When Does Knowledge of One Claim Preclude Coverage for All? The First Circuit Sets a New Boundary

Boston — In a pair of significant decisions released on consecutive days last week, the U.S. Court of Appeals for the First Circuit provided Massachusetts insurance professionals with two pro-insured rulings on insurers’ duty to defend. Both appeals, Federated Mutual Insurance Co. v. Peterson’s Oil Service, Inc. and United States Fire Insurance Co. v. Peterson’s Oil Service, Inc., involved the same insured and the same underlying event: a state court class action alleging that Peterson’s Oil sold its customers home heating fuel with excessively high levels of biodiesel, causing widespread property damage to their heating equipment.

Despite the common facts, the two cases presented the First Circuit with distinct and fundamental questions of insurance law. In the Federated case, the court tackled the limits of the “known loss” doctrine, as Federated’s policy incepted months after the class action against Peterson’s had already been filed. In the U.S. Fire case, the court revisited the definition of a covered “occurrence,” examining whether a deliberate business decision could ever be considered an “accident”.

The court’s ultimate holdings—both in favor of the insured—reinforce the breadth of the duty to defend under Massachusetts law and offer a detailed roadmap for analyzing coverage in complex, long-tail class action claims.

The Federated Decision: Deconstructing the “Known Loss” Doctrine in a Class Action

The central issue in the Federated appeal was whether an insurer has a duty to defend its insured against a class action lawsuit that was already pending when the policy was issued. It’s a scenario that seems to fly in the face of a foundational principle of insurance: you can’t buy coverage for a house that is already on fire.

Factual Background and Policy Language

The timeline was undisputed. On March 18, 2019, Peterson’s was served with a class action complaint and a Chapter 93A demand letter. The letter was sent on behalf of a “putative class, consisting of all customers who purchased fuel from Peterson… at any point since Peterson began delivering fuel with more than 5% biodiesel”. Nearly four months later, on July 5, 2019, Peterson’s first Commercial General Liability (CGL) policy with Federated went into effect.

Federated denied coverage, pointing to its policy’s robust “known loss” and “loss-in-progress” provisions. The CGL policy stated that insurance applies to “‘property damage’ only if… [p]rior to the policy period, no insured… knew that the… ‘property damage’ had occurred, in whole or in part”.

Crucially, the policy went on to state:

“If such a listed insured… knew, prior to the policy period, that the… ‘property damage’ occurred, then any continuation, change or resumption of such… ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period”. 

This was coupled with a “deemer” clause, which specified that an insured is “deemed” to know that property damage has occurred when it “[r]eceives a written or verbal demand or claim for damages”.

Federated’s Argument: The House Was Already Burning

Armed with this language, Federated argued that the March 2019 lawsuit and demand letter gave Peterson’s knowledge of the property damage “in whole or in part” before the policy’s inception. Because the initial complaint and demand were made on behalf of the entire class—past, present, and future—Federated contended that Peterson’s knowledge of damage to the early customers was deemed knowledge of all subsequent damage. Any damage to customers who received the high-biodiesel fuel after July 5, 2019, was merely a “continuation” of a loss that was already known. Therefore, no coverage was available.

The First Circuit’s Analysis: One Claim Does Not Equal All Claims

The First Circuit disagreed, affirming the district court’s ruling that Federated had a duty to defend. The court’s reasoning hinged on a refusal to treat the class action as a single, indivisible “monolith”.

The lynchpin of the analysis was the definition of “occurrence.” The policy defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. The court had to decide: was Peterson’s entire multi-year course of selling defective oil a single “occurrence,” or was each delivery to each customer a separate one?.

The court concluded it was the latter. It reasoned that the “usual and ordinary sense” of “occurrence” connotes a “relatively concrete, time-bound quality” like an “event” or “incident”. Therefore, the court held that “the provision of heating oil to each new customer constituted a separate occurrence”.

This determination was dispositive. If each new customer’s damage was a new “occurrence,” then knowledge of damage to pre-policy customers could not constitute knowledge of damage to a different customer whose property had not yet been harmed. As the court explained, “Because the alleged damage to different customers reflects distinct ‘occurrences,’ each customer experienced distinct ‘property damage.’ Knowledge of one class of customers’ alleged property damage, then, is not knowledge of a different class of different customers’ alleged property damage”.

The state court had eventually certified two subclasses, one of which was the “Post-2019 Class” for customers who purchased fuel after March 2019—a period that overlapped with Federated’s policy term. Because the claims of these post-policy customers represented new, potentially covered “occurrences,” Federated had a potential duty to indemnify them. And under Massachusetts’ powerful “in for one, in for all” principle, an insurer obligated to defend one count in a lawsuit must defend them all. Federated was therefore required to defend Peterson’s against the entire class action.

The U.S. Fire Decision: Can an Intentional Act Be a Covered “Occurrence”?

While the Federated case turned on timing, the U.S. Fire appeal drilled down into the nature of the insured’s conduct. The policies issued by U.S. Fire and North River were in effect between 2011 and 2016, covering the period when Peterson’s began and continued its practice of blending high levels of biodiesel into its heating oil. The insurers argued that because Peterson’s actions were deliberate, there was no “accident” and therefore no covered “occurrence”.

The Evidence of Intent

The insurers’ argument was supported by compelling deposition testimony from Peterson’s president, Howard Wood Peterson, Jr. When asked who made the decision to start blending biodiesel in 2012, he was unequivocal:

Q. Who made the decision to start blending biodiesel?

A. I did.

Q. Did you consult with anyone about that decision?

A. No.

Mr. Peterson admitted that the company provided fuel with 60% to 70% biodiesel and described the practice as a “test” on its customers, who were not informed that their heating systems were not rated for such a high biofuel blend. The underlying complaint itself alleged it was “inconceivable” that Peterson did not know of the risks and that the company was “aware” its product was damaging customers’ equipment.

The Insurers’ Arguments: No Accident, No Coverage (or Limited Coverage)

Based on these facts, the insurers advanced two primary arguments.

1. No “Occurrence”: They argued that Peterson’s “calculated business decision” to alter its product was not an “accident” and thus not a covered “occurrence” under the policies.
2. “Failure to Supply” Limitation: In the alternative, they argued that any coverage was limited by a “Failure to Supply” endorsement, which capped damages at $250,000 per policy year for “‘property damage arising out of the failure of any Insured to adequately supply gas, oil, water, electricity or steam'”. The insurers contended that providing off-spec, poor-quality oil constituted a failure to “adequately supply” oil.

The First Circuit’s Analysis: Intent to Act is Not Intent to Harm

The First Circuit rejected both arguments and affirmed the duty to defend.

On “Occurrence”: The court drew a sharp distinction between an intentional act and an intentional harm. Citing Massachusetts precedent, it explained that a volitional act can still be an “accident” so long as “the insured does not specifically intend to cause the resulting harm or is not substantially certain that such harm will occur”.

The key, the court found, was the negligence count in the underlying complaint. That count alleged Peterson “knew or should have known” that its fuel could harm furnaces. The “should have known” language alleges negligence, not intent to harm. The court found that even if Peterson was reckless, under Massachusetts law, “an injury caused by reckless conduct still constitutes an accident”. Because the complaint did not expressly allege that Peterson’s intended or was substantially certain it would damage heating systems during the 2011-2016 policy periods, the negligence claim “roughly sketche[d] a claim covered by the policy terms,” triggering the duty to defend.

On “Failure to Supply”: The court’s analysis of the endorsement turned on a single word: “adequately.” The insurers argued that the policy term “adequately supply” referred to both the quantity and quality of Peterson’s oil deliveries. Peterson’s argued it refers only to quantity (e.g., a service interruption).

The court found the term “susceptible of more than one meaning,” and therefore ambiguous. It then applied a core tenet of Massachusetts insurance law: ambiguities in policy language, particularly in exclusionary or limiting provisions, are “strictly construed against the insurer” and in favor of the “narrowest plausible interpretation”. The court concluded that the narrower, quantity-only interpretation was plausible. Since the customers’ claims were about the quality of the oil, not the quantity delivered, the limitation did not apply.

Conclusion: Key Takeaways for Massachusetts P&C Professionals

These back-to-back rulings from the First Circuit offer several coverage points for insurers, agents, and brokers operating in Massachusetts.

“Known Loss” is Occurrence-Specific: The Federated decision attenuates the effect of the “known loss” doctrine in the context of class actions or other repetitive claims with distinct claimants. An insurer cannot simply point to a pre-policy lawsuit as a complete bar to coverage if new, distinct instances of covered damages (“occurrences”) can be identified as taking place during the policy period.

The Definition of “Occurrence” Remains Broad: The U.S. Fire case reaffirms the rule that the duty to defend is triggered by the allegations in the complaint, not by the insured’s underlying actions. A calculated business decision that results in unintended property damage can still be a covered “occurrence,” especially when a negligence count is present. An insured’s intent to act is not the same as an intent to cause the specific harm that results.

Ambiguity is the Insurer’s Enemy: The interpretation of the “Failure to Supply” endorsement is a costly reminder that policy language must be precise. The court’s application of the rule of construction against the insurer highlights the peril of using broad or undefined terms like “adequately” in limitations and exclusions.

Together, these cases underscore the expansive, insured-friendly nature of the duty to defend in Massachusetts. So long as any claim in a complaint is “reasonably susceptible” of an interpretation that it falls within the policy’s coverage, the insurer will be in for one, and in for all.