Northern Security Insurance v. R.H. Realty Trust

Citations: 78 Mass. App. Ct. 691; 941 N.E.2d 688; 2011 Mass. App. LEXIS 161Docket: No. 09-P-1757

Court: Massachusetts Appeals Court; February 8, 2011; Massachusetts; State Appellate Court

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An insurer's obligation to cover reasonable legal fees for a privately retained attorney hired by an insured, after the insured rejected the insurer's representation with a reservation of rights, is assessed. The Niininen family sued Peter Kelly and Richard Perry, trustees of a realty trust, claiming mold exposure during their lease from 1998 to 2000, which led to $14,000 in damages and medical expenses. Vermont Mutual Insurance Group sent a reservation of rights letter, failing to inform the trust that it could retain counsel at the insurer’s expense. The trust hired attorney William J. Dailey, Jr., agreeing on a reduced rate of $225 per hour due to personal connections. Northern Security delayed payment of Dailey's bills, ultimately paying $150 per hour instead. Dailey settled the underlying lawsuit for $75,000, significantly lower than the initial demand of $650,000. Seeking the difference in fees, Sloane and Walsh sent a demand letter under G. L. c. 93A, which Northern Security denied. In October 2004, Northern Security initiated a declaratory judgment action regarding its obligations under the insurance policy and the reasonableness of attorney fees. Sloane and Walsh counterclaimed for breach of contract, G. L. c. 93A violations, and unjust enrichment, asserting that $225 per hour was the market rate for Dailey's services. A motion judge later ruled that $225 was a reasonable fee in the Boston area. Sloane and Walsh subsequently sent a second demand letter, which went unanswered by Northern Security, despite prior acknowledgment from the insurer's counsel that $225 was reasonable. A trial determined that the fair hourly rate for Dailey’s services was $350, and Northern Security was ordered to pay that amount.

Northern Security was found to have violated c. 93A, leading to an award of attorney's fees to Sloane and Walsh. The judge determined that Northern Security unreasonably believed it did not have to pay the agreed-upon rate of $225 per hour, especially after prior rulings and opinions from its counsel indicated otherwise. The judge cited Northern Security's inaction regarding a settlement offer from Sloane and Walsh as evidence of unfair settlement practices. Although Northern Security’s actions were deemed a violation, they were not considered severe enough to warrant punitive damages. All other claims and counterclaims were dismissed. 

In its appeal, Northern Security raised three main points of contention: the judge's finding that $225 per hour was per se reasonable, the determination of a c. 93A violation despite Northern Security's rationale for a $150 rate, and the decision not to cap the fee award. The court affirmed some of the trial judge's rulings while reversing others. It stated that when an insurer defends under a reservation of rights and the insured opposes this, the insurer must either waive the reservation or cover the insured's defense costs at a reasonable rate. The discussion highlighted the reasonableness of the $225 fee compared to Northern Security's offered $150, noting that the latter reflected its panel rates rather than market rates. Testimony confirmed the $225 rate was justified based on market standards, supported by expert opinion and the attorney's usual fee. The court found no fault in the trial judge's conclusions regarding the c. 93A violation, noting that unfairness is assessed based on overall circumstances, and that a mere dispute over payment does not typically constitute a c. 93A claim unless accompanied by additional misconduct.

Northern Security delayed payment for attorney fees for fourteen months, acknowledging it owed at least $150 but contesting a $225 hourly fee. It also failed to pay undisputed court expenses, placing attorneys Sloane and Walsh in a difficult position and refusing to negotiate despite their outreach efforts. Northern Security disregarded its counsel's advice and, based on Dailey’s testimony about its practices, appeared to intentionally delay payments to gain a financial advantage. The judge found sufficient grounds to determine that Northern Security violated c. 93A, justifying an award of $350 per hour for attorney fees, although Sloane and Walsh had an agreement with their client for $225 per hour. Compensation is limited to actual damages incurred, avoiding windfalls, thus Northern Security’s liability for attorney fees is capped at the fees the trust incurred. The case is remanded to determine damages based on the $225 hourly rate, with interest, while other aspects of the judgment are affirmed. Sloane and Walsh are permitted to seek appellate attorney’s fees and costs, to be filed within fourteen days, with Northern Security allowed seven days to respond. The counts included breach of contract, breach of good faith, duty of care, misrepresentation, and violation of G. L. c. 93A. Dailey, a highly regarded attorney, testified that Northern Security frequently delayed payments to pressure lawyers into accepting lower fees. Northern Security’s motion for reconsideration was ultimately denied.

Vermont Mutual’s general counsel received advice suggesting that Attorney Dailey’s hourly rate of $225 is likely to be deemed reasonable by the courts, presenting the company with two options: either pay the difference or incur further legal fees contesting the rate. The claims manager echoed this sentiment, noting that Dailey is well-regarded in Boston, and judges would likely accept his rate as reasonable. There is no attorney-client privilege associated with these discussions. Comparatively, Dailey has charged $385 per hour in seven cases and $315 in nine others, indicating that a judge could reasonably view his panel rate as appropriate. Northern Security acknowledged during oral arguments that delays were due to miscommunication, but it was not obligated to respond to a certain type of claim. However, its failure to engage with Sloane and Walsh indicated a reluctance to negotiate. Although claims under a specific chapter do not include violations from another chapter, a judge can still reference such violations as evidence of unfair business practices. Northern Security rejected outside counsel's advice yet failed to substantiate its own $150 fee rate, which lacked credible justification beyond the standard payment to panel attorneys. The judge provided examples of higher hourly rates from comparable cases, indicating that Northern Security's evidence was insufficient. Moreover, the delay in settling undisputed bills was noted, though it did not form the basis of the trial judge's decision. Northern Security sought to overturn the motion judge's determination that $225 is inherently reasonable, but the trial judge viewed this finding as merely a consideration in assessing a violation of the statute and acknowledged its interlocutory nature, stating it was superseded by the final judgment. Any additional points not discussed were deemed unnecessary for consideration.