(Article from Insurance Law Alert, January 2023)
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The Supreme Judicial Court of Massachusetts ruled that a policyholder is not entitled to indemnification for costs it incurred in order to prevent imminent covered loss, finding no contractual or common law basis for such an obligation. Ken’s Foods, Inc. v. Steadfast Ins. Co., 491 Mass. 200 (Jan. 6, 2023).
The dispute arose after the policyholder’s wastewater treatment system malfunctioned, resulting in contamination of a nearby water source. The policyholder took necessary remediation and also implemented a temporary system in order to allow it to continue operating its business. The insurer reimbursed the policyholder for the costs of removing the wastewater that had escaped and of preventing more waste from overflowing pursuant to a policy provision for “reasonable and necessary” cleanup costs for a pollution event. However, the insurer argued it was not obligated to cover the mitigation costs incurred in order to avoid suspending its operations.
Addressing this matter of first impression under Massachusetts law, the Supreme Judicial Court ruled that neither the operative insurance policy nor common law required the insurer to cover such costs. A mitigation provision covered losses resulting from a pollution event that caused a “suspension of operations,” which was defined as a “necessary partial or complete suspension of ‘operations’ . . . as a direct result of a ‘cleanup’ required by a ‘governmental authority.’” The court emphasized that there was no suspension of operations here; to the contrary, the policyholder avoided a suspension by implementing the temporary wastewater system for which it sought reimbursement.
Additionally, the court declined to impose a common law obligation to reimburse the policyholder’s mitigation expenses. The court noted that other jurisdictions are divided on this issue, but concluded that it need not answer whether such a duty exists “abstractly” under Massachusetts law because here, the specific policy language was unambiguous. The court stated: “A common law doctrine cannot displace the clear provisions of the [p]olicy, . . . particularly when the [p]olicy directly addresses and circumscribes the applicability of the doctrine.” (Citation omitted). In refusing to impose a common law duty, the court noted that the contracting parties were sophisticated commercial entities that were “capable of, and responsible for, their own contractual risk allocation.”
Finally, the court noted that a maintenance exclusion further indicated that the parties did not intend to insure the mitigation costs at issue. The exclusion applied to upgrade or improvement costs, even if required by government authority or incurred as a result of covered cleanup costs. The court reasoned that the temporary treatment process utilized by the policyholder in order to continue its business operations appeared to fall within the scope of this exclusion.