Insurance brokers and agents all dread a day they suddenly learn that they did not place a policy, and an uncovered loss has occurred. The silver lining for some is that even if they failed to place the policy, the policy requested would not have provided coverage for the loss.
A recent Appeals Court case dealt with an agency that failed to place a warehouse legal liability insurance policy on one of the cold storage locations owned by an insured. In the Superior Court, the agency had avoided E&O liability because the judge found that the policy, if properly placed, would not have indemnified the company for the loss. On appeal, the Appeals Court reversed the Superior Court’s summary judgment, finding that a provision of the policy that the agency failed to place might have provided coverage.
The decision, Whitecap International Seafood Exporters, Inc. v. Eastern Insurance Group, LLC (“Whitecap” and “Eastern,” respectively) shows how in such “failure to place coverage” cases, there is a case within a case. First, there is the question of whether the agency had assumed the obligation to place the coverage. Then there is the second question whether the coverage requested, if placed, would have provided coverage for the loss suffered by the agency’s client.
In this case, Eastern did not dispute that it failed to place the requested coverage. Instead, it denied liability and claimed that its failure to place the coverage did not matter. If Eastern had placed the coverage it asserted, the policy requested would not have covered the loss in question. Therefore, its negligence did not cause its client’s uncovered loss. The insurer issuing the policy would not have covered the loss even if Eastern had timely placed the policy.
The insurance Eastern failed to place
Cold Storage Solutions (“Cold Storage”) is a trade name for four cold storage warehouses located along Kenneth Welch Drive in Lakeville. These warehouses were separate legal entities identified as Cold Storage Solutions, Inc, and three additional corporations identified as Cold Storage Solutions, I, II, and III.
In 2011, an owner of Cold Storage engaged Eastern to obtain warehouse legal liability insurance for these warehouses. In September 2011, Eastern advised Cold Storage it had obtained warehouse legal liability insurance policies with $12 million in total limits, which would provide blanket coverage for all the frozen food products stored by Cold Storage at the four warehouses.
The blanket policies Eastern obtained were effective from October 6, 2011, to October 6, 2012. The policies consisted of a primary warehouse legal liability policy for $4 million with Acadia Insurance for the warehouses operated by Cold Storage Solutions I, Inc., and an excess warehouse legal liability policy for $8 million with Catlin Insurance Company.
Neither the primary policy nor the excess policy that Eastern had ordered properly insured all the Cold Storage entities. In particular, the policies did not afford any coverage for Cold Storage III operating the warehouse located at 234 Kenneth Welch Drive.
The $2.6 million uncovered loss at Cold Storage III
Before the owners of the Cold Storage entities had received the policies, a multi-million-dollar loss occurred at the Cold Storage III location.
On October 9, 2011, a machine operator drove a mechanized forklift into the racking system of a large freezer inside the Cold Storage III warehouse, causing the collapse of freezer racks supporting millions of pounds of frozen food.
Whitecap stored substantial amounts of frozen snow crab at the facility. After the freezer racks collapsed, Whitecap had to inventory the damage to its snow crab products as some of the crab products had broken from crashing to the floor of the freezer.
Under government regulations, Whitecap had to sort through the broken product to determine which portions it could sell at a discount and which portions were no longer fit for human consumption and inventory all its crab products, broken and unbroken. The inventory process involved Whitecap’s broken and unbroken crab being removed from the damaged freezer, inspected, and marked for identification.
Whitecap’s director of quality control oversaw the inventorying of the broken crab, and Cold Storage III’s employees inventoried the unbroken crab products. The quality control director only allowed the broken crab to remain outside the freezer for no longer than thirty minutes at a time. However, Cold Storage III’s employees allowed Whitecap’s unbroken crab products to remain outside the freezer while inventorying them for up to six hours.
After Cold Storage III’s employees had completed inventorying the unbroken crab products, Whitecap began selling them in the ordinary course of business. Soon after, it began to receive customer complaints regarding the frozen crab. Whitecap traced the affected lots and discovered they shared a common feature. The Cold Storage III employees had left them too long outside the freezer, causing spoilage.
Whitecap, in 2012, sued the Cold Storage entities in Federal Court, seeking $2,643,191.56 in damages based upon Cold Storage III’s negligence.
In 2015, Whitecap and its subrogating insurers, including All America Insurance Company, Citizens Insurance Company of America, and Massachusetts Bay Insurance Company, settled with the Cold Storage entities. As part of the settlement, they took an assignment of Cold Storage III’s rights against Eastern.
The Superior Court lawsuit and Eastern’s “No harm, no foul” defense
On October 8, 2014, Whitecap and its subrogating insurers sued Eastern in the Plymouth County Superior Court. The suit claimed that Eastern (1) had breached a contract to procure insurance, (2) breached a fiduciary duty owed to Cold Storage III, (3) committed professional negligence, (4) made negligent misrepresentations, (5) had acted with gross negligence, (6) had acted in bad faith, and (7) had engaged in unfair business practices under G. L. c. 93A.
After extensive discovery, Eastern moved for summary judgment in late 2017. Eastern argued that an insurance agency was liable for failing to procure an otherwise available insurance policy only if that policy would have covered the loss at issue.
In support of its motion for summary judgment, Eastern included a copy of the warehouse legal liability policy applicable to the other Cold Storage locations that it had placed. According to Eastern, even if it had placed a similar policy for Cold Storage III, the policy would not have covered Whitecap’s loss
The undisputed facts established that Whitecap’s frozen seafood products became spoiled because Cold Storage III’s employees had let them defrost for up to six hours while inventorying them outside the freezer. Eastern argued that under the circumstances of the Whitecap loss, the Acadia policy excluded such a spoilage claim. Therefore, its negligence in failing to place a policy did not cause any loss to Whitecap.
The Superior Court judge agreed with Eastern and ruled that Eastern’s failure to place coverage for Cold Storage III did not cause any harm. The Court found that the insurance policy that Eastern should have placed would not have provided Cold Storage III any coverage for its negligent spoilage of Whitecap’s unbroken crab products. Accordingly, the judge entered summary judgment against Whitecap, as the assignee of Cold Storage III.
Whitecap’s appeal and the Appeals Court’s decision on Whitecap’s coverage claims
The warehouse legal liability policy that Whitecap and Eastern assumed Cold Storage III would have received provided coverage for:
“…direct physical loss caused by a covered peril to property of others that you store at your warehouse.”
The policy stated that it covered “all risks” except for specific exclusions, including an exclusion for the “loss to perishable stock caused by “Spoilage.”
The policy defined “Spoilage’ as “any detrimental change in the physical state of perishable stock. Detrimental change includes…thawing of frozen goods, [or] warming of refrigerated goods…”
Whitecap did not dispute that the thawing of the unbroken crabs fell within the policy’s definition of “spoilage,” but instead argued that the policy still provided coverage under three different provisions:
(1) an exception to the spoilage exclusion.
(2) supplemental coverage for cold storage, and
(3) a coverage extension for “property while it is being moved to prevent a loss caused by a covered peril.”
The Appeals Court justice’s agreed with the Superior Court judge that (1) and (2) of these three provisions would not have provided coverage for Cold Storage III’s liability to Whitecap. They, however, disagreed with the Superior Court decision on the third provision that provided coverage for property “being moved to prevent a loss caused by a covered peril.”
The Appeals Court’s reasoning on each of Whitecap’s three claims for coverage
(1) The exception to the spoilage exclusion.
The judges first addressed Whitecap’s claim that an exception to the spoilage exclusion applied. This exception provided that “if spoilage results in a specified peril, we do cover the loss or damage caused by that specified peril.”
Whitecap attempted to argue that “results in” as used in the exclusion meant “results from” because of the nature of the policy’s specified perils.
‘Specified perils’ means aircraft; civil commotion; explosion; falling objects; fire; hail; leakage from fire extinguishing equipment; fighting; riot; sinkhole collapse; smoke; sonic boom; vandalism; vehicles; volcanic action; water damage; weight of ice, snow, or sleet; and windstorm.”
To Whitecap, spoilage could never cause these specified perils, but almost all the specified perils could cause spoilage. Thus, it argued without the Court adopting its reading of the exclusion; the exclusion would not make sense.
The Court rejected this argument by concluding that when they looked at the policy as a whole, as they must, “…we see that the “specified perils” definition is given full effect elsewhere in the policy.”
The Court ruled that it would interpret the phrase “results in” according to its plain and ordinary meaning of “causes,” and not ascribe to the phrase the meaning Whitecap urged the Court to adopt that would grant Whitecap coverage under this exception to the spoilage exclusion.
(2) The supplemental coverage for cold storage
The Court next addressed the policy’s endorsement providing supplemental cold storage coverage for spoilage where the spoilage “is caused by . . . a sudden or accidental breakdown or malfunction of refrigeration equipment” or by “the incorrect usage of the refrigeration equipment.”
The Court found that neither of the supplemental insuring agreements applied.
They found that, based on the record, the decision to leave the crab outside the freezer for five to six hours caused the damage to Whitecap’s unbroken crab product. The broken crab that had no more than thirty minutes outside the freezer did not suffer spoilage, while the unbroken crab, left outside the freezer for up to six hours, did suffer spoilage.
On the second part of the supplemental coverage, Whitecap argued that the record showed that Cold Storage III’s personnel had tried to cool the unbroken crab products while inventorying them by leaving the door to the freezer open. Keeping the freezer door open, did not work in this case to keep the unbroken crab frozen. However, the attempt amounted, in Whitecap’s opinion, to a loss caused by “an incorrect usage of the refrigeration equipment” that had coverage under the supplement.
The Court agreed that Massachusetts law allows coverage when an insured peril causes “a train of events,” which, if unaffected by any new and independent cause, results in a loss outside of the terms of the policy. However, the Court’s majority found Whitecap’s loss resulted from the decision to leave the unbroken crab outside the freezer for up to six hours at a time. The decision, to these justices, to leave the refrigerator door open was an independent cause of the spoilage loss that barred coverage under the supplement.
(3) Court agrees the emergency removal coverage extension could apply
In its final argument, Whitecap carried the day. The Court ruled that the policy’s coverage extension providing indemnity for “any direct physical loss to covered property while it is being moved . . . to prevent a loss caused by a covered peril” raised a material issue of fact that should have barred summary judgment.
The Court lasered in on the word “any,” stating that the ordinary meaning of “any” modifying “direct physical loss” did not limit the loss to the covered perils.
This coverage extension “applie[d] for up to 365 days after the property [was] first moved,” but an amendment had reduced this 365-day limit to ten days.
While Eastern argued to the Court that the damage had to occur within ten days of the forklift accident, the Court pointed out that the coverage extension unambiguously applied for up to ten days “after the property is first moved.” Since the summary judgment record did not provide definitive evidence from Eastern about when the movement of the product occurred, the Court reversed the summary judgment for Eastern.
Partial dissent by one justice
Interestingly, one of the three justices hearing the appeal dissented in part to the majority’s opinion. This judge did not write his dissent to protest the reversal of the summary judgment. He concurred in that part of the decision. Instead, he wished to make clear that he believed that a material question of fact existed on whether the supplemental coverage applied because of “the incorrect usage of the refrigeration equipment.”
Twenty days to apply for further appellate review to the Supreme Judicial Court
The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.
Under the Massachusetts Rules of Appellate Procedure, Eastern and Whitecap will have twenty days from June 5, 2020, the date of the Appeals Court’s decision to apply for further appellate review.
Based upon the decision of the Appeals Court to take away the Superior Court judgment in favor of Eastern, it will almost certainly apply for further appellate review to the Supreme Judicial Court. It has nothing to lose and everything to gain by filing.
Owen Gallagher
Co-Founder/Publisher Agency Checklists
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:
