Massachusetts High Court Rejects Insured’s Claim to Recovery Expenses Incurred to Prevent Business Interruption

The Supreme Judicial Court of Massachusetts, applying Massachusetts law, has answered a certified question by holding that an insured was unable to recover for costs incurred to prevent an imminent first party loss given the absence of express language covering such amounts under the policy. Ken’s Foods, Inc. v. Steadfast Ins. Co, 199 N.E.3d 1286 (Mass. Jan. 6, 2023). In so ruling, the court looked to the policy language and rejected an implied common law right to recover for “mitigation” expenses incurred to prevent a business interruption loss, despite affirmative coverage for mitigation expenses incurred to reduce a business interruption.

The insured, a food manufacturer, sought coverage under its pollution liability policy after a wastewater treatment system at its manufacturing facility malfunctioned. The policy afforded coverage for cleanup costs and for business interruption losses resulting from a covered pollution event, including mitigation expenses incurred to reduce the costs of the business interruption. While the insurer paid the costs of cleaning up the illegal wastewater discharge, the insured suffered no business interruption. However, the insured tendered for coverage certain costs that it claimed were necessary to avoid a business interruption, including costs for a temporary wastewater treatment process and amounts representing agreed-upon fines from the county. Ultimately, the insured brought a declaratory judgment action against the insurer in federal court to recover these costs. On appeal, the United States Court of Appeals for the First Circuit certified the following 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?”

In answering the certified question, the court ruled that there was no basis to impose such a common law duty in the case at hand because the costs at issue were not recoverable under the plain language of the policy. Because a common law doctrine could not displace the clear policy provisions, the court applied the plain, unambiguous language of the coverage provisions. In so holding, the court found that the costs at issue were clearly outside the scope of the plain, express terms of the relevant coverages. First, the court determined that the costs were not cleanup costs or costs necessary to prevent imminent endangerment to public health or welfare or the environment. Second, the court concluded that the costs were not the result of a business interruption or any mitigation attempts to reduce the costs of business interruption, as there was no suspension of operations or business interruption in the first place.

Finally, the court concluded that the costs appeared to otherwise fall within the policy’s exclusion for costs, charges, and expenses associated with maintenance, upgrades, or improvements of any property or processes on it.

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