Interstate Gourmet Coffee Roasters, Inc. v. The Travelers Indemnity Company

Filing 34

Judge Richard G. Stearns: ORDER enteredgranting in part and denying in part 19 Traveler's/Phoenix's Motion for Summary Judgment; denying 28 Interstate's Motion for Summary Judgment (Zierk, Marsha)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 17-10959-RGS
INTERSTATE GOURMET COFFEE ROASTERS, INC.
v.
THE TRAVELERS INDEMNITY COMPANY
MEMORANDUM AND ORDER
ON CROSS MOTIONS FOR SUMMARY JUDGMENT
August 6, 2018
STEARNS, D.J.
Interstate Gourmet Coffee Roasters, Inc. (Interstate), a Massachusetts
coffee production company, filed an insurance claim with The Travelers
Indemnity Company, also known as The Phoenix Insurance Company
(Phoenix), after a construction accident knocked Interstate off the electrical
grid for thirteen days, effectively bringing its business to a halt. After
Phoenix paid out on the claim, Interstate objected to its refusal to pay
Interstate’s employees the wages and benefits they lost during the stoppage,
and to reimburse salaried employees for the vacation days they were forced
to take while waiting for the business to reopen. Phoenix offered Interstate
an additional $8,000 as a peace offering. The token was refused, and
Interstate sued in the Massachusetts Superior Court, claiming breach of

contract, breach of the implied covenant of good faith and fair dealing, and a
violation of the Massachusetts Fair Business Practices Act, Mass. Gen. Laws,
ch. 93A. Phoenix removed the case to federal district court. Before the court
are the parties’ cross-motions for summary judgment. The court heard oral
argument on July 25, 2018.
BACKGROUND
On November 6, 2014, Phoenix issued Interstate Commercial
Insurance Policy 630-8E877328 (the Policy), effective November 1, 2014
through November 1, 2015.1 Under the Deluxe Business Income (and Extra
Expense) Coverage Form, the Policy provided, in relevant part:
We will pay for: . . . the actual Extra Expense you incur during
the “period of restoration” caused by direct physical loss of or
damage to property at premises which are described in the
Declarations and for which a Business Income and Extra
Expense Limit of Insurance is shown in the Declarations. The
loss or damage must be caused by or resulting from a Covered
Cause of Loss. . . .
2. Extra Expense
Extra Expense means reasonable and necessary expenses
described in a., b., and c. below that you incur during the “period
of restoration” and that you would not have incurred if there had
been no direct physical loss of or damage to property caused by
or resulting from a Covered Cause of Loss.

Def.’s Concise Statement of Material Facts (Def.’s SOF), Dkt. #21, ¶¶
1-2; Def.’s Mem. in Support of its Motion for Summary Judgment (Def.’s
Mem.), Dkt. #20, Ex. 2 at 13.
1

2

a. Expenses to avoid or minimize the suspension of
business and to continue “operations” at: (1) the
described premises . . . .
b. Expenses to minimize the “suspension” of business if
you cannot continue “operations;” or
c. Expenses to repair or replace the property, but only to
the extent the amount of loss that otherwise would have
been payable under this Coverage Form is reduced. 2
On July 9, 2015, a contractor excavated a trench next to Interstate’s
place of business. The open ground adjacent to the trench became
compromised when it rained that night. Compl. ¶¶ 8-9. Water infiltrated
Interstate’s electrical system, knocking out all power. The “suspension
period” (in the terminology of the Policy) lasted thirteen days. Id. ¶¶ 10-11;
Def.’s SOF ¶ 1; Def.’s Mem., Ex. A at 51. During the interruption, several
Interstate employees – salaried and hourly – “redirected their efforts” to
restore regular business operations. Def.’s Mem at 2. The hourly employees
were paid at their customary rate, including overtime pay. Pl.’s Opp’n to
Def.’s Motion for Summary Judgment (Pl.’s Opp’n), Dkt. #28, at 4. Salaried
employees who gave up weekends to take part in the effort were given “time
back” in the form of additional vacation time. Id. at 9. Some thirty Interstate
employees remained idled and either used their accrued leave time or went
unpaid. Id. at 8.

2

Def.’s Mem. at 7 (emphasis in original).
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On July 13, 2015, Interstate submitted a notice of loss to Phoenix.
Def.’s SOF ¶ 3. Two days later, on July 15, 2015, George Dennerlein, a
Phoenix claim representative, met with Michael Dovner, Interstate’s
President and CEO, to inspect the damage. Id. Dovner informed Dennerlein
that he would be withdrawing Interstate’s claim, because he “was planning
to submit a claim through the contractor’s liability carrier.” Id. After the
contractor’s carrier rejected the claim, Interstate resubmitted it to Phoenix
in January of 2016. The claim specified losses for building damage, damage
to personal property, and a $101,289.03 line item seeking reimbursement
for all employee compensation accrued during the suspension period,
whether paid out or not. Id. ¶ 4.
On March 29, 2016, Phoenix paid Interstate $80,853.75 in full
satisfaction of the claim, including “$1,714 for extra expenses related to
employee compensation.” Id. ¶ 7. These “extra expenses” included the wages
of hourly employees who worked overtime in restoring Interstate’s
operations.

The stipend for extra wages was calculated by Phoenix’s

accountant and expert witness, Tammy Novo. Id.; Pl.’s Opp’n at 6. Novo’s
Extra Expense Payroll Summary chart was duly presented to Interstate. Id.
at 16. Phoenix denied Interstate’s claims for hourly workers’ regularly
scheduled hours and for salaried employees’ pay and vacation time. Id. at 7.
4

On June 13, 2016, Interstate objected to the “extra expenses” sum
offered by Phoenix as compensation for extraordinary employee expenses.
Def.’s SOF ¶ 8.

On July 8, 2016, Phoenix asked Interstate for more

information about its employees’ duties during the suspension period.
Interstate responded on August 25, 2016. Id. After reviewing the additional
data, on October 12, 2016, Phoenix offered Interstate an additional $8,000.
Id. ¶ 9. Two months later, on December 26, 2016, Interstate rejected the
offer and demanded a payment of $70,293.20. Id. ¶ 10. It also “alleg[ed]
that Phoenix engaged in unfair and deceptive acts and practices” in the
handling of Interstate’s claim. Id.
Needless to say, neither side budged any farther, and on April 13, 2017,
Interstate began this lawsuit.
STANDARD OF REVIEW
Summary judgment is appropriate when “the movant shows that there
is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). “[T]he mere existence of
some alleged factual dispute between the parties will not defeat an otherwise
properly supported motion for summary judgment; the requirement is that
there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 247-248 (1986) (emphases in original). A material fact is one
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which has the “potential to affect the outcome of the suit under applicable
law.” Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir.
1993). In assessing the genuineness of a material dispute, the facts are to be
“viewed in the light most flattering to the party opposing the motion.” Nat’l
Amusements, Inc. v. Town of Dedham, 43 F.3d 731, 735 (1st Cir. 1995).
Contractual provisions in an insurance policy are construed by the trial judge
as “a matter of law.” Crestview Country Club, Inc. v. St. Paul Guardian Ins.
Co., 321 F. Supp. 2d 260, 262 (D. Mass. 2004).
DISCUSSION
The parties deploy arguments on each of the three causes of action set
out in the Complaint – breach of contract, breach of the implied covenant of
good faith and fair dealing, and unfair and deceptive claim settlement
practices. I will address each, although only the first really matters.
Breach of Contract
Interstate contends that by refusing to reimburse the regularly
scheduled wages of Interstate’s hourly employees accrued during the
suspension period, as well as the earnings and added vacation time for the
salaried employees, Phoenix breached the “Extra Expenses” provision of the
Policy. The employees’ duties, Interstate argues, were “outside the scope of
their normal jobs,” and as such, it is entitled to a full reimbursement. Pl.’s
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Opp’n at 9. Phoenix counters that because these costs would have been
incurred “if there had been no direct physical loss of or damage to property,”
Interstate is out of luck. Def.’s Mem. at 7. Under general principles of
contract law, “the terms of an insurance policy will be construed ‘according
to the fair meaning of the language used, as applied to the subject matter.’”
Mass. Insurers Insolvency Fund v. Premier Ins. Co., 449 Mass. 422, 426
(2007) (quoting Davis v. Allstate Ins. Co., 434 Mass. 174, 179 (2001)).
Abiding by this guidance, the court will attempt to discern “what an
objectively reasonable insured, reading the relevant policy language, would
expect to be covered.” Hazen Paper Co. v. U.S. Fidelity and Guar. Co., 407
Mass. 689, 700 (1990).
Interstate’s reading of the Policy runs flatly contrary to its plain
meaning. The Extra Expenses provision clearly describes “extra expenses”
as the “reasonable and necessary expenses . . . that you incur during the
‘period of restoration’ and that you would not have incurred if there had been
no direct physical loss of or damage to property.” Def.’s Mem. at 7. An
“objective, reasonable insured” – in this case, Interstate – would know that
had the business interruption not occurred, it would have been liable in the
ordinary course for the expenses and wages of its hourly workers and salaried
employees. Hazen Paper, 407 Mass. at 700. Nothing in the Policy suggests
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an exception from its words of exclusion implying coverage for employees
whose normal schedules are disrupted or inconvenienced because of the
occurrence. The only exception is for those hourly workers who expend time
over and above what they are scheduled to perform in the tasks of minimizing
and repairing damage and restoring regular operations. 3
By its own admission, Interstate notes that many of its employees were
unable to work at all during the suspension period and went largely unpaid.
Far from incurring extra expenses, Interstate saved money on employee
compensation by not paying those hourly employees for whom there was no
work to do. Consequently, as a matter of law, Interstate’s hourly and salaried
employees’ regular wages do not constitute “extra expenses” according to the
Policy’s “fair meaning,” Davis, 434 Mass. at 179, and on this point there is
no genuine dispute.

While the parties and the court are unable to locate any
Massachusetts case directly on point, Phoenix cites several supportive cases
from other jurisdictions. See Imperial Trading Co. v. Travelers Prop. Cas.
Co. of Am., 2009 U.S. Dist. LEXIS 64010, at *22 (E.D. La. 2009) (denying
insurance payment for wages of salaried employees who assumed different
duties in the aftermath of Hurricane Katrina because plaintiffs “offered
nothing to demonstrate that their payroll costs are ‘extra’”); Fold-Pak Corp.
v. Liberty Mut. Fire Ins. Co., 784 F. Supp. 49, 55 (W.D.N.Y. 1992) (“Expenses
such as . . . salaries . . . are expenses that [the insured] would have incurred
even had there been no [incident].”).
3

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There is, however, a material dispute as to whether Interstate can
recover for the compensatory vacation time it offered to its salaried
employees who worked beyond their normally scheduled hours during the
suspension period. The Massachusetts Wage Act provides, in relevant part:
“Every person having employees in his service shall pay . . . wages earned to
him . . . . [These wages] may be paid weekly, bi-weekly, or semi-monthly to
a salaried employee . . . . The word ‘wages’ shall include any holiday or
vacation payments due an employee under an oral or written agreement.”
Mass. Gen. Laws ch. 149, § 148. Extra vacation time is considered part of an
employee’s “wages” under Massachusetts law, and is treated similarly to
overtime pay for hourly employees as an additional payroll expense falling
outside employees’ regular wages or salaries. Because Interstate would not
have made extra vacation time available to its salaried employees had the
accident not happened, and because it was offered “to avoid or minimize the
suspension of business,” the additional vacation time incurred by Interstate
as a matter of law is a compensable “extra expense” under the Policy. Def.’s
Mem. at 7.
Phoenix argues that by never seeking payment for the added costs of
compensatory vacation time, Interstate waived any coverage for the expense
to which it was entitled under the Policy. See Def.’s Opp’n to Pl.’s Cross9

Motion for Summary Judgment, Dkt. #32, at 5 (“Interstate cannot now
baldly assert that it is entitled to coverage for alleged expenses that were
neither claimed nor proven with any competent evidence.”). While Phoenix’s
irritation about the lack of clear notice is reasonably well taken, there is
evidence in the record, albeit slight, that suggests otherwise.

In a

“preliminary worksheet” sent to Novo for employment compensation,
Interstate included two separate line items for its salaried employees’ pay,
listed as “Sal” and “Sal+vac.” Skogstrum Aff., Dkt. #28-1, Exs. 4 and 6. In
every instance, the “Sal+vac” amount was larger (if often marginally so) than
the “Sal” amount, raising a fair inference that Interstate was attempting to
claim the monetary value of the extra vacation time it extended to its salaried
employees.
Here, as a matter of law, Phoenix breached its duty to its insured to
explore the issue further and make a fair offer of settlement. 4 Inherent in an
insurance contract is the insurer’s duty of good faith in its dealings with the
insured. Sarnafil, Inc. v. Peerless Ins. Co., 34 Mass. App. Ct. 248, 255-256
(1993), aff’d, 418 Mass. 295, 303-304 (1994) (an unjustified disclaimer of

Given Interstate’s feeble attempt to raise the issue with Phoenix in
making its claim, I find nothing that suggests bad faith on Phoenix’s part in
failing to divine the insured’s intent. All I find is a negligent, if forgivable,
failure on the part of Phoenix to step into the breach.
4

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coverage or refusal to defend prevents an insurer from holding the insured
to the strict terms of the contract and may permit recovery not only of
defense costs but also the excess costs of any reasonable settlement). “Even
excessive demands on the part of a claimant . . . do not relieve an insurer of
its statutory duty to extend a prompt and equitable offer of settlement once
liability and damages are reasonably clear.” Bobick v. United States Fid. &
Guar. Co., 439 Mass. 652, 661-662 (2003). It now falls to Phoenix to make
good on this aspect of the claim.
Breach of Implied Covenant of Good Faith and Fair Dealing
Interstate argues that Phoenix breached the covenant of good faith and
fair dealing implicit in the Policy contract because it “knowingly fail[ed] to
pay for the employees’ wages for services they provided to attend to and
handle the Loss.” Compl. ¶ 33. Massachusetts law implies a covenant of
good faith and fair dealing in every contract; both parties implicitly agree to
do nothing “that will have the effect of destroying or injuring the rights of the
other party to receive the fruits of the contract.” Uno Rests., Inc. v. Boston
Kenmore Realty Corp., 441 Mass. 376, 381 (2004) (quoting Anthony’s Pier
Four, Inc. v. HBC Assocs., 411 Mass. 451, 471 (1991)).

The covenant,

however, cannot “be invoked to create rights and duties not otherwise
provided for in the existing contractual relationship.” Uno, 441 Mass. at 385.
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Interstate provides no proof of bad faith, other than to state that
because Phoenix did not include the regular wages of Interstate’s employees
or the additional vacation time on its Payroll Summary, its analysis of
Interstate’s claim was “incomplete and inaccurate.” Pl.’s Opp’n at 16. This
is simply not true insofar as the wage claim is concerned, as earlier explained,
and Interstate cannot now invoke the covenant to create extended coverage
(business interruption insurance) that it could have purchased, but for
whatever reason did not.
Unfair and Deceptive Acts and Claim Settlement Practices
Massachusetts law forbids entities involved in trade or commerce from
utilizing “unfair methods of competition and unfair or deceptive acts or
practices.” Mass. Gen. Laws ch. 93A, § 2. An insurer can engage in unfair
claim settlement practices by:
(f) Failing to effectuate prompt, fair, and equitable settlements of
claims in which liability has become reasonably clear; [and/or]
(g) Compelling insureds to institute litigation to recover amounts
due under an insurance policy by offering substantially less than
the amounts ultimately recovered in actions brought by such
insureds.5
To make out an actionable Chapter 93A claim, a plaintiff must show that “the
challenged misconduct [rises] to the level of an ‘extreme or egregious’

5

Mass. Gen. Laws. ch. 176D, §§ 3(9)(f) and (g).
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business wrong, ‘commercial extortion,’ or similar level of ‘rascality’ that
raises ‘an eyebrow of someone inured to the rough and tumble of the world
of commerce.’” Peabody Essex Museum, Inc. v. U.S. Fire Ins. Co., 802 F.3d
39, 54 (1st Cir. 2015) (quoting Baker v. Goldman, Sachs & Co., 771 F.3d 37,
51 (1st Cir. 2014)). That two parties engaged in a “good faith dispute as to
whether money is owed, or performance of some kind is due, is not the stuff
of which a [Chapter] 93A claim is made.” Duclersaint v. Fed. Nat. Mortg.
Ass’n, 427 Mass. 809, 814 (1998). So it is here.
ORDER
For the foregoing reasons, Phoenix’s motion for summary judgment,
with the exception of Interstate’s vacation time breach of contract claim, is
ALLOWED. Phoenix will promptly make a fair offer of settlement of the
vacation-time issue and report to the court within thirty (30) days of the date
of this Order. If necessary, the court will provide the services of a court
mediator. Interstate’s cross-motion for summary judgment is DENIED.
SO ORDERED.
/s/ Richard G. Stearns________
United States District Judge

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