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."