In an unusual case of first impression decided in late April, the Appeals Court found an unexplained loss of a customer’s property in an insured’s care, custody and control could satisfy a CGL’s definition of an occurrence. In so deciding the Appeals Court reversed a Superior Court ruling for The Hanover Insurance Group (“The Hanover”) finding the insured had “no reasonable expectation of proving that its claimed loss was caused by an occurrence [under The Hanover’s insurance policy].”
Unexplained loss of 60,000 pounds of sea scallops triggers coverage action
Atlantic Capes Fisheries, Inc. (ACF) harvests Atlantic sea scallops from its own fleet and purchases similar scallops from other vessels and ships them both domestically and internationally, from its facility in Fall River, MA.
Prior to 2011, ACF had used Raw Seafoods, Inc. (“Raw Seafoods”) to inspect, process, portion, pack and freeze millions of pounds of raw, fresh scallops to the specifications of ACF’s customers. In some years, ACF had Raw Seafoods process as much as 4-5 million pounds of scallops, for a price of around $1 per pound.
In 2010, one of ACF’s customers returned 37,000 pounds of spoiled scallops Raw Seafoods had prepared for ACF. Upon inspection, an additional 21,722 pounds of scallops stored in a local freezing facility, processed by Raw Seafoods in the same batch, were found similarly spoiled and were deemed of such poor quality that ACF could not market them.
Raw Seafoods did not dispute that the scallops were delivered by ACF in good, marketable condition, and that while the scallops were in Raw Seafoods’ sole possession custody and control, the scallops apparently became spoiled prior to freezing by Raw Seafoods.
Raw Seafoods reported the claim to The Hanover reserved its rights and commenced a declaratory judgment in Superior Court alleging no coverage because, in part, Raw Seafoods had no explanation of how the loss occurred.
ACF sued Raw Seafoods in the United States District Court to recover the value of the spoiled scallops and prejudgment interest. The Hanover paid for the defense of Raw Seafoods against ACF’s suit consistent with its reservation of rights.
Unexplained property damage is not an “occurrence” under policy
Raw Seafoods’ policy with Hanover provided The Hanover “will pay those sums that the insured becomes legally obligated to pay as damages because of …’property damage’ to which this insurance applies.” The policy also had a “special broadening endorsement” that removed the exclusion for personal property of others “in the care, custody or control of the insured.” With this endorsement, the policy provided coverage for property damage to “customers goods” while on Raw Seafoods’ premises. However, the policy still only applied to “property damage” caused by an “occurrence” with the policy defining “occurrence” as:
an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
In the Superior Court coverage suit, The Hanover and Raw Seafoods moved for summary judgment. One of The Hanover’s main arguments was Raw Seafoods had presented no evidence on how the scallops were damaged—leaving the actual cause of the damage to speculation and conjecture on whether it was an accident that caused the scallops to spoil.
The Superior Court judge agreed and ruled The Hanover’s had no duty to indemnify Raw Seafoods for the federal court’s $600,000 judgment because Raw Seafoods had not shown the spoliation of the scallops constituted an “accident” within the meaning of the policy’s definition of an “occurrence.” In her decision, the judge concluded that “because there was no demonstrated accident distinct from [Raw Seafoods’] performance of its work,” Raw Seafoods could not meet its burden of proving its claimed loss was caused by an “occurrence,” as required under the policy.
The judge entered judgment for The Hanover and dismissed Raw Seafoods’ counterclaims. Raw Seafoods appealed.claimed loss was caused by an “occurrence,” as required under the policy.
Appeals Court finds unexplained loss an accidental occurrence applying special rule of law
The Appeals Court noted that the only issue the parties agreed upon was that the damage “was the result of some, as yet, unknown failure on the part of [Raw Seafoods’] processing people or handling people within [Raw Seafoods’] plant.” Beyond that the parties disagreed.
The Hanover argued before the Appeals Court that Raw Seafoods could not prove an occurrence involving an accident because:
- it had produced no evidence as to precisely how the scallops were damaged—leaving the actual cause of the damage to speculation and conjecture;
- assuming Raw Seafoods could prove that the damage was caused by some mishandling of the scallops on its part, it still had no proof the scallops were damaged by a fortuitous event, and not by a “normal, foreseeable, and expected incident of doing business; and,
- finally, even if the damage resulting from Raw Seafoods’ mishandling of the scallops was atypical or even anomalous, absent evidence to the contrary Raw Seafoods can only speculate that the damage stemmed from unintended conduct.
The Appeals Court noted that although the precise cause and mechanism of damage was not established, the underlying litigation in federal court against Raw Seafoods had proceeded on a theory of “res ipsa loquitur” for determining negligence. The Court stated that:
We have found no Massachusetts precedent for the proposition that a determination of negligence through the application of res ipsa loquitur is treated any differently from any other determination of negligence.’
Under the legal doctrine of res ipsa loquitur, negligence can be inferred as causing an otherwise unexplained event, when three conditions apply:
- the event must be one that rarely occurs absent negligence;
- the evidence must sufficiently eliminate anyone else’s conduct, other than the defendant’s as the cause of the event; and
- the negligence alleged must fall within the scope of the defendant’s duty to the plaintiff.
The Appeals Court analyzed each of the three conditions and found that since each condition was satisfied an “occurrence” under the policy had been established. In the courts words:
- It is undisputed that Raw Seafoods accepted the scallops delivered by ACF and determined them to be fit and wholesome, without offense odor or evidence of spoilage.
- Raw Seafoods had exclusive control over the scallops from delivery until they were shipped in a frozen state to a refrigerated storage facility. The condition of the scallops after the spoilage was discovered established that they were not subjected to any temperature abuse or other conditions or handling which could have caused the damage to scallops, and other similar scallops in cold storage were also spoiled.
- Finally, Raw Seafoods confirmed that the scallops could only have been spoiled while in its possession through lack of care in handling—possibly the failure of Raw Seafoods’ personnel to monitor and maintain the temperature of the scallops.
The Appeals Court then found that because the $600,000 federal court award against Raw Seafoods had been based upon a res ipsa loquitur finding of negligence, The Hanover was bound by that finding. In making this finding, the Appeals Court reiterated the long-standing Massachusetts rule that an insurer cannot relitigate factual issues decided in the underlying case relating to the policy.
Finally, the Appeals Court stated that since the federal judgment was based on a finding of negligence, there can be no “subsequent determination of intentional conduct by Raw Seafoods in the present case.”
Remand to the Superior Court for further proceedings
Although the Appeals Court reversed the summary judgment for The Hanover, this reversal only established that Raw Seafoods had got over the hurdle of proving its policy claim was based upon an accidental occurrence.
In the first proceedings in the Superior Court, the claims by The Hanover that other exclusions to the policy applied had not been addressed by the Superior Court judge. Also, because the Superior Court judge had thrown Raw Seafoods’ counterclaims for unpaid attorney fees, breach of contract and for claim practices in violation of M.G.L. c. 93A and c. 176D, all remaining claims were remanded to the Superior Court for further proceedings consistent with the Appeals Court’s opinion.
Pending application for further appellate review
Following the Appeals Court’s finding that Raw Seafood had established the loss of the scallops to have been an accident, The Hanover applied for further appellate review with the Supreme Judicial Court.
Raw Seafood has filed its opposition to The Hanover’s application for further appellate review. However, as of this article. The Supreme Judicial Court has not acted upon the application.
Agency checklists will update this article with the Supreme Judicial Court’s decision on The Hanover’s application.