An insured with a condo policy paid $10 to raise her loss assessment limit from $1,000 to $50,000 after a 2017 fire loss for her condo unit and the condominium association’s common areas. Two years after the loss, she received an assessment for $84,000 for a common-area loss assessment for the 2017 fire.
Her condo insurer, at first, balked but, after an examination under oath paid its $50,000 loss assessment limit.
The following year, the insured received another loss assessment for $75,000 and made a claim for the $50,000 limit in her renewed policy’s loss assessment coverage which paid for a “loss assessment charged during the policy period.”
The same insurer refused payment, claiming that the policy provision stating that it would pay for the insured’s “loss assessment charged during the policy period” did not apply because it only had liability for the $50,000 limit as “the most [the insurer] will pay with respect to any one loss,” and that limit had been paid to the insured during the prior policy period for the 2017 loss.
In the ensuing lawsuit, the federal district court noted that the insured’s argument had “surface appeal.” However, the court ruled that allowing each policy period to provide coverage for loss assessments dating back to losses occurring in prior policy periods made meaningless the limitation in the standard policy’s loss assessment clause stating: “Regardless of the number of assessments, the limit referenced above is the most we will pay, with respect to any one loss.”
A seven-alarm fire at a Reading condominium complex leads to assessments and a lawsuit
The United States District Court lawsuit involved a condominium owner, Abigail Brennan (“Ms. Brennan”), and her insurance company Metropolitan Property and Casualty (“Metropolitan”).
Ms. Brennan lived in a condominium she owned in the Old Reading Schoolhouse Condominiums (“ORSC”), located in Reading.
On June 2, 2017, a fire broke out on the fourth floor and quickly spread. The fire engulfed the upper floors and became so intense that the Reading Fire Department had to call in seven alarms to get backup units and firefighters from Malden, Stoneham, Boston, Melrose, Wakefield, Lynnfield, Cambridge, Everett, Lynn, North Reading, Medford, Woburn, Somerville, Burlington, and Winchester.
The same day, June 2, 2017, Ms. Brennan contacted Metropolitan to report the fire that had broken out in one of the other top units at ORSC. Ms. Brennan, who owned a top unit, advised the insurer, the “fire department had cut the top out of the unit,” and her unit had sustained water and smoke damage.
The condominium complex itself sustained significant fire damage to its common areas and structure. Ultimately, the repairs to restore the units and complex for occupancy took two-and-one-half years and cost over $17,000,000, $6,000,000 of which was uninsured and recovered through loss assessments of the condominium owners.
Loss assessment coverage
As the owner of a condominium, Ms. Brennan had liability for any assessments that the condominium association levied for common expenses and charges.
The condominium association carried a master policy providing coverage for property losses and liability claims that occurred in the common shared areas; however, if the amount of the damages exceeds the master policy’s limits, the residents of the condo had potential liability for assessments to make up any shortfall.
Loss assessments by a condominium association against the individual condo owners can arise from personal injury incidents in shared areas, damage to the building from fire, flooding, or natural disasters. In severe losses, such as ORSC’s seven-alarm fire, the costs or damages to the common shared areas could reach into the six, seven, or even eight-figures.
Some such losses, like the ORSC loss, can exceed the condominium association’s master policy limits. In other cases, the loss may not be covered under the master policy. See Agency Checklists’ article of October 23, 2018, “Mass. Court Nixes Wayland Condo’s $7 Million Ice Dam Claim against Greater New York Mutual.”
When there are uncovered losses, costs, or damages to the common areas, under the condominium association bylaws, the association may levy fees that the individual condominium owners are required to pay on a pro-rata basis based on their condo’s percentage of the total condominium complexes square footage.
Ms. Brennan’s Loss Assessment coverage terms
The policy that Ms. Brennan had with Metropolitan provided benefits for such loss assessments stating:
13. Loss Assessment. We will pay up to $1000 for your share of any loss assessment charged during the policy period against you by a corporation or association of property owners. This coverage applies only to loss assessments charged against you as owner or tenant of the residence premises.
If an increased Loss Assessment is shown in the Declarations, then the $1000 limit is increased to the amount shown.
This only applies when the assessment is made as a result of each direct loss to the property, owned by all members collectively, caused by a peril covered under SECTION I – LOSSES WE COVER for COVERAGE A – DWELLING.
Regardless of the number of assessments, the limit referenced above is the most we will pay with respect to any one loss. (Emphasis in original).
Ten-dollar endorsement increases loss settlement limit from $1,000 to $50,000
When the 2017 fire occurred, Ms. Brennan had the standard $1,000 loss assessment coverage.
After her policy was renewed on July 15, 2017, Ms. Brennan subsequently requested on February 8, 2018, that Metropolitan endorse her loss assessment coverage from $1,000 to $50,000.
Ms. Brennan paid an additional premium of $10 per year for the increased loss assessment limit of $50,000. In July 2018, Ms. Brennan renewed her policy with Metropolitan for another calendar year and maintained the $50,000 limit for her loss assessment coverage.
The 2019 loss assessment of $84,124.00 for the 2017 fire loss
On February 20, 2019, the management company for the condominium association issued a loss assessment notice to Ms. Brennan for the damage to the common areas resulting from the 2017 fire.
Based upon Ms. Brennan’s percentage ownership interest of 2.55% in the condominium complex, her loss assessment equaled $84,124.
On May 2, 2019. Ms. Brennan submitted a claim for $50,000 of this loss assessment to Metropolitan.
Metropolitan delays payment claiming a $1,000 loss settlement limit applies
Metropolitan did not pay the $50,000 immediately. At first, it claimed that Ms. Brennan only had the right to $1,000 based on her policy’s loss assessment coverage amount as of the date of the fire.
Metropolitan also claimed it was investigating whether Ms. Brennan had known she would receive an assessment prior to increasing her loss assessment coverage in February 2018, during the policy period.
Supposedly, other condominium unit owners insured by Metropolitan had expressed knowledge prior to February 2018 that they expected an assessment was coming from the condominium association. Metropolitan claimed that if Ms. Brennan had pre-existing knowledge of the assessment, that would void her coverage based upon the “known loss” doctrine.
On July 24, 2019, a Metropolitan claim representative advised Ms. Brennan that the Metropolitan law department had rendered an opinion that he should only pay $1000.
In late August, Metropolitan scheduled an examination under oath of Ms. Brennan and demanded voluminous documents from her, including the condominium association minutes of meetings since the fire and all correspondence from the management company for the association.
After conducting her examination under oath, Metropolitan relented and paid Ms. Brennan the policy’s loss assessment benefit of $50,000.
Metropolitan issues Ms. Brennan an intent not to renew her condominium policy effective July 28, 2020
Metropolitan renewed Ms. Brennan’s policy in July 2019, for another policy year. For this renewal policy, Ms. Brennan again purchased a $50,000 loss assessment coverage limit.
On May 21, 2020, Metropolitan issued Ms. Brennan an intent not to renew her policy, effective July 28, 2020. Metropolitan’s notice stated the reasons for the nonrenewal of Ms. Brennan’s policy as “significant fire and loss assessment claims.”
Ms. Brennan’s second loss assessment claim after Metropolitan issued its nonrenewal notice
While Ms. Brennan’s 2019-2020 policy was still in effect, the condominium association’s board of trustees met on May 26, 2020, and determined the final cost to rebuild the ORSC would reach $17,534,944.
This amount, with the insurance recoveries received and the first loss assessment paid by the association’s condominium owners, exceeded the original budget of $14,298,963.00. The board voted unanimously for a second assessment against the ORSC condominium owners in the amount of $2,950,000.
Ms. Brennan received notice on May 29, 2020, that based upon her condominium’s 2.55% percentage interest in the condominium association, she needed to pay a second loss assessment of $75,225.
Ms. Brennan immediately made a new claim for this assessment with Metropolitan requesting the insurer to pay the $50,000.00 limit for her loss assessment coverage on the policy effective July 28, 2019, to July 28, 2020.
Ms. Brennan based her claim on her reading of the policy that the loss assessment limit reset with each policy term and that, therefore, she was entitled to an additional $50,000 in benefits for the May 29, 2020, assessment.
Metropolitan denied her claim, and Ms. Brennan sent a 93A demand letter to Metropolitan on October 1, 2020, alleging unfair claim practices and demanding payment of her second loss assessment.
On October 9, 2020, Metropolitan rejected her 93A demand, and Brennan filed a lawsuit in the Massachusetts Superior Court. Metropolitan, as a foreign insurer, exercised its right to remove Ms. Brennan’s lawsuit to the federal court in Boston.
Ms. Brennan’s lawsuit against Metropolitan for breach of contract and unfair claim practices
In her complaint against Metropolitan, Ms. Brennan alleged four claims or counts.
- The first count sought a declaratory judgment that Metropolitan was obligated to pay her $50,000 for the loss assessment issued on May 29, 2020, under her 2019-2020 insurance policy.
- The second count alleged breach of the insurance contract for Metropolitan’s refusal to pay her for the second loss assessment in May 20, 2020.
- The third count alleged that Metropolitan had engaged in unfair and deceptive claim settlement practices in violation of Chapter 93A, §9 concerning the first and second loss assessments.
- The fourth count alleged that Metropolitan had breached the implied covenant of good faith and fair dealing based on its delay in paying the first loss assessment and its complete failure to pay on the second loss assessment.
In federal court, Ms. Brennan and Metropolitan cross-moved for judgment on the pleadings and summary judgment, respectively. Each claimed that either the plain language of Metropolitan’s insurance policy or the policy language and the undisputed material facts required the court to enter judgment in their favor.
Ms. Brennan argues the 2019-2020 policy pays “for any loss assessment charged during the policy period.”
Ms. Brennan argued that the 2019-2020 policy does not identify in the contract that the loss assessments charged during any prior policy period applied. In her reading, this 2019-2020 policy was a standalone contract wholly separate and distinct from the 2018-2019 policy or any other policy. Based on this argument, Ms. Brennan’s position was that the 2019-2020 policy was unambiguous in providing that Metropolitan would pay up to $50,000 “for any loss assessment charged during the policy period.”
Accordingly, Ms. Brennan argued she was entitled to recover $50,000 because she was charged with a $75,000 loss assessment for the 2017 fire during the 2019-2020 policy period.
In her opinion, the payment of the prior $50,000 limit under the 2018-2019 policy was immaterial because the 2019-2020 policy, by its terms, explicitly stated the $50,000 limit applied to a “Loss Assessment charged during the policy period.”
She argued that since she had not received any benefits for a loss assessment during the 2019-2020 policy period, she was entitled to collect under that policy the second loss assessment relating to the original fire because it was being “charged during the policy period.”
Ms. Brennan argued, in the alternative, that she could still collect the policy’s benefits if the policy were found to be ambiguous because she had put forth a “rational interpretation of the policy language.” Under Massachusetts law, an insured is entitled to the benefit of the more favorable interpretation if more than one rational interpretation of the policy language exists.
Metropolitan argues the limitation of liability clause means it owes only one $50,000 limit
Metropolitan argued that the limitation provision had to be read as encompassing the payments made for loss assessments charged and paid during a prior policy for the same loss. To Metropolitan, interpreting this provision in any other way would render the policy’s limitation language meaningless. As a result, insureds, in theory, could recover unlimited benefits for a single loss in excess of $50,000 based solely upon the timing of the loss assessments.
The court notes that Ms. Brennan’s argument has “surface appeal”
The court, at first, noted that “to be sure, the [Ms. Brennan’s] argument does have a certain surface appeal. After all, the policy, read literally does indeed commit [Metropolitan] to pay up to $50,000 ‘for loss assessment charged during the policy period.’”
Also, the court noted that while the policy caps its benefits to $50,000 for any one loss. “[R]egardless of the number of assessments,” this provision did not explicitly state that this $50,000 limit includes loss assessments charged in prior policy periods.
The court concluded that “read literally, then, [Ms. Brennan’s] interpretation of the policy is understandable.”
The court rejects “unlimited benefits” and “disparate treatment”
The court found, however, that interpreting the policy as Ms. Brennan urged would allow an insured to recover unlimited benefits for a single loss, without limitation, based upon when the loss assessments might come to be charged during future policy periods.
This interpretation, according to the court, could lead to disparate treatment of similarly situated insureds based solely upon the timing of the loss assessments.
The court noted that if it accepted Ms. Brennan’s interpretation, an insured receiving an overall loss assessment of $100,000 through two $50,000 assessments charged one month apart but during the same policy period would be entitled to collect just $50,000. However, a second insured receiving the same $100,000 assessment through two $50,000 loss assessments charged during two policy periods would be entitled to collect the full $100,000.
The court finds that common sense dictates coverage is limited to one recovery limit
The court found that it could not read the policy so as to render the policy’s limitation provision meaningless and result in disparate treatment of similarly situated insureds suffering the same amount of loss from a single event.
The court noted that contract interpretation “depends heavily on context and proceeds on the presumption that the parties were trying to accomplish something rational” and that “a contract should be interpreted in a manner that avoids absurd results and gives it effect as a rational business instrument.”
The court then ruled that the 2019-2020 $50,000 limitation in the instant policy had to be read to encompass benefits paid for loss assessments paid during prior policy periods, and Ms. Brennan’s interpretation was “not a reasonable one, given its potential to read the limitation provision out of the meaning and result in the disparate treatment of similarly positioned insureds.”
In conclusion, the court found that Metropolitan had already paid Ms. Brennan the $50,000, and that was what she was entitled to under the court’s interpretation of the policy.
The court leaves open the unfair claim practice count against Metropolitan over its handling of the first loss assessment
While the court entered summary judgment on counts I, II, and III relating to the payment of the second loss assessment, it denied Metropolitan’s request for summary judgment concerning the claim practices Metropolitan employed in handling Ms. Brennan’s first loss assessment claim
The court noted that Metropolitan was entitled to investigate whether Ms. Brennan had prior knowledge of a likely assessment prior to increasing her loss assessment coverage limit.
The court, however, did not see evidence that this prior knowledge issue was a primary concern to Metropolitan but did see evidence of Metropolitan seeking to avoid the first loss assessment claim.
The record cited by the court showed that Metropolitan had:
- Initially, maintained that Ms. Brennan only had $1000 in loss assessment coverage.
- Had failed to respond promptly to her inquiries about her claim.
- Had gone back and forth on whether its legal department had rendered an opinion on her claim.
- Had asked for documents from Ms. Brennan that it should have already possessed and which, in the court’s opinion, were, in some cases, of questionable relevance.
Also, the court noted that Metropolitan had not scheduled its examination under oath until three months after Ms. Brennan had filed her claim.
The court concluded that given Metropolitan’s delay and alleged treatment of Ms. Brennan and her claim:
“a reasonable factfinder could conclude [Ms. Brennan’s] examination under oath was not based on concerns over her knowledge of a likely assessment but rather reflect that the last-ditch effort by Metropolitan to avoid paying [Ms.] Brennan’s claim after its legal department concluded Metropolitan was otherwise obligated to pay [Ms.] Brennan $50,000. A factfinder reaching such a conclusion could determine that the department had engaged in unfair claim practices.”
The final decision and the scheduling of the unfair claim practice for trial
The judge denied Ms. Brennan’s motion for judgment on the pleadings and granted Metropolitan’s motion for summary judgment on the breach of contract counts, I and II, in their entirety. However, on counts III and IV, the judge only allowed Metropolitan’s motion as to Ms. Brennan’s claim concerning the second loss assessment claim.
Finally, the judge denied Metropolitan summary judgment on Ms. Brennan’s unfair claim practice claims concerning the payment of her first loss assessment.
The unfair claim practice claims are now scheduled for a trial in the spring of 2023.
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.
Connect with me directly, by calling me at 617-598-3801 or by sending an email using the button below.
