Self-insured companies are not in the business of insurance, said the First Circuit recently in Bingham v. Supervalu. This is significant, because Chapter 176D of Massachusetts law prohibits those “in the business of insurance” from failing to promptly and equitably settle claims when liability has become reasonably clear. The penalties for failure to settle a claim can be severe, and may include liability for up to three times the amount of any judgment entered.
Like many large companies, Supervalu, Inc. maintains a centralized risk management system whereby it negotiates and resolves claims made against it or its subsidiaries that are below its self-insured retention. Supervalu employs claims adjusters to perform these functions and once a claim is settled, it issues payment from a central account on behalf of the entity against which the claim was made.
According to the First Circuit, this structure does not require a finding that the company is “in the business of insurance.” The First Circuit relied heavily on the self-insured exemption created by the 2004 Massachusetts Supreme Judicial Court decision Morrison v. Toys “R” Us, Inc., Mass. In Morrison, the SJC held that Chapter 176D could not legitimately be extended to a self-insurer, because the self-insurer has no contractual obligation to settle a plaintiff’s claim and is not regulated by Massachusetts for insurance activities. The First Circuit also held that the structure does not transform a company into a captive insurer or a third-party administrator, both subject to Chapter 176D.
The underlying litigation in Bingham, demonstrates the significance of the “in the business of insurance” limitation. Had an insurer handled the claim as Supervalu did, it very likely would have been found to have violated Chapter 176D.
The plaintiff filed a negligence claim against Shaw’s Supermarket, a Supervalu subsidiary. Supervalu had the authority to negotiate and settle the claim. Two years into the suit, the trial court entered judgment against Shaw’s for failing to answer the plaintiff’s interrogatories and awarded more than $300,000 in damages. Rather than paying the judgment, Supervalu directed Shaw’s to appeal to the Massachusetts Appeals Court, who summarily affirmed the trial court. Supervalu then threatened that it would seek further appellate review at the Massachusetts Supreme Judicial Court. Facing the risk of protracted litigation, the plaintiff agreed to a $475,000 settlement with Shaw’s, which represented a figure slightly below the sum of the original award and the post-judgment interest that had accrued. After the settlement, the plaintiff made a demand to Supervalu for just over $1 million based on Supervalu’s failure to promptly and fairly resolve the plaintiff’s claim against Shaw’s in violation of Massachusetts law. After Supervalu declined to pay, the plaintiff filed suit alleging a violation of Chapter 176D based on Supervalu’s “willful” and “frivolous” delay in resolving the underlying litigation.