United States Court of Appeals
For the First Circuit
No. 12-1137
LUCIANO MANGANELLA,
Plaintiff, Appellant,
v.
EVANSTON INSURANCE COMPANY,
Defendant, Third-Party Plaintiff, Appellee,
v.
JASMINE COMPANY, INC.,
Third-Party Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya and Stahl, Circuit Judges.
Bruce S. Barnett, with whom Daniel E. Rosenfeld and DLA Piper
LLP were on brief, for appellant.
Harvey Nosowitz, with whom Anderson & Krieger LLP was on
brief, for appellee.
November 27, 2012
STAHL, Circuit Judge. This insurance coverage dispute
arises from charges of sexual harassment brought by a one-time
employee against appellant Luciano Manganella, the former president
of Jasmine Company, Inc. Manganella sought a defense to and
indemnity for the harassment claims from appellee Evanston
Insurance Co., Jasmine's liability insurance provider. The
district court ruled that Manganella was not entitled to coverage
from Evanston because, under the doctrine of issue preclusion, a
prior arbitration between Manganella and the purchaser of his
business conclusively established that Manganella's conduct fell
within an exclusion to Evanston's insurance policy. After careful
consideration, we affirm.
I. Facts & Background
Before the events giving rise to this action, Manganella
was the president and sole shareholder of Jasmine, a clothing
retailer that he founded in the 1970s. Donna Burgess, whose sexual
harassment allegations against Manganella form the underlying
claims here, was Jasmine's human resources manager from 1997 to
2006.
In 1998, a former Jasmine employee, Sonia Bawa, filed
claims of sexual harassment against Jasmine based on Manganella's
conduct. Soon thereafter, Jasmine purchased from Evanston the
Employment Practices Liability Insurance Policy at issue here (the
"Policy"). Jasmine's coverage from Evanston under the Policy
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consisted of a series of annually renewed one-year installments.
The Policy covers any "claim" that seeks "relief for a Wrongful
Employment Practice" and is made and reported to Evanston during
the policy period or an extended reporting period. A Wrongful
Employment Practice includes, as relevant here, "conduct of an
Insured with respect to . . . [an] employee that allegedly
culminated in . . . violation of any state, federal or local civil
rights or anti-discrimination law and/or fair employment practices
law." For a resulting claim to be covered, a Wrongful Employment
Practice must have "happened" in its "entirety" during the policy
period or after the retroactive date (here, April 28, 1999).
Importantly, one of the Policy's exclusions (the "Disregard
Exclusion") bars coverage for claims based on "conduct . . .
committed with wanton, willful, reckless or intentional disregard
of any law or laws that is or are the foundation for the Claim."
In July 2005, Manganella sold Jasmine to Lerner New York,
Inc. for approximately $30 million. Manganella and Lerner executed
a stock purchase agreement ("SPA") to effectuate the sale and an
employment agreement under which Manganella would remain Jasmine's
president for three years. Under the SPA, $7 million of the
purchase price was placed in escrow, "as security . . . in the
event of a Major Employment Breach" by Manganella. A "Major
Employment Breach" is a breach of the employment agreement that
arises from, among other things, a refusal to comply with any
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"significant" policy of Lerner's. A few months after the sale was
completed, Jasmine cancelled the final installment of the Policy,
but purchased an extended reporting period, which allowed for
coverage of claims made and reported during the thirty-six months
following the effective date of the cancellation.
In May 2006, further allegations of sexual harassment by
Manganella prompted Jasmine to hire an outside investigator, Stier
Anderson LLC, which interviewed several employees, including
Burgess; she recounted inappropriate comments that Manganella had
made in the past. On June 22, 2006, as a result of conduct
revealed by the investigation, Manganella was fired. In a letter
to Manganella, Lerner accused him of committing multiple Major
Employment Breaches by sexually harassing four female employees and
downloading sexually explicit images on company computers, all in
violation of Lerner's Code of Conduct. Lerner demanded that
Manganella agree to release the escrowed $7 million.
One week later, Lerner invoked the SPA's arbitration
clause, contending that Manganella had forfeited the escrowed funds
by committing a Major Employment Breach. The arbitration panel
held ten days of hearings and received extensive written and oral
argumentation. The panel issued its ruling in April 2007, finding
that Manganella had "sexually propositioned several women employees
and inappropriately touched and propositioned one of these
employees," in willful violation of Lerner's corporate Code of
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Conduct. The panel explained: "We find, despite his protestations
to the contrary, that [Manganella] was well acquainted with the
Company's policy on sexual harassment and other acts of
inappropriate conduct. We find thus that he did not comply with
the policy and that his refusal was willful."
The panel also found, however, that Lerner had failed to
give Manganella notice of and an opportunity to remedy these
violations, as required by the SPA. Consequently, the panel
awarded Manganella the escrowed funds, along with interest and
attorneys' fees. The arbitration award was confirmed by a federal
court in August 2007. Manganella v. Lerner N.Y., Inc., 07-cv-
06250-RJH (S.D.N.Y. Aug. 7, 2007) (order confirming arbitration
award).
On March 19, 2007 (roughly a month before the arbitration
ended), Burgess filed a charge of discrimination against
Manganella, Lerner, and Jasmine with the Massachusetts Commission
Against Discrimination ("MCAD"). The MCAD charge alleged that,
"[t]hroughout her employment with Jasmine[], Manganella subjected
Ms. Burgess to nearly constant physical and verbal sexual
harassment," including "inappropriate comments about Ms.
Burgess'[s] body, inappropriate touching," and, eventually, coerced
sexual activity on five separate occasions. Manganella also "made
sexual comments about other women in Ms. Burgess'[s] presence," and
threatened Burgess (and others) with physical violence.
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Ten days after Burgess filed the MCAD charge, Manganella
notified Evanston of her claims and requested coverage under the
Policy. Less than two weeks later, Evanston replied, denying
coverage for Burgess's claims on the ground that it was "apparent"
that the harassment alleged in her MCAD charge "did not happen in
its entirety subsequent to the [April 28, 1999] Retroactive Date,"
as required for coverage. Evanston's letter also adverted, without
elaboration, to the Disregard Exclusion.
Manganella filed this action against Evanston in July
2009, seeking a ruling that Evanston was required under the Policy
to defend and indemnify him against Burgess's MCAD charge. He also
alleged breaches of contract, breach of the duty of good faith and
fair dealing, and violations of Mass. Gen. Laws chs. 93A, § 9 and
176D, all stemming from Evanston's refusal to defend and indemnify
him. After discovery, Manganella and Evanston cross-moved for
summary judgment. The district court held that Evanston should
have at least investigated the MCAD charge before denying coverage,
given that it was aware of certain facts suggesting that
Manganella's unlawful conduct may not have begun prior to the
Policy's retroactive date. Manganella v. Evanston Ins. Co., 746 F.
Supp. 2d 338, 346 (D. Mass. 2010). The court also concluded,
however, that the conduct described in Burgess's MCAD charge fell
within the Policy's Disregard Exclusion. The court found that the
arbitration panel's determination that Manganella had harassed his
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employees (including Burgess) in willful violation of Lerner's Code
of Conduct also established that, for purposes of the Disregard
Exclusion, Manganella acted "with wanton, willful, reckless or
intentional disregard of" the Massachusetts sexual harassment law
underlying Burgess's MCAD charge. Id. at 347-48. The district
court thus held that the doctrine of issue preclusion barred
Manganella from relitigating that question, and granted summary
judgment for Evanston. Id. at 349.1 Manganella now appeals that
ruling.
II. Analysis
We review a grant of summary judgment de novo. Baker v.
St. Paul Travelers Ins. Co., 670 F.3d 119, 125 (1st Cir. 2012).
Likewise, "[w]e review de novo the district court's application of
the doctrine of issue preclusion because '[t]he applicability vel
non of preclusion principles is a question of law.'" Keystone
Shipping Co. v. New Eng. Power Co., 109 F.3d 46, 50 (1st Cir. 1997)
1
In a separate summary judgment opinion, the district
court resolved third-party claims that Evanston brought against
Jasmine to establish that it did not owe Jasmine coverage for
Burgess's claims. Manganella v. Evanston Ins. Co., No. 09-cv-
11264-RGS, 2011 WL 5118898 (D. Mass. Oct. 28, 2011). The court
reiterated its holding that Evanston had breached its duty to
investigate the MCAD charge before denying coverage, and went on to
determine that Evanston had to indemnify Jasmine for Burgess's
claims because the conduct she alleged happened entirely after the
Policy's retroactive date. See id. at *5-7. That ruling is the
subject of a separate appeal. See Evanston Ins. Co. v. Jasmine
Co., No. 12-1139 (1st Cir. argued Nov. 6, 2012).
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(second alteration in original) (quoting Monarch Life Ins. Co. v.
Ropes & Gray, 65 F.3d 973, 978 (1st Cir. 1995)).
The crux of this appeal is whether the district court
properly applied the doctrine of issue preclusion to bar Manganella
from litigating whether the Policy's Disregard Exclusion applies to
the conduct alleged in Burgess's MCAD charge. As described above,
the district court held that the arbitration between Lerner and
Manganella had decided, in the affirmative, the crucial question of
whether Manganella's acts, as alleged by Burgess, were committed
with wanton, willful, reckless, or intentional disregard for the
Massachusetts sexual harassment law that formed the basis for her
claims against him. 746 F. Supp. 2d at 348. Although the parties
dispute whether Massachusetts or federal preclusion principles
govern this question, we need not resolve that quarrel because we
see no material difference in how the two standards would apply
here. See Keystone Shipping, 109 F.3d at 51 (noting that "our
cases apply the same traditional preclusion principles that would
control in a Massachusetts court").
Issue preclusion (also called collateral estoppel)
"prevents a party from relitigating issues that have been
previously adjudicated." Rodríguez-García v. Miranda-Marín, 610
F.3d 756, 770 (1st Cir. 2010). The doctrine applies to issues of
fact as well as those of law, Allen v. McCurry, 449 U.S. 90, 94
(1980), and can apply where the subsequent proceeding involves a
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cause of action different from the first, see Comm'r v. Sunnen, 333
U.S. 591, 601 (1948). Under modern preclusion doctrine, "the
central question is 'whether a party has had a full and fair
opportunity for judicial resolution of the same issue.'"
Rodríguez-García, 610 F.3d at 771 (quoting Fiumara v. Fireman's
Fund Ins. Cos., 746 F.2d 87, 92 (1st Cir. 1984)).
Generally, final arbitral awards are afforded the same
preclusive effects as are prior court judgments. See FleetBoston
Fin. Corp. v. Alt, 638 F.3d 70, 79 (1st Cir. 2011) (citing Wolf v.
Gruntal & Co., 45 F.3d 524, 528 (1st Cir. 1995)). As we have
noted, however, "there may be particular difficulties" in applying
preclusion principles to an arbitral award, especially where the
reasoning behind the award is unexplained. Id. at 80. Thus, "it
has been suggested that courts have discretion as to whether issue
preclusion is appropriate" in the arbitration context. Id. (citing
18B Charles Alan Wright et al., Federal Practice & Procedure
§ 4475.1, at 518 (2d ed. 2002)). Here, though, "[w]e need not
consider that suggestion, as we find it clear that the outcome we
reach is consistent with the traditional requirements." Id.
Under those traditional requirements, issue preclusion
may be applied to bar relitigation of an issue decided in an
earlier action where: (1) the issues raised in the two actions are
the same; (2) the issue was actually litigated in the earlier
action; (3) the issue was determined by a valid and binding final
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judgment; and (4) the determination of the issue was necessary to
that judgment. Id.; accord Mercado-Salinas v. Bart Enters. Int'l,
Ltd., 671 F.3d 12, 21-22 (1st Cir. 2011). Here, Manganella argues
that two of these predicates are missing: identity of the issues
and necessity to the judgment. We begin with identity of the
issues.
For issue preclusion to apply here, the arbitrators must
have decided an issue "the same as the one presented" in this case.
Smith v. Bayer Corp., 131 S. Ct. 2368, 2376 (2011). The identity
of the issues need not be absolute; rather, it is enough that the
issues are in substance identical. See Montana v. United States,
440 U.S. 147, 155 (1979) (asking "whether the issues presented [in
the two actions] are in substance the same"). Further, the issue
need not have been the ultimate issue decided by the arbitration;
issue preclusion can extend to necessary intermediate findings,
Rodríguez-García, 610 F.3d at 771, even where those findings are
not explicit, Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26,
30-31 (1st Cir. 1994). Nevertheless, the arbitrators must have
effectively resolved the issue presented here: whether Manganella's
conduct, as described in the MCAD charge, was committed "with
wanton, willful, reckless or intentional disregard of" the
Massachusetts sexual harassment law underlying the charge.
Manganella argues that the arbitrators were simply never
called upon to decide whether he acted in disregard of state law.
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He claims that Lerner's Code of Conduct is broader and stricter
than state sexual harassment law; the Code, he says, reaches not
only sexual harassment serious enough to violate the law, but also
less serious harassment, as well as behavior that would embarrass
the company or constitute a failure of leadership. Thus,
Manganella argues, the arbitrators did not, in the process of
deciding whether he violated the Code, decide anything about the
relationship between his conduct and state law.
We think that Manganella overstates the differences
between the Code of Conduct and the state law referenced in the
Disregard Exclusion. The relevant portion of the Code provides:
We are committed to maintaining a workplace
entirely free from illegal discrimination or
harassment. . . .
The term "harassment" may include unwelcome
slurs and other offensive remarks, jokes and
other verbal, graphic or unwelcome physical
contact. Harassment may also include
unwelcome sexual advances, requests for sexual
favors or unwelcome or offensive touching and
other verbal, graphic or physical conduct of a
sexual nature . . . .
The applicable state law similarly provides that sexual harassment
means:
sexual advances, requests for sexual favors,
and other verbal or physical conduct of a
sexual nature when (a) submission to or
rejection of such advances, requests or
conduct is made either explicitly or
implicitly a term or condition of employment
or as a basis for employment decisions; [or]
(b) such advances, requests or conduct have
the purpose or effect of unreasonably
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interfering with an individual's work
performance by creating an intimidating,
hostile, humiliating or sexually offensive
work environment.
Mass. Gen. Laws ch. 151B, § 1(18). Thus, both the state law and
the Code reach "sexual advances," "requests for sexual favors," and
other "verbal" or "physical" "conduct of a sexual nature."
To be sure, the law does impose a severity requirement
absent from the Code; the behavior described above is unlawful only
if it involves a quid pro quo or "creat[es] an intimidating,
hostile, humiliating or sexually offensive work environment." But
this requirement does not, as Manganella suggests, mean that a
single incident cannot constitute unlawful sexual harassment. In
fact, the Supreme Judicial Court has declined to require sexual
harassment claims to be based on any particular number of
incidents. See Gnerre v. Mass. Comm'n Against Discrim., 524 N.E.2d
84, 88-89 (Mass. 1988) (citing Coll.-Town, Div. of Interco, Inc. v.
Mass. Comm'n Against Discrim., 508 N.E.2d 587, 591 (Mass. 1987));
see also Maltese v. Thacker, No. CA963864, 2000 WL 1180285, at *2
(Mass. Super. Ct. May 3, 2000) ("A single incident can, depending
on the nature and severity of the conduct, constitute sexual
harassment."). Thus, the fact that the arbitrators did not
expressly find that Manganella had propositioned any particular
employee more than once does not mean that his conduct could not
have run afoul of the law.
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None of this is to say that we see no distinction between
the standard imposed by the Code and that created by the law.
Rather, the point is that the two standards are similar enough that
we are unable to discern a meaningful difference, on the facts of
this case, between acting in willful violation of the former (which
the arbitrators found Manganella to have done) and acting with
wanton disregard of the latter (which triggers the Disregard
Exclusion). Because of this similarity, sexually harassing conduct
committed in willful violation of the Code, by a person familiar
with the law, would, on these facts, show a wanton or reckless
disregard for whether that conduct was lawful.
Manganella's fall-back position is that the two issues
are nevertheless not the same because the arbitrators did not make
any findings specific to Burgess herself. Thus, he contends, the
arbitration could not have decided whether the conduct alleged in
Burgess's MCAD charge was committed in disregard of the law. This
argument, however, is impossible to square with Manganella's
admission below that "Burgess is one of the Jasmine employees who
the Arbitration panel found Mr. Manganella had sexually harassed."
In light of that concession, the only open question is whether
Burgess was one of the "several" employees Manganella was found to
have "sexually propositioned" or was instead the one employee he
"inappropriately touched" and "propositioned." But for present
purposes, this distinction is immaterial; for the reasons given
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above, we do not see how Manganella could have undertaken any of
this conduct without a wanton or reckless disregard for its
legality. Thus, the lack of factual findings expressly tied to
Burgess herself does not place the present issue beyond the scope
of the arbitrators' decision.
One final point bolsters our conclusion that the
arbitrators effectively decided the issue presented here: proof of
a willful violation of the Code and proof of conduct committed in
disregard of the law would be extremely similar. See 18 Wright et
al., supra, § 4417, at 413 n.2 (noting that, in defining the issues
precluded by a prior action, courts consider, among other factors,
whether there is a substantial overlap between the evidence or
argument advanced in the two proceedings); accord Restatement
(Second) of Judgments § 27 cmt. c (1982). Apart from the question
of findings specific to Burgess, discussed above, the only obvious
difference in proof is that the evidence in the arbitration was
geared toward showing Manganella's familiarity with the Code,
whereas the evidence in a proceeding based on the Disregard
Exclusion would be aimed at showing his familiarity with state law.
But we believe that the arbitration sufficiently established this
point; as the arbitrators found, Manganella was "quite familiar
with the subject of sexual harassment," having in 1998 updated
Jasmine's company policy to reflect the same Massachusetts sexual
harassment law that undergirded Burgess's claims against him.
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Thus, we believe that a subsequent proceeding to litigate the
applicability of the Disregard Exclusion would involve
substantially the same discovery, testimony, and argument as did
the arbitration.
Consequently, we turn to the other element of issue
preclusion that Manganella contends is missing here: necessity to
the judgment. Manganella asserts that the arbitrators' finding
that he engaged in sexual harassment in willful violation of
Lerner's Code of Conduct was not essential to their ruling.
Because the arbitrators' decision ultimately turned on whether
Lerner had given Manganella the contractually required notice of
and opportunity to remedy his misdeeds, Manganella argues that the
arbitrators could have reached the same result by simply assuming
the validity of the harassment allegations and not making explicit
findings thereon. Based on what was actually decided by the
arbitrators, we disagree.
To begin with, although Manganella argues here that the
arbitrators could have just assumed the truth of the harassment
allegations, he did not ask them to do so. Rather, he vigorously
litigated both the truth of those allegations and the question of
whether he knew that his behavior was prohibited. Thus, there is
no concern here that the panel's resolution of this issue was based
on something less than a full adversarial presentation, which could
call into question whether the issue was "actually litigated" for
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preclusion purposes. See FleetBoston Fin. Corp., 638 F.3d at 81
(finding preclusion appropriate where parties not only had a "full
opportunity" to litigate before arbitrators, but also "fully took
advantage of that opportunity"); cf. Kane v. Town of Harpswell (In
re Kane), 254 F.3d 325, 329 (1st Cir. 2001) (giving "situations
where a matter is stipulated [or] admitted without controversy" as
examples in which actual litigation is absent (citing Restatement
(Second) of Judgments § 27 cmt. e (1982))).
In any event, Manganella's argument that the arbitrators'
findings as to his sexually harassing conduct were not necessary to
the arbitral judgment is based on a misapprehension of the
necessity-to-the-judgment requirement. We do not ask whether the
resolution of an issue was necessary to reach the same outcome;
rather, the inquiry is whether the issue was necessary to the
decision actually rendered. See 18 Wright et al., supra, § 4421,
at 548-49 (suggesting that courts should resist the urge "to
speculate that a prior decision could have been rested on narrower
grounds than those actually chosen, so that resolution of the
broader issues was not necessary to the decision"); cf. Rodríguez-
García, 610 F.3d at 771. Here, the arbitrators' determination that
Manganella sexually harassed his employees in willful violation of
the Code was necessary to the actual decision reached because the
panel had to decide whether Lerner's undisputed failure to comply
with the SPA's notice-and-remedy requirement was excusable. New
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York law, which governed the arbitration, sometimes allows non-
breaching parties to eschew such contractually mandated measures,
including where they would prove futile. See Wolff & Munier, Inc.
v. Whiting-Turner Contracting Co., 946 F.2d 1003, 1009 (2d Cir.
1991); Sea Tow Servs. Int'l, Inc. v. Pontin, 607 F. Supp. 2d 378,
389 (E.D.N.Y. 2009). To assess whether this doctrine excused
Lerner's omission, the arbitrators weighed a raft of factors,
including the specifics and severity of Manganella's conduct.
Ultimately, they determined that, although Manganella's behavior
was egregious and willfully violated the Code, notice was still
feasible under the circumstances; in particular, they concluded
that Manganella could have been given the requisite notice after
being placed on administrative leave. The panel's factual findings
as to Manganella's conduct were part and parcel of its resolution
of this issue, and were thus "necessary intermediate findings," to
which we give preclusive effect. See Rodríguez-García, 610 F.3d at
771 (citation and emphasis omitted).2
In sum, the arbitration presented Manganella with the
"full and fair opportunity" for adjudication of the issue at hand
that is the centerpiece of modern issue preclusion doctrine. See
2
We do not see the panel's finding that Lerner was not
excused from complying with the SPA's notice-and-remedy requirement
as reflecting a conclusion that Manganella's malfeasance was
somehow less than serious; rather, the panel explained that its
decision that notice was still appropriate reflected the philosophy
that parties should attempt "to find resolutions to even the most
egregious of misconduct."
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id. (quoting Fiumara, 746 F.2d at 92). The extent of his harassing
conduct and his knowledge that it was prohibited were vigorously
litigated and were essential to the panel's judgment. Allowing
Manganella to contest these questions now would contravene the twin
goals of issue preclusion: protecting litigants from the burden of
relitigating settled issues and promoting judicial economy by
preventing needless litigation. See Parklane Hosiery Co. v. Shore,
439 U.S. 322, 326 (1979). Accordingly, the district court was
correct to bar Manganella from disputing the applicability of the
Disregard Exclusion.
That conclusion, in turn, forecloses the other
contentions that Manganella presses on appeal. Manganella avers
that Evanston must reimburse him for the cost of the arbitration
with Lerner because it was "reasonably related to the defense of"
Burgess's harassment claims. But, because the Disregard Exclusion
applies to Burgess's claims against Manganella, her claims were not
covered and Evanston had no duty to defend Manganella against them,
let alone to defend him in a proceeding "reasonably related"
thereto.
Likewise, the applicability of the Disregard Exclusion is
fatal to Manganella's state law claims, which allege breaches of
contract and violations of Mass. Gen. Laws chs. 93A and 176D and
the duty of good faith and fair dealing. Because Evanston's denial
of coverage was justified by the Disregard Exclusion, these claims
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cannot proceed under the theory that the denial of coverage was
wrongful. See Timpson v. Transamerica Ins. Co., 669 N.E.2d 1092,
1098 (Mass. App. Ct. 1996). The only other basis that Manganella
offers for these claims is Evanston's initial failure to
investigate Burgess's MCAD charge before denying coverage. But, as
Evanston points out (and as Manganella does not address), even if
that omission was improper, it cannot have harmed Manganella
because any investigation would have promptly revealed the
arbitration award, which, as we have explained, establishes the
applicability of the Disregard Exclusion. See Van Dyke v. St. Paul
Fire & Marine Ins. Co., 448 N.E.2d 357, 362 (Mass. 1983) (rejecting
chapter 93A claims because, even if insurer "had conducted a proper
investigation," it would have been justified in refusing
settlement, so "any omission" by the insurer "did not cause any
injury to or adversely affect the plaintiffs"). Because Manganella
offers no other way for these claims to survive in the absence of
his coverage claim, we need not address them further.
III. Conclusion
For the foregoing reasons, we affirm.
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