First Circuit holds insurer does not have duty to defend or investigate when allegations of complaint do not sketch facts showing coverage

Denise Doherty sued Lundgren Management Group, Inc., a building management company, alleging negligence and other claims stemming from water infiltration into her condominium unit beginning in 2004 in a building managed by Lundgren.  She alleged that Lundgren did not make timely or appropriate repairs.

Lundgren was insured by Clarendon National Insurance Company from June 24, 2004 to June 24, 2005.  It was insured by Philadelphia Indemnity Insurance Company from September 1, 2007 to September 1, 2008.

Philadelphia denied coverage in part on the ground that there were no occurrences during its policy period.  Clarendon defended Lundgren.  After the underlying case settled Clarendon sued Philadelphia for contribution.  That case eventually arrived at the United States Court of Appeals for the First Circuit.  In Clarendon Nat't Ins. Co. v. Philadelphia Indemnity Ins. Co., 954 F.3d 397 (1st Cir. 2020), the court affirmed summary judgment for Philadelphia.

COMPLAINT DID NOT REASONABLY SKETCH FACTS LEAVING OPEN THE POSSIBILITY OF COVERAGE

Clarendon first argued that although the underlying complaint alleged that one leak occurred in 2004, it did not allege specific information as to the time of other leaks.  Therefore, the complaint was reasonably susceptible of an interpretation that some of the leaks occurred during Philadelphia's policy period.

It initially appeared that the First Circuit was going to decide the issue under the law relating to the perennial question of when reasonably knowable facts outside the complaint can affect the duty to defend.  But the court pivoted and held that the allegations of the complaint itself showed that there was no coverage under the Philadelphia policy. 

The First Circuit pointed out that an insurer does not have a duty to defend if there is "undisputed, readily knowable, and publicly available information" in court records that demonstrates that the insurer has no duty to defend, or if "there is an undisputed extrinsic fact that takes the case outside the coverage and that will not be litigated in the trial of the underlying action." 

But the court held that there was no coverage because allegations in the complaint itself showed that the loss was outside of Philadelphia's policy period.  The complaint alleged that the leaks started in 2004, that repairs were not made in an appropriate manner, and that Doherty continued to request repairs. The complaint also referenced chronic dampness that began before the Philadelphia policy period.  The duty to defend was not triggered.

NO DUTY TO INVESTIGATE CLAIMS THAT ARE NOT REASONABLY SUSCEPTIBLE TO AN INTERPRETATION THAT THERE IS COVERAGE

Clarendon argued that Philadelphia had a duty to investigate the loss regardless of the language of the underlying complaint.  The court disagreed, holding that while an insurer must look at facts "known or readily knowable by the insurer" to determine whether a duty to defend has been triggered, that does not apply when the complaint does not adumbrate a claim.  (In other words, where coverage is unclear based on allegations in a complaint -- for example, the complaint does not allege the date of a car accident -- the insurer must investigate.  If lack of coverage is not ambiguous based on allegations in a complaint -- the complaint alleges a date of a car accident prior to the coverage period -- there is no duty to investigate.)

Mass. Appeals Court holds that "results in" means "causes," and that chain of causation theory does not apply to third party claims

Four related companies known as Cold Storage Solutions operated cold storage warehouses. They hired Eastern Insurance Group to obtain warehouse liability insurance for them.  Eastern informed them that it had done so, but in fact it had failed to obtain insurance for one of the entities, CSS III.

On October 9, 2011, a forklift operator drove into a racking system in a freezer at the CSS III warehouse, causing racks holding millions of pounds of frozen food to collapse.

Whitecap International Seafood Exporters stored snow crab at the warehouse. Some crab was undamaged in the accident but had to be moved from the warehouse because of the risk that additional racks would collapse.  CSS employees allowed the crab to be left outside the freezer for five to six hours during the process of moving it from the warehouse.  That caused temperature fluctuation damage.

Litigation ensued.  As part of the settlement agreement, Cold Storage Solutions assigned to Whitecap the claim against Eastern for its failure to obtain insurance for CSS III.  In Whitecap Int'l Seafood Exporters, Inc. v. Eastern Ins. Group, LLC, __ N.E.3d __, 2020 WL 3023105 (Mass App. Ct.), the issue before the court was whether CSS III's liability would have been covered if Eastern had obtained insurance for it.

The Superior Court had granted summary judgment to Eastern, holding that there would have been no coverage under the policy that Eastern would have obtained for CSS.  On appeal, the Massachusetts Appeals Court examined three policy provisions.  It held that there was a factual dispute as to coverage under one of the provisions, and remanded the case to the Superior Court.

 EXCEPTION TO SPOILAGE EXCLUSION DOES NOT APPLY; "RESULTS IN" MEANS "CAUSES" NOT "RESULTS FROM"

The policy was an all risks policy.  It contained an exclusion for "loss to perishable stock caused by spoilage."

The spoilage exclusion had an exception providing that "if spoilage results in a specified peril, we do cover the loss or damage caused by that specified peril."  Specified perils as defined by the policy means explosion, falling objects, hail, fire, etc. 

Eastern argued that the phrase "results in" in the exception means "causes."  Whitecap argued that it means "results from."

The Appeals Court agreed with Eastern.  It held that because the temperature fluctuation to the crab did not cause a specified peril the exception did not apply.

COURT REJECTS CHAIN OF CAUSATION ARGUMENT

The policy included supplemental coverage for cold storage, if 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 held that that coverage did not apply because those causes were not the immediate cause of the damage to the crab.  Rather, the damage was caused by the decision of CSS to leave the crab in the loading area for five to six hours. 

Whitecap made a chain of causation (sometimes called train of events) argument, under which "if the efficient proximate cause is an insured risk, there will be coverage even though the final form of  property damage, produced by a series of related events, appears to take the loss outside the terms of the policy."

Chain of causation arguments are among my least favorite to make or oppose in the entire realm of insurance coverage, because when fully analyzed under the case law interpreting it the theory is confusing and slippery and usually requires me to make a chart with arrows.

The court did not dive into the weeds of the argument.  It dismissed the theory on the ground that chain of causation applies only to first-party claims.

Alas, that was a fake out.  The court proceeded to a chain of causation analysis before again concluding that the doctrine did not apply. 

The court held that a chain of causation analysis distinguishes between "an excluded event which causes a loss and a covered event which causes a loss in the form of an excluded event.  An insured may recover under a policy only in the event of the latter."

The court held that the chain of causation theory did not apply because the decision to leave the crab in the loading area for five to six hours was an intervening force and efficient proximate cause of the damage.  

COURT FINDS DISPUTED ISSUE OF FACT

Finally, the policy included a coverage extension for "any direct physical loss to covered property while it is being moved . . . to prevent a loss caused by a covered peril."  The court held that the word "any" means that any type of direct physical loss is covered unless excluded.

Whitecap argued that there were genuine issues of material fact as to whether the crab was moved to prevent a loss caused by additional freezer racks collapsing and whether the loss occurred within the ten day time period from when the crab was first moved, as required by the coverage extension.  The court agreed, and vacated the trial court's grant of summary judgment to Eastern.

Lawsuits filed over denial of claims for business interruption losses as a result of coronavirus pandemic

I am aware of two Massachusetts cases to date against insurers alleging wrongful denials of claims for business interruption losses as a result of the coronavirus pandemic.  Both have been filed in the United States District Court for the District of Massachusetts.

In the amended complaint in the first lawsuit, Legal Sea Foods, LLC v. Strathmore Ins. Co., restaurant chain Legal Sea Foods alleges that its policy issued by Strathmore Insurance Company did not have a virus exclusion -- putting Legal's a step ahead of most policyholders.

Legal's alleges that the coronavirus caused direct physical loss or damage to its insured properties because the virus can be spread through contact with surfaces such as metal and glass used in preparing and serving the restaurant meals.  It also alleges that it is eligible for coverage for losses caused by civil authority.

According to the complaint, Strathmore denied coverage on the grounds that there was no direct physical loss or damage and that the claim was excluded by exclusions for losses caused by ordinance or law or by "acts or decisions, including the failure to act or decide, by any person, group, organization, or governmental body."  Legal's alleged that both exclusions are inapplicable.

The second lawsuit, Rinnigade Art Works v. The Hartford Financial Services, is a class action suit.  The named plaintiff, Rinnigade Art Works, is a graphic design and screen printing business.  Rinnigade alleges that its policy does not contain any applicable exclusions.  The complaint does not specifically discuss whether the policy contains a virus exclusion.

Like in Legal Sea Foods, Rinnigade alleges that it is entitled to coverage for business interruption losses under the policy because the coronavirus caused direct physical loss or damage and that that the state-ordered closings created a loss caused by civil authority.

An open invitation

One of the results of the current protests over racial injustice in this country is that business communities are revisiting the perennial topic of the barriers to advancement for people of color in the corporate and legal world. 

So I would like to put this out there, especially to attorneys of color:  I love to talk to lawyers of all levels of experience about insurance coverage and bad faith issues. If this is an area that you practice in or that you're interested in or that you have an orphan case in or that you just want to know more about, reach out to me.  Ask me substantive questions (after a conflict check).  Ask me career questions.  Or don't ask me anything, just introduce yourself and chat with me. 

I am the co-chair of the Boston Bar Association's Insurance and Reinsurance Subcommittee, which means that I am often looking for panelists to speak about insurance topics.  I get invitations to speak to other groups.  If you would like the opportunity to speak on a panel, or want to suggest an insurance topic, tell me.

Mass. Appeals Court hold that title insurer is not subrogee of mortgagee absent express subrogation clause in insurance contract

I'm always excited when I see a title insurance case, because they are so few and far between.  When such a dispute does arise it is not unusual to cite case law from a century ago.

In 2003, Shane Kelly took out a first mortgage with Chevy Chase Bank for a property he owned in Boston. 

In 2007, Kelly took out a second mortgage on the property with JPMorgan. JPMorgan retained Attorney Roseann Conti to conduct the closing.  Conti had also conducted the closing on the first mortgage.  Although Conti had knowledge of the first mortgage, which was recorded at the Registry of Deeds, she did not notify JPMorgan of it. 

JPMorgan obtained title insurance from Stewart Title Guaranty Company.  Conti acted as Stewart Title's agent.

JPMorgan eventually learned of the first mortgage.  It made a written demand on Kelly that he discharge it, based on a provision of the second mortgage that allowed it to require Kelly to discharge a priority lien on the property.  Kelly did not discharge the first mortgage.  He also stopped making payments on the second mortgage. 

In response to a claim by JPMorgan on the title insurance policy, Stewart Title paid $268,084.83 to discharge the first mortgage.  It did not inform Kelly that it had taken this action. It asserted an attorney malpractice action against Conti, which it settled for less than the amount paid to discharge the first mortgage.

Stewart Title then sued Kelly, seeking the difference between the payment it made to discharge the first mortgage and the sum recovered from Conti. In Stewart Title Guaranty Co. v. Kelly, 97 Mass. App. Ct. 325 (2020), the Massachusetts Appeals Court affirmed summary judgment for Kelly, who was acting pro se.

The court first addressed Stewart Title's allegation that Kelly breached the mortgage contract when he failed to discharge the first mortgage upon demand.  Stewart Title was not a party to the mortgage. It alleged that it was the subrogee of JPMorgan.

Subrogation is a doctrine that in the context of insurance allows an insurer who has paid a loss to a policyholder to bring suit against the person who caused the loss, standing in the shoes of the policyholder.  Insurance policies typically have a clause allowing the insurer to do so.  In this case, however, the title insurance policy did not have a subrogation clause.

 (In the trial court Stewart Title had submitted a motion for reconsideration of the granting of summary judgment to Kelly to which it attached a jacket to the policy that contained an express subrogation provision.  The Appeals Curt held that the trial court judge acted within her discretion to deny the motion to reconsider.) 

Stewart Title argued that the trial court judge's reliance on its failure to produce an express subrogation clause was error because it was not aware that its status as subrogee was disputed.  However, Kelly had denied Stewart Title's allegation that it was a subrogee to JPMorgan throughout the litigation, beginning with the answer to the complaint.  (Even if that were not the case, it's hard to see how Stewart Title could succeed on such an argument where it has the burden of proof on breach of contract.)

Stewart Title then argued that it is entitled to pursue the claim under the doctrine of implied subrogation.  It argued that JPMorgan would otherwise receive a windfall because it would have benefited from the removal of the first mortgage.

The Appeals Court noted that allowing Stewart Title to pursue a claim against Kelly would not avoid a windfall to JPMorgan.  In addition, Kelly was not primarily responsible for JPMorgan's loss.  He did not represent that the property was clear of encumbrances.  Rather, Stewart Title, through its agent, Conti, knew that the first mortgage encumbered the property and failed to disclose that fact to JPMorgan.  The court held that the doctrine of implied subrogation did not apply to such a situation.

The court also held that Stewart Title could not recover against Kelly on a theory of unjust enrichment, because there was no evidence that Kelly had accepted the actions of Stewart Title with knowledge that Stewart Title would expect reimbursement from him.  

Business interruption and property damage coverage for businesses affected by riots

As I discussed here, most businesses do not have insurance coverage for business interruption as a result of the coronavirus pandemic.  There are some attempts at legislation to retroactively change that, and some class action lawsuits challenging the exclusions that prevent the coverage. 

Now, just as businesses are starting to reopen, many of them have been vandalized in riots.  Some are afraid to open because of the fear of additional violence.  Others may be unable to open as a result of curfews.

The good news is that most business property policies do provide coverage for property damage and business interruption as a result of civil unrest.  The business interruption coverage generally requires either property damage or shutdown as a result of an order by a civil authority, so coverage is unlikely if a business owner fears damage from riots but has not been ordered to shut down.

In the bigger picture and the longer term, the best way to prevent business losses from riots is justice for everyone.  Black lives matter.