Vermont Mutual Insurance v. Maguire

          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


                                    -2-
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


                                        -3-
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.

                                      -4-
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


                                        -5-
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


                                  -6-
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


                                   -7-
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.

                                         -8-
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

                                -9-
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

                                -10-
          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.

                                 -11-
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.

                                 -12-
               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).

                                          -13-
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.

                                     -14-
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.

                               -15-
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


                                              -16-
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


                                     -17-
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.




                                    -18-
                               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.

                               -19-