On August 6, the United States District Court entered a decision on an extra expense claim under a commercial insurance policy, Interstate Gourmet Coffee Roasters, Inc. v. The Travelers Indemnity Company. The decision found that added vacation time granted workers as part of a covered loss triggered the added expenses of the insurer’s policy under the definition of wages in the Massachusetts Wage Act.
An interesting and somewhat out-of-the-ordinary feature of the court’s decision was that instead of entering summary judgment on that finding the Court entered an order that the Phoenix Insurance Company, the subsidiary of Travelers that issued the policy (hereafter, “Phoenix”):
Phoenix will promptly make a fair offer of settlement of the vacation-time issue and report to the court within thirty (30) days of the date of this Order.
Faulty excavation puts company out of business for thirteen days
Interstate Gourmet Coffee Roasters, Inc. (Interstate) is a local Massachusetts company in the business of producing and selling coffee to distributors, retailers, and other commercial customers. Interstate has its usual place of business and factory in South Easton.
On July 9, 2015, a contractor improperly excavated a trench at Interstate’s premises. That night it rained, and the open trench became compromised and water leaked into Interstate’s electrical system, knocking out all electrical power to the building. The lack of electricity meant that Interstate could not run its coffee production, and, as a result, at least thirty (30) of Its employees did not work to produce or package coffee.
Interstate rented temporary generators to power parts of its factory. Twenty-six of Interstate’s employees stopped working their normal jobs and focused on undertaking duties necessary to mitigate the loss caused by the accident. According to Interstate, these twenty-six employees spent four hundred and fifty hours in mitigating the loss. After thirteen days, Interstate’s operations were back to normal.
Phoenix policy provides for Extra Expense incurred for a covered property claim
On November 6, 2014, Phoenix issued Interstate Commercial Insurance Policy 630-8E877328 (the Policy), effective November 1, 2014, through November 1, 2015. Under the Deluxe Business Income (and Extra Expense) Coverage Form, the Policy provided, in relevant part:
We will pay for:…the actual Extra Expense you incur during the “period of restoration” caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income and Extra Expense Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or resulting from a Covered Cause of Loss.
- Extra Expense
Extra Expense means reasonable and necessary expenses described in a., b., and c. below that you incur during the “period of restoration” and that you would not have incurred if there had been no direct physical loss of or damage to property caused by or resulting from a Covered Cause of Loss. (Emphasis in court’s decision).
Expenses to avoid or minimize the suspension of business and to continue “operations” at: (1) the described premises. ..
Expenses to minimize the “suspension” of business if you cannot continue “operations;” or
Expenses to repair or replace the property, but only to the extent the amount of loss that otherwise would have been payable under this Coverage Form is reduced
Interstate claims Extra Expense for employee compensation of $101 thousand
On July 13, 2015, Interstate notified Phoenix of the accident and its claim under the Policy. Interstate claimed reimbursement for the compensation it had paid the twenty-six employees who worked to mitigate the loss.
Interstate’s claim was limited to compensation for the hours these employees devoted to mitigating the loss. For these twenty-six employees, Interstate submitted to Phoenix relevant payroll information and also provided descriptions of all the employees’ mitigation duties.
Interstate did not claim reimbursement for any of its employees who did not work and used vacation, personal, or sick time.
On July 15, 2015, a Phoenix claim representative inspected the damaged premises along with Interstate’s President. During the inspection, Interstate’s president advised the claim representative that Interstate wished to withdraw the claim with Phoenix because it was planning to submit a claim through the contractor’s liability carrier.
In January 2016, Interstate advised Phoenix that it had been unsuccessful in pursuing the claim with the contractor’s liability carrier and that Interstate was, therefore, re-submitting the claim with Phoenix.
Interstate did not claim any loss of business income because of the accident but did submit losses for building damage and business personal property. Interstate also submitted an additional claim item for $101,289.03, representing the amount that Interstate claimed to have paid its employees, primarily its salaried employees for mitigation work.
Payment of $1,700 on $70 thousand claim leads to lawsuit
On March 29, 2016, Phoenix paid Interstate $80,853.75 for damage related to the accident. However, of that amount, Phoenix only allowed $1,714 for Extra Expenses related to employee compensation
Phoenix justified its small payment for Extra Expenses related to employee compensation on the analysis of the payroll records by a forensic accountant it had retained as an expert. After Interstate complained of the miserly payment, Phoenix requested additional information and offered to pay Interstate an additional $8 thousand to settle the claim. Interstate rejected Phoenix’s offer of $8 thousand and demanded $70,293.20 in response.
In making its rejection, Interstate also alleged that Phoenix was engaging in unfair and deceptive acts and practices in its handling of Interstate’s claim.
When Phoenix made no additional offer, Interstate filed suit.
Suit for breach of insurance contract, breach of the covenant of good faith, and M.G.L. c. 93A
On April 26, 2017, Interstate filed suit against Phoenix in the Massachusetts Superior Court, alleging breach of the insurance contract, breach of the covenant of good faith and fair dealing, and violation of Massachusetts General Laws, Chapter 93A (Unfair claim practices). In its suit, Interstate alleged that it was entitled to $70,293.20, later amended to $101,289.03, under the Policy for the compensation paid to its employees as a result of the Accident. Interstate further alleges that Phoenix knowingly failed to pay this amount and thereby breached the covenant of good faith and fair dealing and violated M.G.L. Chapters 93A and 176D.
After Phoenix removed the action to the United States District Court, Phoenix and Interstate eventually cross-moved for summary judgment.
Court issues summary judgment decision for Phoenix but mentions “a negligent, if forgivable, failure” on the part of Phoenix
In its summary judgment motion, Interstate contended that by refusing to reimburse the regularly scheduled wages of Interstate’s hourly employees accrued during the suspension period, as well as the earnings and added vacation time for the salaried employees, Phoenix breached the “Extra Expenses” provision of the Policy.
The court held that: “Interstate’s reading of the Policy runs flatly contrary to its plain meaning. The Extra Expenses provision clearly describes “Extra Expenses” as the “reasonable and necessary expenses. .. that you incur during the ‘period of restoration’ and that you would not have incurred if there had been no direct physical loss of or damage to property.”
In the court’s opinion, an “objective, reasonable insured”–in this case, Interstate–would know that had the business interruption not occurred, it would have been liable in the ordinary course for the expenses and wages of its hourly workers and salaried employees.”
However, the Court noted that the Massachusetts Wage Act provides that the word ‘wages’ included any holiday or vacation payments due an employee under an oral or written agreement.” Thus, extra vacation time is considered part of an employee’s “wages” under Massachusetts law and is treated similarly to overtime pay for hourly employees as an additional payroll expense falling outside an employees’ regular wages or salaries.
Because Interstate would not have made extra vacation time available to its salaried employees had the accident not happened, and because it was offered “to avoid or minimize the suspension of business,” the additional vacation time incurred by Interstate, was the court ruled “as a matter of law is a compensable ‘Extra Expense’ under the Policy.”
The court rejected Phoenix’s argument that by never clearly seeking payment for the added costs of compensatory vacation time, Interstate had waived any coverage for the expense. The court noted that Interstate had included two separate line items for its salaried employees’ pay that raised a fair inference that Interstate was attempting to claim the monetary value of the extra vacation time it extended to its salaried employees.
On Interstate’s claim of bad faith on the part of Phoenix, the court said :
Given Interstate’s feeble attempt to raise the issue with Phoenix in making its claim, I find nothing that suggests bad faith on Phoenix’s part in failing to divine the insured’s intent. All I find is a negligent, if forgivable, failure on the part of Phoenix to step into the breach.
On the unfair claim practice complaint of Interstate against Phoenix, the Court did not find that Interstate had shown “the challenged misconduct [rises] to the level of an ‘extreme or egregious’ business wrong, ‘commercial extortion,’ or similar level of ‘rascality’ that raises ‘an eyebrow of someone inured to the rough and tumble of the world of commerce.’”
In this case, the Court found that all that had happened in this case was that Interstate and Phoenix had a good faith dispute as to whether money was owed, or performance of some kind was due, and that in the court’s opinion was “not the stuff of which a [Chapter] 93A claim is made.”
The final order of the Court on summary judgment motions requires “fair offer of settlement”
Within the Court’s decision on the motions for summary judgment, the judge did find “as a matter of law,” Phoenix had breached its duty to its insured to explore the issue further [on the additional vacation time] and make a fair offer of settlement. Based on this finding the Court stated, “It now falls to Phoenix to make good on this aspect of the claim.”
The final order of the Court entered summary judgment for Phoenix “with the exception of Interstate’s vacation time breach of contract claim” and further ordered:
Phoenix will promptly make a fair offer of settlement of the vacation-time issue and report to the court within thirty (30) days of the date of this Order.”
To facilitate the settlement process, the judge stated as part of his final order denying Interstate’s cross-motion for summary judgment, “If necessary” the court will provide the services of a court mediator.”