Summary
applying Massachusetts law
Summary of this case from Carolina Cas. Ins. Co. v. Merge Healthcare Solutions, Inc.Opinion
CIVIL ACTION NO. 04-10047-GAO.
February 15, 2007
ORDER
After review of the pleadings and various submissions of the parties regarding the defendant's motion for summary judgment, the report and recommendation of the magistrate judge, and the objections and responses to objections made in light of the magistrate judge's report, I concur in the magistrate judge's conclusions and therefore ADOPT his report and recommendation in its entirety.
The defendant's motion for summary judgment (docket no. 16) is GRANTED IN PART in favor of the defendant as to so much of Count I of the Complaint as asserts a breach of contract under Coverage A of the insurance policy in question, but is OTHERWISE DENIED.
It is SO ORDERED.
REPORT AND RECOMMENDATION ON DEFENDANT UNITED NATIONAL INSURANCE COMPANY'S MOTION FOR SUMMARY JUDGMENT (#16) I. Introduction
The defendant, United National Insurance Company ("UNIC"), has moved for summary judgment in this insurance coverage dispute. (#16, Motion for Summary Judgment by United National Insurance Company; #17, Memorandum of Points and Authorities in Support of Defendant's Motion for Summary Judgment) UNIC maintains that the plaintiff, Technology Square, LLC ("TSL"), misrepresented material facts in its application for pollution liability insurance. UNIC argues that because of the purported misrepresentation, it can avoid the insurance policy as a matter of Massachusetts law. Alternatively, UNIC argues that certain policy exclusions in the policy preclude coverage as a matter of law.
Pursuant to 28 U.S.C. § 636, this case has been referred to the undersigned for full pretrial case management, including R R on all dispositive motions. ( See Order of Reference, #30)
TSL argues in opposition that it provided UNIC with all the pertinent information that TSL had in its own possession regarding pollution conditions on the property at issue. (#27, Plaintiff Technology Square, LLC's Opposition to Motion for Summary Judgment at 3) Both parties have filed supplemental memoranda in support (#35, Supplemental Memorandum in Support; #36, Supplemental Opposition to Motion for Summary Judgment; #39, Plaintiff Technology Square LLC's Supplemental Memorandum in Response to the Court's Procedural Order), and the motion is therefore ripe for disposition. For the reasons set out below, the Court will recommend denying summary judgment, except to the extent that TSL has conceded that insurance coverage is unavailable under Coverage A of the Pollution Liability Insurance policy at issue here. ( See #39 at 2)
II. Factual Background A. The Purchase of Technology Square and TSL's Environmental Due Diligence
The facts here are related in the light most favorable to TSL, the party opposing summary judgment. Blanchard v. Pearless, 958 F.2d 483, 484 n. 1 (1st Cir. 1992).
The plaintiff, TSL, is a limited liability company created to purchase and develop a piece of real property, Technology Square (the "property" or "site"), located in Cambridge, Massachusetts. (#18, Statement of Material Facts that Supports Def.'s Mot. for Summ. Judgment, Exh. B at 24) TSL purchased the property in June, 1998. (#7, First Amended Complaint ¶ 5) Beacon Capital Partners, LP ("Beacon"), a real estate investment and development firm, is the sole member of TSL. (#18, Exh. B at 24), and directed TSL's business. (#18, Exh. C at 16)
William Bonn ("Bonn") was Beacon's Senior Managing Director and General Counsel. (#27, Exh. 1 ¶ 1) As Beacon's General Counsel, Bonn was involved in the purchase of the Technology Square property. (#27, Exh. 1 ¶ 4) Bonn was the person in charge of Beacon's environmental affairs (#18, Exh. B at 21), and was responsible for making decisions about purchasing pollution liability insurance for the property. (#27, Exh. 1 ¶¶ 3-4) Before purchasing Technology Square, TSL conducted environmental due diligence in order to learn if there were any environmental issues of concern. (#18, Exh. B at 28) As part of that due diligence, Bonn asked the real estate broker to provide Beacon with any reports concerning the environmental conditions of the property. (#27, Exh. 1 ¶ 6) The broker provided Beacon with a single document entitled "Phase I Environmental Site Assessment," ("Phase I Report"), dated October 3, 1997, which had been prepared by a company called Levine Fricke Recon for the previous owner. (#27, Exh. 1 ¶ 6) The Phase I Report indicated the "heavy industrial" historical use of the property — the property had, for example, been the site of a soap manufacturing plant for many years, a hose manufacturing company and a gas station. (#18, Exh. B at 76) Because the Phase I Report "talked about urban fill being a common element in this part of Cambridge" (#18, Exh. B at 45), Bonn asked the seller to permit TSL to conduct invasive soil and groundwater sampling, but the seller refused. (#18, Exh. B at 45) TSL conducted no environmental testing prior to purchasing the property. (#27, Exh. 1 ¶ 7)
On February 26, 1998, TSL conducted a "Due Diligence Status Meeting" with its officers and others. (#18, Exh. E) It is undisputed that TSL did not provide the minutes of this meeting to UNIC. The minutes of that meeting contained the following notation:
Environmental
• Contamination of soil from oil and metals to be expected
• Groundwater contamination not anticipated; water is static
• No reason to suspect volatile compounds
• Recommend redevelopment strategy which minimizes soil removal through design
• Soils to be excavated will require soil characterization; this will trigger a DEP reporting requirement and necessitate an MCP compliance plan
• Regulatory requirements will not delay construction provided an acceptable management plan is in place
• Regardless of developmental issues, consideration should be given to getting property into compliance in anticipation of future re-sale
(#18, Exh. E at 2)
In addition, the minutes also assigned to Wesley E. Stimpson ("Stimpson"), an environmental consultant (#27, Exh. 4 ¶ 3), the task of "[e]stimat[ing] environmental clean up costs" (#18, Exh. E at 2) and of evaluating "the likely environmental conditions of the property." (#27, Exh. 1 at ¶ 8). In particular, Stimpson was asked to evaluate the site based on his review of the Phase I Report. (#27, Exh. 4 ¶ 4) Stimpson reviewed the Phase I Report, along with a collection of historical maps and other publicly available sources of information referred to in the Phase I Report. (#27, Exh. 4 ¶ 5) None of the "historical use" materials was inconsistent with the information contained in the Phase I Report. (#27, Exh. 4 ¶ 6) Based on his review of these materials, Stimpson submitted a memorandum to TSL. (#18, Exh. G) It is undisputed that TSL did not provide a copy of this memorandum to UNIC. The memorandum dated March 4, 1998, which has as its subject "Ball Park Environmental Costs," states:
As requested, we have prepared estimates of costs that would be prudent to carry in the event that you go forward and acquire this property without additional environmental due diligence. It is assumed that you will raze the smaller building and build a new building with about 25,000 sf of ground coverage. This building may or may not have a basement. We have priced a scenario where a basement is assumed with off-site disposal of soil.
As we have also discussed, It would be prudent to bring the property onto [sic] compliance with the MCP. Although not currently in the MCP, there is a good chance that a future buyer would want to see MCP issues addressed, given the past historical heavy industrial use of the property. It is also likely that any significant construction on the property would trigger an MCP compliance obligations [sic]. Our MCP compliance costs assume that studies only are undertake. [sic] No clean up costs have been allocated. This is based on our experience with properties in a similar setting at the Cambridge Center development.
The memorandum estimated the costs as follows:ESTIMATED CONSTRUCTION COSTS MCP COMPLIANCE COSTS
Finally, Stimpson drafted a letter to Beacon, dated May 13, 1998. (#18, Exh. H) It is undisputed that TSL did not provide a copy of this "draft" letter to UNIC. However, TSL disputes that Stimpson actually sent the letter to TSL, (#27, Exh. 4 ¶ 16), or that TSL received the letter, (#27, Exh. 1 ¶ 10). The letter states, in relevant part:
In accordance with your request, we have reviewed environmental site assessment reports prepared by others for the property, assembled readily available historic information and have visited certain portions of the property to view existing conditions. This work was undertaken in support of your evaluation of potential environmental liabilities associated with acquiring the property. . . .
EXISTING CONDITIONS
Information on the historical use of the property was available in an ASTM Phase I Environmental Site Assessment prepared by Levine Fricke Recon dated 3 October 1997 for the property owner. . . . Recent use of the property includes office space for the Massachusetts Institute of Technology, Draper Laboratories and Polaroid Corporation. . . .
Polaroid and Draper appeared on the RCRIS data base as generators of hazardous waste. Draper utilizes and stores significant quantities of hazardous materials at their facility. Draper also maintains a 1,500 gallon underground storage tank to store diesel fuel to power an emergency generator. The integrity of the tank has recently been successfully tested. . . .
HISTORICAL USES
Two historical uses of the property warrant note when considering environmental liabilities. The southwest corner of the property was once occupied by as [sic] gasoline service station from at least 1934 to 1957. In addition, the majority of the property was occupied by various companies that historically made soap and glycerine. These operations occurred from approximately 1898 until the 1950's. As part of these operations, various portions of the property were used to store 55-gallon drums of raw materials and empty drums for reclamation. In addition, twenty-four above-ground storage tanks of various capacities were used for the storage of raw materials and oil. Much of the area that was once occupied by these historic operations is now covered by the existing buildings and associated infrastructure.
SITE VISIT
On 16 February 1997, a representative of Haley Aldrich visited the property to view existing conditions. The site visit concentrated on viewing the below grade spaces that could show indications of releases of oil or hazardous materials into the environment. Special attention was given to observing those areas that contained sump pits for basement space and elevators. In general, all of the areas viewed were neat and orderly. All sumps were sealed with covers or features that did not allow direct viewing of conditions that might be indicative of groundwater conditions. No areas of seepage of ground water into the below grade space could be found or observed. . . .
CONCLUSIONS
There does not appear to be an indication that the current site usages have resulted in significant releases of oil or hazardous materials into the environment. This is supported by the fact that most of the property is in an urban setting with municipal water and sewer available. Most of the building usage is office related and the one underground storage tank has successful test data. The adjacent site uses would not be expected to have a significant impact on the property given the generally developed area and relatively low groundwater movement associated with a flat groundwater gradient or utility controlled flow pattern.
The historical property use could have resulted in releases of oil or hazardous materials into the environment. This is most probable in the drum storage, above ground storage tank and former gasoline service station area. Also, it is most likely that any excavation into the soil at the property will require characterization if the excavated material is disposed off site. This characterization will probably result in the exceedance of a reportable concentration for a variety of compounds under the Massachusetts Contingency Plan (MCP). Exceeding a reportable concentration will move the property into MCP and will require systematic study and evaluation of the past historic uses to demonstrate that there has not been a release of oil or hazardous material significant enough to warrant clean-up under the MCP. Assuming the buildings are to be left in place, a condition of no significant risk should be demonstrable with minimum clean-up, assuming that a deed restriction is place [sic] on the property controlling future intrusive activities and property uses.
(#18, Exh. H at 1-3)
B. The Insurance Policy
Bonn testified that Beacon obtained environmental coverage on all of its properties. (#18, Exh. B at 76) He further testified that he wanted to purchase insurance coverage for the site because the seller had not permitted invasive testing, and because he had read the Phase I report and "was concerned that although the Phase I Report didn't specifically state there were any potential environmental issues on this site, there was enough of a factual background that [he] was concerned about potential liabilities or costs of cleanup. Therefore, [he] made a decision to seek out a separate distinct environmental insurance policy for this site." (#18, Exh. B at 76-77) Bonn stated that he wanted "a very good policy" that "cover[ed] pre-existing conditions." (#18, Exh. B at 77) For that purpose, he relied on Robert M. Currey Associates, Inc. ("RMCA"), a risk management consulting firm. (#18, Exh. B at 28; #27, Exh. 2 ¶¶ 2-3) RMCA assigned to Elvira Jordan ("Jordan") the task of soliciting quotations from prospective insurers. (#27, Exh. 2 ¶ 3) Jordan, through an insurance broker, sought coverage based on certain specifications, and instructed the broker to forward those specifications along with the Phase I Report to the underwriters from whom the broker intended to seek quotations. (#27, Exh. 3 ¶ 5)
The specifications sought coverage for. inter alia: "[d]iscovery of contamination on property at regulatory levels;" "[f]irst Party on-site cleanup for releases emanating from pre existing conditions or new releases, on-site or off-site;" "losses arising from the discovery of pollution conditions or the exacerbation of known pollution conditions as a result of performing any capital expenditure or improvement on the site." (#27, Exh. 3 at Exh. 2)
The broker solicited offers from three underwriters. (#27, Exh. 3 ¶ 5) One underwriter from AIG Environmental described the site as "pretty gnarly." (#27, Exh. 3 ¶ 6) Ultimately, AIG did not quote coverage because it was "concerned about the amount of contamination on the site." (#27, Exh. 3 ¶ 8) Another underwriter from Kemper Environmental ("Kemper") indicated that he was concerned about potential environmental issues on the property, based on the Phase I Report, and about the lack of a Phase II investigation. (#27, Exh. 3 ¶ 7) He noted that, in submitting a quote, he would be "using a 'cross your fingers technique.'" (#27, Exh. 3 ¶ 7)
In the end, Jordan received written proposals from Kemper and from Kenneth Payton ("Payton"), the Managing Underwriter for Olympic Underwriting Managers, Inc. ("Olympic"), which underwrote the policy for UNIC. Kemper's offer was "significantly more expensive" than the one provided by UNIC, although both underwriters had received the same information. (#27, Exh. 3 ¶ 9) During the several telephone conversations that Jordan had with Payton, Jordan does not recall Payton expressing the same level of concern about the possible environmental condition of the property as the other two underwriters did. (#27, Exh. 3 ¶ 10)
Jordan completed UNIC's application for pollution liability coverage on behalf of TSL. (#27, Exh. 3 ¶ 26) The pollution liability insurance application required applicants to submit "[c]opies of any environmental audit or assessment reports which have been conducted within the past three years." (#18, Exh. P at 1) It is undisputed that UNIC received a copy of the Phase I Report. In addition, the application posed a series of questions concerning the pollution conditions on the property. Jordan completed each of the questions by referring to "INFORMATION PREVIOUSLY PROVIDED IN PHASE I REPORTS SUBMITTED PRIOR TO BINDING COVERAGE." ( See #18, Exh. P at [1-4]) In addition, question number 20 asked: "At the time of signing this application are you aware of any circumstances which may reasonably be expected to give rise to a claim under this policy? . . . If yes, please provide details." (#18, Exh. P at [4]) In responding to this question, Jordan again referred to the information previously provided in the Phase I Report. Jordan's "usual practice" was to refer to "information previously provided," when "the application is being submitted after the policy has already gone into effect and the information requested in the application has already been provided." (#27, Exh. 3 ¶ 26) Jordan never represented to Payton "that no pollution conditions were present at . . . Technology Square likely to give rise to a claim under the Policy." (#27, Exh. 3 ¶ 24) She did not recall Payton asking for additional information, other than information concerning Massachusetts environmental regulations. (#27, Exh. 3 ¶ 10) Nor did Payton question or object to any of the responses in the application. (#27, Exh. 3 ¶ 24)
On June 23, 1998, UNIC issued a pollution liability insurance policy (No. L7117442) ("the policy") to TSL. Under the policy, Coverage A for "Third Patty Pollution Liability" provides:
[UNIC] will pay those sums that the insured becomes legally obligated to pay as damages arising out of 'claims' for 'bodily injury' or 'property damages' that result from 'pollution conditions' at, on or emanating from your 'site(s)' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages arising out of 'claims' for 'bodily injury' or 'property damage' that result from 'pollution conditions' at, on or emanating from your 'site(s)' for which this insurance does not apply. We may, at our discretion, investigate any 'pollution condition' and settle any 'claim' or 'suit' that may result.
(#8, Exhibits to First Amended Complaint, Exh. A at 1) Coverage A contains an exclusion for "property damage" to the insured's property; the insurance thus does not apply to property damage "to property owned, leased, operated by [the insured] . . . even if such 'property damage' is incurred to avoid or mitigate further damage or 'claims' which may be covered under the policy." (#8, Exh. A at 3) Coverage B of the policy for "Onsite Cleanup" provides that UNIC "will pay for 'cleanup costs' that result from 'pollution conditions' at, on or within your 'site(s)' to which this insurance applies." Both Coverage A and Coverage B are further limited by a "known conditions" exclusion, which, as modified by endorsement, precludes coverage for
[k]nown conditions . . . arising from 'Pollution Conditions' existing prior to the inception of this Policy, and reported to any officer, director, partner or other employee responsible for environmental affairs of the Named Insured, unless all of the material facts relating to the 'Pollution Conditions' were disclosed to the company in materials prior to the inception of this Policy.
(#8, Exh. A at [31])
Finally, the policy contains, as Endorsement J, the following language:
[I]t is agreed that 'Pollution Conditions' discovered above regulatory action levels, including without limitation the presence of oil or hazardous materials in amounts that equal or exceed applicable Reportable Concentrations as set forth in the Massachusetts Contingency Plan, 310 CMR 40.0000 el [sic] seq. (the "MCP"), as a result of any Phase II investigations conducted at the location are covered under this Policy. It is also agreed that this policy will cover all 'Cleanup Costs,' above the deductible, which are incurred in connection with the insured's voluntary efforts to address such 'Pollution Conditions,' including efforts under the MCP.
(#8, Exh. A at [43])
C. The Insurance Claims
In August and September 1999, after purchasing the property and during planning for development of the site, TSL submitted soil samples from the site for testing. (#7, First Amended Complaint, ¶ 9) The testing revealed that the samples contained lead, petroleum hydrocarbons, and polynuclear hydrocarbons (PAH's) in levels that triggered mandatory reporting under Massachusetts environmental laws. (#7 ¶ 9) Groundwater testing also revealed the presence of petroleum hydrocarbons in amounts exceeding reportable levels. (#7 ¶ 9) On December 15, 1999, TSL submitted a Release Notification Form to the Massachusetts Department of Environmental Protection (the "DEP"). (#7 ¶ 10; #8, Exh. B) On April 4, 2000, the DEP issued a Notice of Responsibility ("Notice") to TSL that identified the site as a "disposal site" under Mass. Gen. L. ch. 21E and the Massachusetts Contingency Plan, 310 C.M.R. 40.0000, and determined that TSL was a "Potentially Responsible Party" ("PRP") under Mass. Gen. L. ch. 21E § 5. (#7 ¶ 11; #8, Exh. C) The Notice also set forth TSL's obligations as a PRP under governing regulations, including, inter alia, eliminating "all substantial hazards presented by the site." (#8, Exh. C at 2)
Subsequent environmental testing and investigation at the site in the spring of 2000 and in August, 2000, revealed additional pollution-related problems, which TSL reported to the DEP in June and September, 2000. (#7 ¶¶ 12, 13; #8, Exh. D, E) Thereafter, TSL undertook environmental investigation and remediation measures; it alleges that it spent over $750,000 in the process of cleaning up and remediating the site. (#7 ¶ 14) TSL then sought to recover its costs under the policy and UNIC denied coverage.
On January 3, 2004, TSL brought this suit alleging that UNIC had breached its insurance contract in denying coverage (Count I), and had violated Mass. Gen. L. ch. 176D and Mass. Gen. L. ch. 93A § 2, by denying coverage in bad faith (Count II). TSL further sought declaratory judgment on its rights under the policy (Count III). On November 30, 2005, UNIC moved for summary judgment on all counts. (#16)
III. Discussion A. Legal Framework
Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In determining whether summary judgment is proper, "a court must view the record in the light most favorable to the nonmoving party and give that party the benefit of all reasonable inferences in its favor." Clifford v. Barnhart, 449 F.3d 276, 280 (1st Cir. 2006). UNIC has moved for summary judgment on the basis of affirmative defenses on which it bears the burden of proof, to wit, that 1) TSL misrepresented material facts in the insurance application and 2) that certain exclusions preclude recovery. See, e.g., U.S. Liability Ins. Co. v. Selman, 70 F.3d 684, 691 (1st Cir. 1995) (noting that Massachusetts follows usual rule of placing burden of proving affirmative defenses on the party asserting them). When the party moving for summary judgment bears the burden of proof on an issue, that party cannot prevail "unless the evidence that [it] provides on that issue is conclusive." Torres Vargas v. Santiago Cummings, 149 F.3d 29, 35 (1st Cir. 1998). In other words, "[that party] must establish beyond peradventure all of the essential elements of the . . . defense to warrant judgment in his favor.'" Id. (quoting Fontenot v. Upjohn Company, 780 F.2d 1190, 1194 (5th Cir. 1986)).
"Under Massachusetts law, the insured bears the initial burden of proving that an injury occurred within the coverage ambit of the insurance policy." U.S. Liability Ins. Co., 70 F.3d at 688 (citing Trustee of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 616 N.E.2d 65, 74 (1993)). Then, after "the insured establishes basic risk coverage, the devoir of persuasion shifts to the insurer to prove a defense to coverage, say, the applicability of a policy exclusion or the insured's failure to comply with conditions precedent." Id. (citing Gusson v. Sostom Mut. Life Ins. Co., 326 Mass. 571, 95 N.E.2d 670, 672 (1950)).
Otherwise, as always, in responding to a properly supported motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or [otherwise], must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). "[A] 'genuine' issue exists if there is sufficient evidence supporting the claimed factual dispute to require a choice between the parties' differing versions of the truth at trial." Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir. 1990) (internal quotations and citations omitted). Finally, in reviewing a motion for summary judgment, the Court "need not credit purely conclusory allegations, indulge in rank speculation, or draw improbable inferences." Nat'l Amusements, Inc. v. Town of Dedharn, 43 F.3d 731, 735 (1st Cir.), cert. denied, 515 U.S. 1103 (1995).
B. The Motion for Summary Judgment — Overview
UNIC argues that summary judgment is appropriate in this action because "the undisputed facts show that the plaintiff was already aware at the time that it applied for insurance coverage with [UNIC] that pre-existing levels of contamination on this property were sufficiently high to trigger clean up obligations under the Massachusetts Contingency Plan ("MCP")." (#17 at 1) UNIC contends that it can avoid the policy under Mass. Gen. L. ch. 175, § 186, because TSL misrepresented material facts on its application for insurance by failing to disclose certain information contained in the due diligence documents about the pollution conditions on the property. Alternatively, UNIC invokes two policy exclusions-the "known conditions" exclusion and the "owned property" exclusion-which UNIC maintains preclude coverage in this case as a matter of law.
TSL responds that the Phase I Report contained all material facts about pollution conditions on the property, and that TSL's knowledge about pollution conditions on the property derived from and was "coextensive" with the information contained in the Phase I Report. (#27 at 3) TSL argues that UNIC was capable of deriving from the Phase I Report the same conclusions and speculations about the pollution conditions on the property as those contained in the due diligence documents. The Court considers these arguments in turn.
1. Misrepresentation of Material Fact
UNIC first moves for summary judgment under Mass. Gen. L. ch. 175, § 186, which provides:
No oral or written misrepresentation or warranty made in the negotiation of a policy of insurance by the insured or in his behalf shall be deemed material or defeat or avoid the policy or prevent its attaching unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss.
"A 'material fact' is one which would 'naturally influence the judgment of [an] underwriter in making the contract at all, or in estimating the degree and character of the risk, or in fixing the rate of the premium.'" Hanover Ins. Co. v. Leeds, 42 Mass.App.Ct. 54, 57 (1997) (quoting Employers' Liab. Assur. Corp. v. Vella, 366 Mass. 651, 655 (1975)); see also Boston Mut. Ins. Co. v. New York Islanders Hockey Club, L.P., 165 F.3d 93, 97 (1st Cir. 1999) (stating that "the materiality requirement limits avoidance to cases where an accurate answer could reasonably have affected an insurer's choices"). UNIC has the burden of proving that a misrepresentation in a policy application was material. See, e.g., A.W. Chesterton Co. v. Mass. Insurers Insolvency Fund, 445 Mass. 502, 513 (2005) (under Massachusetts law, in order to void or rescind a policy of insurance or deny a claim based upon misrepresentations in an application for insurance, the insurer must demonstrate either that the misrepresentations were made with intent to deceive or that they increased the risk of loss to the insurer).
UNIC contends that summary judgment is appropriate because TSL misrepresented facts in its application for insurance that "increased the risk of loss" under the policy. This assertion necessitates two inquiries: first, whether TSL misrepresented facts in the insurance application; and second, whether the purported misrepresentations "increased the risk of loss" to the insurer. The Court considers each part in order.
a. Did TSL Misrepresent Facts?
UNIC's argument is as follows. Question number 20 in the insurance application asked: "At the time of signing this application are you aware of any circumstances which may reasonably be expected to give rise to a claim under this policy?" (#18 Exh. P at [4]) TSL responded: "INFORMATION PREVIOUSLY PROVIDED IN PHASE I REPORTS SUBMITTED PRIOR TO BINDING COVERAGE." UNIC maintains that TSL misrepresented facts in the insurance application by simply referring to the Phase I Report and by failing to provide a more complete response to question 20. Although UNIC does not dispute that TSL provided its underwriter with a copy of the Phase I Report, UNIC argues that TSL should also have disclosed: the three due diligence documents; the fact that TSL would probably construct new buildings on the site; and the fact that the seller of the property had refused to permit TSL to conduct soil and groundwater testing. In short, UNIC maintains that TSL was aware that pre-existing levels of contamination on the property were sufficiently high to trigger clean up obligations under the MCP (and so that TSL was "aware of circumstances" that could give rise to a claim under the policy at the time TSL applied for insurance coverage).
They are: 1) TECHNOLOGY SQUARE MINUTES: Doe Diligence States Meeting Minutes, February 26, 1998; 2) MEMORANDUM dated March 4, 1998 from Stimpson to TSL on the subject of "Ball Park Environmental Costs; 3) "Draft" correspondence from Stimpson to TSL.
TSL does not dispute that it never presented the due diligence documents to UNIC during the course of negotiating the insurance coverage. Instead, it maintains that all material facts were contained in the Phase I Report, and that all the information contained in the three documents to which UNIC points was derived from the Phase I Report. (#27 at 8) Further, TSL maintains that the content of the due diligence documents amounts only to "speculation" or opinion that TSL might find pollutants on the property that would trigger compliance obligations, and not "material facts" that TSL was obliged to disclose. (#27 at 5-6) TSL therefore disputes the inferences that UNIC asks the Court to draw from these documents, vis., that they establish that TSL knew that certain conditions existed on the property that were likely to give rise to a claim.
The Court concludes that the record evidence, read in a light favorable to TSL, suggests that a dispute of fact exists on whether TSL's response constituted a misrepresentation, and on whether the Phase I Report represented the extent of TSL's awareness about "circumstances which may reasonably be expected to give rise to a claim under [the] policy."
First, it is undisputed that TSL conducted no additional testing at the site. Moreover, some of the information contained in the due diligence documents works against the argument that TSL was aware of circumstances that could give rise to a claim. For example, the draft letter from Stimpson to TSL (which TSL disputes having received) stated that "[t]here does not appear to be an indication that the current site usages have resulted in significant releases of oil or hazardous materials into the environment." (#18, Exh. Hat 2) Similarly, the minutes of the due diligence meeting suggest that groundwater contamination was "not anticipated." (#18, Exh. E at 2)
UNIC maintains that TSL should have disclosed that the seller did not permit testing of the site. One can reasonably infer from the response so question 20 that no additional testing beyond the Phase I Report had been conducted. Indeed, TSL has introduced evidence that another underwriters expressed concern that no Phase 11 Report had been prepared. (#27, Exh. 3 ¶ 7) In any event. the Court concludes that whether the seller's refusal to permit testing constituted a material fact is a question for the jury.
Further evidence, read in a light favorable to TSL, permits the inference that TSL's knowledge was "coextensive with the Phase I Report." (#27 at 3) Bonn testified that he wanted to purchase insurance coverage for the site because the seller had not permitted invasive testing, and because he had read the Phase I report and "was concerned that although the Phase I Report didn't specifically state there were any potential environmental issues on this site, there was enough of a factual background that [he] was concerned about potential liabilities or costs of cleanup." (#18, Exh. B at 76-77) Thus, if Bonn was "aware of any circumstances which may reasonably be expected to give rise to a claim under th[e] policy," it can be inferred from Bonn's statement that his awareness derived from the Phase I Report, which TSL provided to UNIC.
Bonn, of course, also had the benefit of the due diligence documents which UNIC contends TSL should have disclosed. On this point, TSL has submitted the affidavit of its consultant, Wesley Stimpson, who avers that he "was asked to evaluate the likely condition of the Site based on [his] review of [the Phase I Report]." (#27, Exh. 4 ¶ 6) Although Stimpson also states that he relied "on other sources of data that were publicly available (from the City of Cambridge) about the historical use of the Property" (#27, Exh. 4 ¶ 5), he avers that "[n]one of the Historical Use Materials . . . was inconsistent with the historical use information provided in the [Phase I Report]." (#27, Exh. 4 ¶ 6) Rather, Stimpson states that "for purposes of evaluating the likely environmental condition of the Property, the historical uses that [he] regarded as significant were those disclosed in the [Phase I Report], including (most importantly) its occupation by (a) a soap manufacturing plant and (b) a gas station." (#27, Exh. 4 ¶ 6) Stimpson further stated his belief that "any reasonably competent and experienced environmental professional — in which category I Include, among others, environmental engineers, LSP's and professional engineers working on contaminated sites — would have expected that the soil on the Site was contaminated by oils and metals based on the information provided in the [Phase I Report]." (#27, Exh. 4 ¶ 12)
In this regard, TSL has submitted evidence to support that inference. For example, TSL has submitted the affidavit of Elvira Jordan, who averred that two other underwriters, also relying on the Phase I Report alone, derived conclusions from the Phase I Report that either led them to decline to offer coverage (as in the case of AIG), or to offer coverage at significantly more expensive rates. Indeed, TSL notes that Payton, UNIC's underwriter, stated in his deposition that he was not surprised, based on reviewing the Phase I Report, that contamination was found on the site. (#27, Exh. 5, Exh. Cat 161) Payton testified: "my experience tells me that any type of city fill, any soil in the city, looking back through historical data, that it's going to be contaminated. . . . I don't think anyone would — wouldn't assume that any time you're disturbing city fill, that you got to remove the soil." (#37, Exh. A at 31) Indeed, Payton testified that he could have drawn the same conclusions that Stimpson drew from the Phase I Report. Thus, in the Court's view, Payton's testimony suggests that the conclusions that an environmental professional could have drawn from the Phase I Report were various; the inference that the Court must indulge in TSL's favor here is that the Phase I Report alone was sufficient to represent the state of TSL's awareness that the soil on the site was contaminated.
Finally, UNIC points out that TSL drafted and submitted to the underwriter certain policy language that permits the inference that TSL knew throughout the application process of facts likely to give rise to a pollution liability claim. That provision states:
It is agreed that 'Pollution Conditions' discovered above the regulatory action levels, including without limitation the presence of oil or hazardous materials in amounts that equal or exceed applicable Reportable Concentrations as set forth in the massachusetts Contingency Plan, 310 CMR 40.0000 et seq. (the "MCP"), as a result of any Phase II investigations conducted at the location are covered under this Policy. It is also agreed that this policy will cover all 'Cleanup Costs,' above the deductible, which are incurred in connection with the insured's voluntary efforts to address such 'Pollution Conditions,' including efforts under the MCP.
However, TSL has submitted evidence that it routinely requests such coverage. (See #27, Exh. 3 ¶¶ 16-20) In any event, whether specifically requesting the provision conclusively establishes that TSL was aware of circumstances that would give rise to a claim under the policy is a question of fact for the jury. Thus, the Court concludes that disputes of fact exist on the question of whether TSL misrepresented facts on the insurance application.
b. Risk of Loss
Even assuming that TSL misrepresented facts in the application, under Massachusetts law whether a misstatement increases the insurer's risk of loss is ordinarily a question of fact on which the insurer bears the burden of proof. See Pahigian v. Manufacturers' Life Ins. Co., 349 Mass. 78, 85 (1965); Boston Mut. Ins. Co., 165 F.3d at 97; McLean Hosp. Corp. v. Lasher, 819 F. Supp. 110, 131 (D. Mass. 1993). Although the question "is often resolved as a matter of law under Massachusetts law where the health condition or occurrence falsely concealed is objectively serious enough that no reasonable person could doubt that it increased the risk of loss," Boston Mut. Ins. Co., 165 F.3d at 97 (internal quotation and citation omitted), for the reasons set out below, the Court cannot conclude in this case that any purported misrepresentation increased UNIC's loss as a matter of law.
Cases resolving this inquiry as a matter of law have been primarily limited to instances in which am insured failed to disclose medical information. See Boston Mut. Ins. Co. 165 F.3d at 97-98, no. 5 6 (collecting cases).
Materiality in this context is an objective test: "Where the misstatement would 'naturally influence' the judgment of the underwriter, it may be material without proof that the insurer would ultimately have refused to insure the applicant or would have charged more for the insurance." Boston Mut. Ins. Co., 165 F.3d at 97 n. 4 (collecting cases for proposition that proof of subjective reliance is unnecessary and that "increased risk may be inferred either from objective scientific evidence of from testimony as to insurer's practice") (internal citation omitted). In attempting to establish the materiality of the misrepresentations, UNIC relies entirely on the testimony and affidavit of Kenneth Payton, the person responsible for underwriting the policy. Payton avers that certain facts contained in the due diligence documents would have influenced his decision to underwrite the policy and "[are] of the sort that [he], as well as United National's underwriting guidelines, would deem material to the risk and coverage that [he] was underwriting." (#18, Exh. M ¶ 18) He points to, inter alia, the following facts gleaned from the documents:
• Soil contamination from oil and metals at the property was expected;
• Soils to be excavated due to this anticipated contamination would require soil characterization that would trigger Department of Environmental Protection reporting requirements and necessitate an MCP compliance plan;
• Significant construction on the property would trigger an MCP compliance obligation;
• In anticipation of bringing the property into compliance with the MCP for future resale, that the estimated construction costs associated with the off-site disposal of contaminated soil and hazardous waste ranged from $100,000 to $610,000.
(#18. Exh. M ¶ 17)
He further avers that if he had known this and other information, "United National's underwriting guidelines would have required him: 1) not to quote the coverage at all; 2) quote coverage "pursuant to the terms and conditions of a clean-up cost-cap policy"; 3) quote subject to a "substantially higher premium" or "subject to a deductible equal to, at a minimum, the estimated clean up costs of the property." (#18 Exh. M ¶ 20)
UNIC has been unable to produce the underwriting guidelines on which Payton purports to rely. (See #34, Joint Statement of Counsel Regarding Efforts to Obtain Underwriting Guidelines from [UNIC]) Thus, UNIC bases its motion for summary judgment on this point wholly on Payton's affidavit and testimony. For the following reasons, the Court must conclude that Payton's affidavit and testimony are insufficient to establish the materiality of the purported omissions as a matter of law, and that questions of fact remain.
First, Payton's deposition testimony establishes that, based on the Phase I Report, he was not surprised about the discovery of contaminants above regulatory action levels. (#27, Exh. 5, Exh. Cat 152-153, 161) This statement undercuts UNIC's assertion that Payton would have deemed material the conclusions that TSL drew from the Phase I Report about the possibility of contaminants on the site. Furthermore, in the draft letter dated May 13, 1998, Stimpson stated: "[t]here does not appear to be an indication that the current site usages have resulted in significant releases of oil or hazardous materials into the environment" (#18, Exh. H at 2) Payton testified that's a pretty definite statement" that would actually have supported a decision to underwrite the policy. (#37, Aff. of James T. Hargrove, Exh. A at 28-29) Further, TSL points to the following exchange from Payton's deposition:
Q. Now, [Mr. Stimpson] says it's also likely that any significant construction on the property would trigger an MCP compliance obligation. . . . Now, If Mr. Stimpson was drawing these inferences and conclusions based upon the same Phase I report that was given to you, could you not have drawn those same conclusions?
A. Yes. Yes.
(#37, Exh. A at 32)
Payton further testified that he would likely not have underwritten the policy if he had known that there would be new construction on the site. Payton stated in deposition that he thought "nothing was going to be done with the site." (#37, Exh. A at 33) But the specifications that TSL asked the underwriters to quote included coverage for "Capital Expenditures," that is, "[c]overage extended for losses arising from the discovery of pollution conditions or the exacerbation of known pollution conditions as a result of performing any capital expenditure or improvement at the site." (#27, Exh. 3, Exh. 1 at [6]) And an endorsement to the policy specifically provides coverage in connection with capital expenditures or improvements to the site if the pollution condition was discovered in the process of improving the site. (#8. Exh. A at [33]) When asked at deposition whether this language should have prompted some inquiry on Payton's part, Payton attributes TSL's desire to include the language to an insured's wanting all the "bells and whistles." (#37, Exh. A at 39) An alternative (and reasonable) conclusion is that Payton was not overly concerned about "improvements" on the site, or that, indeed, Payton knew that construction was likely on the site but chose to offer coverage anyway. In any event, a question of fact remains on whether that fact could have increased the risk of loss.
Further, TSL has presented evidence that the Phase I Report, standing alone, was enough to influence the decisions of two other underwriters. One underwriter declined to offer coverage at all. The other offered coverage that was substantially more expensive than the coverage offered by UNIC. Further, Elvira Jordan, who was responsible for soliciting quotations for coverage, stated that, unlike the other underwriters, Payton "did not express the same level of concern about the possible environmental conditions of the Property." (#27, Exh. 3 ¶ 10) Given this evidence, TSL asks the Court to draw the inference that Payton's underwriting decision was being driven by other considerations, such as his interest in soliciting a repeat customer. (#27 at 15) At summary judgment, the Court will draw this inference in TSL's favor. Alternatively, the Court will assume, favorably to TSL, that the due diligence documents would not have influenced an insurer's underwriting decision because the Phase I Report was sufficient to raise a red flag about pollution conditions on the property, and to alert an insurer about the need to investigate further.
2. The "Known Conditions" Exclusion
UNIC next maintains that the known conditions provision in the policy precludes coverage in this case. That provision precludes coverage for "Known Conditions" that "[a]ris[e] from 'Pollution Conditions' existing prior to the inception of this Policy, and reported to any officer, director, partner or other employee responsible for environmental affairs of the Named Insured, unless all of the material facts relating to the 'Pollution Conditions' were disclosed to the company in materials prior to the inception of this Policy." (#8, Exh. A at [31])
The interpretation of a contract under Massachusetts law is normally a question of law for the court. B T Masonry Construction Co., Inc. v. Public Service Mutual Ins. Co., 382 F.3d 36, 38 (1st Cir. 2004) (citing Ruggerio Ambul. Serv., Inc. v. Nat'l Grange Ins. Co., 430 Mass. 794, 724 N.E.d 295, 298 (2000)). Nevertheless, summary judgment is inappropriate when the material facts upon which a coverage question is based are in dispute. Id. For substantially the reasons set out above, the Court concludes that genuine disputes of fact exist on the question of whether "all of the material facts relating to the 'Pollution Conditions' were disclosed to the company in materials prior to the inception of th[e] Policy," and that summary judgment is therefore inappropriate.
3. The "Insured's Property Damage" Exclusion
UNIC also argues that it is not liable to provide coverage under Coverage A of the policy, entitled "Third Party Pollution Liability." because the insured property damage exclusion applies. Coverage A of the policy provides:
[UNIC] will pay those sums that the insured becomes legally obligated to pay as damages arising out of 'claims' for 'bodily injury' or 'property damage' that result from 'pollution conditions' at, on or emanating from your 'site(s)' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages arising out of 'claims' for 'bodily injury' or 'property damage' that result from 'pollution conditions' at, on or emanating from your 'site(s)' for which this insurance does not apply.
(#8, Exh. A at 1)
Under the "Insured's Property Damage" exclusion contained in Coverage A, the insurance does not apply to "property damage"
[a]rising from 'property damage' to property owned, leased, operated by, or in the care, custody or control of you, even if such 'property damage' is incurred to avoid or mitigate further damage 'claims' which may be covered under th[e] policy.
(#8, Exh. A at 3)
The Court need not dwell on this point. In its original opposition, TSL neglected to address this part of UNIC's argument, and the Court directed TSL to respond. (#38, Procedural Order on Defendant United National insurance Company's Motion for Summary Judgment) In its Supplemental Memorandum (#39), TSL concedes that Coverage A does not apply to the property damage at issue. ( See #39 at 2) The Court need go no further. Given TSL's concession on this point, the Court will recommend summary judgment under Count I (Breach of Contract) to the extent that TSL seeks insurance coverage under Coverage A of the policy. See generally 11 Moore's Federal Practice, § 56.40[2] (Matthew Bender 3d ed.).
4. Unfair or Deceptive Acts of Practices under Mass. Gen. L. ch. 93A, § 2 and ch. 176D
Last, UNIC maintains that it is entitled to summary judgment on TSL's allegations that UNIC's denial of coverage and handling of TSL's claims violated both Mass. Gen. L. ch. 93A and Mass. Gen. L. ch. 176 D. "Chapter 93A proscribes those engaged in trade or commerce from employing '[u]nfair methods of competition and unfair or deceptive acts or practices' in business transactions." Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 217 F.3d 33, 40 (1st Cir. 2000) (quoting Mass. Gen. Laws ch. 93A, § 2), cert. denied, 531 U.S. 1146 (2001). Chapter 176D prohibits unfair claim settlement practices, such as "refusing to pay claims without conducting a reasonable investigation based upon all available information," Mass. Gen. L. ch. 176D § 3(9)(d), or "failing to settle claims promptly, where liability has become reasonably clear," id. at § 3(9)(m).
"Liability under c. 176D and 93A does not attach merely because an insurer concludes that it has no liability under an insurance policy and that conclusion is ultimately determined to have been erroneous." Pediatricians, Inc. v. Provident Life Acc. Ins. Co., 965 F.2d 1164, 1173 (1st Cir. 1992). However, "[t]he possession of a plausible defense does not automatically preclude a finding of a 93A violation; the defense must be clearly articulated and asserted in good faith." Commercial Union Ins. Co., 217 F.3d at 40-41. Further, "[r]esolution of a [Chapter] 93A claim, including the issue of bad faith, depends on a factual determination of the defendant's knowledge and intent." O'Leary-Alison v. Metropolitan Property and Casualty Ins. Co., 52 Mass. App. 214, 217, rev. denied, 435 Mass. 1104 (2001). Under given factual circumstances, engaging in "foot dragging" and "a pattern of stringing [the plaintiff] along" or asserting "specious defenses" have all been found to constitute violations of the consumer protection laws. Commercial Union Ins. Co., 217 F.3d at 40-41 (internal quotations and citation omitted).
UNIC argues that the record contains no evidence to support TSL's allegations. The Court disagrees, and will recommend denying summary judgment on this claim. TSL has pointed to evidence sufficient to create a dispute of fact on the question of whether UNIC acted in good faith in denying coverage. ( See #28 Statement In Response to Defendant's Statement of Material Facts at 9-12) For example, UNIC denied coverage in May, 2001, because, among other reasons, there was "no indication that the problem [was] of recent origin." (#27, Exh. 5, Exh. G at 3) Later, a UNIC representative conceded in deposition that it was irrelevant whether the pollution problem was of recent origin because the policy did not contain a retroactive date. (#27, Exh. 5, Exh. J at 104) Similarly, UNIC denied coverage because the "source of [the] problem is urban fill." (#27, Exh. 5, Exh. G at 3) Yet, in deposition, UNIC's representative conceded that he believed "that if urban fill is mixed with pollutants, that it's still covered as a pollutant." (#27, Exh. 5, Exh. J. at 105) TSL has pointed to a number of instances in which UNIC took a certain position in denying coverage, but later conceded that the position was untenable. ( See #28 at 9-12) Under the circumstances, the Court must conclude that issues of fact remain for a jury on the question of whether UNIC acted in good faith in denying coverage.
IV. Recommendation
For all the above reasons, I RECOMMEND that summary judgment be ALLOWED on Count 1 (Breach of Contract) to the extent that TSL concedes that insurance coverage is precluded under Coverage A of the policy and that the motion be OTHERWISE DENIED.
V. Review by the District Judge
The parties are hereby advised that pursuant to Rule 72, Fed.R.Civ.P., any party who objects to this recommendation, either in whole or in part, must file a specific written objection thereto with the Clerk of this Court within 10 days of the party's receipt of this Report and Recommendation. The written objections must specifically identify the portion of the recommendation, or report to which objection is made and the basis for such objections. The parties are further advised that the United States Court of Appeals for this Circuit has repeatedly indicated that failure to comply with Rule 72(b), Fed.R.Civ.P., shall preclude further appellate review. See Keating v. Secretary of Health and Human Services, 848 F.2d 271 (1 Cir., 1988); United States v. Emiliano Valencia-Copete, 792 F.2d 4 (1 Cir., 1986); Scott v. Schweiker, 702 F.2d 13, 14 (1 Cir., 1983); United States v. Vega, 678 F.2d 376, 378-379 (1 Cir., 1982); Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1 Cir., 1980); see also Thomas v. Arn, 474 U.S. 140 (1985).
Soil Management (1,600 tons urban fill plus 100 tons of hazardous waste $100,000 Soil Management (14,000 tons of urban fill plus 200 tons of hazardous waste) $610,000 Other Costs 1. RAM Plan Submittal including ESMP and $5,000 Health Safety Specifications $2,000 2. Soil Characterization for disposal to $20,000 3. RAM Status and Completion Reports $8,000 TOTAL $115,000 to $643,000 Site Characterization Studies $150,000 Tier Classification $150,000 Risk Characterization TOTAL $210,000 (#18, Exh. G at 1-2)