An Insured’s Underpayment of Loss Lawsuit Over Brookline Building Backfires
Court Finds No Coverage and Orders Repayment of the $350K the Insured Initially Received
The Appeals Court recently affirmed a decision in Anwar Faisal et al. v. United National Insurance Company that reminds one of the saying, “Be careful what you ask for. You may get it.” In this case, the insured sued to get more money on a property damage claim, asking the court to rule on his policy’s coverage. The court ruled he had no coverage and ordered him to reimburse his insurer all the claim money he had previously received.
In 2015, Anwar Faisal (“Mr. Faisal”) purchased an eight-story vacant former nursing home in Brookline.
Since Mr. Faisal had no immediate plans for the building, his insurance agent obtained a commercial property policy (“Policy”) through an excess broker for the vacant property.
The Policy had a specific endorsement allowing occupancy of the first floor of the insured building but provided that the rest of the building had to be vacant “except [for] showing it to prospective buyers or renters for the purpose of selling or leasing” the property.
During the Policy’s period, Mr. Faisal entered into a $4,750,000 lease with the Brookline Schools for the use of the vacant property as temporary elementary classes after specified renovations.
While these renovations were in process, the building caught fire and suffered substantial damage. Mr. Faisal made a claim, and United National paid Mr. Faisal $350,000 out of a claimed $750,000 loss.
Mr. Faisal sued United National for the remaining $417,000 requesting the court to enter a declaratory judgment as to the Policy’s coverage and award breach of contract and unfair claim practice damages.
After retaining counsel, United National counterclaimed, seeking reimbursement of its $350,000 payment, alleging it had paid Mr. Faisal in error because Mr. Faisal had breached the Policy’s vacancy condition with his extensive renovation.
The Superior Court entered a declaratory judgment as Mr. Faisal requested, but its judgment declared that Mr. Faisal had no coverage under the Policy because of his breach of the vacancy condition. In addition, the Court ordered the return of the $351,426.99 paid to Mr. Faisal in error and granted a real estate attachment on the insured property in favor of United National.
Mr. Faisal appealed to the Appeals Court; however, it rejected his appeal.
The excess and surplus policy for Mr. Faisal’s vacant building
Mr. Faisal bought a 75,000 square feet vacant eight-story masonry building on Webster Street in Brookline. The building had previously been used as a nursing home. Mr. Faisal did not have an immediate plan as to how he would develop the building when he requested property coverage for the vacant building.
In order to obtain insurance coverage for the property, Dadgar Insurance Agency, Mr. Faisal’s insurance broker, contacted XS Brokers, a United National MGA, seeking coverage for the vacant building. Dadgar advised XS that only the first floor of the building would be used by the owner as offices, and the remainder would remain vacant.
Mr. Faisal received a commercial property policy from United National that covered the building with a coverage limit of $16,000,000 from February 20, 2015, through February 20, 2016 (the “Policy”).
The Policy’s Declarations Page stated “Vacant Building” as the insured’s kind of business.
Based on the use of the first floor of the building by Mr. Faisal for offices, the Policy had an endorsement entitled: “Exception to Vacancy Requirement.”
This endorsement, in pertinent part, stated the permitted occupancy and the vacancy requirement:
“As a condition of this insurance, except as described in Paragraph 3. below, the designated premises must remain vacant during the policy period.”.
Paragraph 3 of the endorsement stated an exception to the vacancy requirement with a schedule stating:
“The first floor of the building is permitted to be occupied as offices.”
However, the endorsement further defined the Policy’s vacancy condition, stating:
“A building is not vacant when any portion of it is used for any activity whatsoever except showing it to prospective buyers or renters for the purpose of selling or leasing it.”
The $4,750,000 lease of the building for a temporary school after renovations
On November 24, 2015, during the Policy period, Mr. Faisal and the Town of Brookline entered into a “School Space Lease Agreement” (the “Lease”) in which the Town of Brookline would use the Property as a temporary elementary school.
The Lease had a three-year term with a payment of $4,750,000. The Lease required Mr. Faisal to make certain improvements to the Property. As a result, Mr. Faisal had maintenance crews, during the Policy period, remove items (beds, curtains, rugs, rods, railings, etc.) from the upper floors of the Property, which were left by the previous nursing-home tenant.
Additionally, Mr. Faisal hired a general contractor to begin renovation construction work at the Property. This contractor took measurements, created design plans, and began to undertake construction work on the Property’s upper floors.
On December 4, 2015, the Town of Brookline issued a building permit to the general contractor to perform non-structural interior demolition work at the Property.
From December 2015 until February 2016, the general contractor, and his employees, completed interior work at the Property by removing certain walls and priming walls for future painting on various floors of the Property’s building.
During the same time, subcontractors pulled permits and provided electrical and plumbing work for the general contractor.
The fire loss and policy claim
On February 9, 2016, a fire broke out at the Property, causing extensive damage before being extinguished by the Brookline Fire Department.
Mr. Faisal promptly filed an insurance claim for the fire loss with United National under his Policy.
United National undertook an investigation and appraisal of the fire loss. Mr. Faisal hired a public adjuster who worked with him during United National’s claim investigation to provide loss documentation and meet with United National’s representatives at the Property to inspect the loss.
Besides the burn damage to some of the building’s rooms, the fire and the water on the fire destroyed the Property’s fire alarm system’s control panel and severely damaged its electrical systems and wiring. Also, the fire and the water needed to douse the fire damaged the building’s other informational systems.
Mr. Faisal claimed the fire loss totaled in excess of $750,000. However, on September 29, 2016, United National paid Mr. Faisal $351,426.99 as the insured loss.
The Superior Court suit and appeal
On February 9, 2018, Mr. Faisal brought an action against United National to collect the $417,000 he claimed was still owed under the Policy. Mr. Faisal’s suit alleged against United National:
A count for breach of contract for failing to fully pay the loss under the Policy,
A declaratory judgment count alleging the need for the Court to declare coverage because “A dispute may exist between Defendant United National Insurance Company and Plaintiff as to whether coverage exists under the insurance policy:” and,
A Chapter 93A count alleging unfair claim practices listed M.G.L. c. 176D, § (3)(9).
After Mr. Faisal served United National with his complaint, United National retained counsel to defend the company. However, after United National retained counsel, it took the position there had been no coverage for Mr. Faisal’s claim because Mr. Faisal had violated the vacancy condition of coverage.
United National responded to Mr. Faisal’s lawsuit with a counterclaim asserting two counts, seeking:
A Declaratory Judgment that the Policy did not provide coverage for Mr. Faisal’s claim because the property was not “vacant” as defined and required by the Policy; and
A court order that Mr. Faisal was obligated to reimburse United National for the $351,426.99 it paid him in error.
Based on the original claim investigation by United National and discovery in the Superior Court, United National moved for summary judgment. In its statement of undisputed facts, which the Court ruled Mr. Faisal had not denied, United National established that demolition, construction, and renovation activity were taking place throughout the building, including
The removal of interior walls
Electrical work.
Removal of fixtures – including plumbing fixtures.
Removal of filing cabinets and beds.
Meetings between Mr. Faisal’s general contractor and individuals from the Town of Brookline regarding the ongoing construction and,
Daily cleaning throughout each floor of the property.
Based on this undisputed evidence, the Superior Court ruled in favor of United National.
The Superior Court agreed with United National that there was no coverage, ordered the return of the $351,000, and granted a real estate attachment on Mr. Faisal’s property in favor of United National in the amount of $351,000.
Faisal’s appeal limited to one issue of “waiver” is rejected by the Appeals Court
Mr. Faisal filed a timely appeal to the Appeals Court. In the Appeals Court, he did not dispute that the construction activities conducted on the property violated the vacancy requirement of the contract. He focused his argument on urging the Appeals Court to reverse the order of the Superior Court that he had to reimburse United National the $351,426.99 it had paid him.
Mr. Faisal claimed that under the law relating to waiver, estoppel, and unjust enrichment, he should not have to reimburse United National because it had failed to preserve a “right of reimbursement” for the claim payment.
The Court summarily disposed of Mr. Faisal’s claims that estoppel and unjust enrichment principles applied to his case because he had not previously raised these issues, as required, in the Superior Court.
In the Superior Court, Mr. Faisal had only argued in opposition to United National’s motion for summary judgment that the language of the Policy was vague and ambiguous and that a material issue of fact existed as to whether the property was vacant.
The Court rejected Mr. Faisal’s new claims stating:
“Mr. Faisal had ample opportunity to address his claim that he should not be obligated to return the payment under theories of estoppel and unjust enrichment or failure to reserve rights. He failed to raise any of these claims before the motion judge, and we will not consider them for the first time on appeal.”
Mr. Faisal’s final argument was that United National had waived its right to recoup the payment made in error because of the elapsed time between the September 2016 payment and United National’s 2018 reimbursement claim after Mr. Faisal had filed suit.
In rejecting this argument, the Appeals Court agreed with the Superior Court judge that “the principles of waiver cannot operate to extend coverage for a claim that was unambiguously excluded in the policy.”
The Court noted that Massachusetts law of waiver in the insurance context holds that “[Waiver} does not extend to the broadening of the coverage, so as to make the policy cover a risk, not within its terms. That would require a new contract and cannot be accomplished by waiver.”
In conclusion, the Court referenced a case where an insured had to reimburse an insurer (See Agency Checklists’ article of May 29, 2012, “Restaurant’s Failure to Give Notice under Protective Safeguard Endorsement Bars Fire Claim; Court Orders Advance Payment Returned to Insurance Carrier”).
The Appeals Court’s final order
Declaratory judgment and order granting summary judgment affirmed
Mr. Faisal has twenty days to request further appellate review
Since the Massachusetts Appeals Court is an intermediate appellate court, the ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review within twenty days of the Appeals Court’s decision. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.
Under the Massachusetts Rules of Appellate Procedure, Mr. Faisal has until December 13, 2022, to apply for further appellate review.
Agency Checklists will keep you posted
Agency Checklists will monitor this case and follow up if an application for further appellate review is filed and allowed.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
Connect with me directly, by calling me at 617-598-3801.
