United States Court of Appeals
For the First Circuit
No. 10-1542
VERMONT MUTUAL INSURANCE COMPANY,
Plaintiff, Appellee,
v.
DESMOND F. MAGUIRE, JOSEPHINE L. MAGUIRE, BORIS MAGUIRE,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Lipez, Circuit Judge,
Souter, Associate Justice,*
and Howard, Circuit Judge.
John J.E. Markham, II, with whom Bridget A. Zerner and Markham
& Read were on brief, for appellants.
Peter C. Kober for appellee.
October 31, 2011
*
The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
LIPEZ, Circuit Judge. Boris Maguire ("Maguire") and his
parents, Desmond and Josephine Maguire (collectively, "the
Maguires"), challenge the district court's determination that
Vermont Mutual Insurance Company had no duty to defend a claim made
against them by a young man whom Maguire had injured during a bar
fight. The district court concluded that the Maguires' homeowners'
insurance policy did not require Vermont Mutual to provide a
defense until a lawsuit had been filed, and thus the duty to defend
had not been triggered. The court also held, in the alternative,
that Vermont Mutual did not breach its duty to defend.
We agree that Vermont Mutual did not breach its duty to
defend, and we therefore affirm on that alternative basis.
I.
A. The Bar Fight and the Claim
During his Thanksgiving vacation from college in November
2007, Maguire was socializing with friends in Boston. After
drinking at two other establishments, the group, which included a
young man named William Schaetzl, arrived at the Pour House Bar and
Grille. Another group of young adults, including Robert Kalsow-
Ramos, was also drinking at the Pour House. Although the details
of what ensued are not clear, the parties agree that what began as
an altercation between Schaetzl and Kalsow-Ramos ended abruptly
when Maguire hit Kalsow-Ramos in the face with a glass beer mug.
The glass shattered, cutting the side of Kalsow-Ramos's face and
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the muscle, tissue, and saliva duct below. Kalsow-Ramos underwent
emergency surgery and recovered, but the incident left him with
permanent scars.
Within weeks, Maguire received notice of a criminal
hearing at the Boston Municipal Court scheduled for January 4,
2008, to address whether there was probable cause to charge
Maguire. The Maguire family retained Attorney Max Stern to
represent Boris at the hearing.
When Stern arrived at the courthouse, he met Attorney
Paul Rufo, who represented Kalsow-Ramos. Rufo and Stern discussed
the possibility of settling any potential civil claims and
requested that the hearing be postponed. The hearing was
rescheduled for February 29.
On January 9, Rufo sent Stern a letter stating that
Kalsow-Ramos intended to seek legal remedies against Maguire. That
letter was followed by a more detailed one, dated January 16, in
which Rufo outlined his client's view of the facts, enclosed
medical records and photographs of Kalsow-Ramos's injuries, and
made a formal "demand for settlement of [Kalsow-Ramos's] claim for
personal injury." Rufo offered to settle for a payment of
$800,000, and stipulated that the offer expired on February 1.
During the subsequent negotiations, Rufo emphasized to
Stern that Kalsow-Ramos wanted to avoid participating in any
criminal proceedings, and thus he was willing to accept a lower
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settlement payment. However, any such settlement had to be
finalized before the probable cause hearing on February 29. On
February 6, Rufo sent a revised settlement offer to Stern, calling
for a $475,000 payment in exchange for release of all criminal and
civil liability. The Maguires' new attorney, John Markham, reached
an agreement with Rufo on February 12 contingent upon Vermont
Mutual waiving a particular provision -- the "voluntary payment"
provision, discussed below -- in the Maguires' homeowners'
insurance policy. When Vermont Mutual refused to do so, the
Maguires and Kalsow-Ramos continued to negotiate. On February 26,
they signed an agreement obligating the Maguires to pay $425,000 to
Kalsow-Ramos, who agreed not to pursue criminal or civil claims
against Boris.2
B. Vermont Mutual's Involvement
Vermont Mutual had issued a homeowners' insurance policy
to Desmond and Josephine that was in effect in November 2007 and
covered the Maguires' personal liability for bodily injury in
certain specified circumstances. Three provisions of that policy
are pertinent here. First, Vermont Mutual was obligated to pay
only if the injury was inflicted accidentally. Second, under the
so-called "voluntary payment" clause, the Maguires were not
2
Law enforcement officials could, of course, have pursued
charges against Maguire without Kalsow-Ramos's endorsement. In
that event, the settlement agreement required Kalsow-Ramos to
return the $425,000.
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allowed, except at their own cost, to make any payments or assume
obligations to others in connection with an otherwise covered
incident. The third provision set forth Vermont Mutual's defense
and indemnity obligations when "a claim is made or a suit is
brought against an insured for damages."
Vermont Mutual became aware of the Pour House incident on
January 10, when it received Rufo's January 9 correspondence,
forwarded by Stern. A claim file was opened and assigned to Mark
McGreevy, a claims investigator. McGreevy called Stern to
acknowledge receiving his letter and to speak with him about the
incident. The following day, Stern forwarded the police report of
the incident to McGreevy.
Several days later, on Thursday, January 17, Stern
forwarded Rufo's detailed demand letter to McGreevy by email.
McGreevy responded within minutes, requesting an interview with
Maguire the following week. Without explicitly agreeing to an
interview, Stern wrote back on January 18, saying that, "[i]n view
of the possibility of a criminal charge, we would need the
statement to be attorney-client privileged," and explaining that
Maguire had already returned to college in North Carolina.
The following Tuesday, January 22, McGreevy and Rufo
discussed the claim. Acknowledging the January 16 demand letter,
McGreevy told Rufo that Vermont Mutual did not yet know enough
about the case to make an offer and would not be in a position to
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do so by Rufo's February 1 deadline. In the claim file, McGreevy
noted that he planned to meet with Rufo on January 28.
McGreevy then visited the Pour House on January 24 and
tried to speak with the bar's general manager, who refused on
advice of his attorney. Over the next few days, he called various
individuals and attorneys, including the police officer who
investigated the incident and the insurance carrier for the Pour
House.
McGreevy then continued his investigation by calling the
witnesses listed in the police report and attending a Boston
Licensing Board hearing concerning the incident. Most of the
witnesses refused to speak with McGreevy or were advised by counsel
against doing so. All told, McGreevy was able to speak to just one
witness, who saw only the aftermath of the altercation on the
street. McGreevy did, however, hear the testimony of Pour House
employees at the Licensing Board hearing, which took place on
February 4. He also requested, from the City of Boston, a copy of
the transcripts of the licensing hearing and a copy of the incident
reports that the bar's attorney provided at the hearing.
On February 4, McGreevy sent Stern a "reservation of
rights" letter saying that Vermont Mutual might not pay the claim
because the injury might have been intentional, and because Stern
had refused to allow McGreevy to interview Maguire. McGreevy
explained, however, that Vermont Mutual was "currently
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investigating [the Kalsow-Ramos] claim" and that the company would
"continue to handle th[e] claim even though a coverage question
exists."
At 5:08 p.m. on February 7, Stern forwarded to McGreevey
the February 6 message from Rufo containing the $475,000 settlement
proposal. That message stated that, "as with all of [their]
previous settlement discussions," Stern should treat the email as
privileged. The email also stated that the offer would expire at
9:00 a.m. on February 7. In the cover email to McGreevy, Stern
reiterated that Maguire could be interviewed if it were kept
confidential and privileged. He also told McGreevy that he was "in
possession of the substance of statements of two witnesses who
establish that Kalsow-Ramos and his friends -- not Maguire -- were
the aggressors in the incident" and that he "wish[ed] to share [the
statements] in a privileged manner." To that end, Stern "suggested
. . . that Vermont [Mutual] retain counsel and that we establish a
joint defense or common interest privilege."
On February 11, Markham, now representing the Maguires,
sent McGreevy a letter explaining a proposed settlement that
required Vermont Mutual either to pay $450,000 or to waive the
"voluntary payment" provision and allow the Maguires to settle
directly with Kalsow-Ramos. Stern was apparently still involved in
Maguire's representation, because Rufo emailed the "final"
settlement term sheet to Stern on February 12. Stern returned an
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executed version of the term sheet and a check, dated February 11,
from Desmond Maguire for $175,000, to be held in escrow.
On February 15, Attorney Peter Kober, whom Vermont Mutual
retained as coverage counsel, sent a letter to Markham stating that
his client refused to pay the $450,000 and refused to waive the
"voluntary payment" clause. Kober voiced several of Vermont
Mutual's objections, including that the proposed settlement might
violate public policy and that the settlement amount might not be
reasonable.3 Moreover, Kober reiterated the substance of
McGreevy's February 4 letter, saying that Maguire may have acted
intentionally and that Vermont Mutual's efforts to investigate the
claim were seriously hampered by Stern's refusal to allow an
interview with Maguire absent the protection of attorney-client
privilege. Kober also objected to the short notice of the
settlement offer, which Vermont Mutual felt did not afford
sufficient time to "investigate all circumstances necessary for it
to respond in an informed manner."
On March 5, Vermont Mutual was told of the February 26
settlement. In May, Markham demanded that Vermont Mutual reimburse
the Maguires for the settlement, as well as for their attorney's
fees and costs. Kober repeated the concerns that he had
3
Kober explained that the information that Stern had provided
up to that point reflected that Kalsow-Ramos's medical expenses to
date were $39,287.77, and that there was no information provided to
support his claim of $20,000 in future medical expenses.
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communicated in February and, simultaneously, filed this
declaratory judgment action against the Maguires.
C. Procedural History
In its complaint, Vermont Mutual sought a declaratory
judgment that it owed no duty to defend or indemnify the Maguires
against Kalsow-Ramos's claim. The Maguires counterclaimed that
Vermont Mutual had breached the insurance contract, and that the
breach had been in bad faith, see Mass. Gen. Laws ch. 176D & ch.
93A.
At a pretrial conference, the parties agreed with the
district court's suggestion to bifurcate the trial by submitting
some questions to the jury and then proceeding to a bench trial on
the remaining questions. The jury was asked to determine three
issues related to Vermont Mutual's duty to indemnify: whether
Kalsow-Ramos's injury was accidental; if so, whether $425,000 was
a reasonable settlement amount; and, if it was, whether Vermont
Mutual was prejudiced by the Maguires' settlement of the claim
without Vermont Mutual's consent.4 On the first two questions, the
4
The jury was asked to answer each question by checking "yes"
or "no." If the answer to the first question or the second was no,
the jury was told not to address the subsequent question or
questions. If the jury concluded that Kalsow-Ramos's injury was
not accidental, Vermont Mutual was not obligated to indemnify the
Maguires for the settlement amount; answering the remaining two
questions would be superfluous. Similarly, if the jury concluded
that the settlement amount was unreasonable, Vermont Mutual need
not show any additional prejudice resulting from the Maguires'
settlement of the claim without Vermont Mutual's participation.
The jury made no findings regarding the duty to defend, when it
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jury found for the Maguires: the injury was accidental and the
settlement was reasonable. On the third question, however, the
jury found that the settlement prejudiced Vermont Mutual's ability
to protect its interests.
The district court then addressed Vermont Mutual's duty
to defend the Maguires against Kalsow-Ramos's claim. Examining the
portion of the contract governing when Vermont Mutual was required
to provide counsel, it held that the provision created a duty to
defend only after a suit had been filed. It also held that Vermont
Mutual "did all it was obligated to do under the policy" because it
"took all reasonable investigatory steps in the limited, seven-week
timeframe between notice of the claim and the settlement." Vt.
Mut. Ins. Co. v. Maguire, No. 08-cv-10965-RWZ, 2010 WL 1416124, at
*5 (D. Mass. Apr. 6, 2010). Finally, the court held, for a number
of reasons, that Vermont Mutual had not exhibited bad faith in
failing to defend the Maguires. The court entered judgment for
Vermont Mutual, and the Maguires timely appealed.5
arose, or whether it was breached.
5
The record does not reveal why the district court held the
jury trial before the bench trial. We find the sequence puzzling.
Determining the existence of a duty to defend, which turns on a
reading of what a third party is claiming, would seem logically to
precede the determinations of what actually happened and the
implications of what transpired for the duty to indemnify.
Millipore Corp. v. Travelers Indem. Co., 115 F.3d 21, 35 (1st Cir.
1997) ("Under Massachusetts law . . . [t]he duty to defend is
antecedent to, and independent of, the duty to indemnify."). The
existence of each duty depends on different evidence, as well. See
id. Moreover, the allocation of the burden of proof on the first
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On appeal, the Maguires argue that, under the terms of
their homeowners' policy, Vermont Mutual had a duty to provide a
defense to Kalsow-Ramos's claim, and that it breached that duty by
failing to protect the Maguires when counsel was needed.6 Vermont
Mutual contends that its duty to defend was never triggered, both
because no lawsuit was ever filed, and because the Maguires never
formally tendered the defense. It also argues that the district
question put to the jury -- whether the injury was accidental --
differs depending on whether the insurer breached its duty to
defend: if there was no breach, the insured bears the burden of
proof; if there was a breach, the burden shifts to the insurer.
See Polaroid Corp. v. Travelers Indem. Co., 610 N.E.2d 912, 916
(Mass. 1993). These considerations suggest that the jury trial
should have followed the bench trial. Cf. Teachers Ins. Co. v.
Schofield, 284 F. Supp. 2d 161, 164 (D. Me. 2003) ("To secure the
just, speedy and inexpensive determination of an action involving
a duty to defend and a duty to indemnify and avoid a duplication of
trials requires that courts proceed in the following order: the
determination of a duty to defend, then the determination of
liability in the underlying action, and finally the determination
of the duty to indemnify." (quoting Penney v. Capitol City
Transfer, Inc., 707 A.2d 387, 389 (Me. 1998))); Emhart Indus., Inc.
v. Century Indem. Co., 559 F.3d 57, 64 (1st Cir. 2009) (quoting
district court's description of its decision to hold a jury trial
on the duty to indemnify before a bench trial on the duty to defend
as "odd chronology").
6
The Maguires did not address their bad faith counterclaim in
their briefs. At oral argument, counsel stated that such briefing
or argument was unnecessary because his clients sought a remand, at
which point the bad faith issue could be re-litigated. Counsel was
wrong. Because the Maguires failed to assert any argument on the
issue of bad faith, the issue is not before us, see, e.g., SEC v.
Tambone, 597 F.3d 436, 440 n.3 (1st Cir. 2010) (en banc), and may
not be raised on remand, see United States v. Ticchiarelli, 171
F.3d 24, 28-29 (1st Cir. 1999) (explaining that failing to
challenge a legal decision on appeal precludes raising it later in
the litigation). In any event, given the disposition of this
appeal, there will be no remand.
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court's conclusion that there was no breach is based on a number of
findings of fact that are not clearly erroneous.
II.
Although the parties' briefs focused primarily on whether
the contractual duty to defend arose in this case, we need not
address that issue. We conclude that, even if there was such a
duty, Vermont Mutual did not breach it.7
The Maguires contend on appeal that Vermont Mutual
breached its duty to defend by failing to protect them when counsel
was needed to negotiate a settlement. The district court rejected
that argument, finding that "Vermont Mutual took all reasonable
investigatory steps in the limited, seven-week timeframe [sic]
between notice of the claim and the settlement," and that the
company "did all it was obligated to do under the policy."
According to the court, Vermont Mutual "did not refuse to defend or
participate in a reasonable settlement," but rather "decline[d] to
move at the speed dictated by the Maguires" and "decline[d] to
participate in a settlement it deemed possibly unethical and which
was beyond the scope of its contractual obligation."
7
The Maguires suggest that we certify to the Massachusetts
Supreme Judicial Court the question of whether, under state law, an
insurance company's duty to defend may be triggered in the absence
of a lawsuit. Our assumption that Vermont Mutual had such a duty
makes it unnecessary to further address the issue. Likewise, we
need not consider whether there was a tender of the Kalsow-Ramos
claim under Massachusetts law.
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We review the trial court's findings of fact for clear
error, and its legal conclusions de novo. Trace Constr., Inc. v.
Dana Barros Sports Complex, LLC, 945 N.E.2d 833, 837 (Mass. 2011).8
Vermont Mutual contends that the district court's finding that
there was no breach of the duty to defend was a factual
determination that should be reviewed only for clear error. We
agree that the question of breach ordinarily turns largely on the
facts, see, e.g., Sarnafil, Inc. v. Peerless Ins. Co., 636 N.E.2d
247, 253 (Mass. 1994) (noting "factual considerations" that may
determine an insurer's breach of duty), but the standard of review
is ultimately of no consequence here. Even considered de novo, the
district court's determination of "no breach" must be upheld.
Assuming there was a duty to defend triggered by the
demand for settlement, it arose on January 17, when Vermont Mutual
received a copy of the detailed Kalsow-Ramos demand letter.
Cf. Cont'l Cas. Co. v. Gilbane Bldg. Co., 461 N.E.2d 209, 212
(Mass. 1984) (explaining that existence of duty is determined by
comparing third-party allegations and insurance policy). At that
point, McGreevy began investigating the claim in earnest,
8
The parties agree that we should apply the substantive law
of Massachusetts to their contract dispute, see Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938) (federal court sitting in
diversity applies substantive law of forum state), and we perceive
no basis to do otherwise, see Great Clips, Inc. v. Hair Cuttery of
Greater Bos., L.L.C., 591 F.3d 32, 35 (1st Cir. 2010) (accepting
parties' "colorable" assumption that Massachusetts law governed
contract at issue).
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responding to Stern's email containing the demand letter within
minutes. On January 22, less than a week later, McGreevy timely
responded to Rufo's demand letter by rejecting the offer to settle
for $800,000.9 After that point, he continued to investigate the
claim diligently by visiting the Pour House, attempting to
interview numerous witnesses and speak with attorneys involved in
the case, attending the Licensing Board hearing, and obtaining
relevant reports and transcripts. Less than three weeks after
receiving the initial demand letter, McGreevy issued the
reservation of rights letter that explicitly told the Maguires that
Vermont Mutual would continue to handle the claim despite some
doubt that coverage existed.
Meanwhile, Stern –- first alone and then together with
Markham –- was negotiating a settlement with Kalsow-Ramos and gave
Vermont Mutual no notice of such negotiations until February 7,
after the reservation of rights letter had been sent on February 4.
Moreover, although Stern forwarded the email with Rufo's new offer
of $475,000, made on February 6, the offer had expired eight hours
before it was ever presented to McGreevy. In the same email, Stern
reiterated that Maguire could only be interviewed if such
communications were privileged, and he revealed that he had
9
The Maguires do not argue that the rejection of the initial
demand violated the insurer's duty to defend or settle the claim.
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additional witness statements that he would share with Vermont
Mutual only if they, too, were privileged.
After Vermont Mutual learned of the ongoing settlement
negotiations in the early evening of Thursday, February 7, it
received Markham's letter on Monday, February 11, reporting that a
settlement had been reached contingent upon Vermont Mutual either
paying the settlement amount or waiving the "voluntary payment"
provision. Vermont Mutual's attorney, Kober, responded four days
later, explaining why the company would not accept either option
and reiterating the company's concern about the time frame and the
restricted access to Maguire. Because Vermont Mutual did not agree
to either contingency, the final settlement, entered February 26,
contained slightly altered terms.10
Throughout this unusually condensed timeline, Vermont
Mutual took no action that signaled a rejection or abandonment of
its responsibility to defend Maguire. Nor did it fail to pursue
the claim such that a breach of the duty to defend could be based
on the company's inaction. To the contrary, McGreevey actively
investigated the incident and told the Maguires that Vermont Mutual
would continue to handle the claim. Yet, despite McGreevey's
attentiveness and the reassurance of the reservation of rights
10
As noted supra, the final agreement obliged the Maguires to
pay Kalsow-Ramos $425,000 in exchange for his agreement not to
pursue any claims against Boris. If criminal charges were
nonetheless filed, Kalsow-Ramos would be required to return the
full payment.
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letter sent on February 4, the Maguires went ahead with
negotiations and authorized their attorneys to reach a settlement
with Kalsow-Ramos, first on February 11 and ultimately on February
26.
Given this background, the Maguires' assertion that they
felt "unprotected" can be based only on Vermont Mutual's
communication that it needed more information before it would enter
into a settlement. Such investigation of the nature and value of
the Kalsow-Ramos claim was not only permissible, but required. See
Mass. Gen. Laws ch. 176D, § 3(9)(c), (d), (f) (requiring insurers
to "adopt and implement reasonable standards for the prompt
investigation of claims," refuse to pay claims only after
"conducting a reasonable investigation based upon all available
information," and effectuate settlements after "liability has
become reasonably clear"). Moreover, although the Maguires contend
that Vermont Mutual was obligated to enter the settlement
negotiations so as to protect the insureds, the only opportunity
the company was given to do so was after the initial demand letter
–- when the company did, in fact, enter the discussion by rejecting
the $800,000 offer. After that point, the Maguires negotiated
through Stern and Markham, disregarding Vermont Mutual's explicit
promise to handle the claim.
The reason the Maguires took that step is obvious. If
their primary concern had been the civil claim, Vermont Mutual's
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statement on February 4 that it was handling the claim would have
been a sufficient indication, at least in the short term, that
their interests were being protected. Their main concern, however,
was avoiding criminal charges. The Maguires do not argue that
their insurance coverage extended to criminal defense, nor do they
posit that Vermont Mutual was obligated to take the possibility of
such charges into account in determining the value of the claim and
the need to expedite negotiations. We see no basis for either
argument. Indeed, the latter argument raises the troubling
implication that insurance companies have a duty to negotiate
aggressively and offer greater amounts as an incentive for third-
party plaintiffs –- some of whom may be unrepresented or
susceptible to financial coercion –- to drop criminal charges.
The Maguires rely heavily on Sarnafil to support their
contention that Vermont Mutual breached its duty to defend.
However, that case reinforces our conclusion that no breach
occurred here. In Sarnafil, the insured, Sarnafil, sought to be
reimbursed for the expenses it incurred in defending an arbitration
with a third-party claimant. On September 27, 1984, Sarnafil
forwarded to its insurance company a letter from the third party
alleging that Sarnafil was liable for certain repair costs. On
October 4, the insurer sent a reservation of rights letter that
"promis[ed] a prompt investigation." 636 N.E.2d at 250. Material
in the record, however, indicated that the insurer, Peerless, "made
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no investigation." Id. In addition, while Sarnafil "repeatedly
[sought] Peerless's acknowledgement of coverage" throughout October
and early November, it received no response until November 20 -- at
which point Peerless wrote that "it was engaged in a 'comprehensive
review and analysis of the coverage questions.'" Id.
The Massachusetts Supreme Judicial Court held that, on
the record before it, the insurer's responsibility for the
arbitration expenses was a matter for a fact finder. The court
noted that
[a]n insurer which reserves its rights and
takes no action in defense of its insured,
when it knew, or should have known, of a
covered claim, or which fails to investigate
diligently, despite repeated claims of
coverage and requests for a defense from an
insured facing demands for immediate action,
could be found to have committed a breach of
the duty to its insured.
Id. at 253.
The facts here are a far cry from the scenario depicted
by the court in Sarnafil. Vermont Mutual did not merely reserve
its rights and then fail to conduct an investigation. To the
contrary, it acted quickly and diligently to uncover the facts
relating to the incident and the value of the claim. On this
record, we see no basis for concluding that Vermont Mutual breached
any duty to defend that may have existed.
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III.
Because Vermont Mutual did not breach its duty to defend
–- assuming such a duty existed here –- it is not obligated to
reimburse the Maguires for the amounts they paid to "defend," or,
to be more precise, "negotiate" the Kalsow-Ramos claim. It is also
relieved of any obligation to reimburse the Maguires $425,000 for
the settlement because that settlement was a "voluntary payment"
that was expressly forbidden by the policy.11
The judgment of the district court is affirmed.
So ordered.
11
A showing of actual prejudice may be required when an
insurer seeks to disclaim coverage based on its insured's violation
of a policy provision, though the showing has been held unnecessary
where the insurer had no opportunity to protect its interests. See
Augat, Inc. v. Liberty Mut. Ins. Co., 571 N.E.2d 357, 360-61 (Mass.
1991) (involving breach of the voluntary payment provision). The
issue is academic here as the jury made a finding of prejudice.
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