The Supreme Judicial Court (SJC) has under advisement an unusual case concerning the question of whether, in a breach of warranty case for bodily injury under Chapter 93A, there is coverage under a commercial liability policy for the mandatory attorney fee award allowed under Chapter 93A.
This case arose out of a lawsuit against ServPro franchisees (ServPro) insured by Vermont Mutual. The franchisees cleaned up a sewer backup in a customer’s basement. They used a cleaning product that required the customer to stay out of the basement and to ventilate it continuously for four days after ServPro finished.
ServPro did not advise the customer about the hazards of the cleaning product. The customer went in and spent several days cleaning up and organizing the basement after ServPro left. Subsequently, the customer developed chronic asthma, which she and an expert witness related to the ServPro cleaning product and the ServPro franchisees’ failure to warn her about the product’s hazards.
The customer sued ServPro under G. L. c. 93A for bodily injury damages, attorney fees, and multiple damages for breach of warranty. After a jury-waived trial, since no right to a jury trial exists under G. L. c. 93A, a Superior Court judge found for the customer and awarded her single damages of $267,248.67 and attorney fees of $215,328.
Vermont Mutual appealed the judgment against ServPro to the Appeals Court. After that Court denied the appeal, and the SJC denied further appellate review. Vermont Mutual paid the bodily injury award with interest.
Vermont Mutual, however, refused to pay the attorney fee award or any interest on the attorney fee award demanded by the plaintiff. Instead, it filed a declaratory judgment requesting the Superior Court to declare that it had no liability to pay attorney fees under its insuring agreement and policy form.
On cross-motions for summary judgment, the Superior Court disagreed with Vermont Mutual and ruled that the attorney’s fees awarded against ServPro “are covered under the Policy as “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury.”‘
Vermont Mutual appealed the Superior Court judgment on attorney fee coverage, and the SJC ordered the appeal transferred to it for a final decision. The SJC heard oral arguments last week, and the case is under advisement.
Breach of warranty claims under G. L. c. 93A and liability policy coverage
General Laws Chapter 93A is a statute that prohibits unfair and deceptive acts and practices in commerce or trade in the Commonwealth. The statute allows for individuals and businesses to sue for damages and recover up to treble damages and attorney fees for proven violations of the Act.
In most cases, claims under G. L. c. 93A have no coverage under liability policies since, by definition, they assert liability for an insured’s “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”
The statute, however, does not define what constitutes an unfair or deceptive business practice. In enacting Chapter 93A, the Legislature granted the Attorney General authority to issue regulations defining unfair and deceptive acts in consumer and business transactions.
One of the general regulations the Attorney General has promulgated defines a violation of G.L. c. 93A when a business breaches a product warranty. This regulation states:
“[i]t shall be an unfair and deceptive act or practice to fail to perform or fulfill any promises or obligations arising under a warranty.” 940 CMR § 3.08
As a result of this regulation, the standard commercial liability policy may have coverage for product liability claims alleging violations of G. L. c. 93A arising out of an insured’s alleged breach of warranty.
The Superior Court bodily injury lawsuit under c. 93A resulting in an award of legal fees
In 1999, Phyllis Maston (Ms. Maston) and her husband hired Vermont Mutual’s insureds, Paul and James Poirier, franchisees of ServPro, (“ServPro”), to clean up their basement after a sewer backup flooded it.
ServPro provided the same cleanup services to a neighbor of Ms. Maston who also had damage from the same sewer backup. ServPro advised that the neighbor to stay out of the basement for four days and continuously run fans to ventilate the basement during that four-day period. Ms. Maston testified that she had not been so advised and had, after ServPro finished its cleanup work, gone into the basement and done additional cleaning and organizing over several days without knowing anything about ServPro’s warning to her neighbor.
Subsequently, she developed chronic asthma and sued ServPro for failing to warn her of the exposure to a disinfecting product they used while cleaning up her house’s basement as well as alleging a breach of warranty under G.L. c. 93A. Vermont Mutual could not settle the claim and defended the lawsuit.
At trial, the evidence showed that ServPro had failed to warn Ms. Maston about the hazards of the cleaning fluid, which had compounds that could cause asthma and respiratory sensitization. The material safety data sheet for the product specified that workers use approved respirators in applying the product.
Also, ServPro’s franchisor had written policies and standards for its franchisees, like ServPro, to follow in using the cleaning fluid in question. As a franchisee, ServPro, in using this cleaning product, was supposed:
- To have their employees remove occupants from any treated areas to prevent exposure.
- To determine whether there were potentially at-risk people in the building where the product was being applied.
- To inform customers about the product to be used.
- To inquire about any sensitivity customers might have to the product.
- To ensure that any area treated with the product was properly vented; and,
- To ensure the cleaning product had time to dry before allowing persons to use the area where the product had been applied.
Based on the medical evidence and the testimony of an expert witness as to the cleaning product causing Ms. Maston’s chronic asthma, the Superior Court judge hearing the case under G.L. c. 93A found against ServPro in the amount of $267,248.67 for Ms. Maston’s bodily injuries. The judge declined to award any multiple damages, finding the violations were not willful and knowing violations punishable under the statute. However, since Ms. Maston had proven ServPro had violated G. L. C. 93A by breaching its product’s implied warranty of merchantability and its failure to warn of the product’s hazards, the judge made a mandatory attorney fee award of reasonable attorney fees to Ms. Maston. This attorney fee award totaled $215,328.
Vermont Mutual appealed the judge’s decision to the Appeals Court, but that court affirmed the judgment against the ServPro franchisees. As a result of the appeal, another attorney fee award for the unsuccessful appeal against the 93A judgment was entered for $21,600.
The Superior Court ruling that a reasonable insured would expect coverage for attorney fees
Vermont Mutual provided business owner’s insurance to the husband and wife doing business as ServPro of Fitchburg-Leominster, with a $1 million liability limit for bodily injury coverage for the policy period from December 17, 1998, to December 17, 2001. (Policy)
The Policy was an ISO “Business Owners Liability Form,” which provided in its insuring agreement that:
[Vermont Mutual] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury,’[or] ‘property damage’…to which this insurance applies…No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Coverage Extension — Supplementary Payments…
After the denial of the ServPro appeal, Vermont Mutual paid the original judgment, which, with pretrial and post-judgment interest at twelve percent, totaled $696,669.48. Ms. Maston, through counsel, claimed the right to receive as a judgment creditor the attorney fee award she received from the Policy.
Vermont Mutual disagreed and elected to file a declaratory judgment against Ms. Maston and its ServPro insureds, seeking a ruling the attorney fee awards under G.L. c. 93A were not damages under the Policy.
On cross-motions for summary judgment, the Superior Court judge hearing the motions ruled for Ms. Maston, finding Vermont Mutual’s policy provided coverage for her 93A award of attorney fees.
The judge found that the Policy did not define the term “damages” and did not limit coverage to damages solely because of bodily injury. Also, the judge found that the Policy did not specifically exclude attorney’s fees from coverage as “those sums that the insured becomes obligated to pay as damages because of `bodily injury.”‘
As a result, the judge concluded that a reasonable person in the ServPro franchisees’ position “would understand the phrase, “those sums that the insured becomes obligated to pay as damages because of ‘bodily injury,’ to encompass coverage for attorney’s fees awarded in connection with a judgment for breach of warranty under G. L. c. 93A.”
The judge further concluded Vermont Mutual could simply have defined ‘damages because of ‘bodily injury’ to exclude attorney’s fees where, under the 93A statute, those fees stemmed from the underlying bodily injury.
The legal arguments before the SJC for reversing or affirming the Superior Court ruling on attorney fee coverage
Vermont Mutual appealed the Superior Court decision to the Appeals Court. However, the SJC took the case on direct appellate review and requested amicus briefs from interested parties.
In seeking amicus briefs on Vermont Mutual’s appeal, the SJC framed the issue for any prospective amicus as:
Whether a businessowner’s policy provided coverage for attorneys’ fees awarded pursuant to G. L. c. 93A against the plaintiff’s insured in an underlying civil action, under a general provision for coverage of “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury.’
Vermont Mutual as the appellant, seeking reversal of the Superior Court’s decision, argued in its brief and at oral argument that:
- The SJC had previously interpreted the term ‘Bodily Injury’ as used and defined in liability insurance policies and statutes governing insurance coverage.
- It had held that the term was “unambiguous and understood to mean hurt or harm to the human body.”
- It had been noted in prior decisions that “Bodily injury… is a narrow term and encompasses only physical injuries to the body and the consequences thereof.”
The “settled rule of policy interpretation requires that the Court interpret the words of the policy “giving effect to the document as a whole.”
In looking at the policy, as required, Vermont Mutual argued that a reasonable insured would see that the only place the payment of attorney fees is mentioned in the Policy is in the exception to the exclusion for an insured assuming liability under a contract.
In this exception, where the Policy provides bodily injury and property damage coverage for “insured contracts,”:
That part of any contract or agreement pertaining to your business…Under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization.”
Then for those insured contracts, the policy provided:
Solely for the purposes of liability assumed in an ‘insured contract,’ reasonable attorney’s fees and necessary litigation expenses incurred by or for a party other than the insured are deemed to be damages because of ‘bodily injury’ or ‘property damage’…
To Vermont Mutual, the language stating “Solely for the purposes of,” which limited attorney fees to be damages under the Policy for legal defense payments involving ‘insured contracts’ made it unreasonable for an insured to believe that attorney fees were damages under the Policy’s general liability insuring agreement.
To Ms. Maston and the Proserv franchisees, who were the opposing parties in the Superior Court, and the appellees before the SJC, Vermont Mutual’s arguments misconstrued the scope of the insured contract exception.
To them, the word “Solely” in the exception applied to the “single factual scenario” where a legal defense obligation arose under an insured contract and could “be read to modify the Policy’s general grant of coverage for ‘those sums that the insured becomes legally obligated to pay as damages because of `bodily injury.'”
Beyond arguing against Vermont Mutual’s broad reading of an exception to an exclusion, the appellees argued that:
- The word “damages” in the Policy’s general insuring agreement is undefined.
- The Policy did not exclude attorney fees from coverage for “those sums that the insured becomes legally obligated to pay as damages because of bodily injury.”
- Reading the Policy as a whole, reasonable insureds, like the Proserv franchisees, would understand they had coverage for attorneys’ fees they were legally obligated to pay because of a judgment for breach of warranty under G.L. c. 93A.
Question from the SJC justices during oral argument
It is always difficult to divine from the question that SJC justices ask during an oral argument where they will ultimately land on the issue. However, below are a few of the questions asked about attorney fee coverage for breach of warranty 93A violations. Draw your own conclusions.
To Vermont Mutual’s counsel:
- So, in some ways, it’s the insurer’s fault that there were these reasonable attorney fees awarded?
- When you take your average insured, who’s trying to figure out what the language means here. Isn’t the average insured going to think that…the insurance company is going to cover any damages that are paid because of bodily injury and that that would include attorney fees?
To Ms. Maston’s counsel:
- That language is sort of striking, right? You can’t ignore it. You can’t just say it applies to something else. When it says “solely” in this other context, you get attorney fees.
- Well, but these set of facts are common, a breach of warranty or a tort? Right. I mean, most of these policies cover this kind of stuff. So, this is a fairly radical shift in the law.
Agency Checklists will keep you posted
The SJC has promulgated a standard that “Cases should be decided within 130 days after argument or after submission without argument.”
A majority of the justices can extend the 130-day standard “to accommodate special problems in individual cases.” However, the court does endorse any extension on the case docket.
Agency Checklists will report on the decision when issued since, as a justice said above, a ruling for coverage would be “a fairly radical shift in the law.”
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
To learn more about ForbesGallagher, visit our website. Or, to contact me directly, please call me at 617-598-3801 or send an email using the button below.
