The Federal First Circuit Court of Appeals has entered a decision interpreting Massachusetts law relating to the standards applicable to a liability insurer summarily refusing to defend a bodily injury and property damage complaint against its insured.
Court’s decision parses Massachusetts law on when a vague complaint triggers a duty to defend
In this First Circuit appeal involving Clarendon National Insurance Company (Clarendon) and the Philadelphia Indemnity Insurance Company (Philadelphia), the Court outlined the fine line that distinguishes when an insurer may refuse to defend a complaint based on its allegations alone.
In this case, Clarendon acting under an assignment of rights from its insured, sued Philadelphia claiming that Philadelphia had failed to investigate a complaint and wrongfully denied a defense in a liability suit that their common insured had tendered it.
On appeal, the Court affirmed the Massachusetts insurance coverage law that states a complaint against an insured need not “unequivocally make out a claim within the coverage.” The complaint “need only show, general allegations, a possibility that the liability claim falls within the insurance coverage, regardless of the “possibility that the underlying claim may ultimately fail, or that the merits of the claim are weak or frivolous.” The Court noted that if there is such a possibility of coverage, the insurer’s duty to defend will attach until the insurer obtains a declaratory judgment of no coverage.
However, in this case, the Court’s decision focused on a legal corollary to this coverage principle, which holds that if the allegations against an insured “lie expressly outside the policy coverage and its purpose,” then an insurer is relieved of its duty to defend and investigate.”
The Clarendon and Philadelphia Policies covered differing policy periods
The Lundgren Management Group, Inc. (“Lundgren”) provided management services to the Admiral Flagship Condominium Trust in Chelsea.
Clarendon Insurance issued Lundgren a liability policy effective from June 24, 2004, to June 24, 2005. Philadelphia subsequently issued Lundgren a similar policy for the term from September 1, 2007, to September 1, 2008.
There was no dispute that the Philadelphia policy had a specific provision excluding coverage for losses occurring before its inception date of September 1, 2007. This provision stated:
b. This insurance applies to “bodily injury” and “property damage” only if:
* * *
(3) Prior to the policy period, no insured listed…and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.
Condominium owner’s continual request for repairs to chronic water damage and wood rot problems
Denise Doherty resided at a condominium in the Admiral Hill development for several years before 2004. In that year, the building envelope of the condominium began to have water leaks that “caused ceiling cracks and loosening plaster” in her unit. Ms. Doherty complained to Lundgren, but the leaks were not repaired “in a timely or appropriate manner” despite Ms. Doherty’s repeated requests.
In 2005, Ms. Doherty discovered the threshold on her property showed rot. She again brought the problem to the attention of Lundgren who failed, in Ms. Doherty’s opinion, to make satisfactory repairs.
In February 2006, Ms. Doherty discovered further water infiltration and again notified Lundgren. After Ms. Doherty complained about the inadequacy of Lundgren’s repairs allowing mold to grow in her unit, Lundgren hired a mold testing laboratory to test Ms. Doherty’s unit.
On March 10, 2006, the testing laboratory issued a report disclosing the presence of hazardous mold in unsafe levels in Ms. Doherty’s unit “caused by water intrusions and chronic dampness.” Although after that, Lundgren assured Ms. Doherty that it would resolve the mold problem, its efforts were, Ms. Doherty claimed, “ineffectual.”
On September 2, 2008, Ms. Doherty’s doctor ordered her to leave the condominium and not to return until Lundgren made effective repairs to eliminate the mold problem.
Ms. Doherty’s suit over the condominium’s water damage last six years
After continued unanswered requests to Lundgren to effectuate the repairs and remediation, on February 12, 2009, Ms. Doherty filed suit in Suffolk Superior Court. She named Lundgren, the condominium trust, and several of its trustees as defendants. Her amended complaint alleged counts for negligence, nuisance, trespass, misrepresentation, and breach of contract, stemming from the failure of Lundgren as the condominium trust’s manager to make adequate repairs to her unit.
In her complaint, Ms. Doherty asserted negligence against Lundgren based upon water infiltration into her condominium. The amended complaint subsequently filed asserted claims of misrepresentation, nuisance, trespass, and breach of contract concerning water damage and leaks that had developed in the roof of Ms. Doherty’s unit and the exterior of the structure.
Ms. Doherty alleged she suffered bodily injury and property damage, including “adverse health effects, loss of personal belongings, loss of her home, loss of value to her condominium unit, and loss of income.”
Before finally settling, the litigation continued for six years, less a week, with the final stipulation of dismissal ending the case filed on February 19, 2015.
Philadelphia issues a quick denial of coverage based on the complaint’s allegations
After being served with Ms. Doherty’s complaint, Lundgren tendered the defense of Ms. Doherty’s claim to Philadelphia on June 30, 2009. On July 24, 2009, Philadelphia denied coverage. Its denial letter stated, “there are no allegations in the complaint that occurred within our policy period.” Also, the denial letter claimed that the “damages sought in this matter pertain to exposure to mold” and the policy specifically excludes ‘property damage’ . . . and any damages that result from ‘fungi’ as defined in the policy.”
Clarendon, who Lundgren also notified of the complaint, financed the defense of Lundgren under a reservation of rights reserving Clarendon’s rights to assert the mold exclusion in its policy.
When Clarendon was settling the Doherty litigation, Clarendon, through its third-party claims administrator, demanded that Philadelphia contribute to the cost of defending Lundgren. Philadelphia again denied Clarendon’s claim for contribution in a letter dated November 3, 2014. This letter admitted that the mold exclusion “potentially” might not apply to the allegations in the underlying complaint but reiterated that “the alleged damage occurred prior to the inception of [Philadelphia]’s policy, . . . during the Clarendon policy period.”
Following the settlement and Philadelphia’s refusal to contribute, Clarendon obtained an assignment of rights from Lundgren on March 17, 2015, of all the claims arising from the Doherty matter.
Clarendon files Suit Against Philadelphia as assignee of Lundgren’s rights
On November 29, 2017, Clarendon filed suit against Philadelphia in Suffolk County Superior Court based upon Philadelphia’s alleged wrongful denial of coverage to Lundgren. It sought damages for “contribution, breach of contract, and 93A/176D violations (unfair claim practices)” in the three counts of its complaint.
The complaint asserted that Philadelphia had breached its contract with Lundgren when it “improperly denied coverage for defense and indemnity and had failed to contribute “its pro-rata share for either coverage.” The 93A/176D violation was that Philadelphia had “failed to investigate the matter.”
The Philadelphia removed Clarendon’s complaint to the Federal District Court in Boston based upon diversity jurisdiction. After a short period of voluntary discovery disclosures, Philadelphia filed a motion for summary judgment on July 2, 2018, that Clarendon opposed. After a hearing, the District Court entered summary judgment in favor of Philadelphia.
The District Court found that Ms. Doherty’s amended complaint alleged damage that began well before the beginning of Philadelphia’s policy period on September 1, 2007, and that Lundgren had knowledge of this damage including that:
- Leaks developed “during the year 2004.”
- The leaks continued through 2005.
- In 2006, the leaks caused hazardous mold.
- Doherty notified Lundgren about the leaks throughout this period.
- The complaint did not state or imply that these were new leaks occurring after repairs
Based on these facts, the judge concluded Lundgren knew of the damage before the Philadelphia policy period began and ruled:
Because the damages alleged in Doherty’s amended complaint are not ‘reasonably susceptible of an interpretation that they state’ a claim covered by Philadelphia’s policy, the suit did not trigger Philadelphia’s duty to defend.”Judge Sorokin’s summary judgment decision
See Agency Checklists’ article of February 12, 2019, “Philadelphia Indemnity Had No Duty to Defend Known Property Damage Claim In Chelsea Condo On Admiral’s Hill.”
Clarendon appeals the District Court’s finding Philadelphia had no coverage
Clarendon appealed its summary judgment decision to the First Circuit Court of Appeals.
On appeal, Clarendon did not dispute the facts so much as it argued that the Federal District Court had erred in its interpretation of Massachusetts law relating to an insurer’s duty to defend and to investigate a claim for defense coverage. This error, according to Clarendon, resulted in the District Court improperly dismissing Clarendon’s breach of contract case, contribution case, and unfair claim practice case involving alleged violations of Chapter 93A/176D.
Clarendon’s arguments for an expansive reading of the Doherty complaint
Clarendon argued that the District Court had restrictively read the underlying complaint because under Massachusetts law, “there is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.
Clarendon argued that the Doherty complaint against Lundgren had generalized allegations that should have been “read to infer coverage,” and thus, trigger Philadelphia’s duty to defend Lundgren in the Doherty suit.
Clarendon’s argument involved a detailed exegesis of the complaint and the parsing, in the appellate Court’s opinion, of the allegations in a conjectural manner.
A significant point in Clarendon’s argument was that the Doherty complaint only specified one date for one leak and did not otherwise specify the timing of the other leaks. It argued that there was no “specific information as to the time or location of other leaks,” and that the underlying complaint failed to provide any information about “when each leak occurred and what measures were taken to repair them and when any of the repairs were effective.”
The argument by Clarendon then parlayed these facts into asserting that the “several leaks” mentioned without any other specification would imply there were multiple issues over time. Therefore, according to Clarendon, one could reasonably interpret the complaint as alleging that “a new leak occurr[ed] during Philadelphia’s policy period.”
Clarendon also asserted that Philadelphia had failed to fulfill its independent duty to investigate the Doherty “claim or loss” regardless of the language in the underlying complaint. Clarendon argued that this failure to investigate violated Chapter 93A and 176D.
The First Circuit Court of Appeals “close read” of the complaint confirms Philadelphia had no coverage
The First Circuit panel deciding Clarendon’s appeal stated that after “a close read of the underlying complaint and the records” they found the District Court had not erred in granting summary judgment.
To this Court, the allegations in the underlying complaint were not “reasonably susceptible of an interpretation that “roughly sketches” a claim covered by Philadelphia’s policy.
The Court noted that in attempting to establish that the underlying complaint had roughly sketched the potentially covered event, Clarendon was only pointing to “small differences and grammatical structure between paragraphs ambiguities arising from missing information of the time and place of various leaks.” In the Court’s opinion, neither of these assertions sketched out a covered claim.
The Court found that Clarendon’s reliance on the word “leak” in the singular in one paragraph to suggest that the subsequent use of the plural “leaks” in another paragraph did not require an inference that distinctive leaks existed caused by different structural problems.
The Court ruled that even though the complaint does not mention the precise location, time, and repairs undertaken that alone is insufficient to show that Doherty’s claim “possib[ly] . . . falls within the insurance coverage.” The Court noted that the underlying complaint “unambiguously” stated that Lundgren had not appropriately made the 2004 repairs and that Ms. Doherty had continued to request “complete repairs of all leaks . . . to no avail.”
Also, the Court noted the complaint referenced “chronic dampness,” occurring at least as early as March 10, 2006, before the inception of Philadelphia’s policy.
Based on this decision, the Court found that there was no basis for assuming that the complaint alleged new leaks that occurred after the inception date Philadelphia’s policy. Therefore, the alleged leaks reported to Lundgren tripped the known loss exclusion (quoted in full earlier) in Philadelphia’s policy that barred coverage.
The Court also rules Philadelphia had no duty to investigate beyond the allegations of the Doherty complaint
On the independent duty to investigate, the Court found that Clarendon had correctly stated Massachusetts law that requires an insurer to look to facts, “known or readily knowable to the insurer” besides the underlying complaint to determine whether a duty to defend is owed to an insured. However, the Court stated that any additional facts only aid in the interpretation of the complaint, and do not provide a separate basis for finding coverage. Therefore, if the complaint itself does not “sketch out” or “adumbrate [suggest or foreshadow vaguely] a claim,” the insurer has no duty to investigate further any additional facts.
Accordingly, the Court found that Philadelphia had not breached either its duty to defend or its duty to investigate the Doherty claim.
Court ends the decision by finding no unfair claim practice violations
On the 93A violation, the Court noted that Clarendon had not specified which provisions of the Unfair Claim Practices Act, Chapter 176D, Philadelphia allegedly violated. However, based on the record in the appeal, the Court assumed that Clarendon asserted that Philadelphia had failed to reasonably investigate the underlying complaint, and adequately inform Lundgren of the reasons for denying coverage for the Doherty suit.
The Court first reiterated that as previously found, Philadelphia had no duty to investigate the Doherty claim beyond the complaint it received, evidencing no loss alleged within its policy period.
The Court next found no legal substance in Clarendon’s final claim that Philadelphia’s denial letter violated c. 176D. Clarendon asserted that Philadelphia had failed to provide Lundgren a reasonable explanation, as required by § 3(9)(n) of c. 176D, of its reasons for denying coverage.
The Court, however, found that when Philadelphia advised in its denial letter that ‘there are no allegations in the complaint that occurred within our policy period,” that statement alone satisfied G.L. c. 176D’s requirements under the circumstances of this case.
The Court ended its decision stating: “For the foregoing reasons, we affirm the district court’s summary judgment order.”
The First Circuit Court of Appeals, as a practical matter, is the final word
Federal courts of appeal are the final word in each of the judicial districts over which they have appellate jurisdiction. The First Circuit Court of Appeals decides cases arising in the Federal District Courts of Maine, Massachusetts, New Hampshire, Rhode Island, and somewhat surprisingly, Puerto Rico.
This Court’s decision is final unless reversed by the Supreme Court of the United States. Clarendon and similar appellants have no right to appeal to the Supreme Court. They can only request the Supreme Court to review their case by filing a “petition for certiorari.” Since the Supreme Court only grants less than one (1%) percent of the approximate ten thousand certiorari petitions submitted yearly, as a practical matter, the decisions of the Federal circuit courts of appeals are final.
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Owen is an experienced insurance litigator as well as a certified mediator and arbitrator who specializes in insurance industry disputes. His interest and affinity for insurance began at a young age working the counter at his father’s assigned risk agency in Roxbury.
Over the course of his career, Owen has argued a number of cases in the Massachusetts Supreme Judicial Court and has helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth. Contact Owen via one of the links below: