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Note: P. Gioioso & Sons, Inc. (Insured), a construction company that provides excavation and other services pertaining to underground water lines and sewers, purchased general worker’s liability and automobile insurance plans between 2001 and 2010 from Liberty Mutual Insurance Company (Insurer). From 2005 to 2010, the policies were high deductible under which Insured was responsible for the first USD 300,000 of each covered loss. Under these policies, Insurer would pay claims in advance and then be reimbursed by Insured. As a condition of this type of policy, Insured was required to sign a new Security Agreement each year and provide new assurance of reimbursement through a standby letter of credit in favor of Insurer. The Security Agreement provided that the standby was “subject to upward or downward adjustment in amount by [Insurer] at least annually” for both existing and future obligations.

Unhappy that Insurer had required a USD 2.2 million standby, Insured purchased insurance elsewhere, expecting a reduction in the amount of the standby. However, Insurer refused to reduce the amount of the standby, explaining that only current policyholders with good credit were eligible for such reductions.

Claiming Insurer had set an unreasonably high amount for the standby and caused Insured to lose business, Insured sued Insurer for breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, and violation of G.L.c. 93A, §11 (allowing for damages or equitable relief to a person engaging in trade or commerce who suffers a loss of money or property caused by employing another person in trade or commerce who engages in unfair or deceptive practices). Insurer counterclaimed for reimbursement payments under the policy. Insurer motioned for summary judgment.

The Massachusetts Superior Court, Business Litigation Session, Kaplan, J., granted summary judgment to Insurer on all four of Insured’s claims and partial summary judgment on the counterclaim.

Insured’s breach of contract and breach of covenant of good faith and fair dealing claims depended on establishing that Insurer had gained some undue advantages under the Security Agreement. Insured failed to produce any meaningful evidence, and the court held “[Insurer] received no economic advantage by asking for collateral in an amount in excess of what it reasonably believed was required to secure [Insured’s] future financial obligations to it.”Furthermore, Insurer produced a report written by one of its actuaries, which explained that “[Insurer’s] methodology for estimating future losses on the Policies was standard in the industry and the LDFs [loss development factors] that it employed were actually more beneficial to insureds than those used by other casualty insurers.” The Judge also found that Insurer did not act in bad faith regarding the liquidation credit policy. While Insurer could have been clearer about its use of liquidation credits, “the fact that [Insurer] was willing to be undersecured with respect to existing policy holders that had good credit, does not tend to prove that it acted in bad faith in exercising its discretion to demand full security from former policyholders.”

Insured’s claim of breach of fiduciary duty was rejected because no such relationship existed between Insured and Insurer. The Judge found that the relationship between Insured and Insurer “as it relates to the claims asserted in this case, was that of counterparties to a contract.” Similarly, the Judge dismissed Insured’s final claim regarding a violation of G.L.c. 93A, § 11 because “no breach of contract, breach of the implied covenant of good faith and fair dealing, and no fiduciary relationship between [Insured] and [Insurer]” existed.

Finally, Insurer argued it was entitled to recover its litigation fees and expenses in defending against Insured’s complaint and prosecuting its own counterclaim. The Security Agreement provided that the policyholder would pay “reasonable legal fees and expenses … which [Insurer] may incur.” Because the policy terms were ambiguous, the Judge denied Insurer’s request for recovery of litigation fees, concluding that any ambiguity in the Security Agreement “must be resolved against [Insurer], as it would be in interpreting a term of the policy.”

[KEC]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.