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Massachusetts Bay Insurance Company (MBIC) sought $2 million in damages it paid under a reservation of rights to settle disputes against its insured, Neuropathy Solutions, Inc. (Neuropathy).
IN Massachusetts Bay Insurance Company v. Neuropathy Solutions, Inc., dba Superior Health Centers and Rigoberto Bernal, an individual; et al., no. 22-55272, United States Court of Appeals, Ninth Circuit (April 3, 2023) the Ninth Circuit determined who owed the settlement payment.
The district court’s decision
With regard to the request for assessment of the submissions, the district court considered that MBIC had an obligation to defend and indemnify Neuropathy in the underlying case (the Bernal action), and that MBIC was thus not entitled to any compensation.
MBIC met the conditions to request a refund of the amount paid to settle Bernal measures for neuropathy. To seek relief under California law, an insurer must provide (1) a prompt and express reservation of rights; (2) an express notice to the insured of the insurer’s intention to accept a proposed settlement offer; and (3) an express offer to the insured that it may assume its own defense in the event that the insured does not wish to accept the proposed settlement.
The reservation of rights
MBIC provided a prompt and express reservation of rights and informed Neuropathy of its intention to settle the claims for the $2 million insurance limit, subject to Neuropathy’s approval and MBIC’s reservation of rights. This letter also informed Neuropathy of its “right to assume the continued management of this matter going forward” if Neuropathy did not want to settle the claims for $2 million. Neuropathy signed the settlement agreement on May 28, 2021. Contrary to Neuropathy’s arguments, MBIC gave Neuropathy sufficient time to consider the proposed settlement.
Under California law, the insurer’s obligation to indemnify claims actually covered is based on proven facts. In contrast, the insurer’s duty to defend claims that are only potentially covered runs on facts alleged or otherwise disclosed. The insurer’s obligation to defend is thus broader than its obligation to compensate.
The district court was wrong
The Ninth Circuit concluded that the district court erred by invoking the broader standard of duty to defend (coverage potential) to require MBIC to cover not only the costs of defending the underlying Bernal lawsuit but also the $2 million paid to settle it.
To the extent that the underlying Bernal action falls within the coverage provisions of the insurance. coverage is excluded under the policy’s “Professional Services” exclusion. This provision excludes: “bodily injury”, “property damage”, [and] “personal and publicity injury” caused by the provision of, or failure to provide, any professional service, advice or instruction: (1) By [the insured]; or (2) On [the insured’s] on behalf of; or (3) From whom [the insured] assumed liability by reason of a contract or agreement, regardless of whether any such service, advice or instruction is customary in the profession of any insured.”
Then, the Ninth Circuit concluded that based on California case law, the policy text and the operative complaint in Bernal action, neuropathy liability i Bernal fall within the “Professional Services” exception.
The “Professional Services” exclusion extends to errors in monitoring and supervising others in the provision of professional services, and Neuropathy incurred liability due to the provision of professional advertising and medical services, not inadequate record keeping or poor customer service. Finally, the complaint’s allegation that Neuropathy engaged in discriminatory marketing techniques and high-pressure sales tactics falls within the professional services exception for advertising services and health advice or instruction.
Neuropathy liability i Bernal The action was thus excluded from coverage, and MBIC is entitled to a refund of the $2 million it paid to settle that lawsuit.
Liability insurance provides a very broad obligation to defend an insured that is more than the obligation to pay compensation. In this case, MBIC paid to defend its insureds and properly gave the insured the right to take over the defense if it did not want to settle. It refused, and the Ninth Circuit required the insured to reimburse the insurer for the $2 million paid to settle.
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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and email@example.com
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