Continental’s Mold Exclusion Denial Leads to Bad Faith Lawsuit

Court Denies Insurer’s Motion to Dismiss Bad Faith & 93A Claim

In a recent decision, Judge F. Dennis Saylor IV of the United States District Court for the District of Massachusetts denied Continental Casualty’s (“Continental”) motion to dismiss counts alleging unfair claim practices and breach of a covenant of good faith and fair dealing in a coverage suit brought by Radius Marketing Group, Inc.(“Radius”).

Radius held an insurance policy with Continental covering its warehouse facility in Rockland, Massachusetts. On February 1, 2023, a septic line burst underneath the warehouse floor, causing raw sewage to flood the facility and damage Radius’ stored products.

After Radius reported the incident, Continental paid $1,282,736.57 for the loss but declined further payments. Continental invoked a $25,000 mold damages cap for inventory and products not initially discarded. Radius sued Continental, alleging violations of Massachusetts General Laws Chapter 93A (the state’s unfair and deceptive practices statute) and Chapter 176D (governing unfair claim settlement practices in insurance), as well as breach of contract and breach of the implied covenant of good faith and fair dealing.

Continental moved to dismiss Radius’s Chapter 93A and implied covenant claims, arguing that the coverage dispute was a good faith disagreement over policy interpretation and did not constitute an unfair claim practice. The insurer contended that Radius’s bad faith claims failed to state claims upon which a court could grant relief under the circumstances.

In denying the motion to dismiss, Judge Saylor ruled that the factual allegations in Radius’ complaint, if proven true, could potentially support claims of unfair claim practices and breach of the implied covenant. The Court emphasized that at this stage of the proceedings, it must accept the plaintiff’s well-pleaded facts as true and draw all reasonable inferences in the plaintiff’s favor.

The decision allows Radius to proceed with its claims, including the possibility of multiple damages under Chapter 93A if the Court found Continental committed unfair claim practices. The Court noted that further factual development is necessary to determine the merits of Radius’ allegations regarding Continental’s claim handling and seeking to limit recovery under the policy’s mold exclusion sublimit.

The Facts of the Case

Radius Marketing Group, Inc., a Massachusetts corporation supplying printed promotional and marketing products, leased space at a warehouse facility at 401 VFW Drive in Rockland, Massachusetts. Continental Casualty Company, an Illinois insurance corporation, provided property coverage for this facility from April 1, 2022, to April 1, 2023.

On February 1, 2023, a septic line burst underneath the warehouse’s concrete floor. Raw sewage and septic effluent flooded the facility, damaging Radius’ stored products. Radius reported the incident to its insurance agent the same day.

Continental first contacted Radius about the incident on February 7, 2023. On February 10, the insurer assigned an adjuster and requested initial documentation, which Radius provided. Continental also retained City Salvors as a consultant to assess the “contents portion of the claim.”

By February 14, 2023, Continental had hired Envirotech Laboratories, which confirmed the presence of raw sewage in the floodwater. Continental shared these results with Radius on February 24 and advised discarding products in direct contact with the water while retaining unaffected items. Radius complied with these instructions.

On February 27, 2023, Continental informed Radius it had retained JS Held, LLC (“Held”) to perform environmental testing and swab products not directly affected by the water. Held’s March 23 report confirmed sewage pathogens on some samples and recommended additional cleaning and removal of visibly damaged contents. However, neither Held nor Continental directed the removal of all remaining contents.

Concerned about potential airborne contaminants, Radius hired Envirotest Lab, Inc., for further testing. Envirotest’s report found elevated microbial volatile organic compounds throughout the warehouse and recommended immediate disposal of all materials due to the presence of sewage and mold.

In June 2023, Held returned to the warehouse and confirmed Envirotest’s findings but only recommended disposing of open boxes on the west side of the warehouse. The complaint alleges Held admitted to not inspecting sealed boxes during this second investigation.

Continental divided Radius’s claimed loss into four categories: (1) covering items immediately discarded, (2) items discarded per Held’s initial report, (3) items stored in trailers, and (4) additional costs, including business losses. As of November 2023, Continental had paid $1,282,736.57 to Radius but declined further payment, citing a $25,000 mold damages cap for inventory not initially discarded.

Radius alleges that two of its largest clients terminated contracts due to its inability to provide products following the incident. The company has demanded additional compensation from Continental for the later phases of the loss, which exceeds $750 thousand, which Continental has refused to pay.

The Continental Policy

Radius had a Businessowners Special Property Coverage Form (SB-146801-J) policy issued by Continental at the time of the loss.

The policy covered “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from a Covered Cause of Loss.” Covered Property included “Business Personal Property” located in or on the buildings at the described premises, including property the insured owned and used in its business.

The policy had an endorsement regarding “Fungus,” Wet Rot, Dry Rot and Bacteria Exclusion/Limited Coverage Endorsement (Form SB-146997-B).”

This endorsement stated:

“Coverage only applies when the ‘fungus,’ wet or dry rot or bacteria is the result of Covered Causes of Loss other than fire or lightning that occurring during the policy period and only if all reasonable means were used to save and preserve the property from further damage at the time of and after that occurrence.”

The endorsement further specified:

“The coverage described under paragraph D.2. of this Limited Coverage endorsement is limited to $25,000, unless a different limit is shown in the Declarations. Regardless of the number of claims, this limit is the most we will pay for the total of all loss or damage arising out of all occurrences of Covered Causes of Loss (other than fire or lightning) which take place in a 12-month period (starting with the beginning of the present annual policy period).”

The Lawsuit by Radius

On December 14, 2023, Radius Marketing Group filed a complaint against Continental Casualty Company in the Plymouth County Superior Court. The complaint stated four counts against Continental:

1. A request for declaratory judgment on Conintintal’s application of the mold exclusion (Count 1).

2. Violation of Massachusetts General Laws Chapter 176D and Chapter 93A (Count 2).

3. Breach of contract (Count 3); and

4. Breach of the implied covenant of good faith and fair dealing (Count 4).

Radius’s complaint alleged the sewage contamination, not mold, caused most of the damage and that Continental had wrongfully invoked this limitation to cap its liability for a significant portion of the claimed loss.

On January 12, 2024, Continental removed the action to the United States District Court for the District of Massachusetts. The removal was based on diversity of citizenship under 28 U.S.C § 1332(a) and (c), as Continental is an Illinois insurance corporation and Radius is a Massachusetts corporation.

Continental’s Motion to dismiss Counts 2 and 4 of Radius’ Complaint

Following the removal, Continental filed a motion to dismiss Counts 2 and 4 of Radius’s complaint for failure to state a claim upon which relief could be granted. Specifically, Continental sought dismissal of:

1. The alleged violations of Massachusetts General Laws Chapter 176D and Chapter 93A

2. The claim for breach of the implied covenant of good faith and fair dealing

Continental did not seek dismissal of the declaratory judgment request or the breach of contract claim.

The motion to dismiss set forth Continental’s argument that Counts 2 and 4 did not state legal grounds sufficient for any further legal proceedings to proceed.

Continental argued it had based its denial of coverage on “a plausible, reasoned legal position,” Therefore, even if the Court ultimately found Continental’s position to be mistaken, the law did not allow for recovery under c.93A and c. 176D.” The case law Continental cited to the Court specifically held that “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.”

The Legal Standard for A Motion to Dismiss

Ruling on Continetal’s motion to dismiss the legal standard, as the judge explained, is that the Court must assume the truth of all well-pleaded facts in the complaint and give the plaintiff the benefit of all reasonable inferences from those facts.

A complaint must only state plausible factual allegations that are enough to raise the right to relief above the speculative level, assuming all allegations in the complaint are true, even if the facts alleged are doubtful.

Judge Saylor emphasized that the plausibility standard is not equivalent to a probability requirement. Instead, it asks for more than a mere possibility that the defendant has acted unlawfully. The complaint must contain sufficient factual matter that, if accepted as true, could allow the Court to draw a reasonable inference that the defendant is liable for the alleged misconduct.

In ruling on Continental’s motion to dismiss, the only question for the judge was whether the complaint’s allegations state a cause of action upon which Radius could potentially recover, assuming the truth of Radius’s allegations.

This standard effectively means that dismissal is only appropriate if, taking all of Radius’s allegations as true, the complaint still fails to set forth factual allegations supporting each element necessary to sustain recovery under a valid legal theory. It sets a relatively low threshold for Radius to meet to proceed with its claims and have the opportunity to prove its case through discovery.

Analysis of the Chapter 93A Claim

Judge Saylor’s decision applied the motion to dismiss standard to Radius’s claim under Massachusetts General Laws Chapter 93A, which prohibits unfair or deceptive acts or practices in the conduct of any trade or commerce, and Chapter 176D, specifically addressing unfair claim settlement practices in the insurance industry.

The Court noted that while Chapter 176D did not create a private cause of action, violations of its provisions can be evidence of unfair practices under Chapter 93A.

The Court accepted, as Continental argued, that a good-faith denial of insurance coverage, where liability is not reasonably clear, cannot give rise to a violation of Chapters 93A and 176D as long as the carrier made the denial in good faith, based on a plausible interpretation of the insurance policy and the denial was not otherwise immoral, unethical, or oppressive (The 93A standard).

In this case, the Court found that Radius’s complaint alleged more than just a good-faith dispute over policy interpretation. Radius claimed that Continental acted unfairly or deceptively by failing to account for the fact that mold was present only due to the introduction of raw sewage and that Continental did not timely address or raise the issue of the mold exclusion during the handling of the loss.

The Court also considered Continental’s reliance on expert consultants in evaluating liability. While such reliance can be evidence of good faith, the complaint alleged that the initial report by Held missed clear evidence of sewage contamination. The Court noted that the reasonableness of Held’s findings is a question of fact that cannot be resolved at the motion to dismiss stage.

Furthermore, the Court highlighted the direct relationship between the presence of raw sewage and the growth of mold. This relationship raised questions about the fairness of invoking the policy’s mold exclusion in the aftermath of a sewage spill.

The Court also considered the alleged delays in assessing the contamination. The complaint suggested that Continental initially denied coverage for some of the warehouse contents and only invoked the mold exclusion once it became clear those contents were compensable.

In conclusion, Judge Saylor found that the complaint raised factual issues that involved more than a mere policy interpretation dispute.

The Court’s Analysis of the Implied Covenant Claim

Judge Saylor’s decision also addressed Continental’s motion to dismiss Radius’ Count for breach of the implied covenant of good faith and fair dealing. This covenant, under Massachusetts law, is implied in every insurance contract and requires that neither party do anything that will destroy or injure the other party’s right to receive the fruits of the insurance contract.

The Court noted that a party might breach this covenant without necessarily breaching any express term of the insurance contract. The essential inquiry was whether the challenged conduct conformed to the parties’ reasonable understanding of performance obligations, as reflected in the overall spirit of the bargain, rather than whether the defendant strictly adhered to the letter of the insurance contract.

Judge Saylor emphasized that to establish a breach of the implied covenant, a plaintiff must prove two elements:

1. An enforceable insurance contract existed between the parties.

2. The defendant did something that had the effect of destroying or injuring the right of the plaintiff to receive the fruits of the insurance contract.

The Court acknowledged that it was undisputed that an insurance policy, which is a contract, existed between Radius and Continental. This satisfied the first element.

Regarding the second element, the Court found that Radius’s complaint plausibly stated that Continental did something that had the effect of destroying or injuring Radius’s right to receive the fruits of the insurance contract. Specifically, Radius alleged that Continental invoked the mold exclusion to deny coverage for items contaminated by raw sewage.

While Continental argued that it relied on the findings of its expert, Held, in applying the policy’s mold limitation, the Court noted that at this stage of the proceedings, it had to accept Radius’s allegations as true. These allegations suggested that Continental’s denial of coverage may not have been made in good faith.

Judge Saylor pointed out that Chapter 93A claims and breach of implied covenant claims often survived or failed together. In this case, as with the Chapter 93A claim, the Court found that Radius’s allegations, if proven true, could support a claim for breach of the implied covenant of good faith and fair dealing.

The Court concluded that given the parties’ manner of performance, as alleged in the complaint, it appeared reasonable for Radius to have expected Continental to cover all products contaminated by sewage.

Radius’  allegation that this did not occur was sufficient to state a claim for breach of the implied covenant at this stage of the proceedings.

Court’s Decision and Summary of Reasons

Judge Saylor denied Continental’s motion to dismiss Radius’ count under Chapter 93A and Chapter 176D, as well as its count for breach of the implied covenant of good faith and fair dealing.

The Court reasoned that if proven true, Radius’ allegations could potentially support claims of unfair claim practices and breach of the implied covenant. Judge Saylor noted that the complaint raised factual issues that went beyond a mere policy interpretation dispute. These issues included:

1. The timing and manner of Continental’s invocation of the mold exclusion

2. The relationship between the sewage spill and the subsequent mold growth

3. The alleged delays in assessing contamination and adjusting the claim

4. The reasonableness of Continental’s reliance on its expert’s findings

In denying the motion to dismiss, the Court allowed Radius’s claims to proceed, allowing it to conduct discovery to prove its allegations of unfair claim practices and breach of the implied covenant of good faith and fair dealing.