Massachusetts Superior Court Clarifies Advice of Counsel Defense

Consider the Risks: An Insurance Law Blog

A recent case decided by newly appointed Justice to the SJC, Ralph Gants, when he was sitting on the Superior Court, is illustrative of the caution insurers should take when relying on the advice of counsel and, more importantly, when attempting to establish a defense based on its counsel’s advice.

In Hejinian v. General American Life Ins. Co., 2007 Mass. Super. LEXIS 267 (Mass. Super. Ct. 2007), the Plaintiff, a beneficiary of a $1,000,000 life insurance policy issued by General American, brought suit alleging that General American breached the insurance policy by denying Plaintiff’s claim on the basis that his wife, the insured under the policy, failed to disclose that she had been diagnosed with cancer at the time the policy was delivered. Although there was no evidence that the Plaintiff’s wife had any knowledge that she had cancer at the time she completed the life insurance application, she failed to advise General American of her cancer diagnosis at the inception of the policy.

In July 2007, Judge Gants held that, pursuant to M.G.L. c. 175, §124, a life insurance company could not void a policy it issued without a medical examination where the insured provides truthful answers on a life insurance application but is subsequently diagnosed with cancer before the inception of the policy. See M.G.L. c. 175, §124 (requiring life insurer to show “willfully false, fraudulent, or misleading” statements in the policy application in order to void the policy where no medical examination was required.) Because General American had not required a medical examination, it could not rely on the Plaintiff’s wife’s failure to notify it of her cancer diagnosis at the inception of the policy.

In January, Judge Gants ruled on the Plaintiff’s G.L.c. 93A and 176D claims which had been severed and stayed pending the resolution of the Plaintiff’s claims concerning coverage. See Hejinian v. General American Life Ins. Co., No. 05-3851 (Mass. Super. Ct. Jan. 9, 2009). Plaintiff alleged that, among other things, General American violated G.L.c. 93A and 176D by refusing to pay the death benefit on the policy. General American’s defense to the claim was partially based on the advice of its counsel.

Specifically, General American claimed that, as a matter of law, its denial of coverage, notwithstanding §124, could not be found to be unreasonable because it relied on the advice of counsel. General American’s counsel advised it to make several meritless arguments, including that §186 applied even without a medical examination. See M.G.L. c. 175, §186 (allowing insurer to void policy where misrepresentation increases the risk of loss.)

Judge Gants held, however, that “the advice of counsel defense . . . does not give an insurance company a blank check to decline coverage as long as it finds an attorney willing to supports its declination.” Rather, an insurer’s reliance on the advice of its counsel must be reasonable and counsel’s evaluation of the case must be completed diligently and in good faith. Judge Gants determined that General American’s reliance on its counsel’s advice that §186 applied even without a medical examination was not reasonable where an insurer doing business in Massachusetts should be expected to know the Massachusetts statutes that govern the determination of coverage and where the Plaintiff’s attorney repeatedly referenced §124 in his demand letters to General American. As a result, Judge Gants held that General American violated GL. c. 93A and 176D and awarded the Plaintiff treble damages and attorneys’ fees.

In light of the Hejinian decisions, every insurer should not only ensure that it has policies in place to make its claims personnel aware of all relevant statutes in each state it conducts business but should also carefully consider the advice it receives from its counsel before relying on such advice.