First Circuit holds that policyholder did not breach cooperation clause when time insurer gave it to respond had not run out when insurer disclaimed coverage

 

Following an arson fire in 2021 that destroyed a building owned by BAS Holding Corporation on the Brockton Fairgrounds, Philadelphia Insurance Company undertook an investigation that focused on whether the building was vacant, which would limit coverage.  

As part of its investigation Philadelphia issued multiple document requests to BAS.  BAS cooperated fully and responded with over 700 documents.

On June 16, 2021, Philadelphia sought to take an Examination Under Oath, or EUO, of BAS.  Rather than naming a particular witness, it asked BAS to designate someone who could answer questions about eight enumerated topics.  

On August 3, 2021, BAS presented Susan Rodrigues as its designee to testify at the EUO.  She answered most questions, and if she did not know an answer to a question she agreed to research the issue and provide an answer at a later date.

During her testimony Rodrigues identified six people who might be able to provide additional information, including five maintenance workers and George Carney, the president and owner of BAS, who Rodrigues indicated might be knowledgeable about the sale of the building to BAS in 1999 and what the building had been used for other than storage since it was built in 1931.  

The day after Rodrigues testified, Philadelphia requested EUOs of the six people she had identified, and specifically noticed the EUO of Carney for August 19, 2021.  BAS replied the same day with an email stating that it would respond to Philadelphia's request in a separate correspondence. Philadelphia claims that reply was a refusal to produce Carney for an EUO.

A few days later, BAS responded more fully, asserting that the request for six additional EUOs was improper and stating that it would consider the request if Philadelphia set forth a factual basis for it.  Philadelphia asserted this communication was a second refusal to produce Carney for an EUO.  

On August 10, Philadelphia responded that it had no obligation to provide BAS with an explanation of why a further EUO was reasonably necessary.  It stated that it was permitted to take the EUO of Carney because he owns and manages BAS.  It asked that BAS confirm within the next two weeks that Carney would appear at the EUO scheduled for August 19, and to contact Philadelphia if that date would not work in order to arrange for a new date.  

Three days later, on August 13, well before the two weeks given by Philadelphia to BAS to respond,  Philadelphia denied BAS's claim for refusing its request for EUOs.  

Philadelphia then filed suit in federal court, seeking a declaration that the building was not covered under the policy, that its loss was excluded by the policy's vacancy provision, and that BAS breached the requirement that it cooperate with the EUO.

The United States District Court for the District of Massachusetts granted summary judgment to Philadelphia on the ground that BAS failed to cooperate by not providing Carney for the EUO.  BAS appealed to the United States Court of Appeals for the First Circuit.  The United States Court of Appeals for the First Circuit reversed, as the evidence "unequivocally" showed that BAS never willfully and inexcusably refused to submit to an EUO.  

The First Circuit noted that under Massachusetts law attendance at reasonably requested EUOs is a condition precedent for insurance coverage.  An insurer may disclaim coverage when faced with a "willful, unexcused refusal to submit to an examination under oath, without proof of actual prejudice."  

The court held that "there is no way" to read as a willful refusal the August 4 email in which BAS's attorney stated that he would respond at a later date to the request for the six additional EUO's. 

The court held that the next email, objecting to Philadelphia's request for the EUOs and stating that BAS would consider the request if Philadelphia would identify why they were reasonably required to do so, also could not be held as a willful and unexcused refusal.  

In the August 10 email from Philadelphia, the insurer provided additional information to BAS and asked for a response within the next two weeks.  Less than 72 hours later, Philadelphia denied the claim in part on the ground that BAS had refused to appear for the additional EUOs. 

Philadelphia also complained that Rodrigues had appeared for the first EUO.  The court held that she was a not unreasonable choice to testify on the topics listed by Philadelphia.  She handled all of the insurance for BAS, and was the operations coordinator for the Brockton Fair.  As part of that role she oversaw the use and maintenance of the fair and buildings throughout the year.  Her testimony showed that she was knowledgeable on most of the issues raised by Philadelphia.  

The court held that given the sequence and content of the email communications and Rodrigues's testimony, it is "impossible" to find that BAS willfully and without excuse refused to present Carney for an EUO.  The First Circuit distinguished those facts from cases where coverage was disclaimed after multiple failed attempts to schedule an EUO, after an EUO was missed, or weeks after an unproduction EUO was completed.  The court held that BAS's conduct bore no resemblance to the behavior of the insureds in those cases.  

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

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.