No. 96-1193DCommonwealth of Massachusetts Superior Court, CIVIL ACTION ESSEX, ss.
March, 1998
FABRICANT, JUSTICE.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER FOR JUDGMENT
This action to reach and apply the proceeds of a legal malpractice insurance policy was tried before me, jury-waived, on February 2, 3, and 25, 1998. After consideration of all evidence presented, memoranda of law submitted, and arguments of counsel, I make the following findings and rulings.
A. Stipulated Facts.
At the outset of the trial, the parties submitted an “Agreed Statement of Facts,” consisting of 25 numbered paragraphs, setting forth facts that are undisputed between the parties. The stipulated facts are as follows:
1. On May 2, 1990, Mary Flynn was struck while crossing the street by an automobile driven by Evelyn Scannell.
2. Mrs. Flynn thereafter retained Attorney Joseph Orlando of Gloucester to represent her with respect to the accident.
3. In August of 1990, Mrs. Flynn discharged Attorney Orlando and retained Attorney Sheeran to represent her with respect to the accident, under a standard contingent fee agreement providing that one third of any recovery would be payable as a fee.
4. Mrs. Scannell’s automobile insurance policy, issued by Liberty Mutual Insurance Company, had a $10,000 limit of liability on account of bodily injury to others.
5. Mrs. Flynn’s automobile insurance policy, issued by Safety Insurance Company, had a $10,000 limit of liability for injuries caused by an underinsured motorist.
6. In July of 1991, Attorney Sheeran obtained an Asset Investigation Report prepared by Lajoie Investigations, Inc., of Worcester, indicating that Mrs. Scannell had no assets other than the 1986 Nissan which she was driving at the time of the accident. On July 29, 1991, Attorney Sheeran sent a copy of the report to Mrs. Flynn.
7. In or about July, 1991, Attorney Sheeran advised Mrs. Flynn to settle her claim for $20,000, of which $10,000 was to be paid by Liberty Mutual Insurance Company and $10,000 was to paid by Safety Insurance Company. Mrs. Flynn agreed to release Mrs. Scannell and Liberty Mutual for $10,000 and she agreed to release Safety Insurance Company for additional $10,000.
8. This settlement represented the full limits of Mrs. Scannell’s and Mrs. Flynn’s automobile insurance. In or about August, 1991, Attorney Sheeran converted to his own use the combined settlement proceeds of $20,000.
9. In or about March, 1992, Mrs. Flynn discharged Attorney Sheeran as her counsel and demanded the return of her file.
10. On May 29, 1992, Attorney Sheeran’s license to practice law was suspended by the Board of Bar Overseers, based on multiple allegations of forgery and embezzlement of client funds. 8 Mass. Atty. Discipline Rpts. 213 (1992).
11. In or about June, 1992, Mrs. Flynn retained Attorney Richard Howard, of Perkins, Smith Cohen in Boston, to represent her with respect to claims against Attorney Sheeran.
12. In or about October, 1990, New England Insurance Company (“NEIC”) issued Policy #LP48294, naming the firm of Sheeran
Porcello as the insured. The policy was written on a claims made basis with a policy period of October 31, 1990, through October 31, 1991. No claims relating to Mrs. Flynn were made or reported to NEIC within that time period and that policy is not at issue in this case.
13. In or about November, 1991, NEIC issued Policy # LP53453, naming John Sheeran, individually, as the insured. This policy also was written on a claims made basis, with a policy period of October 31, 1991, through October 31, 1992.
14. In or about November, 1991, John Porcello purchased a professional liability insurance policy from CNA Insurance Company (“CNA”). NEIC did not insure Attorney Porcello as to claims made against him after October 31, 1991.
15. Between June and October of 1992, Attorney Sheeran was represented by Attorney William Worth of Boston. In that time period, Attorney Worth sent NEIC written notice of at least 14 claims against Attorney Sheeran.
16. Attorney Worth never gave NEIC notice of a claim by Mrs. Flynn.
17. Attorney Sheeran never gave NEIC notice of a claim by Mrs. Flynn.
18. On or about July 15, 1992, Attorney Howard sent a letter to Richard Burkett, a copy of which is designated as Exhibit 5 on the parties’ Joint List of Exhibits.
19. On or about October 23, 1992, Mrs. Flynn filed suit in the District Court, naming Attorney Sheeran and Attorney Porcello as defendants. Service was made on Sheeran, accordingly to the deputy sheriff’s return, on October 29, 1992, “by leaving at [his] last and usual place of abode,” as well as by mail to him at the same address. Neither Mrs. Flynn nor anyone acting on her behalf sent NEIC a copy of the Complaint.
20. On December 2, 1992, Attorney Sheeran was defaulted under Rule 55(a) for failure to answer. Attorney Porcello was defended by CNA under his 1991-1992 policy.
21. On December 16, 1992, Attorney Sheeran was indicted on multiple counts alleging theft of client funds, including the theft of Mrs. Flynn’s $20,000 settlement proceeds.
22. On or about November 4, 1993, Attorney Sheeran pleaded guilty to multiple felony charges, including theft of Mrs. Flynn’s $20,000 settlement proceeds.
23. On November 10, 1993, Mrs. Flynn settled her claims against Attorney Porcello for $25,000. The settlement funds were paid by CNA under Attorney Porcello’s 1991-1992 policy.
24. On May 25, 1994, the District Court after a hearing on assessment of damages entered a final judgment by default under Rule 58 on Mrs. Flynn’s complaint against Attorney Sheeran. The judgment was in a principal amount of $441,335.33, plus interest of $73,998.94 and costs of $147.80, for a total of $515,482.01. There was no opposition at the assessment of damages hearing.
25. Mrs. Flynn filed suit against NEIC on June 11, 1996, seeking to reach and apply Attorney Sheeran’s rights under Policy #LP53453.
FINDINGS OF FACT
In addition to the facts stipulated between the parties, I find the following facts:
1. NEIC issued Policy # LP53453 (hereinafter “the policy”) to John Sheeran based on an application he submitted dated October 21, 1991. Question #7 on the application form asked “Is any applicant aware of any circumstances which MAY RESULT in any claim being made against the applicant, predecessors in business or any of the present or past partners.” Attorney Sheeran answered “NO.” Attorney Sheeran knew at the time he submitted the application that he had converted funds of Mary Flynn, along with funds of other clients. He did not at that time have any reason to believe that his handling of Mary Flynn’s claim against Evelyn Scannell had been deficient in any other respect. In particular, he did not have any reason to believe that the settlement he had obtained was anything less than the maximum settlement value of the claim, in light of the amount of insurance coverage available and Scannell’s lack of any other assets, nor did he have any reason to believe that Flynn or anyone on her behalf would claim that the settlement was deficient. The evidence presented at trial provides no indication of whether NEIC would have issued the policy to Sheeran if he had disclosed his knowledge of his conversion of Flynn’s settlement. No evidence indicates any attempt by NEIC to rescind the policy at any time.
2. The policy contains the following provisions that are material to the issues in dispute in this action. Section I of the “Insuring Agreement” defines the scope of coverage, as “all sums which the Insured shall become legally obligated to pay as damages because of any claim or claims . . . first made against the insured and reported to the company during the policy period . . . arising out of any act, error, or omission of the insured . . . .” Section I of the “Claims Made Provisions,” provides that the policy covers such liability “(b) provided that claim is first made against the insured . . . during the policy period . . . and (c) further provided that the claim is reported to the Company during the policy period . . . .” The “Claims Made Provisions” goes on to describe alternative means by which the Insured may notify the Company of potential claims, and goes on to provide that “A claim shall be considered to be reported to the Company when the Company, or its authorized agent, first receives written notice of the claim or an event which could reasonably be expected to give rise to a claim.” Exclusion (a) bars coverage for “any claim arising out of any criminal act, error or omission of any Insured.” The policy defines a “claim,” in Condition I(e), as “a demand received by the insured for money or services including service of suit or institution of arbitration proceedings against the insured.” Condition VII provides that “[u]pon the insured’s becoming aware of any act, error or omission which could reasonably be expected to be the basis of a claim or suit covered hereby, written notice shall be given by or on behalf of the insured . . . . If claim is made or suit is brought against the Insured, the Insured shall immediately forward to the Company every demand, notice, summons or other process received by him or his representative.” Condition VIII provides that “the Insured shall cooperate with the Company . . . [and] shall attend hearings and trials and assist in securing and giving evidence and obtaining the attendance of witnesses.” Condition IX provides that “No action shall lie against the Company unless, as a condition precedent thereto, the Insured shall have fully complied with all terms of this policy and until the amount of the Insured’s obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and the Company.”
3. Upon being retained in or about June, 1992, Attorney Howard obtained from Mrs. Flynn’s daughter, Ann Cavanaugh, Attorney Sheeran’s file on Mrs. Flynn’s claim against Evelyn Scannell. The file revealed that no insurance was available other than the $20,000 that Attorney Sheeran had obtained, and that no assets of Evelyn Scannell had been identified. Attorney Howard considered the possibility that a cause of action might have been available against the City of Gloucester based on signs (or the absence thereof) in the area where the accident occurred. He determined that the deadline for presentment to the city had already passed before Attorney Sheeran had been retained. Attorney Howard also considered the possibility that a cause of action might have been available against Evelyn Scannell’s employer. After review of the police report of the accident that was contained in Attorney Sheeran’s file, indicating that Scannell was on her way to work at the time of the accident, Attorney Howard did not investigate this possibility further.
4. Prior to receiving Attorney Howard’s letter to Senior Claim Supervisor Richard Burkett of July 15, 1992 (Trial exhibit 5), NEIC had received from Attorney Worth, on behalf of Sheeran, notice of several claims or potential claims by persons other than Flynn. NEIC had also received notice of several claims or potential claims, by persons other than Flynn, against Attorney Porcello, arising from the conduct or alleged conduct of Sheeran. Stephen Lovell, then Unit Claims Manager for the Legal Malpractice Unit, had assigned Burkett to handle claims against Attorney Porcello, and had assigned Senior Claim Supervisor Mark Garafano to handle claims against Attorney Sheeran.
5. Attorney Howard’s letter of July 15, 1992 (Trial Exhibit 5), informed NEIC that “Mr. Sheeran settled an automobile accident case on behalf of Mrs. Flynn, not only at an amount far below the worth of the case, our information is that it was settled for $30,000, but at this juncture he has failed to turn over or account for any of the settlement proceeds to Mrs. Flynn.” The letter requested that NEIC get in touch with Mr. Howard “to let us know what your company would need to process this claim further.” Attorney Howard did not send a copy of the letter to Attorney Sheeran, either directly or through Attorney Worth.
6. Mr. Burkett referred Attorney Howard’s July 15, 1992, letter to Stephen Lovell. Lovell referred the letter to Mark Garafano, and filled out a “Create File Order Form” so as to cause the opening of a claim file. Lovell assigned the matter “claim no.” 173537, and indicated on the form that the “claim made date” was 7/16/92. Under “Supervisor’s additional instructions, Lovell checked a box marked “Establish Initial Reserve,” and filled in $150,000. He also checked “Assign Investigator/Adjuster,” and wrote in “Bistany Adjustment.” He checked “Investigate Coverage Issue,” and wrote “When was insured first aware of claim? Did he have prior notification from clt atty?”.He checked “Other,” and wrote in “Follow for results of investigation.”
7. Neither Burkett nor Garafano, nor anyone else on behalf of NEIC, contacted Attorney Howard or his office in response to the July 15 letter.
8. On September 22, 1992, Julia Solomon (now Julia Solomon Lipman), then a paralegal employed by Attorney Howard’s law firm, telephoned NEIC and spoke with Mr. Burkett. She indicated Attorney Howard’s intention to file suit if the matter was not settled. Burkett referred Solomon to Mark Garafano. She spoke with Garafano on October 1, 1992. Garafano told Solomon that he was unfamiliar with the matter, and would obtain information and respond further. Sometime shortly thereafter, Garafano received a telephone message from Solomon, but did not return the call because he had not yet obtained any further information about the matter.
9. Upon filing suit against Sheeran on or about October 23, 1992, Attorney Howard did not notify NEIC in any manner, directly or indirectly.
10. In the statement of damages form filed in the District Court in connection with the complaint against Sheeran and Porcello, Attorney Howard indicated that damages claimed were in the amount of $20,000.
11. About one week after filing suit, on or about November 2, 1992, Attorney Howard sent Sheeran, by certified mail, a letter in the nature of a demand pursuant to G.L.c. 93A. The letter asserted that Sheeran had “inadequately and negligently” represented Flynn by “negligently causing Mrs. Flynn to settle the claim for amounts below what a properly represented client would have accepted,” and that Sheeran’s firm had “converted Mrs. Flynn’s monies to its own use and benefit.” The letter demanded “that you pay over to Mrs. Flynn the $20,000 together with the attorney’s fees that she has incurred to date of approximately $4,000.” Neither Howard nor anyone else sent a copy of this demand letter to NEIC or informed NEIC of it. On or about November 31, 1992, Howard received the letter by return mail, unclaimed.
12. Garafano did not respond further to Julia Solomon after their conversation on October 1, 1992, but did, as a result of her inquiry, inform Lovell that more information was needed with respect to the Flynn matter. The communication from Garafano caused Lovell to identify errors in his earlier paperwork that had created some confusion among NEIC personnel with respect to the various claim files relating to Sheeran and Porcello. To correct the problem, Lovell notified Burkett and Garafano that “I’m converting #173537 to be the designated aggregate under LPO 53453 and assigning it to me. Both of you will continue to handle the other 3 files . . . .”
13. On November 5, 1992, Lovell sent Philip Bistany, a self-employed insurance adjuster, a memorandum requesting that he “investigate the enclosed matter which we will handle under a R/R [reservation of rights]. You should focus your investigation on 2 areas: a) what proof is there that the insured embezzled settlement funds b) there may be some validity to the theory the insured settled for short money given the injuries and facts in the underlying case.” Lovell provided Bistany with a copy of Attorney Howard’s letter of July 15, 1992. Bistany was also engaged to investigate several other matters relating to Attorney Sheeran. Bistany was acquainted with Sheeran, having interviewed him in connection with an earlier investigation.
14. Beginning in November of 1992 and continuing at least through May, 1993, Bistany made a series of efforts to contact Sheeran. Bistany coordinated these efforts with Attorney James Dangora, whom NEIC had engaged to represent Sheeran, under reservation of rights, with respect to certain of the matters under investigation.[1] .Bistany began his efforts on November 12, 1992, by calling Attorney Worth. Worth informed Bistany that he had had no communication with Sheeran in several months, and authorized Bistany to communicate with Sheeran directly if he could reach him. Bistany then made several telephone calls and visits to Sheeran’s home and office, leaving several messages by telephone and in person at both locations. Sheeran did not respond. Bistany then sent Sheeran a letter, dated November 23, 1992, addressed to Sheeran’s home. Sheeran did not respond. Bistany then instructed his staff to make further visits to Sheeran’s home and office whenever they were in the vicinity of those locations on other business. They did so, leaving a number of messages to which Sheeran did not respond. On January 5, 1993, Bistany sent another letter, addressed both to Sheeran’s home and to his office. Sheeran again did not respond. In March of 1993, Bistany learned from published sources that Sheeran had been indicted, and that he was represented in connection with the criminal charges by Attorney William O’Hare. Bistany contacted Attorney O’Hare, who refused to disclose Sheeran’s location and refused to allow Bistany to meet with Sheeran. In May, 1993, Bistany learned that Sheeran was incarcerated at the Essex County House of Correction in Middleton. Bistany left a telephone message for Sheeran at the House of Correction, but received no response. By letter dated May 12, 1993, Bistany reported to Lovell regarding his unsuccessful efforts to contact Sheeran. In that letter Bistany also expressed his view that “most of the allegations that are being made would not be covered under the Professional Liability policy,” and noted that “there has been really no activity by any of the attorneys in the above captioned claims and I am sure that this is all caused by the fact that most attorneys in the area are aware of Atty. Sheeran’s situation and are waiting for the court disposition as possibly their best avenue would be before the Board of Bar Overseers Client’s Fund.”
15. Beyond his unsuccessful attempts to contact Sheeran, Bistany did not make any efforts to investigate the Flynn matter. In particular, he did not contact Attorney Howard or anyone in Howard’s office, nor did he obtain records of the accident or information regarding Scannell. During the time he conducted his investigation, Bistany knew, having received a copy of Howard’s letter, that Howard’s allegations on behalf of Flynn included both negligence and theft by Sheeran. Bistany did not know, at any time during his investigation, that Flynn had filed suit against Sheeran. Bistany limited his investigation to efforts to contact Sheeran because he believed that embezzlement by Sheeran would preclude all coverage under the policy, rendering investigation on any other subject irrelevant.
16. On April 12, 1993, Julia Solomon telephoned Mark Garafano. They had a brief conversation, in which Solomon made reference to Flynn’s having filed suit against Sheeran. Garafano did not remember their October conversation, and requested that Solomon provide him information in writing. This conversation was the first time NEIC received any information regarding Flynn’s suit against Sheeran. The information provided by Solomon in the conversation did not include the nature of the claims alleged in the complaint, or the facts that the suit had been filed nearly six months earlier and that default had entered against Sheeran more than four months earlier. Garafano did not act on the information provided, and did not take notes of the conversation, but rather awaited written materials from Solomon. As of the time of his testimony at trial, Garafano had no memory of the conversation.
17. Solomon drafted a letter, dated April 23, 1993, addressed erroneously to “Michael Garafano.” The letter indicated that it was “to memorialize our recent telephone conversation.” The letter recited the history of Solomon’s communications with Burkett and Garafano, and then stated:
Since then our client has filed suit against both Sheeran and has obtained a Request for Default against him. Our next step is to have damages assessed. Our 93A demand letter to Sheeran was returned unclaimed. We renew herewith our demand to settle this case for $20,000.
The letter referred to an enclosed copy of Howard’s July 15, 1992, letter, but did not refer to any enclosed copies of pleadings or other materials in the case filed against Sheeran, did not identify the case by court or docket number, and did not indicate any date when hearing would be held on assessment of damages. Solomon reviewed the letter with Attorney Howard, and obtained his approval to send it. In accord with her usual practice, she placed an unsigned copy of the letter in the case file.[2] .It was Solomon’s practice personally to take outgoing letters to the firm’s mailing area. She believes that she did so with this letter, but has no specific memory as to whether she did or not.
18. The April 29, 1993, letter, as drafted by Solomon and as appearing in Howard’s case file, bears the notation “cc: Ann Cavanaugh,” Flynn’s daughter. No evidence was presented at trial as to whether Cavanaugh received the copy. I draw no inference from the absence of such evidence.[3]
19. Neither Garafano nor Burkett, Lovell, or anyone else at NEIC received the April 29, 1993, letter. In making this finding I credit the testimony of all of the witnesses who testified regarding the letter, all of whom appeared to be testifying truthfully, and all of whom would be subject to the same incentive to testify falsely on this point, so as to avoid the implication that they had failed to perform their own jobs properly. Accordingly, I find that the letter was misplaced at some unidentified and unidentifiable point between Solomon’s desk and delivery to NEIC.
20. Failing to receive the promised written materials from Solomon, Garafano took no further action on the matter. He did not make any effort to contact Solomon or Howard, nor did anyone else at NEIC do so until October of 1994.
21. Neither Howard, nor Solomon, nor anyone else on behalf of Flynn took any further action to contact NEIC until October of 1994. In particular, until that date Howard and his firm did not notify NEIC of the May 24, 1994, hearing on assessment of damages, either before or after it occurred, did not provide NEIC with copies of any pleadings, motions, or other papers filed in the case, and did not inform NEIC of the entry of judgment in that action.
22. Other than Julia Solomon’s brief reference to a suit in her April 12, 1993, conversation with Garafano, NEIC’s first notice of the litigation against Sheeran was its receipt of a letter dated September 12, 1994, from Attorney David DiCicco, who represented Attorney Porcello. DiCicco’s letter provided NEIC with the name and docket number of the case, and informed NEIC that Sheeran had defaulted both on Flynn’s claim of negligence, and on a cross-claim of negligence filed by DiCicco on behalf of Porcello, and that DiCicco had obtained judgment and execution against Sheeran, on that claim, in the amount of $29,275.01. DiCicco’s letter asserted that “there are grounds to file an action to reach and apply the insurance policy held by your company,” and requested that NEIC contact him. DiCicco’s letter was referred to Lovell, who reviewed NEIC’s file to determine whether NEIC had ever been notified of the suit. Finding no indication that it had, Lovell responded to DiCicco, by letter dated September 23, 1994, denying that NEIC had ever been notified of or requested to defend the suit, requesting copies of the complaint and cross-claim, and citing the policy’s exclusion of any claims arising out of criminal acts. NEIC heard no further from Attorney DiCicco.
23. On October 6, 1994, an attorney with Attorney Howard’s firm sent a letter to Lovell demanding payment of the District Court judgment under the policy. The letter characterized the judgment as “based solely on Mr. Sheeran’s negligence in his representation of Ms. Flynn,” and asserted that Sheeran had “settled an automobile accident case on behalf of Mrs. Flynn at an amount far below the worth of the case.” Referring to “correspondence . . . back to at least July 15, 1992,” the letter asserted that “Mr. Sheeran’s professional negligence clearly falls under the policy . . . and [NEIC] was given repeated notice of Ms. Flynn’s claims against Mr. Sheeran and the suit filed by Ms. Flynn.”
24. Lovell responded, by letter dated October 24, 1994, asserting that “the Company was never notified of the existence of nor was requested to defend the lawsuit that you referred to in your letter. For that reason alone it is not liable for the judgement.” Lovell requested copies of the complaint, and also cited the exclusion for claims arising from criminal acts.
25. NEIC never received a copy of the complaint or other pleadings in Flynn’s suit against Sheeran prior to the initiation of this litigation.
26. Sheeran obtained a reasonable settlement of Flynn’s action against Scannell, in light of the unavailability of insurance coverage beyond $20,000 and Scannell’s lack of assets. Flynn agreed to the settlement based on Sheeran’s sound advice that the settlement was reasonable under those circumstances. That advice was consistent with the advice Flynn had previously received from Attorney Orlando.
27. Flynn did not suffer any harm as a result of the settlement of her claim against Scannell for $20,000. She did suffer harm as a result of Sheeran’s conversion of the proceeds of the settlement. The harm to her from that conduct was in the amount she would have received if Sheeran had turned over to her the proceeds of the settlement, less his fee under the contingent fee agreement — that is, approximately $13,332. Flynn has been made whole for that loss through the settlement of her claim against Porcello; indeed the amount of her recovery against Porcello exceeds the amount of her loss from Sheeran’s conduct.[4]
28. It is more likely than not that, had Sheeran turned over the proceeds of the settlement to Flynn, Flynn would have remained satisfied with the settlement and would not have made any claim against Sheeran. In that sense, Flynn’s claim of negligence against Sheeran arises out of Sheeran’s criminal conduct in converting the settlement proceeds.
29. Sheeran had a strong defense to Flynn’s claim of negligence, based on the reasonableness of the settlement in light of the insurance coverage available and Scannell’s lack of assets. Had that defense been presented in the District Court action in a timely manner, it is more likely than not that he would have prevailed on the issue of liability for negligence.
30. Sheeran had no viable defense to Flynn’s claim that he converted the $20,000 settlement proceeds.
31. Neither Sheeran nor anyone else ever requested that NEIC provide a defense to Flynn’s action against Sheeran.
32. NEIC was severely prejudiced by Sheeran’s failure to notify it of Flynn’s suit, to forward a copy of the complaint, and to cooperate in the defense of the suit. NEIC made reasonable efforts to obtain Sheeran’s cooperation. Sheeran’s failure to meet his obligations under the policy deprived NEIC of an opportunity to make a timely presentation of what would have been a strong defense to the negligence claim.
33. NEIC had no knowledge whatever of Flynn’s action against Sheeran prior to the entry of default against him on December 2, 1993. The entry of default established Sheeran’s liability on both the negligence and conversion claims, and foreclosed any defense to liability on either claim, absent removal of the default. Neither Howard nor anyone on Flynn’s behalf ever offered to assent to a motion to remove the default. It is unlikely that an opposed motion to remove the default would have been granted without a showing of good cause for Sheeran’s failure to file a timely response to the complaint. No such cause existed.
34. NEIC, through Bistany as its agent, had a reasonable opportunity to obtain information about Flynn’s suit against Sheeran, and the factual basis for it, at about the time of the entry of default, by contacting Attorney Howard’s office. Bistany’s failure to do so was unreasonable under the circumstances, in light of his knowledge of the allegation of negligence in Howard’s July 15, 1992, letter. Had Bistany done so, any of four possible scenarios would have occurred: (1) NEIC would have defended the suit and prevailed on the negligence claim; (2) NEIC would have attempted to defended the suit, but failed to obtain removal of the default, so that its defense would have been limited to efforts to minimize the judgment; (3) NEIC would have refrained from defending the suit due to the absence of a report of the claim and request for defense from Sheeran, and/or his lack of cooperation in the defense, and default judgment would have entered; or (4) NEIC would have disclaimed coverage and refused to defend based on the criminal conduct giving rise to the claim, or other conditions or exclusions of the policy, and default judgment would have entered. None of these scenarios would have produced a result more favorable to Flynn than the present situation. Thus, Bistany’s failure to avail himself of the opportunity to obtain information from Howard, although it may have adversely affected interests of NEIC and/or of Sheeran, did not adversely affect any interests of Flynn.
35. As of April 12, 1993, NEIC had knowledge, through Solomon’s telephone communication with Garafano, that suit had been filed, but not of the court or docket number, the nature of the claims alleged, or the fact that default had already entered. NEIC’s failure to take any action based on Garafano’s limited knowledge at that time was reasonable under the circumstances, particularly Solomon’s expressed intention to provide further information in writing.
36. NEIC first obtained specific identification of the suit against Sheeran, by court and docket number, through DiCicco’s letter in September of 1994. With that information, NEIC had a reasonable opportunity to obtain copies of the pleadings from the Court. By that time, however, the judgment had become final and non-appealable, so that its access to such information would not have cured the prejudice it had suffered from lack of such access earlier.
RULINGS OF LAW
1. In an action to reach and apply the proceeds of an insurance policy, the plaintiff stands in the shoes of the insured. She has whatever rights the insured would have under the policy, and no more, and she is subject to any defenses the insurer would have against the insured. Foshee v. Ins. Co. Of North America, 359 Mass. 471, 472 (1971), and cases cited.
2. In the case of a claims made policy, an insured’s failure to comply with notice and reporting provisions bars coverage, regardless of any prejudice to the insurer. Charles T. Main, Inc. v. Firemen’s Fund Ins. Co., 406 Mass. 862, 865 (1990); see also Tenasky v. Alliance Syndicate, Inc., 424 Mass. 678, 680-681
(1997). Compare, Darcy v. The Hartford Insurance, 407 Mass. 481, 485-486 (1990) (requiring strong showing of actual prejudice from lack of timely notice under occurrence policy).
3. The policy in issue here covered only Sheeran’s liability for “claims . . . first made against the insured and reported to the Company during the policy period.” This scope of coverage is to be applied strictly. See Charles T. Main, Inc. v. Firemen’s Fund Ins. Co., 406 Mass. at 865. The term “claim,” as used in the policy’s coverage provision, has the specific meaning set forth in the policy’s definition, appearing in Condition I(e): “a demand received by the insured for money or services including service of suit or institution of arbitration proceedings against the Insured.”
4. Attorney Howard’s letter to Burkett of July 15, 1992, was not a “claim,” within the definition of the policy, because it was not received by the insured. For the same reason, Julia Solomon’s telephone communications with Burkett and Garafano in September and October of 1992, and Howard’s c. 93A demand letter to Sheeran, were not claims within the meaning of the policy.
5. The complaint filed by Howard, on behalf of Flynn, against Sheeran, was a claim within the meaning of the policy if it was received by Sheeran within the period of the policy. I assume, for purposes of the present analysis, that Sheeran did receive the complaint within the policy period, so that the complaint met the definition of “claim” under the policy.[5] Because this “claim” — that is, the complaint — was not “reported to the Company during the policy period,” by Sheeran or anyone else, it is not within the coverage of the policy. See Charles T. Main, Inc. v. Firemen’s Fund Ins. Co., 406 Mass. at 865.
6. The language in the “Claims Made Provisions” that “A claim shall be considered to be reported to the Company when the Company, or its authorized agent, first receives written notice of the claim or an event which could reasonably be expected to give rise to a claim” has no application to this situation. Read in context, it is apparent that this language relates to situations in which the insured notifies the company of a potential claim prior to actually receiving a “claim” within the definition of the policy, and then receives such a claim after the end of the policy period. Under those circumstances, this language serves to bring the claim within the scope of the policy, by treating it as having been reported at the time of the insured’s earlier notice. No such notice occurred here. This language does not purport to, and does not, modify the definition of “claim,” or the scope of coverage under the policy.
7. Sheeran failed to comply with his obligations under Condition VII of the policy to “immediately forward to the Company every demand, notice, summons or other process received by him or his representative,” and under Condition VIII of the policy to “cooperate with the company.” These breaches by Sheeran of conditions of the policy, combined with the failure of Attorney Howard’s office to give NEIC timely and sufficient information about the suit, caused actual and severe prejudice to NEIC, by preventing it from presenting in a timely manner a substantial, available defense to the negligence claims. Accordingly, coverage would be barred under Condition IX of the policy, even if the suit were otherwise within the scope of coverage. Cf. Darcy v. The Hartford Insurance, 407 Mass. 485-486 (showing of actual prejudice from lack of notice and/or cooperation would bar coverage).
8. NEIC had no duty to defend Sheeran against Flynn’s suit, even if the suit would otherwise have been within the coverage of the policy, because Sheeran never requested that NEIC provide a defense, nor did anyone else do so on his behalf. See Hartford Acc. and Indem. Co. v. Gulf Ins. Co., 776 F.2d 1380, 1383
(1985) (no duty to defend, despite knowledge of suit, where only request was from “rival insurance company” ten months after litigation began, because “[a]n insurance company is not required to intermeddle officiously where its services have not been requested”).
9. Sheeran’s liability for Flynn’s judgment would be excluded from coverage under Exclusion (a) of the policy, even if her suit would otherwise have been within the coverage of the policy, because Flynn’s suit arose from Sheeran’s criminal conduct in converting the settlement proceeds.
10. The judgment against Sheeran has no binding force against NEIC, because the claim on which it entered was not within the scope of the policy, and because NEIC received no timely notice of the claim and had no reasonable opportunity to defend against it. Cf. Sciaraffa v. Deblen, 304 Mass. 240, 242-243
(1939) (insurer bound by judgment against insured on claim within policy); MacBey v. Hartford Accident and Indemnity Co., 292 Mass. 105, 106 (1935) (insurer bound where duly notified); Miller v. United States Fidelity Guarantee Co., 291 Mass. 445, 448 (1935) (insurer bound where duly notified and had opportunity to defend); Jefferson Ins. v. National Union Fire Ins., 42 Mass. App. Ct. 94, 104 (1997) (insurer bound by settlement where it improperly refused to defend after notice); Crane Service
Equipment Co. v. United Fidelity Guarantee Co., 22 Mass. App. Ct. 666, 670 (1986) (insurer bound by judgment against insured where it defaulted on its duty to defend, apparently after due notice).
ORDER
For the reasons stated, it is hereby ordered that judgment enter in favor of the defendant on all counts of the complaint.
_____________________ Judith Fabricant Justice of the Superior Court
March, 1998