Insurers in Massachusetts, in particular those offering specialty lines to sophisticated insureds, can feel even more confident that their carefully crafted and agreed-upon policy language won’t be rewritten by judges. In Ken’s Foods, Inc. v. Steadfast Insurance Co., the Supreme Judicial Court reinforced the fundamental principle that sophisticated parties that enter into a contract, such as an insurance policy, are bound by the allocation of risks reflected in the contract’s language, and not by any common-law duty to mitigate covered losses, even if the contract language leads to an arguably unfair result for the insured that some might deem inefficient.

“Prevention” and “Mitigation” of a Covered Loss Are Not the Same Thing

In Ken’s Foods, the plaintiff (insured) experienced a wastewater treatment system malfunction at its manufacturing facility, leading to an illegal wastewater discharge. Honoring the terms of its pollution liability policy, Steadfast paid for the necessary cleanup costs incurred by Ken’s Foods, including “emergency expenses” incurred to avoid “actual imminent and substantial endangerment to the public health or welfare or the environment.”

In addition to the cleanup and emergency expenses, the insured also incurred costs to prevent an interruption to its operations. These included expenses related to establishing a temporary wastewater treatment process that, while not needed to avoid danger to public health or welfare, allowed the business to continue uninterrupted. These costs were less than the losses Ken’s Foods would have sustained if it had experienced an actual business interruption.

The policy covered business interruption losses resulting from a covered pollution event, including mitigation expenses incurred to reduce the costs of an actual business interruption in the event that an interruption occured. However, Steadfast argued that the costs Ken’s Foods incurred to prevent the loss were not covered as “mitigation expenses’ since there was no business interruption to mitigate. Relying on the specific policy’s express language, coverages, and exclusions, the court found that the policy’s mitigation provision “did not require Ken’s Foods to prevent an imminent suspension of operations or require reimbursement of such costs” nor were those costs covered under any other provision of the policy.

Nevertheless, Ken’s Foods argued there is a common-law right for reimbursement of costs incurred to prevent an imminent covered loss. That was the certified question the U.S. Court of Appeals for the First Circuit asked the SJC to resolve: 

“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?”

Courts Unlikely to Reallocate Risks Between Sophisticated Parties 

The SJC answered that there is no such common-law duty, and thus the costs at issue were not recoverable under the policy’s express terms. The court began its analysis “with the recognition that an insurance policy, particularly in a voluntary line of insurance, is a contract between two private parties. Both parties are therefore entitled to the ‘benefit of their stated bargain,’ including their allocation of risk.” This is especially the case where, as here, the contracting parties are also sophisticated business entities. “When dealing with ‘sophisticated commercial parties,’ we have been especially hesitant to reconsider ‘contractual risk allocation,'” the court noted.

Accordingly, the SJC held: 

“There is no common-law duty for insurers to cover costs incurred by an insured party to prevent imminent covered loss, when the plain, unambiguous terms of the insurance policy at issue speak directly to the question of mitigation and reimbursement and do not provide coverage, and the costs are otherwise excluded by other provisions of the policy. To provide for recovery in these circumstances would be to rewrite the insurance contract and reallocate the risks negotiated by the parties.”

For insured businesses with pollution liability coverage or other specialty lines of insurance, this case serves as a reminder to carefully consider and understand the policy’s coverages and exclusions before incurring expenses that, while well-intentioned and otherwise smart from a business perspective, may nevertheless not be covered. For insurers, the case offers a reassurance that Massachusetts courts are disinclined to rewrite policies or substitute their judgment for those of sophisticated parties, even where the ultimate result might be deemed an inefficient outcome by some.

If you have questions about this decision and how it could impact your business, please contact one of the insurance and reinsurance attorneys at Sugarman Rogers. 

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Dylan Sanders

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