Massachusetts High Court: Policy Terms, Not Common Law, Control in Loss Prevention Cost Claim

In a pollution liability case, the Massachusetts high court has determined that an insurer does not have a common law duty to cover the expenses that a business incurred in its efforts to prevent an imminent covered loss.

Salad dressing maker Ken’s Foods sought coverage from Zurich subsidiary Steadfast Insurance for its costs in preventing a shutdown of a processing plant in Georgia due to a pollution event. Ken’s Food had maintained that its insurer had a common law duty even if its policy said otherwise.

The federal court — First Circuit Court of Appeals— agreed to take up the appeal in the case but asked the state’s highest court to weigh in on the question of whether Massachusetts recognizes such a common-law duty, even if those costs are not covered by the policy.

The Massachusetts Supreme Judicial Court declined to answer the question abstractly, confining its answer to the specific policy language in this case: “We conclude that the costs at issue are not recoverable. A pollution liability insurance policy is a contract between two private parties that should be interpreted according to its plain terms, which reflect the benefit of the bargain struck by the parties, including their allocation of risk. The costs at issue here fit within neither of the relevant coverages in the insurance policy.”

The court noted that the dispute is between “sophisticated commercial parties” capable of, and responsible for, their own contractual risk allocation. “To provide for recovery in these circumstances would be to rewrite the insurance contract and reallocate the risks negotiated by the parties,” the court stated.

The company’s $10 million comprehensive environmental insurance policy covered both clean-up expenses as well as business losses resulting from pollution events that cause a “suspension of operations.”

Steadfast denied the claim for costs related to preventing a suspension of business, arguing that while the insurance policy covers business losses resulting from a complete suspension of operations, it does not cover “ex ante” (before the event) prevention efforts.

Ken’s Foods appealed a federal district court denial of its claim seeking nearly $3 million together with interest, costs and attorneys’ fees.

The state’s high court backed the insurer, finding that the costs were not cleanup costs or costs necessary to prevent imminent endangerment to public health or welfare or the environment, and they were not the result of a business interruption, as business was never suspended. Nor were they necessary to reduce the costs of business interruption, as there was no business interruption whatsoever. Also, the court found that the costs appear to fall within the policy’s exclusion for expenses associated with maintenance and process improvements, even if such improvements were required by a government authority as a result of a cleanup.

“In sum, the plain language of the insurance policy controls, and consequently, there is no basis to impose a common-law duty inconsistent with the coverages and exclusions contained in the policy,” the court concluded.

In December 2018, an accidental discharge at Ken’s Foods’ processing facility in Georgia caused wastewater to enter waterways. Ken’s Foods immediately addressed the “pollution event” to prevent further discharge and to clean up the pollution, including by fully cooperating with Georgia state officials. The source was contained by February 2019.

Part of Ken’s Foods’ effort went to preventing a suspension of operations at its Georgia facility, which is one of four it has across the country. These efforts included stopping the actual pollution event, negotiating “allowances” with the county to accept pre- treated water that would otherwise have exceeded acceptable levels, and continual processing of the contaminated water before releasing it to the county for further treatment.

Ken’s Costs

Ken’s Foods estimated that it incurred more than $2 million in its efforts to prevent a suspension of operations. Due to its prevention efforts, Ken’s Foods never had to suspend operations at its Georgia facility, which manufactures its entire line of salad dressings and other food products, producing an average monthly profit of “at least” $9.6 million. The plant employs approximately 350 full-time employees who are collectively paid $1.6 million per month. Thus, without its prevention efforts, Ken’s Foods claims it would have incurred losses in excess of the $10 million coverage provided by its policy with Steadfast.

The “suspension of operations” coverage provision in the policy says that Steadfast will pay “other loss” if the pollution event directly causes a “suspension of operations.” Suspension of operations is defined to mean “the necessary partial or complete suspension of ‘operations’ at the ‘covered location’ as a direct result of a ‘cleanup’ required by ‘governmental authority.'”

Mitigation Efforts

The policy also discusses Ken’s Foods’ duties regarding mitigation. In the event of a suspension of operations, the insured must act in good faith to mitigate actual loss of business income, “diligently execute” a cleanup, and resume operations as soon as practicable.

A federal district court granted summary judgment for Steadfast because it concluded that there is no indication that Massachusetts common law entitles Ken’s Foods to recover “costs undertaken to avoid a suspension of operations [that] are not covered by the applicable insurance policy.”

While Ken’s Foods relied solely on a common law duty to force Steadfast to cover its preventative expenses, it pointed to no Massachusetts case recognizing such a duty. Ken’s Foods posited that the Massachusetts Supreme Judicial Court would recognize the duty, which it claims is “is deeply rooted in the common law.” But now that court has rejected that idea.

Steadfast disagreed that it had a common law duty and further contended that Massachusetts has categorically rejected applying any common-law duty that puts obligations on insurers beyond the express terms of the policy. But the federal court said it did not agree that Massachusetts had already decided the issue and there are no Massachusetts supreme court decisions on the matter.

The federal appeals court noted that an argument in favor of a common law duty is that it would align the interests of the parties. Without a duty to compensate for actions that prevented a covered loss, an insured may decide to just allow its operations to be suspended to ensure it receives insurance proceeds — in this case, $10 million — rather than eat the costs ($2 million by Ken’s Foods) to prevent the harm. The court further noted that an insured still has an interest in preventing a suspension of operations even if its insurance does not cover prevention costs, especially if the suspension would cost more than insurance would cover.

Ken’s Foods alleged that it would have been out $10 million per month if it had not prevented a shutdown. But the court said it is “not obvious” that Ken’s Foods would have permitted that to happen even if it were clear Steadfast had no obligation to reimburse the cost of prevention measures up to the $10 million coverage limit.

Even Ken’s Foods itself admitted that it “would have wanted to avoid firing any personnel and to meet its payroll obligations” and that its losses from a suspension of operations would have consumed the policy’s entire limit of liability.

The appeals court rejected the district court’s dismissal of Ken’s Foods’ argument “merely because no Massachusetts court had yet done so.” The appeals court called that “too stringent a standard.”

The court also found that precedents in other jurisdictions failed to “generally and persuasively” offer guidance in one direction.

Thus the federal court turned to the state’s highest court for guidance.

Photo: Ken’s Foods plant in McDonough, Georgia. Source: Ken’s Foods.

Topics Massachusetts