Insurers do not have to cover costs incurred to prevent an imminent covered loss if the costs themselves are not covered by the policy, the Massachusetts Supreme Court ruled Friday, responding to a question from a federal appeals court, ruling in a Zurich Insurance Group entity’s favor .
In December 2018, an accidental spill at a processing plant operated by Marlborough, Mass.-based Ken’s Foods Inc. caused sewage to enter Georgia waterways, according to court papers in Ken’s Foods Inc. v. Steadfast Insurance Co .
The company immediately took action to prevent further spills and to clean up the pollution, which included fully cooperating with Georgia officials, according to court papers.
Its efforts, which generated more than $2 million in costs, prevented an interruption of operations at the processing plant.
Without these measures, the company would have incurred losses in excess of the $10 million covered by its comprehensive environmental policy with Zurich Insurance Group unit Steadfast.
Steadfast refused to pay for preventive measures on the basis that it only covered business losses resulting from a complete interruption of operations. Ken’s Foods sued Steadfast in US District Court in Boston, seeking nearly $3 million and treble damages.
The district court ruled in Steadfast’s favor, holding that there was no indication that Massachusetts common law entitles Ken’s Foods to recover costs in this situation.
In June, a three-judge panel of the First U.S. Circuit Court of Appeals in Boston ruled that the issue should be considered by the state’s highest court.
The Massachusetts Supreme Court unanimously agreed with the district court that Steadfast need not pay these costs.
“A pollution liability insurance policy is a contract between two private parties that should be interpreted according to its plain terms, reflecting the benefit of the purchase made by the parties, including their allocation of risk,” the ruling said.
“The current costs here are not covered by any of the relevant insurances in the insurance. They were not clean-up costs or costs necessary to prevent imminent danger to public health or welfare or the equipment and they were not the result of a business interruption, as operations were never interrupted.
“Nor were they necessary to reduce business interruption costs, as again there was no business interruption at all,” the ruling said.
“In sum, the plain language of the insurance policy governs, and accordingly there is no basis for imposing a community law obligation inconsistent with the coverages and exclusions contained in the policy.
Attorneys in the case had no comment or did not respond to a request for comment.