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Whether Massachusetts recognizes a common-law duty for insurers to cover costs incurred by an insured party to prevent imminent covered loss is an open legal question, according to the federal court.

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A formal request by Federal Appeals Court to the SJC to decide if insurers owe costs to prevent a covered loss

On June 7, 2022, the Federal First Circuit for the Court of Appeals (“First Circuit”) formally requested the Supreme Judicial Court of Massachusetts (“SJC”) to decide an issue pending before the First Circuit in the case of Ken’s Foods, Inc. v. Steadfast Insurance Co. (“Steadfast”) that raises a significant unsettled question of Massachusetts insurance law.

The First Circuit asked the SJC to opine on the following question of law:

To what extent, if any, does Massachusetts recognize a common-law duty for insurers to cover costs incurred by an insured party to prevent imminent covered loss, even if those costs are not covered by the policy?

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The certification procedure allows the SJC to decide open questions of Massachusetts law

Since Federal Courts apply but do not decide what the common law of Massachusetts, or any other state, should be, the SJC allows under its rules for the Supreme Court of the United States, a Court of Appeals of the United States, or of the District of Columbia, or a United States District Court to certify questions of Massachusetts law that are before one of these courts which is case critical but for which there are no controlling Massachusetts legal precedents to apply in deciding the legal dispute before the Federal court.

The certified case involves an insured paying $2 million that prevented a potential loss of an insurer’s $10 million coverage limit

Ken’s Food produces and retails salad dressing, prepared sauces, condiments, and marinades nationwide. It is based in Marlborough but has four other locations around the country.

To insure its operations, Ken’s Foods had, among other coverages, a comprehensive environmental policy with Steadfast Insurance Co. that had a $10 million limit of liability that included indemnity for a “suspension of operations” caused by a “pollution event.”

In December 2018, an accidental discharge at one of Ken’s Foods’ processing facilities in Georgia accidentally discharged polluted wastewater into a waterway. Ken’s Foods immediately began working with state officials to prevent further polluting discharges and to clean up the pollution, which took until February 2019. To keep the processing plant operating, Ken’s Foods incurred $2 million in extraordinary costs.

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Ken’s Foods policy language for “suspension of operation’s coverage

Ken’s Foods’ policy covered both cleanup expenses as well as business losses resulting from pollution events that cause a “suspension of operations.” The relevant portion of the “suspension of operations” coverage provision stated that reads:

We will pay “other loss” to the extent resulting from a “new pollution event” on, at, or under a “covered location” . . ., if that “new pollution event”:

1. Is first “discovered” during the “policy period”; and
2. Directly causes a “suspension of operations” at such “covered location” during the “policy period.”

“Suspension of operations” is defined under the policy to mean “the necessary partial or complete suspension of ‘operations’ at the ‘covered location’ as a direct result of a ‘cleanup’ required by ‘governmental authority.’

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Ken’s Foods’ duty to mitigate any “suspension of operations” event

Under the policy, Ken’s Foods’ duties included “mitigation.” This provision required that Ken’s Foods:

In the event of a “suspension of operations,” the “insured” must act in good faith to:

1. Take steps to mitigate “actual loss of business income;” and
2. Diligently execute and complete “cleanup” to the extent such “cleanup” is within the “insured’s” control; and
3. Resume “operations” at the “covered location” as soon as practicable.

There was no dispute that the accidental discharge was covered under the policy. However, much of Ken’s Foods’ efforts were directed toward avoiding a suspension of operations at its Georgia processing facility.

These actions to prevent a covered “suspension of operations included:

• Stopping the actual pollution event.
• Negotiating “allowances” with the county to accept pretreated water that would otherwise have exceeded acceptable levels since, without these allowances, Ken’s Foods facility “would have been forced to stop all operations” or, alternatively, would have required hauling and processing of wastewater, involving fees much greater than the allowances negotiated with the county.
• Installing a temporary wastewater treatment process to maintain plant operations.
• Containing the contamination by pumping contaminated water through its temporary wastewater treatment process to reduce the environmental impact.

These efforts to prevent a plant shutdown cost Ken’s Foods an estimated $2 million.

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Without Ken’s Foods’ successful plant closure prevention efforts, Steadfast loss would have exceeded the policy’s $10 million limit

Ken’s Foods never had to suspend operations at its Georgia facility because of the pollution event. The prevention efforts avoided a “suspension of operations” that would have been a covered loss under Steadfast’s policy.

The facility’s suspension of operations for this pollution event would have affected Ken’s Foods’ entire line of salad dressings. The sale of salad dressings produced an average monthly profit, according to Ken’s Foods, of over $9.6 million and provided employment for 350 full-time employees who were paid a monthly payroll of $1.6 million.

By Ken’s Foods’ calculation, if it had not acted to spend $2 million to prevent a suspension of operations, Steadfast would have had to pay out its $10 million coverage limit under its comprehensive environmental policy.

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Ken’s Foods’ request for $2 million incurred costs to avoid Steadfast having a policy limit loss denied

Steadfast paid some $882,000 in cleanup expenses under the policy. However, Ken’s Foods also requested reimbursement for the cost of its prevention efforts.

Steadfast refused to pay those costs on the basis that the policy did not cover preloss prevention efforts but only covered business losses resulting from a complete suspension of operations.

After Steadfast’s reimbursement denial of Ken’s Foods’ loss prevention costs, Ken’s Foods sued Steadfast in the Boston Federal Court, seeking to recover the $2 million it spent to avoid a suspension of operations loss under its policy with Steadfast.

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Ken’s Foods’ suit against Steadfast sought common law damages outside the terms of the policy

Before the Federal District Court, where it lost, and the First Circuit, to where it appealed, Ken’s Foods acknowledged that it had no coverage under the terms of Steadfast’s policy to recover for its loss prevention costs.

Instead, Ken’s Foods asserted that Steadfast had a common-law duty to cover the expenses it had incurred to prevent an imminent covered loss.

Although there is no specific Massachusetts case recognizing such a duty, Ken’s Foods argued that the SJC, if presented with the question, would recognize such a duty existed under the common law. Ken’s Foods predicted that the SJC would favor such a duty base on the criteria the SJC had used to recognize similar common-law duties. Ken’s Foods also noted that while Massachusetts had not yet ruled on the existence of such a duty, several other states had recognized that insurers owed such a common law duty.

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Steadfast claims the SJC had rejected Ken’s Foods’ claimed duty in a prior certified case

Steadfast’s argument against Ken’s Foods in the District Court and at the First Circuit was that the SJC’s decision in the case of Mount Vernon Fire Insurance Co. v. Visionaid, Inc. established that Massachusetts did not allow any common-law duty to obligate insurers beyond the express terms of the insurance contract.

In the Mount Vernon case, the First Circuit had certified to the SJC the question of whether an insurer defending an insured under a liability policy had a common law duty to prosecute a mandatory counterclaim arising out of the same insured occurrence.

In a decision, with two of the seven justices dissenting, the SJC found that the insurer’s duty to defend a claim did not require it to prosecute any counterclaims that its insured was legally required to file. See Agency Checklists’ article of  June 26, 2017, “SJC–Insurers Defending Claim Do Not Have To Prosecute Insureds’ Counterclaim.”

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First Circuit disagrees and certifies because the SJC has imposed common law duties on insurers

The First Circuit in deciding to certify the question of whether Massachusetts law allowed a common law duty requiring insurers to pay covered loss prevention costs, disagreed with Steadfast’s claim.

The Court acknowledged that in the Mount Vernon decision, the SJC had said:

Where the language of an insurance policy is clear and unambiguous, we rely on that plain meaning and do not consider policy arguments in interpreting the plain language.

However, the Court noted that the prohibition on “consider[ing] policy” arguments was in a section of the opinion “interpreting the plain language” of the insurance policy itself.

In a later section, the SJC reaffirmed a common-law rule that did require Massachusetts insurers to assume a common law duty not expressed within the policy terms.

This duty is the so-called “in for one, in for all” rule. This rule requires that, where an insurer must defend one count of a multi-count complaint against its insured, it must defend the insured on all counts, including those that are not covered.

Based on the SJC having left intact this extra-contractual common law duty for insurers to defend uncovered claims in the Mount Vernon decision, the First Circuit concluded that there was no clear Massachusetts rule about the common-law duty Ken’s Foods posited for insurers to reimburse insureds for expenses incurred to avoid an imminent covered loss.

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Another insured had the same idea about collecting imminent damage prevention costs but lost

The question that the First Circuit is now posing almost had an answer from a Massachusetts appellate court.

In the winter of 2015, between January and March, Massachusetts had record snowfall with a record number of ice dams and roof collapse claims.

During that winter, the supermarket chain, Roche Brothers, spent over $800,000 for snow removal from its stores’ roofs to prevent the weight of snow from causing roof collapses. Roche Brothers spent this money to avoid imminent losses for which its insurer would have had to pay major property damage and business interruption losses that would have been far greater than the costs incurred by Roche Brothers.

When Roche Brothers sought reimbursement from its carrier, the carrier denied the claim.

Roche Brothers sued and lost before the Superior Court. It appealed, but Appeals Court dismissed its appeal for lack of prosecution after what appears to have been settlement discussions. See Agency Checklists’ article of  May 8, 2018, “No Coverage For Roche Bros. Who Spent $800,000 In Snow Removal Prevention.”

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Some agents might want to check if any of their clients might have incurred imminent loss prevention costs

Since the SJC could rule on this certified question that insurers have a common law duty to reimburse insureds who may have previously incurred expenses to avoid imminent covered losses, agents may want to alert their larger commercial insureds. Based on the factual situations of the two claims mentioned in this article, such claims may be infrequent. However, it may also be that everyone just assumed that there was no coverage for preventive measures.

Without digging deeper, it is difficult to state what the statute of limitations for such reimbursements, if allowed, could be. However, since such a duty, if allowed, would be under the common law and outside the policy’s terms, a six-year statute of limitations might apply.

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I will monitor the Ken’s Foods certification process

I plan to follow the certification process and keep Agency Checklists’ readers up to date on this possible change [or not] to Massachusetts insurance coverage law. For those interested in reprinting or using this analysis as a basis for their own post, please attribute it to Owen Gallagher, Agency Checklists along with a link to this page. Thank you.