Are Self-Insurers Subject to State Insurance Claim Handling Statutes?
According to the court in Bingham v. Supervalu, Inc., No. 15-1437 (1st Cir. November 13, 2015), the answer is “no.” As the Bingham decision illustrates, however, the answer to this question depends on the self-insurer’s risk management structure, as well as applicable statutory guidelines and requirements.
At issue in Bingham was whether the corporate parent of a supermarket chain was liable to an underlying tort plaintiff for alleged violations of a Massachusetts statute that prohibits those “in the business of insurance” from engaging in unfair and deceptive practices, including the failure to effect “prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” (Chapter 176D, § 3(9)(f) of the Massachusetts Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance Act). The corporate parent, Supervalu, Inc., purchased commercial general liability insurance for its subsidiaries that provided coverage in excess of a $2 million self-insured retention. For claims within the self-insured retention, Supervalu had the authority to negotiate and settle claims on behalf of its subsidiaries pursuant to a centralized risk management system. Supervalu employed claims adjusters to perform claims handling functions and issued claim payments from a central account on behalf of its subsidiaries.
When one of Supervalu’s subsidiaries, Shaw’s Supermarket, was sued in an underlying bodily injury lawsuit seeking less than $2 million in damages, Supervalu retained defense counsel to defend and settle the claim. Supervalu appealed a judgment entered in favor of the underlying plaintiff and, when that judgment was affirmed, threatened to appeal again on a different issue. Supervalu eventually settled with the underlying plaintiff.
After the settlement, the underlying tort plaintiff sued Supervalu for statutory damages under Chapter 176D of the Unfair and Deceptive Acts and Practices Act. (Chapter 93A, § 9 of the Massachusetts Consumer Protection Act permits a private cause of action for damages against an insurer that violates Chapter 176D.) The plaintiff alleged that: (1) Supervalu was subject to the Act because it was “in the business of insurance”; and (2) Supervalu violated the Act because the sole motive behind Supervalu’s decision to appeal the judgment and its threats to take a second appeal was to prolong the litigation process in hopes of obtaining a reduced settlement, as neither appeal was likely to succeed.
The Bingham court held that Supervalu was not liable under the Act because Supervalu was not “in the business of insurance.” The court found Supervalu was not “in the business of insurance” because: (1) it did not sell insurance policies for profit; and (2) it was not contractually obligated to settle claims made against its subsidiaries. Rather, it was acting as a “self-insurer” for claims that fell within its self-insured retention, and a self-insurer was not the same as an insurer. In so ruling, the court found significant that Shaw’s did not assume risk on behalf of unaffiliated third parties, nor did it settle claims for unaffiliated third parties. The court rejected the argument that Shaw’s was acting as a captive insurer because it did not issue policies or accept premium. The court also rejected the argument that Supervalu was acting as a third-party administrator because it was not acting on behalf of an insurer.