Mass. Appeals Court Reaffirms Rigid No-Prejudice Notice Rule for Claims-Made Policies

A recent appeals court case reaffirmed that under Massachusetts law, claims-made and reported policies do not require that late notice of a claim prejudice an insurer. The statutory rule for occurrence policies is that insurers cannot deny coverage for late notice unless they establish prejudice.

In the case of Meadows Construction Co. LLC v. Westchester Fire Insurance Co., the Appeals Court was asked to rule that the addition of the language, “as soon as practicable”, allowing an insured to notify the insurer about facts and circumstances that might reasonably develop into a future reportable claim, allowed for late notice. The case also put before the Court the question of whether the statutory rule applicable to occurrence policies that required prejudice to the insurer for late notice applied to claims-made policies with the “as soon as practicable” wording.

This insurance coverage action arises from Westchester Fire Insurance Co.’s (“Westchester”) denial of coverage for an underlying “wage and hour” class-action lawsuit against Meadows Construction Co. LLC (Meadows) filed in Middlesex County on July 1, 2016, and served on Meadows on July 19, 2016.

The facts concerning Meadows’ failure to report

In 2015, Meadows was a construction company that had public jobs that were subject to the Massachusetts prevailing wage law. Under that law, Meadows had to pay its workers, whether unionized or not, the prevailing wage schedule set by the state.

Westchester issued Meadows a package policy for the period September 12, 2014-September 12, 2015, that covered Meadows for, among other coverages, Employment Practices Claims arising out of Meadows’ Employment Practice Wrongful Acts on a claims-made and reported basis.

In July 2015, two of Meadows employees, Juliano Ribeiro and Renato Peregrino, made written claims against Meadows with the assistance of the Brazilian Immigrants Center a community-based organization working to assist immigrant workers. The two workers obtained written settlements signed by a Meadows supervisor, Victor Andrade. The settlements stated they resolved claims by Ribeiro and Peregrino for “nonpayment for services provided.”

On August 13, 2015, Meadows’s attorney, Stephen Kolberg, sent a letter to Danielle Villela of the Brazilian Immigrants Center pertaining to the two workers disavowing the written settlement agreements that Mr. Andrade had signed. Attorney Kolberg asserted that Mr. Andrade did not have authority from Meadows to make any such settlement agreements. Attorney Kolberg stated that he was willing to review any documents Ms. Villela might have, and he advised that all further communications about the matter should be directed to him.

On August 26, 2015, Ms. Villela sent an email to Attorney Kolberg in which she stated:

According to workers, Meadows Construction usually gave employees’ check (sic) to Victor Andrade. Mr. Andrade retained those checks, probably deposited it in some account and gave less money to workers. You can see in attachment one of those checks that employee got from Mr. Andrade, but most of the money was paid in cash.

First, we would like to request from Meadow Construction all the payroll records that were paid to Mr. Ribeiro and Mr. Peregrino during this last three years. So having all those (sic) information we can recalculate the exactly amount owed to employees.

Second, we would like to request a meeting between the Meadows Construction, Mr. Andrade, Workers and the Brazilian Workers Center that we can clarify all the issues in this case.

If you have any questions, please do not hesitate to contact us at the Brazilian Worker Center. Thank you for your prompt attention to this matter.

The Policy expired on September 12, 2015. Meadows did not renew it. The sixty-day additional reporting period expired on November 12, 2015

On December 4, 2015, the Brazilian Worker Center (BWC), another community-based organization working to assist immigrant workers around issues of education & training, and workplace rights, wrote to Meadows stating:

As you know, a group of workers came to BWC asking for support to resolve what it (sic) is believed to be a workers’ rights violation, as it (sic) is explained below.

It is our understanding that workers who are hired to work on public projects for your company did not receive the prevailing wage mandated by the labor law, which can be as much as $63 per hour. When we raised this issue with foremen of your company, they admitted the problem and offered to make the payments in the name of the company.

Based on our conversation with workers, it is our understanding that Meadows’s supervisors would somehow cash and/or deposit workers’ .pay-checks, which were made out for the full amount owed to workers who were listed on the certified payroll records, and then the supervisors would pay the workers (usually in cash, but also either through personal checks or checks form shell corporations) far less than they were owed under the Prevailing Wage and Overtime Laws.

We have contacted attorneys at the Justice at Work (A Legal Service Organization) that agreed to provide legal assistance to the workers on this issue, and the state and federal authorities have also been contacted.

If you would like to attempt to resolve this matter before further legal action is taken, the workers are open to having a meeting with you where you can provide the necessary information/documentation regarding the amounts that the workers should have been paid and to hopefully enter into an agreement to settle this case.

On December 8, 2015, Meadows’ attorney responded, claiming Meadows was not aware of any claims other than the original two with Messrs. Ribeiro and Peregrino. Meadows contested their claims and asked for documents to review, including the names of the workers making the claims, the amounts claimed, and the name of the foreman who supposedly was paying workers in cash and not by checks.

On July 1, 2016, Juliano Ribeiro and Antonio da Silva filed a class-action lawsuit on behalf of themselves and other similarly situated Meadows employees. They served Meadows on July 19, 2016. The class-action advanced wage act claims for failing to pay the prevailing wage and failing to pay overtime. The class was defined as all those who worked on Meadows public works projects during the relevant time period who were not paid the prevailing wage and time and a half for hours worked in excess of 40 per week.

Meadows notified Westchester of the lawsuit on August 2, 2016, requesting defense and indemnity.

On September 2, 2016, Westchester disclaimed any duty to defend or indemnify Meadows for any claims made in the Ribeiro and da Silva class action suit on the ground that Meadows had failed to report any such claim during the policy period, a condition precedent to coverage.

The policy provisions of Meadows’ policy Westchester relied upon to deny coverage

The policy issued by Westchester had a coverage period from September 12, 2014, to September 12, 2015, and covered Meadows, among other coverages, for Employment Practices Claims arising out of Meadows’ Employment Practice Wrongful Acts.

Under the policy, an Employment Practices Claim included:

“a written demand against an Insured for damages or other relief,” and“a civil, judicial, administrative, regulatory or arbitration proceeding against an Insured seeking damages or other relief, commenced by the service of a complaint or similar pleading ….”

The Employment Practices Coverage of Westchester’s policy indemnified Meadows for a covered Loss it might be legally obligated to pay by reason of an Employment Practices Claim subject to claims made and reported conditions. These conditions were:

The Employment Practices Claim had to be first made against Meadows during the Policy Period; and,Meadows had to report the Claim made to Westchester pursuant to subsection E.l. of the policy for an Employment Practices Wrongful Act taking place prior to the end of the Policy Period.

The reporting conditions of Section E.1 of the Employment Practices Coverage Section stated:

The Insureds shall, as a condition precedent to their rights under this Coverage Section only, give to the Insurer written notice of any Claim made against the. Insureds as soon as practicable after the company’s… chief executive officer or chief financial officer (or equivalent positions) first becomes aware of such Claim, but in no event later than:

(a) sixty (60) days after such individual first becomes aware of such Claim; or

(b) the expiration of the Policy Period or Extended Period, if purchased, whichever is later.

However, the Employment Practices Coverage Section also had as a subsection, Section E.2 that states:

If, during the Policy Period or the Discovery Period, any of the Insureds first become aware of facts or circumstances which may reasonably give rise to a future Claim under this Policy, and if the Insureds, during the Policy Period or the Discovery Period, if purchased, give written notice to Insurer as soon as practicable of:

of the Wrongful Act allegations anticipated.
the identity of the potential claimants.
the circumstances by which the Insureds first became aware of the Wrongful Act.
the identity of the Insureds allegedly involved.
the consequences which have resulted or may result; and
the nature of the potential monetary damages and non-monetary relief.

then any Claim made subsequently arising out of such Wrongful Act shall be deemed for purposes of this Coverage Section to have been made at the time such written notice was received by the Insurer….

Meadows did not dispute that Section E.1’s terms barred any coverage. Meadows had never given Westchester any written notice, as a condition precedent to coverage, of a claim made against it before the “expiration of Policy Period” concerning Messrs. Ribeiro and da Silva wage dispute.

Instead, Meadows looked to Section E.2’s terms concerning notice “as soon as practicable” to the Insurer for facts and circumstances that might reasonably give rise to a future claim. It argued that this “as soon as practicable” language did not impose a condition precedent of notice within a specific time and that under M.G.L. c. 175, § 112 Westchester could not deny coverage unless it suffered provable prejudice because of Meadows’ late notice.

Meadows’ Superior Court suit against Westchester

Based on its reading of the policy’s Section E.2 and its view of the effect of M.G.L. c. 175, § 112, Meadows filed a four-count complaint against Westchester alleging:

A declaratory judgment claim seeking a declaration of the rights and obligations of the parties regarding the policy and the Class Action claims.A claim of indemnification from Westchester for the class action claims and resulting legal fees.A claim for contribution (subsequently dismissed by agreement).A claim treble damages and legal fees against Westchester for allegedly violating G. L. c. 93A and c. 176D in failing to investigate the Class Action claims and denying defense and coverage to Meadows.

The Superior Court, on cross-motions for summary judgment, denied Meadows claims and granted summary judgment to Westchester based upon Meadows, failing as a condition precedent of policy coverage, to report any Employment Practices Claim made during the policy period to Westchester before the expiration date of the policy or the within sixty days of the policy’s expiration as allowed under Section E.1.

Meadows filed an appeal of the Superior Court’s decision to the Appeals Court, hoping for a better reception to its arguments from the higher court.

Meadows’ argument a “prejudice standard” for a claims-made policy to the Appeals Court

Before the Appeals Court, Meadows argued that it should have coverage because it had furnished notice “as soon as practicable” under Section E.2 of the policy. This provision, according to Meadows, did not require notice during the policy period as a condition precedent to coverage.

Meadows argued that it first became aware of facts or circumstances which could reasonably have given rise to a future claim covered under the policy in July 2015, when Juliano Ribeiro and Renato Peregrino alleged “nonpayment for services provided.” However, these allegations, Meadows claimed, were “bare-bones at best” because the documents did not allege wage/hour violations, nor did they hint at the prospect of litigation, individually or as a class action.

Meadows asserted that it had written twice requesting supporting facts and documents for the supposed claims, once on August 13, 2015, during the coverage period, and again on December 8, 2015, without any response.

Thus, Meadows argued, its actions comported with Section E.2. of the notice section of the policy because, while it did not give written notice to Westchester until Messrs. Ribeiro and Peregrino filed their lawsuit, that was “as soon as practicable” under the circumstances. Until it received the lawsuit, Meadows claimed that it did not have the information needed to give Westchester, as required by Section E.2, a description of the allegations, the identity of the claimants, the circumstances, the identity of the insureds involved, the consequences and the potential monetary damages. Only after its employees filed their suit did Meadows have the requisite information to provide to Westchester. Only after the suit, according to Meadows, did the allegations that were “cursory statements of two disgruntled employees during the coverage period” become fleshed out.

Meadows requested the Court to rule that it “acted reasonably under the circumstances and should not be faulted where there was insufficient information to report the matter earlier.”

The second prong of Meadows’ argument claimed that its late notice made “as soon as practicable” would not bar coverage unless Westchester could establish prejudice arising out of the receipt of the late notice. Meadows relied on M.G.L. c. 175, Sec. 112, which states, in part:

[a]n insurance company shall not deny insurance coverage to an insured because of failure of an insured to seasonably notify an insurance company of an occurrence, incident, claim or of a suit founded upon an occurrence, incident or claim, which may give rise to liability insured against unless the insurance company has been prejudiced thereby.”

Meadows quoted a precedent from the Supreme Judicial Court construing § 112, that contrasted claims-made policies with occurrence policies stating “[t]he purposes of the two types of reporting requirements differ sharply. The purpose of a notice requirement, “as soon as practicable,” is to permit an insurer to make an investigation of the facts and occurrence relating to liability.”

Based on this statement by the Supreme Judicial Court, Meadows argued Westchester’s choice of the “as soon as practicable” language of Section E.2 removed that Section from applying as a claims-made condition because the statute, M.G.L. c. 175, § 112, controlled.

The Appeals Court summarily reject Meadows’ arguments

The Appeals Court, noting the issue under appeal was whether summary judgment was properly entered in the insured’s favor, first stated the general principles of insurance policy construction that it would apply.  These were:

The interpretation of an insurance policy is a question of law, which we review de novo.
Interpretation of an insurance policy is no different from interpretation of any other contract.
Where there is no ambiguity, “we must construe the words of the policy in their usual and ordinary sense.
When the language of a policy is ambiguous, “we interpret it in the way most favorable to the insured.
However, an ambiguity is not created simply because a controversy exists between parties, each favoring an interpretation contrary to the other.
A term is ambiguous only if it is susceptible of more than one meaning, and reasonably intelligent persons would differ as to which meaning is the proper one.

Then “With these legal principles in mind,” the Court went into a short summary of the facts and law.

The Court started with the fact that Westchester had issued Meadows a claims-made policy for the period September 12, 2014, to September 12, 2015, which Meadows had not renewed. Under Massachusetts law, a claims made and reported” policy is legally different than an “occurrence” policy. The Court noted that a “claims made and reported” policy covers claims against an insured that are made during the policy period and reported within a specified period, whereas an “occurrence” policy covers insured events that occur during the policy period, regardless of when they are reported to the insurer.

The Court pointed out that, in addition to the policy provisions, the declarations page of the policy had in boldface all-capital letters a warning to Meadows that the policy coverage sections “cover only claims first made against the insured during the policy period . . . and reported to the insurer pursuant to the terms of the relevant coverage section.”

The Court acknowledged that Meadows had conceded that its notice the wage and hour class action complaint had not been submitted for defense and indemnity during the policy period, or within sixty days of the policy period’s expiration such that Section E.1’s conditions were not satisfied.

The Court, however, found no merit in Meadows’ argument that it was entitled to an extended notice period based on the provisions of Section E.2. This Section, as Meadows argued, allowed Meadows to give written notice to Westchester of “facts or circumstances which may reasonably give rise to a future Claim covered under this Policy” and thereby maintain coverage if the facts and circumstances engendered a future claim.

As the Court put Meadows’ argument, “In essence, the insured’s argument is that, because it did not become aware of facts or circumstances which could reasonably give rise to the claims made in the wage and hour class action complaint until it was served with the complaint, its notice to the insurer shortly thereafter was timely.”

The Court noted that the parties had vigorously briefed the issue of whether the communications that took place during the policy period involving Messrs. Ribeiro and Peregrino were sufficient to make the insured reasonably aware of a potential future claim. However, the judges found the issue of whether these circumstances were enough to trigger Meadows’ obligation under Section E.2 was irrelevant.

The Court rejected Meadows’ argument on Section E.2 providing coverage because it was undisputed that Meadows never gave written notice to Westchester of any fact or circumstances of a future claim during the policy period or otherwise. The only notice to Westchester from Meadows involved notice of an actual claim and not a potential claim, which notice of the claim came long after the policy had expired. Thus, as the Court stated, “the insured can find no safe harbor in section E.2.”

On Meadows’ final argument that M.G.L. c. 175, § 112 applied to claims-made policies, the Court simply stated that Meadows had misread the case it cited in support of this proposition. The Supreme Judicial Court has specifically rejected the argument, ruling in the case cited by Meadows that:

“A requirement that an insurer on a claims-made policy must show that it was prejudiced by its insured’s failure to report a claim within the policy period, or a stated period thereafter would defeat the fundamental concept on which claims-made policies are premised.”

The Appeals Court’s final conclusion

“Where coverage was properly disclaimed, the insurer had no duty to defend or indemnify, nor did it violate chapters 93A or 176D.

Judgment affirmed.” (Emphasis in original).

Twenty days to apply for further appellate review to the Supreme Judicial Court

            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. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.

Under the Massachusetts Rules of Appellate Procedure, Medows will have until Monday, February 7, 2022, to apply for further appellate review.

Based upon the settled law in the area of claims-made and reported insurance policy decisions, the likelihood of a successful petition to the Supreme Judicial Court seems unlikely, at best.

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.

To learn more about ForbesGallagher, visit our website. Or, to contact me directly, please call me at 617-598-3801 or send an email using the button below.