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Jul 2011

The Massachusetts Appeals Court recently issued an insurance coverage opinion in which it interpreted the word “maintain” in the context of a Protective Safeguards Endorsement in a first-party property insurance policy.  The policy at issue required, as a condition for coverage, that the insured “maintain” a fire protection system.  The court held that, in this context, the word “maintain” was ambiguous because it was susceptible to multiple meanings.  For example, “maintain” could mean narrowly “to keep in existence”, or could mean more broadly “to keep in a condition of good repair”.  Since the term “maintain” is ambiguous, the Court ruled (in accordance with the usual rules for insurance contract interpretation) that the term must be construed against the insurance company and therefore would be given its more narrow interpretation (which in this case would result in coverage for the insured).  The Court also held, however, that the policy contained two exclusions, both of which applied and independently excluded coverage.  The first exclusion operated to exclude coverage if the insured knew of any impairment in the fire protection system and failed to notify the insurer.  The second exclusion operated to exclude coverage if the insured “failed to maintain [the fire protection system] over which [the insured] had control, in complete working order.”  The Court held that since the insurer had established the absence of any genuine dispute that the insured: (1) knew the fire protection system was “impaired” and failed to tell the insurer,  and (2) knew that the fire protection system did not work, each of these two exclusions independently applied and defeated coverage.  The Appeals Court therefore affirmed the trial court’s grant of summary judgment to the insurer.

A few other interesting issues were raised in the decision.  The Court held that since it had determined that coverage was in fact excluded for the loss at issue, a claim brought by the insured for unfair or deceptive insurance practices under Mass. Gen. Laws c. 176D was properly dismissed to the extent that the c. 176D claim was based upon the alleged erroneous denial of coverage. Interestingly the Court appeared to acknowledge that even where coverage was excluded by the terms of the policy, a viable c. 93A claim might exist if the insurer unreasonably delays in responding to the insured’s demands/inquiries about coverage. (In this case, no such unreasonable delay was found because any delay by the insurer in denying coverage was determined to have been caused, at least in part, by the insured’s failure to provide on a timely basis information about the fire suppression system at issue.  Although this point was only mentioned in a footnote, it served as an important reminder that the cooperation conditions of insurance policies requires an insured to provide information reasonably requested by an insurer even where the information bears not upon the merits of the claim but only bears upon the question of whether the insurer has coverage for the claim. See also in this regard MetLife Auto & Home vs. Cunningham, 59 Mass. App. Ct. 583, 589 (2003).

The Court also held that the insurer was entitled to reimbursement of an “advance” payment made to the insured, holding that the insured would be unjustly enriched if it were permitted to keep an erroneously-made insurance payment (i.e. a payment made based upon the erroneous assumption that there was coverage for the claim). The Court also cited as a general policy consideration that if it had held otherwise, insurers may be disinclined to make advance payments required by such insurance policies for fear that such payments would never be recovered even if it ultimately were determined that there was no coverage for the loss.

The case is French King Realty Inc. v. Interstate Fire & Cas. Co., 79 Mass. App. Ct. 653 (2011).

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