  Thus, an insurer is not liable for its insured’s refusal to settle litigation.

Homeowners Douglas Rawan and Kristen Rawan hired Kanayo Lala, a registered professional engineer, to design structural aspects of their new home.  Lala significantly underestimated the building loads and stresses in his calculations for the design.  After the construction was completed, its beams and joists began to crack.  The Rowans sued Lala for professional negligence.

During the relevant time period, Continental Casualty Company (“Continental”) insured Lala under a professional liability policy with a per-claim limit of $250,000.  The policy provided that Continental would “not settle any claim without the informed consent” of Lala.

Continental appointed defense attorneys for Lala.  The Rawan’s consulting engineer and a third-party engineer expert concluded that Lala made serious computational errors based on erroneous engineering assumptions.   A Continental claims representative wrote to Lala and defense counsel, stating that the case may be worth six figures and suggested mediation.  The defense counsel wrote back stating: “There is [zero] chance at settling this [case] under $100,000.”

The Rawan’s initially demanded $272,890 in damages, but ultimately their demand increased to $1.3 million.  The Rawan’s amended their complaint adding Continental as a defendant and alleging that it engaged in bad faith settlement practices.  The trial court stayed the action against Continental until the case against Lala was resolved.  Lala refused to authorize settlement discussions above $100,000.  Lala was advised by counsel that there was a real possibility of a verdict at trial in excess of the limits of the policy.  Lala, however, did not authorize any additional settlement discussions.   The jury awarded the Rawans $420,000 in damages, which the judge increased to $440,000.  Continental sent the Rawan’s a check for $141,435.98, the remaining amount on Lala’s policy after deducting the legal fees incurred of the defense.  Lala paid the remainder of the judgment.

The Rawans then moved for summary judgment on their claim against Continental for failure to effectuate a prompt, fair, and equitable settlement.  Continental cross-moved for summary judgment.  The trial granted Continental’s motion, and the Rawan’s appealed.  The Massachusetts Supreme Court transferred the appeal on its own motion.

The issue before the Massachusetts Supreme Court was whether consent to settle clauses in professional liability policies conflict with an insurer’s statutory obligation to effectuate a prompt settlement once liability has been clearly established.  Under Massachusetts law, an insurers’ failure to “effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear” is an unfair claim settlement practice.  Similarly, an insurers’ refusal to pay claims “without conducting a reasonable investigation based on all available information” constitutes an unfair claim settlement practice.

The Massachusetts Supreme Court found that there was no legislative intent to preclude consent to settle clauses in professional liability policies and that such clauses are not void as a matter of public policy.  First, the Massachusetts Supreme Court considered the fact that because professional liability insurance is voluntary, not mandatory, consent to settle clauses encourage professionals to purchase such insurance, thereby providing coverage for the insured and deeper pockets to compensate those injured by the insured.  Moreover, control over settlement is important to professionals because settlement of malpractice claims directly implicates their reputation.  Next, the Massachusetts Supreme Court focused on freedom of contract and the public interest to give individuals broad powers to order their affairs through legally enforceable agreements.  Lastly, the Massachusetts Supreme Court found significance in the absence of any express or implied prohibition, or even any reference to consent to settle clauses in the legislative history.

Ultimately, it was determined that it was not appropriate to impute the Lala’s refusal to settle to Continental when Continental’s ability to settle the claim was contingent on Lala’s consent.  “The proximate cause of the [Rawan’s] harm was the insured’s refusal to settle, and not any conduct attributable to Continental.”   The Massachusetts Supreme Court held that a consent to settle provision does not violate an insurer’s duty to effectuate a prompt, fair, and equitable settlement; however, it noted that “[a]n insurer still owes a duty to conduct a reasonable investigation and engage in good faith settlement attempts consistent with its duty to both its insured and the claimant.”  Rawan v. Continental Cas. Co., No. SJC-12691 (Sup. Ct. Mass. Dec. 16, 2019).