What ChatGPT says about exclusions in insurance policies, and why I'm not worried the app will put me out of a job any time soon

 

So many people are talking about ChatGPT -- the artificial intelligence content creator -- that awareness of it has trickled down even to us attorneys, well-known to be late adopters of all technology.  I thought I'd give it a try.  I signed up for ChatGPT (which took several attempts, none of which were my fault, and included one message that I would have to wait because traffic was heavy -- not a great sign for the cuttingest-edge tech), and I input this question:

In Massachusetts what should you do if your insurance carrier says that an exclusion applies to a claim against you?

ChatGPT generated this response:

If your insurance carrier says that an exclusion applies to a claim against you in Massachusetts, you have several options:

1.     Review the policy: Make sure you understand the specific exclusion and its terms. You may want to review the policy documents and any relevant laws or regulations.

2.     Negotiate with the other party: If you believe that the exclusion should not apply, you may try to negotiate with the other party to reach a settlement.

3.     Hire an attorney: If you are unable to resolve the issue with the other party, you may want to consider hiring an attorney who specializes in insurance law. An attorney can help you understand your rights and options and represent you in negotiations or in court.

4.     File a complaint with the Massachusetts Division of Insurance: If you are dissatisfied with the insurance company's decision, you may file a complaint with the Massachusetts Division of Insurance. This agency can investigate the matter and take appropriate action, such as ordering the insurance company to pay a claim or imposing fines.

If the exclusion is valid and the claim is not covered under your policy, you may be personally responsible for paying any damages or legal costs associated with the claim. In this situation, it's important to consider your options and to consult with an attorney if necessary.

While this response has some okay isolated statements, overall I would rate it: malpractice.  I’ll take it point by point:

1.     Review the policy: Make sure you understand the specific exclusion and its terms. You may want to review the policy documents and any relevant laws or regulations.

This may work for the simplest exclusions, but even then I wouldn’t bet on it.  If you have a homeowner’s policy that excludes – let me make up a good one here – “damages arising out of the ownership of dinosaurs,” and you have a pet dinosaur that eats your plumbing, resulting in water damage, it might seem obvious that the exclusion excludes coverage. Right?

Well, not necessarily.  What part of the policy lists the exclusion?  If the exclusion is within your property coverage – which covers damage to your own house – it might apply.  But if it’s in your liability coverage – which covers injuries or property damage you cause to someone else – it might not apply. 

Even if the exclusion is in the relevant portion of the policy, are their any exceptions to the exclusion?  Or any limitations to it?  Or has it been removed altogether?  Your policy may have thirty different forms and endorsements, and language affecting the exclusion may be in a different endorsement than the exclusion itself.

And what about the courts?  Have they interpreted the exclusion?  What have they concluded?

If you have been told that an exclusion applies, don’t try to figure it out yourself.  Consult an attorney who specializes in insurance coverage issues. 

2.   Negotiate with the other party: If you believe that the exclusion should not apply, you may try to negotiate with the other party to reach a settlement.

WRONG.  This would only be correct if the “other party” is the insurance company – but typically the other party is the party who is suing you, for which you are seeking insurance coverage.  If you believe the exclusion does not apply, you need to deal with the insurance company on coverage, not settle with the other party.  Again, hire an attorney.

3.  Hire an attorney: If you are unable to resolve the issue with the other party, you may want to consider hiring an attorney who specializes in insurance law. An attorney can help you understand your rights and options and represent you in negotiations or in court.

This is good advice, except for the order.  Hire an attorney first. 

4.     File a complaint with the Massachusetts Division of Insurance: If you are dissatisfied with the insurance company's decision, you may file a complaint with the Massachusetts Division of Insurance. This agency can investigate the matter and take appropriate action, such as ordering the insurance company to pay a claim or imposing fines.

This is technically true.  I have known people to have good results requesting the assistance of the Division of Insurance, more often with health insurance than with liability insurance.  If you file a complaint with the Division and it catches the attention of a staffer who decides that they agree you have been wronged, they may make a phone call or send a letter that will intimidate the insurer into backing down.  But the Division will not get involved in a dispute over the meaning of an insurance exclusion that is best left to the  courts.  Also, be aware that the Division will not work with a policyholder who is represented by counsel.  You can go to the Division and later, if you’re not satisfied with the results there, hire an attorney.  But you can’t do it the other way around. 

If the exclusion is valid and the claim is not covered under your policy, you may be personally responsible for paying any damages or legal costs associated with the claim. In this situation, it's important to consider your options and to consult with an attorney if necessary.

Agreed. 

My verdict:  The results from ChatGPT are significantly worse than you would get from a Google search -- which will generally lead you to coverage attorneys -- and may cause you to lose rights under your policy or pay a claim that should be covered by insurance.  

SJC holds that under plain language of pollution policy there is no coverage for costs incurred to prevent business interruption after pollution event

 

Ken's Foods, Inc. operates a manufacturing facility in Georgia.  In 2018 its wastewater treatment system malfunctioned and wastewater flowed into a Georgia tributary.  Ken's Foods cleaned up and contained the pollution, incurring about $1 million in costs.

Ken's Foods also implemented a temporary wastewater treatment system that allowed it to continue its operations without interruption.  It spent over $2 million on these measures, including governmental fines, which allowed it to avoid a suspension of operations that otherwise would have cost it over $10 million per month in expenses and lost profits.  

Ken's Foods sought coverage under a pollution liability policy issued to it by Steadfast Insurance Company.  Steadfast paid costs incurred in cleaning up the wastewater discharge and denied coverage for the costs incurred to avoid suspending operations.  

    Policy provisions

Coverage C of the Steadfast policy covered the costs of remediating contamination and legal claims arising from a pollution event, including "emergency expenses," that is, "costs, charges and expenses incurred to avoid an actual imminent and substantial endangerment to the public health or welfare or the environment."  

Coverage H of the policy covered loss of business income resulting from a pollution event that caused a "suspension of operations," which was defined as "necessary partial or complete suspension of operations at the covered location as a direct result of a cleanup required by a governmental authority."  The policy provided that Steadfast was responsible for such losses from four days after a notification of a suspension until Ken's Foods could resume operations.  Under this coverage, Ken's Foods was required to mitigate loss of business income, complete cleanup, and resume operations as soon as practicable in the event of a suspension of operations. 

    Certified question

Ken's Foods sued Steadfast in federal court.  The United States Court of Appeals for the First Circuit certified the question to the Supreme Judicial Court of Massachusetts: "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?"  

    No coverage under the express terms of the policy

In Ken's Foods, Inc. v. Steadfast Insurance Co., the SJC responded today (January 6, 2023; published opinion not available yet) that costs incurred by Ken's Foods to prevent a suspension of operations were not recoverable under the policy, because there was no suspension of operations. Rather, Ken's Foods avoided a partial or complete suspension by implementing process changes and negotiating pollution allowances and accompanying fines with the county authority.  "These very measures showed that a partial or complete shutdown was not 'necessary,' albeit due to the creative response of Ken's Foods and the flexibility of government regulators."  

The court held that the mitigation of loss provision of Coverage H was inapplicable.  That provision also required a suspension of operations, which did not occur.  The provision did not require Ken's Foods to prevent an imminent suspension of operations or require reimbursement of such costs.  

    No coverage under common law

As a question of first impression in Massachusetts, the court held that Ken's Food did not have a common law right to reimbursement for the costs incurred to prevent a suspension of operations.  The court noted that this there is a division of opinion among other jurisdictions on this question.

The SJC contained its ruling to the language of the policy and stated that it was not addressing whether there can ever be a common law right to reimbursement -- although under its analysis, there can never be such a right if not set forth in the policy. The court held that the plain, unambiguous language of the policy and the rules for policy interpretation, as  it had already discussed, did not provide for coverage for preventative costs.  

    "Asymmetry" of coverage does not change analysis

In a footnote the court addressed Ken's Foods' argument that the lack of a duty of an insurer to pay for preventive costs creates an asymmetry:  If Ken's Foods had not taken preventative measures, Steadfast would have argued that it had failed to mitigate damages as required by the policy.  The court held, "However this is an asymmetry created by the text of the contract itself."  It quoted Williston on Contracts:  "The question whether a bargain is smart or foolish, or economically inefficient or disastrous, is not ordinarily a legitimate subject of judicial inquiry."  

A video primer on insurance claims for damage to buildings

Welcome to my first video on insurance issues. In this one I discuss basic issues in real property insurance claims.  

Watch my recent webinar on Good Faith Claims Handling

On September 28, 2022 I gave a webinar on the topic Liability Insurance and Good Faith Claims Handling: What Every Massachusetts Attorney Should Know.  This was a joint program of two of my favorite institutions, the Insurance Library (currently holding a Silent Auction) and the Social Law Library.  You can access the video here.  

US District Court for District of Massachusetts holds that Vermont Mutual's post-judgment settlement offers that were less than verdict were in bad faith; puts it on notice for future conduct

    Fire in apartment and tenants' underlying lawsuit against landlord

Chester Robinson and Lorraine Hames were tenants in a multi-unit apartment building owned by Edward Toland and Cogavin Associates.  A fire forced them to move out.

The tenants sued the landlords in Superior Court for negligence, breach of covenant of quiet enjoyment and violation of Mass. Gen. Laws ch. 93A. Vermont Mutual Insurance Company defended the landlords under a reservation of rights. 

Exercising their option to choose counsel to be paid by the insurer when the insurer is defending under a reservation of rights, the landlords chose Emil Ward, an experienced landlord tenant lawyer, as their attorney. 

Underlying jury verdict and insurer's settlement offers that do not match the verdict

Ward regularly communicated with Vermont Mutual about the claim.  Throughout the litigation, Vermont Mutual made several settlement offers, but no offer exceeded $30,000.  Vermont Mutual believed that the landlords would prevail on the merits, based on Ward’s representations as to the strength of the defense.  Ward believed the tenants’ case was generally weak before and during trial, and was surprised when the jury verdict came back against the landlords in the amount $61,750 for negligence and about $20,000 for breach of the covenant of quiet enjoyment.  With prejudment interest the total award was more than $120,000.  The plaintiffs were also entitled to attorneys fees because of the quiet enjoyment claim.  Those fees exceeded $240,000. 

After trial but before the judge’s ruling on the 93A claim, Vermont Mutual raised its settlement offer to $112,016. 

At that point Ward predicted that the Superior Court would rule in favor of the tenants on the 93A claim.  He asked Vermont Mutual to make a larger settlement offer.  Vermont Mutual refused.  The court granted 93A damages to the tenants and entered an aggregate judgment of over $405,000. 

Ward requested settlement authority from Vermont Mutual in the amount of the judgment.  Vermont Mutual refused.

The landlords appealed the judgment.  

    Underlying settlement

While the appeal was pending, the landlords settled with the tenants for $380,000. Vermont Mutual did not participate in the settlement.

    Insurer's declaratory judgment action and counterclaims by landlords and tenants

Vermont Mutual filed a declaratory judgment lawsuit against the landlords and tenants in federal court. The tenants counterclaimed for breach of Mass. Gen. Laws chs. 93A and 176D, alleging that Vermont Mutual had failed to make a reasonable offer of settlement.  The landlords also counterclaimed, alleging that Vermont Mutual had breached its contract with them.

    Reckless acts, even if they breach ch. 93A, are occurrences

Vermont Mutual argued that because the Superior Court awarded damages for the landlords’ violation of ch. 93A, the fire was not an “accident” within the meaning of the policy.  Therefore, it had no duty to indemnify any damages related to the fire, because the harm that flowed from the landlords’ unfair and deceptive conduct was largely the same as the harm caused by their negligence and breach of covenant of quiet enjoyment.  Moreover, the Superior Court had ruled that the landlords’ violation of ch. 93A was willful or knowing, and therefore the damages were not caused by an occurrence.  

The United States District Court for the District of Massachusetts held in Vermont Mut. Ins.Co. v. Toland, 2022 WL 4481508 (D. Mass.) (unpublished) that an injury that ensues from a volitional act of an insured is still an accident within the meaning of an insurance policy if the insured does not specifically intend to cause the resulting harm or is not substantially certain such harm will occur.  Thus, injuries caused by recklessness are covered as caused by an accident.

The court noted that in the context of ch. 93A reckless conduct is considered willful.  But that does not affect insurance coverage for reckless acts. 

    Insurer's post-judgment settlement offer was unreasonable

The court then examined whether Vermont Mutual breached its duty to make a reasonable offer of settlement.  The court held that the pre-trial settlement offers of $30,000 were not unreasonable.  The insurer could have plausibly believed that the policy did not cover some of the claims brought by the tenants, as there was evidence that the landlords’ conduct was intentional.  In addition, Vermont Mutual believed in good faith that the landlords would prevail at trial, based on Ward’s reports. 

The court held that Vermont Mutual’s offer after verdict but before the 93A ruling was unreasable.  A jury verdict makes liability reasonably (or even “pellucidly”) clear. It would have been reasonable for Vermont Mutual to make a substantial offer, discounting the jury verdict by the likelihood of success on appeal.  Here, the likelihood of a successful appeal was low.  Taking such factors into account, Vermont Mutual’s offer of $112,026 was too low. 

Insurer cannot base post-judgment settlement offer on its self-serving division of damages for covered claims from damages for non-covered claims

Vermont Mutual based its offer on its analysis of the “proportionate share of recoveries” – in other words, what percentage of the verdict pertained to a covered loss.  But, “because Vermont Mutual failed to intervene to allocate damages in the underlying action, it had the burden to establish allocation, and the Supreme Judicial Court has rejected the kind of speculative calculation made by Vermont Mutual – which was effectively an attempt to determine the particular  amount that happened to be in the juror’s minds as they returned the verdict.”   The federal court held that Vermont Mutual’s self-serving figures were not reasonable. 

Multiple damages not awarded, but Vermont Mutual put on notice for future claims

The court declined to award multiple damages on the 93A claim.  The tenants argued that multiple damages were warranted in light of what they claim is Vermont Mutual’s continuing practice of litigating hopeless positions in order to drive inadequate settlements.  The Court ruled that it did not have before it sufficient evidence to compel such a conclusion.  “Vermont Mutual is on notice, however that further such conduct could well warrant Chapter 93A sanctions.” 

Takeaways:

·       What constitutes a reasonable offer of settlement changes as the situation changes.  The court held that Vermont Mutual’s pretrial offers of $30,000 were not unreasonable, given the assessment of defense counsel that the plaintiffs’ claim was weak.  But once there was a jury verdict, liability was “pellucidly” clear, and Vermont Mutual was required to make an offer of settlement based on that understanding. 

·       After a jury verdict an insurer can’t swoop in and claim to know what amount of the verdict was for damages covered by the policy and what amount was for damages not covered by the policy.  The insurer has the burden of establishing allocation, and the proper procedure to do so is to intervene in the underlying trial.  Although not discussed in the decision, intervention would allow the insurer to request special verdict forms in which the jury would say what damages were awarded for what acts.  Otherwise, the insurer must engage in impermissible speculation (or have a later trial on allocation issues).  

        ·   Although the court chose not to award multiple damages under ch. 93A against Vermont Mutual, it had some harsh words for the company.  The court did not discuss what evidence the plaintiffs offered of Vermont Mutual’s alleged practice of litigating hopeless positions in order to drive inadequate settlements.  It merely held that the evidence was insufficient.  But it did put Vermont Mutual on notice that “further such conduct could well warrant Chapter 93A sanctions.”  The court appears to be inviting future litigants to cite this statement as a basis for multiple damages in future 93A claims against Vermont Mutual.  

    Massachusetts Lawyers Weekly quoted me in an article about this case, here.  

 

 

 

Invitation to my webinar on Liability Insurance and Good Faith Claims Handling: What Every Massachusetts Attorney Should Know

 

The webinar is on Wednesday, September 28, 2022 from 4 PM to 5:30 PM, and is co-sponsored by the Insurance Library and the Social Law Library.  You can register through this link.  

Feel free to email me questions ahead of time and I'll try to answer them in the webinar.

I have a couple of comp tickets.  If you want to come and having a free ticket would make a difference to you, shoot me an email.  

US District Court holds insurer may be liable for treble underlying attorney's fees when it demands an examination under oath in bad faith; also discusses condominium loss assessment coverage

 

The United States District Court for the District of Massachusetts has issued an opinion holding that the limit of a condominium unit owner's loss assessment coverage is the most the unit owner can recover for a single loss, even if there are multiple assessments in different policy periods that exceed the limit. 

It also held that an insurer who takes an examination under oath in bad faith may be liable under Mass. Gen. Laws ch. 93A for treble the attorney's fees and costs incurred in defending the EUO.   

Fire at a condominium building, loss assessments to unit owners, and insurance coverage for loss assessments

Abigail Brennan owned a condominium unit in a building that was damaged by a fire in June 2017.  She was insured by Metropolitan.  At that time the policy had a "loss assessment coverage" that provided that Met would pay the first $1000 of any assessment to unit owners by the condominium association.  The loss assessment coverage clause provided that Met would pay the limit “for your share of any loss assessment charged during the policy period.”  It also provided, “Regardless of the number of assessments, the limit referenced above is the most we will pay with respect to any one loss.”  

On July 15, 2017, Metropolitan renewed the policy.  During the term of this policy, on February 8, 2018, Met agreed to increase Brennan’s loss assessment coverage from $1000 to $50,000 for a premium increase of $10 per year. 

In July 2018 Metropolitan renewed the policy again, keeping the $50,000 in loss assessment coverage.  On February 20, 2019, the management company for the condominium informed Brennan of a loss assessment of $84,124 for the losses sustained in the 2017 fire.  She submitted the claim for loss assessment coverage on or around May 2, 2019.  Met approved the claim after six months and paid her a $50,000 benefit.  Met stated the six months was necessary to investigate whether Brennan knew she would receive an assessment prior to obtaining increased loss assessment coverage in February 2018.  If she did, coverage would be voided as a known loss. 

On May 29, 2020 Brennan received a second loss assessment for the 2017 fire damage, this one for $75,000.  She submitted a claim to Met, who denied it on the ground that the policy limited coverage to $50,000 for any one loss and she had already received $50,000 related to the 2017 fire through the first loss assessment. 

Brennan argued that the loss assessment limit reset with each policy term, so she was entitled to collect an additional $50,000.

United States District Court for District of Massachusetts holds that policyholder is entitled to only one payment of policy limit, even though there were assessments for the loss in different policy periods 

In Brennan v. Metropolitan Property & Casualty Insurance Company, 2022 WL 1652275 (D. Mass.) (unpublished), the United States District Court for the District of Massachusetts presumed that the purpose of a policy provision purporting to limit an insurer’s coverage obligation to a certain amount regardless of the number of loss assessments is to limit the insurer’s obligation to pay no more than that amount, regardless of the overall total value of the loss assessments, or when the assessments were imposed.  A different interpretation would allow an insured to recover unlimited benefits for a single loss.  In addition, different unit owners might receive different insurance amounts based solely on when the loss assessments were charged compared to their policy periods. 

The court noted that “contract interpretation depends heavily on context and proceeds on the presumption that the parties were trying to accomplish something rational.  . . .  Common sense is as much a part of contract interpretation as is the dictionary or the arsenal of canons.  Thus a contract should be interpreted in a manner that avoids absurd results and gives it effect as a rational business instrument.”

The court held that, applying such common sense, the $50,000 limitation must be read as the limit for a single loss, regardless of the number of assessments across policy periods.  (I wonder what the result would be if Brennan had switched carriers between the two assessments.  Or if the first loss assessment was when the coverage was $1000, and the second assessment was after the coverage had increased to $50,000.)   

Court denies summary judgment to Metropolitan on allegation that it acted in bad faith in adjusting the claim for the first loss assessment

Brennan alleged that Met engaged in unfair settlement practices in its handling of the first and second loss assessments.  The court granted Met summary judgment with respect to the second loss assessment.  In a somewhat damning opinion the court denied summary judgment to Met on the first loss assessment.   

With respect to the first loss assessment, Brennan alleged that Met had engaged in an unfair delay in an effort to avoid paying her more than $1000. Met argued that it was entitled to investigate whether Brennan had knowledge of a likely assessment prior to increasing her loss assessment coverage.  If she had such knowledge coverage would not be available. 

The court did not disagree that Metropolitan had the right to investigate whether Brennan had knowledge that the assessment would be made prior to raising her claim limit.  But the court pointed out that there were facts in the record indicating that that was not its primary concern. 

Those facts included that Metropolitan first maintained that Brennan had only $1000 in coverage rather than $50,000; failed to respond promptly to Brennan’s inquiries; went back and forth on whether its legal department had rendered an opinion on her claim; asked for documents from her that it should have already possessed and were in some cases of questionable relevance; and waited three months to demand an examination  under oath, a demand which may have reflected an effort by Metropolitan to avoid paying her claim. 

The court held that a reasonable fact-finder could conclude that the examination under oath was not based on concerns over Brennan's knowledge of a likely assessment, but rather reflected a last-ditch effort by Met to avoid paying her claim after its legal department had concluded Met was otherwise obligated to pay $50,000. 

Court holds that legal fees incurred in defending examination under oath taken in bad faith may be actual 93A damages that can be trebled 

Met argued that Brennan suffered no cognizable injury under 93A where it ultimately paid her full claim on the first loss assessment.  Brennan alleged that she was compelled to hire an attorney and incur legal fees and costs associated with producing over 400 documents to Met as a result of being forced to undergo the examination under oath.  She also alleged she had to take out a loan to pay the first loss assessment.  The court noted that her legal fees may be treated as actual damages.  

On my soapbox

Every claims handler should read and understand this decision.  It stands for the proposition that adjusting a loss is not a game in which the insurer should use whatever methods they can find to avoid paying the full value of a claim, even when they know the claim is covered and the amount of loss is not disputed. The consequences of failing to abide by that principle may be full damages under Mass. Gen. Laws ch. 93A, including the trebling of attorney's fees in the underlying case.