On October 17, 2017, a United States magistrate judge entered summary judgment against a commercial insured of the Peerless Insurance Company based upon the binding effect of the appraisal condition in the insurance policy and the resulting failure of the insured to prove that any acts of the Peerless constituted violations of the unfair claim practices act or G.L. c. 93A.
The decision, Bearbones, Inc. d/b/a Morningside Bakery and Amaral Enterprises v. Peerless Indemnity Insurance Company (Morningside, Amaral, and Peerless, respectively) shows the binding effect and conclusiveness of the statutory reference procedure required in most first party property insurance policies in Massachusetts.
Morningside operated a bakery in a commercial condominium at 283 Tyler Street Pittsfield, owned and operated by Amaral. Morningside and Amaral had a common owner and each was listed as named insured on a single Peerless commercial business policy effective from October 1, 2012 through October 1, 2013.
Frozen pipe loss in 2013 engenders four-year dispute over values and claims handling
On February 19, 2013, a frozen pipe in the bakery’s premises burst causing water damage to the bakery’s equipment and the condominium’s premises. Morningside and Amaral immediately notified Peerless of the loss
Upon receipt of the claim, Peerless inspected the within two days and calculated the replacement cost of the building damage. On February 25, 2013, Morningside forwarded Peerless an estimate from a plumber, regarding the cost to repair the plumbing and heating at the bakery and an invoice emergency water mitigation and drying services and an estimate to finish remediation and cleanup of the water damage.
On April 15, 2013, an attorney for Morningside and Amaral advised Peerless of his representation of the insureds.
The next day, April 16, 2013, Peerless issued a payment in April 2013 of $11,672.94, for plumbing, heating system, and building repairs; and a payment of $4,094.99, for an emergency service invoice and the estimate to complete the loss remediation services.
On July 25, 2013, Peerless paid an additional $16,728.15, for a claim for damage to the bakery’s oven. As of that date, Peerless had paid all the claims documented to Peerless’ satisfaction presented by Morningside and Amaral.
Morningside and Amaral sue Peerless without complying with policy’s loss reference condition
Morningside’s policy with Peerless had the statutory condition for appraisal or reference:
In case of loss under this policy and a failure of the parties to agree as to the amount of loss, it is mutually agreed that the amount of such loss shall be referred to three disinterested [persons]…”
On August 6, 2017, counsel for Morningside and Amaral provide some information on a business loss claim. Peerless responded the next day that additional information was required to calculate the loss measure on the business income claim. Peerless followed up this request on August 30, 2013 and October 2, 2013, advising it had not received the listed documentation requested in back in May 16, 2013 correspondence. In the October 2, 2013 letter, Peerless stated that if it did not receive the requested documentation by October 30, 2013, the claim would be closed.
Peerless quickly moved to dismiss the suit because Morningside and Amaral had not complied with the statutory and policy provision requiring the value of the loss under the policy to be determined by reference or appraisal.Two days later, on October 4, 2013, Morningside and Amaral sued Peerless in Superior Court for damages under the policy.
Morningside and Amaral did not oppose the motion to dismiss but instead sent a written demand to Peerless’ counsel on December 23, 2013, to refer the matter to a reference panel. Peerless responded by providing as required by statute its list of three proposed referees on January 2, 2014.
Although the reference statute required Morningside and Amaral select a referee from Peerless’ list and provide Peerless with a list of its three proposed referees within ten days, Morningside and Amaral did not respond for over one year, until January 14, 2014.
After the reference panel had been completed by the two referees selected by Peerless and Morningside and Amaral selecting a third referee as provided by statute, the referees set April 6, 2015, the date for commencing proceedings.
Second lawsuit filed before reference proceedings start
Before the reference proceeding required by the policy and by statute commenced, Morningside and Amaral filed a new lawsuit in the United States District Court against, Peerless.
The lawsuit had three separate claims against Peerless:
Count I—Declaratory judgment seeking a declaration Peerless had to indemnify Morningside and Amaral in full excluding any deductibles and pay consequential damages, in addition to compensatory damages, arising from the “substantial and unwarranted delay by Peerless in adjusting the claim and its deficient claims handling process.”
Count II—Breach of contract by Peerless seeking “damages in excess of $1,000,000.”
Count III—Unfair Claims Settlement Practices alleging Peerless violated G.L.c.93A by committing violating eleven of the fourteen proscribed practices deemed as unfair claim practices under G.L. c. 176D, § 3(9).
Beside claiming over one million dollars in contract damages, Morningside and Amaral claimed those damages should be doubled or trebled and they should be awarded their attorney fees.
Reference award of $89 thousand on $1.2 million plus demand.
Following the filing of the federal suit and before the reference proceeding commenced Morningside and Amaral through counsel provided Peerless a document entitled “financial expert report” detailing a claimed economic loss of $1,290,000. Some of the alleged damages included:
- $30,000.00 to replace damaged equipment;
- $37,850.00 per month from business interruption until operation restored to pre-incident conditions;
- $120,269.00 to replace destroyed equipment;
- $156,000.00 in advertising costs/expenses to restore lost goodwill of the bakery;
- $180,000 lost opportunity costs concerning the commercial condominium realty;
- $454,200.00 estimated gross annual income lost each year.
The reference proceedings went forward as scheduled in April. The three referees inspected the property and held seven days of hearing. On July 7, 2015, the referees unanimously awarded Morningside $89,212.24 as the value of its loss. The award, as is customary, did not an all-inclusive for without consideration prior payments made by Peerless.
Following the award Peerless paid an additional $42,227.28 representing the total referees awarded less its previous payments. However, Peerless also deducted Morningside’s and Amaral’s fifty-percent share (“$14,488.88”) of the third referee’s $28,977.76 bill for services.
After reference award breach of contract damage claim “pie in the sky”
Eventually, in the federal lawsuit Peerless and Morningside and Amaral moved for summary judgment. In their motion, Morningside and Amaral pressed their claim for their full $1,000,000 plus damages.
The federal magistrate hearing the motion first addressed Morningside’s and Amaral’s breach-of-contract claim. The magistrate found the contract dispute on the amount of loss had been submitted to reference as required under Massachusetts law and the terms of the policy. The referees had issued an award, which Peerless had paid in full. Thus, Peerless, in the magistrate’s opinion, had fulfilled its contractual obligation to pay Morningside and Amaral for their covered losses.
Although Morningside and Amaral still argued their covered losses exceeded $1 million, the magistrate hearing the case ruled their claim was barred by the statutory provision on reference that states:
the award in writing by…the referees shall be conclusive and final upon the parties as to the amount of loss or damage.”
Because of this statute and the unanimous award Morningside’s and Amaral’s breach-of-contract claim, the magistrate ruled their damage claim for breach of contract failed “as a matter of law.”
Unfair claim practice and unfair and deceptive business practice claim also fail
Morningside’s and Amaral’s unfair claim practice suit stood on different grounds that their breach of contract damage claim. The reference award did not bar this claim as a matter of law but still the magistrate found no basis for the claim.
Peerless’ alleged three violations, per Morningside and Amaral, were:
- the payment of an amount less than the written referees’ award ultimately provided;
- the delay of 60 days after the loss for Peerless to make any payments to the Morningside and Amaral;
- Peerless’ inclusion of a bank, not listed on the policy, as an additional payee on certain checks issued in connection with the adjustment of loss; and
The magistrate noted on Morningside’ and Amaral’s first claim the disagreement on the amount of loss was “vast by any measure.” Morningside and Amaral sought an award at reference of between $1,170,000.00 and $1,290,000.00, while Peerless had paid only $32,496.08. The referees’ award was $89,212.24, less than ten percent of what Morningside and Amaral were seeking. The magistrate then ruled: “Given this large discrepancy, there is no basis…to conclude Peerless was acting in bad faith or engaging in extortionate behavior by disputing, and submitting to reference, the amount of loss [Morningside and Amaral] were claiming
On the second claim that the 60-day delay in payment was an unfair claim practice, the magistrate noted it was undisputed that Peerless did not make any payments under the policy until 56 days after the February 19, 2013 loss. However, Morningside and Amaral gave the magistrate no legal precedent to support their position that a lapse of 60 days—actually, 56 days—from the date of the loss to the date of first payment is an unfair business practice violating G.L. c. 93A. The magistrate instead ruled: “…56 days appears to be within the realm of reasonableness and, therefore, such a delay, by itself, does not amount to an extreme or egregious business wrong.”
Finally, the magistrate ruled Peerless did not violate Chapter 93A, by including Amaral’s mortgagee, Lee Bank, as a payee on certain of the checks issued in connection with the loss. The commercial property coverage part declarations page of the policy did list the mortgage holder as “none,” and there was no attached schedule listing Lee Bank as a mortgage holder. However, it was also undisputed that Lee Bank was, in fact, the mortgage holder and that Peerless knew that fact.
The magistrate noted Peerless might well have faced liability to Lee Bank had it failed to include Lee Bank as a payee on a payment for loss or damage to real estate. “Under these circumstances,” the magistrate ruled, “Peerless’ actions bear none of the hallmarks of misconduct that would run afoul of Chapter 93A, including the ‘absence of good faith and the presence of extortionate tactics.’”
The magistrate denied Morningside’s and Amaral’s motion for summary judgment and entered summary judgment for Peerless.
Lesson learned: Property policy insured loss values are not litigated
The basic lesson from Morningside’s and Amaral’s two suits to avoid their policy’s appraisal or reference method for determining loss value is that such attempts may be a waste of time and money. Determining loss value under most property policies by reference to three referees is required by Massachusetts statutory law. Insured’s who try to avoid this requirement without the consent of the insurer can lose not just their time, but also right to recover if they fail to initiate reference with the short two year statute of limitations under Massachusetts law. See Agency Checklists’ article of .