Right to Include Estimated Costs In Policy Coverage Limits Reinforced

In July 2017, Amanda Monette bought a home in Chicopee, Massachusetts

Two recent decisions by Massachusetts courts have reinforced insurers’ right to include estimated debris removal costs when calculating coverage limits for property losses under homeowners insurance policies.

The rulings by the Business Litigation Session of the Suffolk Superior Court arose from putative class actions filed against Merrimack Mutual Insurance Company and the Citation Insurance Company (“Citation”). In both cases, policyholders alleged that the insurers improperly inflated coverage limits and, in turn, premiums by secretly incorporating debris removal expenses in the limits for Coverage A, which covers direct physical damage to the insured dwelling.

Since the claims against Citation and Merrimack were exactly the same and had the same result, this article primarily focuses on the course of the Citation claim and lawsuit brought by one Amanda Monette (“Monette”).

The crux of the legal argument

The crux of Monette’s legal argument against Citation was that the property loss limits and the resulting premium must be based solely on the direct costs to repair or rebuild the dwelling without any padding for debris removal. Her complaint questioned Citation’s right to require policyholder to maintain specific limits, limits that she alleged were often greater than what it would cost the policyholder to build a similar structure (replacement cost). Monette’s lawsuit sought class-action status for all insureds of Citation who had allegedly been overcharged premium by requiring the inclusion of the cost of debris removal in the property loss limit under Coverage A of the standard homeowner policy.

The homeowners insurance policy form at issue contained language stating that the debris removal “expense is included in the limit of liability that applies to the damaged property.”

Monette focused on the meaning of the terms “this expense” and “included” in arguing that the provision was intended to provide coverage for actual debris removal costs incurred due to a specific loss and not as an estimated expense included in calculating the actual cash value or replacement cost limit for Coverage A.

On cross-motions for summary judgment, the Business Litigation Session Judge rejected Monette’s interpretations, finding that Citation’s policy clearly signaled to insureds that projected debris removal costs may increase the stated coverage limits.

The Court agreed with Citation that reading “this expense” to refer to actual rather than estimated costs ignored the policy’s context and that “included” did not merely mean Citation provided debris removal coverage at no extra charge.

The Court also declined to apply a statutory provision, G.L. c. 175 §95, that prohibited fire insurance policies from exceeding the fair value of insured property. Monette had argued that including debris removal costs violated this statute. However, the Court found this statute applied to fire policies and not to homeowners policies.

After the Court entered final judgment late last month on both purported class actions, Monette and the Merrimack plaintiffs filed notices of appeal. However, three days later, they withdrew their appeals, terminating their lawsuits.

The Business Litigation Session ruling removed whatever doubt, if any, there was about whether the standard homeowners policy language allows insurers to build in debris removal costs when calculating Coverage A limits.

A lawsuit seeking vindication of a retired risk manager’s claim of insurers massively overcharging for debris removal coverage

Homeowners insurance policies have contained provisions stating that debris removal costs are “included” in the limits for Coverage A, which covers damage to dwellings.

The standard homeowner policy under “Property Coverages.” Section 1 includes “Coverage A — Dwelling,” which provides, in relevant part, that the Policy covers “[t]he dwelling on the `residence premises’ shown in the Declarations, including structures attached to the dwelling.”

Another part of the property portion of the policy includes “Additional Coverages,” which, among other things, addresses debris removal, providing:

1. Debris Removal. We will pay your reasonable expense for the removal of:

Debris of covered property if a Peril Insured Against that applies to the damaged property causes the loss; or

Ash, dust or particles from a volcanic eruption that has caused direct loss to a building or property contained in a building.

This portion of the policy also advises:

This expense is included in the limit of liability that applies to the damaged property. If the amount to be paid for the actual damage to the property plus the debris removal expense is more than the limit of liability for the damaged property, an additional 5% of that limit is available for debris removal expense. (Emphasis in original).

For a number of years, Frank Lombard (“Lombard”), a retired insurance consultant, had argued that including the expense for debris removal as a component of Coverage A premium resulted in inflated coverage limits and excessive premiums paid by consumers.

Lombard contended that Citation and other insurers failed to properly disclose to consumers that projected debris removal costs are added to the direct dwelling repair and replacement expenses used to determine Coverage A limits. This alleged lack of transparency led to companies overcharging consumers for the risk assumed by tens, if not hundreds, of millions of dollars annually.

Beginning in at least 2016, Lombard discussed his theory of debris removal overcharges to attorneys who might see the potential for a large recovery for homeowner insureds in a class action.

Monette Obtains Quotes with Guidance from Lombard

In July 2017, Amanda Monette bought a home in Chicopee, Massachusetts. As part of purchasing the home, she looked to secure homeowners’ insurance for the property. To assist with obtaining quotes, she retained Lombard, who was a family friend, as an insurance consultant.

Lombard advised Monette to get quotes from Citation Insurance and other insurers. He told Monette that he would review any quotes she received to ensure appropriate coverage at a competitive price.

The Coverage A limit in Citation’s homeowners policy set the dollar limit to reconstruct an insured’s home in the event of a total loss. Citation used a report from CoreLogic, a recognized service for calculating construction costs, to determine the Coverage A limit for Monette’s original policy.

The CoreLogic report included a “Reconstruction Cost with Debris Removal” estimate of $287,594 based on two figures: a reconstruction-cost-without-debris-removal estimate of $274,707 and a debris-removal estimate of $12,887. This Reconstruction Cost with Debris Removal estimate formed the basis for the $288,000 Coverage A limit.

Upon reviewing Citation’s quote, Lombard told Monette that the $288,000 Coverage A limit was excessive for a home like hers. He asserted that the $12,887 debris removal estimate should not have been incorporated into the main Coverage A limit, as the correct limit was the $274,707 reconstruction cost amount.

Based upon Lombard’s calculation, Citation overcharged Monette $120 based on the correct “replacement cost new” valuations.

Although Lombard advised her that the Coverage A limit was inflated, Monette ultimately purchased the Citation policy as quoted and renewed it annually for several years. Each year, Monette paid between $120 and $150 in overcharges by Lombard’s calculations of the alleged overcharge for debris removal.

Monette engages counsel recommended by Lombard to initiate a class action against Citation

In 2019, Lombard urged Monette to pursue a claim against Citation based on his long-standing theories about insurers’ improper practices related to debris removal costs.

Monette agreed and retained counsel as recommended by Lombard. Her counsel served Citation with a Chapter 93A demand letter that Lombard helped craft. The letter echoed Lombard’s assertions that Citation unfairly used a Reconstruction Cost with Debris Removal estimate to inflate the Coverage A limit and failed to provide debris removal coverage at no extra cost.

Citation denied Monette’s claims in her 93A demand letter.

The allegations of the Citation lawsuit

In 2020, Monette filed a purported class action suit against Citation claiming that Citation caused the Coverage A limits and resulting premiums to “substantially exceed” the amounts truly needed to repair or replace their homes if damaged by covertly incorporating debris removal estimates into her Coverage A limits.

By virtue of the practice regarding debris removal costs, Monette’s attorney’s alleged Citation engaged in unfair and/or deceptive acts and practices in violation of M.G.L. c. 93A § 2, by:

 Failing and refusing to permit Monette to purchase Coverage A limits based on “replacement cost new;”

Requiring Monette to purchase Coverage A limits that were inconsistent with the policy terms, that Monette did not want, and that Monette was not required to purchase, in order to be eligible for unreduced replacement cost benefits;

Charging Monette extended replacement cost endorsement premiums that were excessive or worth nothing because the base coverage was predicated on “reconstruction cost with debris removal;”

Basing Monette’s Coverage A limits in part on projected costs for “debris removal,” thus increasing Monette’s premiums, even though the policy provided for up to a 5% increase in the Coverage A limits if necessary to cover debris removal costs.

Citations’ defense that Monette is seeking “something for nothing”

In response to Monette’s claims of inflated Coverage A limits and premiums, Citation asserted that its policies clearly permitted including debris removal costs when calculating the limits. It contended that rather than being concealed, this practice was expressly authorized by policy language, stating these expenses are “included” in the liability limits for damaged dwellings.

The insurers argued that factoring in projected debris removal expenses allows them to make adequate funds available in the event of a loss. If the limits only reflected estimated repair and construction costs, there may not be enough to cover critical debris clearance needed before rebuilding can start. By incorporating average projected debris removal costs upfront, Citation argued it ensured policyholders could fully repair or replace dwellings after a covered incident.

Citation noted in its court filings that it did not actually pocket the alleged “overcharges,” as suggested by Monette. Rather, it pointed out that premiums were reduced if an insured reduced their Coverage A limits, demonstrating that the limits directly impacted overall premium amounts. Thus, it contended that including debris removal estimates in the limits did not unfairly inflate profits but simply enabled the collection of appropriate premiums for the enhanced Coverage.

Finally, Citation asserted that Monette’s argument about debris removal not being includable in calculating the policy’s limit amounted to her asserting that she got “something for nothing.”

The Court rejects the argument debris removal is not includable in the Coverage A loss limit

After extensive discovery, both Monette and Citation moved for summary judgment, claiming their respective readings of the policy language entitled them to judgment in their favor on liability.

The Court immediately disagreed with Monette’s argument that the language of the Policy demonstrated that Citation could only use direct rebuilding costs in determining Coverage A limits.

The Court noted first that Monette claimed that estimated debris removal costs cannot be included in the calculation of Coverage A limits. Secondly, that Citation had acted unfairly and deceptively because it sought to secretly inflate Coverage A limits and charge higher premiums by incorporating estimated debris removal costs into its determination of those limits.

The Court found the Debris Removal provision, which is in the Policy’s “Additional Coverages” section, states that:

“[Citation] will pay your reasonable expense for the removal of … [d]ebris of covered property” and that “[t]his expense is included in the limit of liability that applies to the damaged property.”

To the Court, where there was a loss to the insured dwelling, which is covered by Coverage A, the “limit of liability that applies to the damaged property” referenced in this sentence would be the Coverage A limit of liability. Thus, in the Court’s opinion, the Policy expressly provided that debris removal expense for a dwelling loss is factored into the Coverage A limit. As a result, there was nothing misleading or deceptive about accounting for debris removal costs in establishing the Coverage A limit. Instead, per the Court’s reasoning, this ensured that adequate proceeds to cover both direct rebuilding costs and debris removal are available for the insured after a loss.

Based on this analysis, the Court entered summary judgment for Citation (and also for Merrimack in the tandem case brought by the same law firm with different plaintiffs but the same legal theories).

Appeal filed and then withdrawn

On September 25, 2023, the Court entered Final Judgments formally allowing Citation Insurance’s and Merrimack Mutual’s motions for Summary Judgment and denying the Plaintiffs’ cross-motions for Summary Judgment.

Three days later, on September 28, 2023, The Plaintiffs filed a notice withdrawing the appeals the had previously filed, ending their lawsuits.

Conclusion

The Business Litigation Session’s ruling removes any doubt about insurers’ ability to incorporate projected debris removal costs when calculating Coverage A limits for dwellings. This decision reinforces standard industry practice and interprets policy language as clearly signaling to insureds that debris removal estimates may increase stated coverage limits. While Monette and the other plaintiffs alleged a lack of transparency, the court found the policies expressly stated these expenses are “included.”

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.