Every so often, a court may decide a case that presents unusual facts that may make a new law. A recent Massachusetts Appeals Court case perfectly illustrates this example. In this lawsuit, the Court found an insurer liable for an underwriting decision made twenty-eight years ago, in 1992. In that case, Margaret Cerasuolo et al. v. Northern Security Insurance Company et al., the insureds believed they had lead paint liability coverage for a rental property based on documents submitted with their original 1992 application for insurance.
After eighteen years, the insureds were sued for lead poisoning involving a child living at the property. The insurer subsequently denied coverage. It claimed that the original documents concerning deleading compliance were inadequate. As a result of this discovery, the insured sued both his independent agent and the insurer after paying almost $300,000 to settle the suit.
After two jury trials finding the carrier estopped to deny coverage, the Appeals Court affirmed, stating: “These circumstances justify the application of the traditional equitable principle of estoppel.”
The insureds seek lead paint coverage for their rental properties from the Doukakis-Corsetti Insurance Agency
John Cerasuolo and his wife, Margaret, owned through a real estate trust, various rental properties, including one located in Malden.
In the early 1990s, lead poisoning and liability insurance issues were causing great concern among landlords in Massachusetts. Mr. Cerasuolo had heard stories of people losing their houses over lead claims.
Around May 1992, Mr. Cerasuolo asked independent agent Gus Doukakis, of the Doukakis-Corsetti Insurance Agency, Inc. (“DCI”), to obtain lead coverage as part of a business owner’s policy for the apartment house rented to tenants in Malden.
Mr. Cerasuolo met with Mr. Doukakis only once, at the Malden property where Mr. Doukakis told Mr. Cerasuolo about the necessity of his obtaining “Letters of Compliance” to obtain coverage for lead-related claims. This conversation was the first time Mr. Cerasuolo had ever heard of “Letters of Compliance.” However, Mr. Cerasuolo and Mr. Doukakis did not further discuss what a valid letter of compliance would look like or might say.
Mr. Cerasuolo knew a “Letter of Compliance” would show a building was compliant with the Lead Law, and so he felt he had enough information to obtain a “Letter of Compliance.” In his own words, it was “self-explanatory.”
The lead inspection and the letters received by Mr. Cerasuolo
Mr. Cerasuolo later hired a licensed lead inspector and told him he needed ‘Letters of Compliance’.
After the inspection of the Cerasuolos’ rental properties, the lead inspector met with Mr. Cerasuolo at the Malden property on June 15, 1992, and presented five documents to Mr. Cerasuolo which he believed were the required ‘Letters of Compliance’.
Mr. Cerasuolo furnished the five documents to DCI, who transmitted them to the insurer they were placing the Cerasuolos policies with, Northern Security Insurance Company (“Northern Security”), a subsidiary of Vermont Mutual.
The excerpted text of the letters that Mr. Cerasuolo believed were letters of compliance had the caption:
LETTER OF LEAD PAINT (RE)OCCUPANCY (RE)INSPECTION CERTIFICATION UNAUTHORIZED DELEADING
Also, the first page of each stated, in part:
… This notice does not constitute deleading compliance.
… No other interior abatement may occur unless the conditions of 105 CMR 460.160 (A) through (E) are repeated.
… NO FINAL LETTER OF LEAD ABATEMENT COMPLIANCE WILL ISSUE ON THIS PROPERTY DUE TO UNAUTHORIZED DELEADING. ALL OR PART OF THE WORK PERFORMED TO CORRECT LEAD HAZARDS WAS NOT COMPLETED BY A LICENSED DELEADING CONTRACTOR AS REQUIRED IN 105 CMR 460.110 (D). A complete clean-up in accordance with 105 CMR 460.160, by a licensed deleader (invoice for clean-up attached), was performed on 6-10-92 by John Cerasuolo license #D.S. 000 678. (Emphasis in original).
On August 10, 1992, Mr. Doukakis bound the Cerasuolo’s rental property coverage with Northern Security, and, in October, DCI sent Mr. Cerasuolo the first BOP policy that Northern Security issued with effective dates from August 11, 1992, to August 11, 1995.
Mr. Cerasuolo did not read it but assumed the policy on the Malden location provided lead paint liability coverage. No one from Northern Security nor DCI advised the Cerasuolos that there was an issue with the ‘Letters of Compliance’ submitted through DCI to Northern Security.
The Cerasuolos renewed their policies with DCI and Northern Security for the next eighteen years until 2010.
The first policy issued contained a proprietary endorsement expressly excluding coverage for “bodily injury” to a child under the age of six years if the “lead poisoning” arose from a premise built before 1965 unless the premise was subject to a “Letter of Abatement Compliance” or a “Letter of Interim Control.” The policy also contained a “Disclosure Notice,” which not only explained the lead poisoning exclusion but also stated that specific coverage for such lead-related claims could be purchased, even without a Letter of Abatement Compliance or a Letter of Interim Control, for an additional premium.
After 1998, the Cerasuolos’ policies contained an exclusion in an ISO drafted endorsement, which explained the exclusion and again offered lead-related liability coverage for an additional premium.
The lead poisoning suit against the Cerasuolos and its settlement
On January 3, 2011, a tenant of the Cerasuolos who was the mother and next friend of her minor son filed a complaint for bodily injuries against John Cerasuolo and Margaret, individually and as Trustee of the John Cerasuolo Trust of November 24, 1972, the real estate trust with title to the Malden property.
The complaint alleged that her son had resided as a tenant with his family in a building owned by the Cerasuolos in Malden from June 2007 until June 2010; and that, before the family rented the property, the Cerasuolos had failed to test for the presence of lead paint and other sources of lead, that they knew or had reason to know that children under the age of six years were susceptible to irreparable injury from lead poisoning; and, at the time of rental to the family, the Cerasuolos failed to disclose the presence of dangerous levels of lead.
The mother further alleged that her son suffered from lead poisoning during the time he had resided at the Cerasuolos’ Malden property and suffered lead paint ingestion injuries that retarded his educational, social, vocational and intellectual development and his future earning capacity, as well as caused him to incur medical and other expenses.
The suit sought strict liability damages under the lead paint law.
The Cerasuolos reported the suit to DCI, who passed the complaint on the Northern Security. After some delay, Northern Security advised the Cerasuolos that it was denying defense and indemnity for the lead paint liability claim against the Cerasuolos arising out of the Malden property. Northern Security’s coverage position was the “Businessowners” insurance policies, which the Trust had purchased from Northern Security did not afford coverage for lead-related claims.
The Cerasuolos immediately retained private counsel, who eventually negotiated a settlement in the summer of 2013. Under the terms of the settlement, the Cerasuolos paid the claimant $250,000.00. The Cerasuolos also paid their attorney $45,000.00 for defending and settling the suit.
The third-party suit against Northern Security and the Doukakis-Corsetti Insurance Agency, Inc
Before finalizing the settlement of the lead paint suit against them, the Cerasuolos filed third-party claims against Northern Security and DCI.
The Cerasuolos alleged that, in 1992, when the Trust was seeking coverage for the Malden rental property, DCI had advised Mr. Cerasuolo that the Trust was required to obtain “Letters of Compliance” showing lead abatement of the Malden property; that, in reliance upon that advice, the Trust provided DCI with documents dated June 15, 1992 (the alleged letters of compliance) which DCI submitted to Northern Security; that Northern Security issued multiple policies to the Cerasuolos without requesting any further information relative to lead abatement of the Premises; that the policies included an endorsement limiting coverage for lead poisoning-related bodily injury; and that, upon receiving notice of Cerasuolos’ claim, Northern Security denied coverage to the Cerasuolos on the ground that the documents submitted by the Cerasuolos in 1992 did not constitute the “Letters of Compliance” or its “equivalent” necessary to confer coverage under the policies.
As against Northern Security, the Cerasuolos sued (1) to estop Northern Security from denying coverage for Cerasuolos’ claims by asserting that the documents submitted by Mr. Cerasuolo to DCI did not constitute “Letters of Compliance;” (2) for a declaratory judgment that they were entitled to a defense to and indemnity for the minor tenant’s lead poisoning damage claims, (3) for the reformation of the Northern Security BOP policies on the grounds of mutual mistake; and (4) for damages for Northern Security’s alleged unfair business practices under M.G.L. c. 93A, §11, and unfair claim practices under c. 176D.
As against DCI, the Cerasuolos third-party complaint sought damages against DCI for its professional negligence in placing the policies with Northern Security and for breach of an alleged contract to procure lead paint liability coverage.
Summary judgment for Northern Security on most claims but DCI settles
After discovery on the various claims of the Cerasuolos completed, Northern Security and IDC moved for summary judgment.
On May 31, 2016, the Superior Court that heard Northern Security and DCI’s motions issued a twenty-nine-page decision ruling that:
- Northern Security has no duty to defend or indemnify the Cerasuolos in connection with their tenant’s lead paint claims.
- There was no mutual mistake between Northern Security and the Cerasuolos that would allow the reformation of the policy as written.
- Northern Security had no liability to the Cerasuolo under M.G.L. c. 93A and 176D for unfair claim practices.
However, the judge denied Northern Security’s attempt to dismiss the Cerasuolos’ estoppel claim. The judge retained for a jury to decide that part of the claim “concerning Northern Security’s failure to inform the Cerasuolos that the Letter of (RE) Occupancy (RE) Inspection was not equivalent to a “Letter of Compliance” and that, it intended to exclude lead paint coverage.”
The judge in denying summary judgment on Cerasuolos’ estoppel claim against Northern Security ruled, “it is possible that a fact-finder could conclude that Northern Security’s conduct led the Cerasuolos to reasonably believe that they had secured lead paint coverage for the [Malden property].”
The judge also allowed summary judgment in favor of DCI on the Cerasuolos’ negligence claim but denied summary judgment on the Cerasuolos’ breach of contract claim against DCI.
Just before the Cerasuolos claims were to be tried by a jury in the spring of 2017, DCI settled with the Cerasuolos paying $140,000.00. Northern Security, however, elected to go to trial.
Evidence on Northern Security failure to advise the Cerasuolos
The Cerasuolos presented a simple argument in their case against Northern Security.
The inspector they hired inspected the properties and certified that there had been a “complete clean-up … by a licensed deleader,” and there were “no violations of the Lead Law.”
Mr. Cerasuolo gave the letters to DCI, DCI sent them to the insurer with the application, and they were stamped “Save – Pertinent Underwriting Information” and placed in the Cerasuolos’ underwriting folder. Although the underwriter knew they were not “Letters of Compliance” and would not provide the Cerasuolos with lead coverage, she did not inform DCI or the Cerasuolos that the lead coverage they were seeking was denied, and Mr. Cerasuolo reasonably assumed he had obtained the coverage he requested.
For the next eighteen years, the policies issued included lead coverage for insureds who had submitted letters of compliance or their equivalent. However, no one ever informed the Cerasuolos that the letters they submitted were insufficient for lead coverage. In 2010, when they received service on the tenant’s lead poisoning claim, they tendered the suit of Northern Security. Eight months later, they were notified for the first time that their letters did not technically satisfy the policy’s requirements, and thus, they did not have lead coverage.
While the Cerasuolos believed the letters submitted as part of their insurance application were sufficient for lead coverage when Northern Security’s underwriter received the letters, she testified that it was “obvious” to her that they were not “letters of compliance” and the Cerasuolos, when she issued the policies would have no lead coverage. Although having reached that conclusion, she did not inform DCI or the Cerasuolos that the lead coverage they were seeking was denied because of the defective letters.
At trial, the underwriter acknowledged that if the Cerasuolos had been told the letters were insufficient, they could have obtained lead coverage elsewhere, or from Northern Security for an additional premium without letters of compliance.
The Cerasuolos also relied on testimony from Mr. Thomas Quinn, who testified as an insurance underwriting expert.
Under Massachusetts law expert testimony, if relevant, on insurance industry practices is “admissible subject to the sound discretion of the trial judge … [if] a witness possesses sufficient knowledge to testify.” In Mr. Quinn’s case, he claimed expert knowledge of the insurance industry standards since 1971 and testified that his opinions had a reasonable degree of professional certainty.
His opinion to the juries, in both the first and second trials, was that based on the lead inspection letters submitted with the Cerasuolos’ application, any underwriter would have known the Cerasuolos were seeking lead coverage. This was especially so since, as Northern Security admitted, there was no place on the application to request lead coverage, and these letters submitted with the application were not customarily included in applications.
Mr. Quinn’s testimony was that Northern Security was under a “responsibility” to disabuse Mr. Cerasuolo of his erroneous assumption that he had submitted “Letters of Compliance.” He opined that Northern Security had a “responsibility” to let Mr. Cerasuolo know that the documents he had submitted were “not good enough” to obtain coverage for lead-related claims
Per the Cerasuolos appellate brief, Mr. Quinn opined that the standard of care in 1992 required the insurer to read the letters, determine if they were adequate for lead coverage, and, if not, to inform the insureds. He characterized Northern Security’s “failure” to comply with this “responsibility” as “just a blatant and egregious disregard for the obligation they have to their insured
In the first jury trial that lasted seven days, the jury found for the Cerasuolos in the amount of $295,000.00. However, the judge who presided over the trial decided she had improperly charged the jury and ordered a new trial.
After a failed attempt to have the Appeals Court intervene and reinstate the jury’s verdict, Northern Security and the Cerasuolos had a second jury trial. On this trial, the jury again found for the Cerasuolos but awarded $180,000.00 in damages or $115,000.00 less than the first jury.
Northern Security filed its notice of appeal on February 1, 2018, on the second jury’s verdict, and the Cerasuolos filed a cross-appeal seeking to reinstate the first jury’s verdict.
The decision by the Appeals Court against Northern Security
On appeal, Northern Security first relied upon the legal claim that an estoppel cannot create coverage. Insurers may be estopped to deny coverage that a policy would otherwise provide, but estoppel against the insurer cannot provide coverage the policy does not have in the first instance.
Northern Security argued that contrary to the Cerasuolos’ claim and their expert’s testimony, Northern Security had no legal duty to speak, and the Cerasuolos could not rely upon Northern Security silence as the basis for establishing lead paint coverage under the circumstances.
Initially, the appeals court stated that Northern Security correctly stated the general rule that “the doctrines of waiver and estoppel will not operate to change the risks covered or insurance extended by a policy so as to create, and larger expand the coverage of the policy.”
The Court, however, stated that this general rule, as do many legal rules, had an exception. This exception was that if the insurer “misrepresents the extent of coverage to insured, thereby inducing the insured to purchase coverage which does not in fact covered the disputed risk.”
The Court noted that the jury was “properly instructed” by the judges in both trials that where DCI acted as a licensed insurance agent for Northern Security, its conduct in knowledge concerning the request of the insured are imputed to Northern Security, “even if that knowledge was not in fact passed on to Northern Security.”
Also, the Court noted that:
- Mr. Cerasuolo told the lead inspector that he was trying to obtain letters of compliance for insurance purposes.
- The lead inspector gave Mr. Cerasuolo the deleading letters, which stated. in part, that “no violations of the Lead Law exist.”
- Mr. Cerasuolo, who had limited formal education and who had not been told what a letter of compliance was, believed that he had received the necessary letters of compliance.
The Court, however, set a potentially higher mark for carriers and independent agents to meet in dealing with insureds by stating in conclusion to the above facts concerning Mr. Cerasuolo’s efforts to obtain the letters of compliance:
Members of the insurance industry, including Northern Security’s agent Doukakis, who were much more knowledgeable than Mr. Cerasuolo regarding letters of compliance and who were aware of Mr. Cerasuolo’s purpose in obtaining and submitting the deleading letters, reviewed them and did not correct him. Based on this evidence, the jury could have found that the Cerasuolos reasonably believed that they had coverage for lead poisoning claims.
While the above statement deals with a specific type of letter, it does open the door to a possible duty to advise which presently does not exist in Massachusetts law for insurance agents and insurance carriers.
The Court’s conclusion on Northern Security’s duty to speak and its estoppel to deny coverage was:
Based on the Cerasuolos purchasing the policies under the circumstances and finding out years later that the policy did not provide the requested coverage, the Court found that the jury’s verdict was justified under “traditional equitable principle of estoppel.”
On the cross-appeal, the Court ruled that the first judge had not committed error in her charge to the jury and reinstated the first jury’s verdict of $295,000. That verdict with post-judgment interest totaled over $464,000.00 as of the Appeals Court’s affirmance of the first award.
Northern Security pays $464,750.00 and foregoes requesting further appellate review by the Supreme Judicial Court
Usually, in a case with the unique issues this case presented, I would have expected the insurer to seek further appellate review from the Supreme Judicial Court. The affirmance by the Appeals Court of expert testimony on underwriting procedures that opine on duties of carriers to advise insureds on defective coverage applications may have adverse ramifications in other coverage cases.
Here, Northern Security had entered on the Superior Court docket a notice by the Cerasuolos on the satisfaction of their judgment for $464,750,00 inclusive of interest and with costs waived. The final entry on the docket by the judge stated: “In accordance with the stipulation of the parties, this court further orders and endorses that said judgment has been satisfied in full with all rights of appeal waived by all parties.”
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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.
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