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Note: P. Gioioso & Sons, Inc. (Insured), a construction company, purchased general worker’s liability and automobile insurance plans from Liberty Mutual Insurance Company (Insurer) beginning in 2001. In 2005, Insured began purchasing “lower cost, high deductible, occurrence-based insurance coverage” under which Insured was responsible for the first USD 300,000 of each covered loss. To secure its obligations thereunder, Insured and Insurer executed a security agreement requiring Insured to obtain a “clean, irrevocable letter of credit” in favor of Insurer for an amount pursuant to an attached schedule “subject to upward or downward adjustment in amounts by [Insurer] at least annually.”

Insurer subsequently adjusted the schedule such that Insured was required to obtain a USD 2,200,000 standby. Claiming Insurer had set an unreasonably high amount for the standby and causing Insured to lose business, Insured sued Insurer for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of a state statute providing a cause of action for unfair business practices. Insurer counterclaimed for reimbursement payments under an earlier policy requiring Insurer to defend Insured against lawsuits as well as for attorney’s fees and expenses under the security agreement. The trial court granted summary judgment in favor of Insurer on all claims and partial summary judgment on Insurer’s counterclaim, denying attorney’s fees and expenses. Insured and Insurer appealed. The Appeals Court of Massachusetts, Agnes, Sacks and Lemire, JJ., affirmed in part and reversed in part.

The appellate court looked to the text of the security agreement which provided that Insurer “may, at its sole discretion, determine that the estimated amount of unpaid Obligations is greater than the amount of the existing letter of credit”, and, upon giving notice to Insured, require Insured to obtain an amended or new standby to satisfy anticipated obligations under Insured’s policies. The appellate court concluded that “[Insured] failed to identify a genuine dispute of material fact” as to its claim of breach by Insurer because the contract conferred “sole discretion” on Insurer to determine the required security. Furthermore, Insured failed to provide any basis of genuine dispute that Insurer breached any implied covenants of good faith and fair dealing. The appellate court also affirmed summary judgment regarding Insured’s unfair practices claim noting that “[Insured]’s theories as to how [Insurer] violated [the state statute] are coextensive with its contract theories.”

The appellate court affirmed summary judgment granted in favor of Insurer regarding its counterclaim for reimbursement payments. The general liability policy provided that Insurer had the “right and duty to defend [Insured] against any suits seeking damages”, and for Insurer to settle suits. Insured argued that it was not liable because Insurer should have appealed the underlying lawsuit at the time. The appellate court disagreed noting that the standard for an insurer’s duty to pursue an appeal is based on a “reasonable likelihood of success”, and, in this case, pointing to “uncontroverted evidence”, the appellate court concluded that Insurer “exercised common prudence” and that its “decision to settle had an intelligent and reasoned basis”. The appellate court, however, reversed the trial court decision denying Insurer attorney’s fees and expenses. The appellate court looked to the text of the security agreement which provided for fees and expenses “in connection with (a) the exercise or enforcement of any of the rights or remedies of [Insurer] hereunder and/or (b) the failure by [Insured] to perform or observe any of the provisions hereof.” The appellate court reasoned that Insurer was “entitled by contract” to the fees and expenses and that the trial court’s limiting of expenses “only to fees incurred as a result of a breach of the security agreement’s terms” had the effect of rendering clause (b) “superfluous.” Reversing in part, the appellate court concluded that Insurer was entitled to a calculation of fees and expenses incurred in defending itself against Insured exclusive of costs associated with the separate reimbursement counterclaim and the costs of the appeal since Insurer failed to request for the same in its filings.

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