Failure to Notify Insurer as 93A Violation

Some service providers, like construction contractors or home inspectors, advertise that they carry insurance. Consumers rely on those assurances. Consumers may also reasonably assume that others who offer services, including professionals like doctors, lawyers, accountants and the like, carry malpractice insurance although they don’t advertise it. A consumer is likely to prefer a service provider who carries insurance because insurance offers another source of funds to which the consumer can look if the provider performs negligently but lacks the funds to pay for the resulting harm to the consumer.

However, insurance companies require that their policy holders follow specific procedures in order to claim the benefit of insurance coverage. Among other things, a policy holder against whom a claim is made, or who thinks an incident has occurred which might lead to a claim, must promptly notify his or her insurance company so that it can begin its own investigation. Failure to give the required notice can preclude the insured business, and the plaintiff consumer, from collecting the insurance coverage.

Recognizing that consumers rely on the insured status of merchants from whom they purchase services, a Massachusetts Superior Court has ruled that, at least where a merchant expressly claims to be insured, the merchant’s failure to notify its insurer of a consumer’s claim is an unfair or deceptive business practice under Massachusetts G. L. c.93A, which may entitle the consumer to treble damages and attorneys fees if the consumer recovers a judgment against the merchant which the merchant is unable to pay from its own funds. The Superior Court considered a case in which Black Paw Home Inspection company had advertised that it was “fully insured,” presumably for claims arising from negligently performed home inspections. Homeowners brought a claim alleging that they had purchased a defective home in reliance on a negligent Black Paw home inspection. Despite the lawsuit, Black Paw failed to notify its insurer, thereby precluding Black Paw or the plaintiff homeowners from collecting the insurance proceeds.

The court noted that a company claiming to be insured “conveys two messages to potential consumers: (1) that it is reputable enough to obtain insurance; and, more importantly, (2) that if the consumer were to bring a claim of negligence against the service provider, there would be a “deep pocket” – an insurance company – to ensure full payment of any judgment or settlement.” According to the court, “implicit in the second message is that the service provider will extend the benefits of its insurance coverage to its customers by reporting negligence claims to its insurer and complying with all other conditions necessary to ensure coverage. By choosing not to submit a negligence claim to its insurer, the service provider is effectively negating the second message because there will be no insurance (and consequently no “deep pocket”) in the absence of timely submission.” The court concluded that it “may be deceptive and certainly would be unfair for a service provider who advertises that it is fully insured to knowingly engage in conduct that would prevent a customer’s claim from being insured.”

Of course, a consumer only suffers injury from a service provider’s failure to notify its insurer if the consumer ultimately obtains a judgment or settlement that the provider is unable to pay in full. It is the unpaid portion of any judgment or settlement which the consumer may recover for the service provider’s unfair conduct, and which may be doubled or trebled if the merchant acted knowingly or willfully. In addition to those damages, victorious plaintiff under c.93A is entitled to recover his or her reasonable attorneys fees from the defendant, often a significant sum.

Left undecided is whether a company like Black Paw violates the law by failing to notify its insurer of the potential for a claim, i.e. that an incident has occurred which the service provider thinks may lead to a claim in the future. Also undecided is whether a business providing services to other business, rather than to consumers, will also be held liable under c.93A for failure to notify its insurer of a claim made.

Nor is it clear whether a service provider who has not expressly claimed to be insured, but whom the consumer reasonably expects to be insured, also violates c.93A if it fails to notify its insurer of a claim. For example, if an accounting firm, which a consumer reasonably expects to carry malpractice insurance, fails to notify its insurer of a malpractice claim made against it, is that a c.93A violation subjecting the firm to treble damages and the obligation to pay the consumer’s attorneys fees? Arguably, it is.

The obvious message of the Superior Court’s decision is that a business that advertises its insurance coverage must be especially vigilant in reporting any and all claims made against it to its insurer, even those which it deems frivolous, or which appear not to exceed the insurance policy’s deductible amount. Failure to do so risks adding a consumer protection violation to the underlying negligence claim.

If you have questions regarding this or any other legal real estate matter, please contact Attorney Roger T. Manwaring, Esq. at rtm@barronstad.com or (617) 531-6584.

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