On September 16, 2015, the Appeals Court decided whether a request for arbitration as to the amount of a property policy loss, where arbitration is a condition precedent to filing suit, operates to toll the two-year statute of limitations provided for under G.L. c. 175, § 99.
In Linda Hawley & Another vs. Preferred Mutual Insurance Company, the Appeals Court ruled that an insured’s suit against Preferred Mutual for a flood loss under a dwelling policy was barred by the mandatory two-year statute of limitations contained in the policy. The insured had argued that her request for statutory reference made five days before the policy’s two year statute of limitations expired operated to stay the statute of limitations. A panel of the Appeals Court disagreed and ruled that the insured should have filed suit notwithstanding her belated reference request.
A month’s water leakage causes flood and mold loss
Mr. and Mrs. Hawley owned a multi-unit rental property insured by Preferred Mutual. On June 11, 2004, the Hawleys’ first-floor tenant called to report a leak coming from the ceiling above the bathtub. Shortly thereafter, the ceiling collapsed. Mr. Hawley promptly contacted his insurance agent to report the loss, and the agent, in turn, notified Preferred Mutual.
Thirteen days later, Preferred Mutual’s independent adjuster inspected the property and found water and mold damage to the first and second floor bathrooms noting that the cause of the damage appeared to be a broken showerhead pipe.
In July, Mr. Hawley informed Preferred Mutual that the cause of the leak was the second floor shower door falling into the bathtub, creating a hairline crack in the bathtub. Based on this information Preferred Mutual concluded that continued use of the bathtub after the crack developed had allowed more water to leak and caused dangerous levels of mold.
Insureds file for reference but wait four years to file suit
In November 2004, Preferred Mutual denied the Hawley’s claim. The Hawleys hired an attorney who filed demands with Preferred Mutual alleging unfair claim practices but did not take any other actions required by the policy.
On June 5, 2006, five days before the two-year statute of limitations contained in the policy was set to expire, the Hawleys sent Preferred Mutual a request for reference. Thirty-four days later, on July 10, 2006, Preferred Mutual responded with a letter declining the request for reference.
The Hawleys made three additional demands for reference. Preferred Mutual’s repeated and final response, made on August 31, 2006, was to decline to proceed to reference.
The Hawleys ultimately filed suit, on June 2, 2008, just short of four years from the date of loss.
The mandatory Massachusetts endorsement for property policies
In the Superior Court, Preferred Mutual prevailed because the Hawleys had not filed their lawsuit under the policy within two years from the date of loss.
Ordinarily, if an insurance contract does not have a specific provision relating to bringing suit, Massachusetts law allows the insured six years from the date the loss accrued to bring suit. However, all property policies have a mandatory endorsement under the heading “Massachusetts Statutory Conditions” that provides that any provisions in the policy relating to appraisal or the filing of suits against the issuing company are replaced by “the relevant provisions of the Massachusetts Standard Fire Policy contained in this endorsement.”
Standard fire policy has mandatory provisions on loss arbitration and a short two-year statute of limitations to sue
The Massachusetts Standard Fire Policy form in the endorsement tracks the mandatory language found in G.L. c. 175, § 99. For claim purposes, two statutory provisions have been traps for the unwary insured. The first is the short statute of limitations contained in the statute that states:
No suit or action against this company for the recovery of any claim by virtue of this policy shall be sustained in any court of law or equity in this commonwealth unless commenced within two years from the time the loss occurred.
The second provision required is the “reference” or arbitration clause required by G.L. c. 175, § 99, Twelfth, requiring arbitration of the amount of the policy loss before a policyholder can file suit against the insurer:
In case of loss under this policy and a failure of the parties to agree as to the amount of loss…the amount of such loss shall be referred to three disinterested [persons]… and the award in writing by a majority of the referees shall be conclusive and final upon the parties as to the amount of loss or damage, and such reference…shall be a condition precedent to any right of action in law or equity to recover for such loss…
Insureds argue statutory request to arbitrate loss should have stayed two-year statute of limitations
In the Superior Court and in the Appeals Court, the Hawleys argued that their request for reference to arbitration tolled the statute of limitations. In particular, they argued that G.L. c. 175, § 99, does specifically state:
…that if, within said two years [from the date of loss]… the amount of the loss shall have been referred to arbitration after failure of the parties to agree thereon, the limitation of time for bringing such suit or action shall in no event be less than ninety days after a valid award has been made upon such reference…
However, on appeal, the Appeals Court found that “the breach of contract claim was filed outside the statute of limitations, as the request for reference did not toll the statute of limitations, and, even if it had, the complaint was not filed within a reasonable time after the denial of the request for reference…”
The Court began with the fact that “In this case, the loss occurred on June 11, 2004, and the statute of limitations expired on June 10, 2006, nearly two years before the Hawleys filed a complaint.”
The Court then addressed the main issue raised by the Hawleys that the statute of limitations may be tolled in circumstances in which the matter has been referred to arbitration through the reference procedure in the policy required by G.L. c. 175, § 99.
The Court found, however, that the statutory tolling provision did not apply in the Hawleys’ case because the reference procedure has not yet begun when the statute of limitations expired. The Court noted that the Hawleys made their request for reference on June 5, 2006, some five days before the statute of limitations expired. However, G. L. c. 175, § 100, allowed Preferred Mutual as the insurer ten days to respond to a request for reference, and another ten days thereafter for the insured to reply. Therefore, because of the belated initiation of the request for reference, the arbitration could not legally have commenced, as required to toll the statute of limitations, until after the two-year period to commence an action under the policy had expired.
Court gives guidance for insureds to avoid late reference request by filing suit within required two-year period to preserve policy rights
While the Court did rule against the Hawleys’ last-minute request for policy loss arbitration staying the statute of limitations, the Court did provide guidance as to what insureds in a similar predicament should do to preserve their rights.
The Court advised that since the Hawleys knew that, “their belated request for reference might well take them past the two-year statute of limitations, it was open to the Hawleys to file their complaint timely…”
The Court found that §99 and the policy allowed a court to delay commencement of the action to allow the insured to first proceed with arbitration. In other words, since referral to arbitration as to the amount of the loss and the receipt of an award as determined by the arbitrators is a condition precedent to filing suit, an insured can file a suit within the two-year period and ask the court to stay the action pending arbitration
The Appeals Court concluded that § 99 provided this procedure as “a specific mechanism to allow for the delay of an action when deemed appropriate by the court” and, as a result, found that there was no need to provide any judicial remedy for tolling the statute of limitations.
Preferred Mutual held not to have committed unfair claim practices since loss not covered.
Lest the result seem too harsh based on the facts and circumstances, the Appeals Court went to reach the merits of the Hawleys’ claim in relation to their allegations of unfair claim practices against Preferred Mutual.
The Superior Court judgment from which the Hawleys had appealed had found that Preferred Mutual’s policy did not cover the loss. This ruling resulted from the Superior Court finding that the loss had been subject to the policy exclusion for losses caused by “constant or repeated seepage or leakage of water or steam over a period of weeks, months or years from within a plumbing, heating, air conditioning or automatic fire protection sprinkler system or from within a household appliance.” Initially, the Hawleys’ had asserted that the plumbing system of the property did not include the bathtub where the leak that caused the loss began. However, the Hawleys’ counsel, at oral argument before the Appeals Court, acknowledged that the bathtub was part of the plumbing system. Accordingly, the Appeals Court agreed with the Superior Court judge that the policy specifically would have excluded the loss, even if the Hawleys had pursued their suit in a timely manner.
Watch out for the short statute of limitations required by G.L. c. 175, § 99!
The statutory provisions required by statute for Massachusetts property policies can become traps for the unwary for insureds that do not carefully follow a policy’s conditions on determining a loss amount through reference or with filing suit within two years of the actual date of the loss.
Previously Agency Checklists reported on an October 5, 2015 decision, Karl Nurse v. Omega US Insurance, case, in the article entitled, “Statutory Two-Year Suit Limitation Trumps Discovery Rule In Major Water Loss Case”. The Nurse case decision followed the Hawley decision by only three weeks. Thus, in this short period of time, two different Appeals Court panels found that insureds could not recover under their property policies because they had not complied with the short statute of limitations contained in G.L. c. 175, § 99.
Copy of decision in Hawley vs. Preferred Mutual Insurance Company
To review the decision of the Appeals Court, click on this link: Hawley vs. Preferred Mutual Insurance Company