Berkley National Insurance Company v. Granite Telecommunications LLC et al
Judge Richard G. Stearns: ORDER entered granting in part and denying in part 81 Motion for Summary Judgment. (RGS, law2)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 21-10626-RGS
BERKLEY NATIONAL INSURANCE COMPANY
GRANITE TELECOMMUNICATIONS LLC and
ATLANTIC NEWPORT REALTY LLC
MEMORANDUM AND ORDER ON
BERKLEY’S MOTION FOR SUMMARY JUDGMENT
July 29, 2022
Berkley National Insurance Company filed this action against Granite
Telecommunications LLC and Atlantic Newport Realty LLC (together,
defendants) seeking reimbursement for costs it incurred in defending
defendants against, and ultimately settling, a personal injury lawsuit filed by
Stephen Papsis. Berkley now moves for summary judgment on all Counts of
its Complaint, alleging that it had no duty to defend or settle the Papsis suit
because it fell under the bacteria/fungi and pollution exclusions to
defendants’ insurance policy and thus that it is equitably entitled to
restitution. After careful review of the record and the parties’ briefs, the
court will allow Berkley’s motion in part.
Granite is a telecommunications company with offices at 100 Newport
Avenue in Quincy, Massachusetts. The offices are leased from Atlantic
Newport, the owner of the property. Am. Compl. ¶ 10. From June 30, 2016,
through June 30, 2017, Granite was the named insured in a Commercial
Lines Policy (the Policy) issued by Berkley.1 Id. ¶¶ 35, 40; Consolidated
Statement of Facts and Responses (CSFR) (Dkt # 97) at 7. The Policy stated
that Berkley would reimburse sums “that the insured becomes legally
obligated to pay as damages because of ‘bodily injury’ or ‘property damage,’”
and that it would “have the right and duty to defend the insured against any
‘suit’ seeking those damages.” Am. Compl. ¶ 36. The Policy’s coverage
included the cost of settling any such suits. Id.
The Policy, however, contained the proviso that Berkley would “have
no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily
injury’ or ‘property damage’ to which this insurance does not apply.” Id. ¶ 36.
Of immediate relevance, the Policy stated that Berkley was not obligated to
Atlantic Newport was an additional insured. Am. Compl. ¶¶ 35, 40 &
pay costs arising from bodily injury that “would not have occurred, in whole
or in part, but for the actual, alleged or threatened inhalation of, contact with,
exposure to, existence of, or presence of, any ‘fungi’ or bacteria on or within
a building or structure.” CSFR at 8. Further, the Policy explicitly excluded
coverage for costs associated with bodily damage “arising out of the actual,
alleged or threatened discharge, dispersal, seepage, migration, release or
escape of ‘pollutants.’” Id.
On November 10, 2016, Papsis was working as a chef in Granite’s
company café when sewage backed up from the building’s drains into his
workspace. Am. Compl. ¶ 11; CSFR at 2-3. On November 19, 2019, Papsis
filed suit against Granite and Atlantic Newport in the Middlesex Superior
Court, alleging that he had been “exposed to sewerage emanating from the
drains . . . causing serious and permanent injuries.” CSFR at 3. Papsis
reported that “the sewage from the floor drains rose to a level of three inches
in the kitchen and got on his shoes in the course of his efforts to deal with the
backup,” which exposed him to bacteria, “causing [his] foot to become
infected.” Id. at 4; see id. at 4-6 (recounting statements that Papsis had made
to his employer, Lessing’s Food Service Management Corporation).
Berkley undertook the defense of Granite and Atlantic Newport in the
Papsis lawsuit, while reserving the right to deny coverage under the Policy’s
fungi/bacteria and pollution exclusions. Id. at 9; see Dkt # 78 (providing
further background on the dispute between Berkley, Granite, and Atlantic
Newport). The parties agreed to mediate Papsis’s claims. CSFR at 9.
Prior to the mediation, Papsis’s counsel made a settlement demand of
$5.25 million, alleging that Papsis’s exposure to “raw sewage” proximately
caused “osteomyelitis and Charcot arthropathy of his right foot,” resulting in
seven separate surgeries “to address [the] infection.” Id. at 10. Papsis’s
counsel also appended a July 1, 2021, expert report from Dr. Abhay R. Patel,
an orthopedic surgeon, to the memorandum, in which Dr. Patel stated:
It is my opinion within a reasonable degree of medical certainty
that this exposure to sewage water directly led to Mr. Papsis
developing osteomyelitis along with a Charcot arthropathy of his
midfoot. Other than cellulitis, Mr. Papsis never had any
significant issues with his right foot previously before this
incident. It is also my opinion within a reasonable degree of
medical certainty that Mr. Papsis’s 11/30/2016 foot radiographs
showed such extensive bone and joint destruction that [it] is
extremely unlikely that Mr. Papsis developed those changes
before the 11/10/2016 sewerage exposure incident since it would
have been nearly impossible for him to stand on his foot for 1012 hours a day at this job while such a process was occurring.
There are several instances in the literature in which the diabetic
patients develop a relatively rapid Charcot arthropathy after an
inciting event, which to a reasonable degree of medical certainty,
is what occurred in this situation.
Id. at 10-11. On August 31, 2021, the mediation resulted in a confidential
settlement that resolved all claims that Papsis had brought against Granite
and Atlantic Newport. Id. at 17.
On April 15, 2021, Berkley filed this lawsuit in federal court seeking a
declaration that it had no duty to defend or indemnify defendants in the
Papsis lawsuit. See Compl. (Dkt # 1). Berkley also seeks reimbursement
from defendants of the costs of defending and settling the suit. On October
25, 2021, Papsis responded to an interrogatory from Berkley that asked
whether he believed that any of his injuries “were due to a cause other than
exposure to bacteria in sewage that backed up into 100 Newport Ave. EXT
on November 10, 2019” by stating, “No answer required.” CSFR at 17-18. In
response to a request for clarification, Papsis’s lawyer sent an email further
stating, “Mr. Papsis is not contending that his injuries were caused by
something other than bacteria in sewage, so ‘no answer required’ is the only
truthful response.” Id. at 18.
“Summary judgment is warranted if the record, construed in the light
most flattering to the nonmovant, ‘presents no genuine issue as to any
material fact and reflects the movant’s entitlement to judgment as a matter
of law.’” Lawless v. Steward Health Care Sys., LLC, 894 F.3d 9, 21 (1st Cir.
2018), quoting McKenney v. Mangino, 873 F.3d 75, 80 (1st Cir. 2017). The
moving party “bears the initial responsibility of informing the district court
of the basis for its motion and identifying those portions of [the record]
which it believes demonstrate the absence of a genuine issue of material
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
If this is
accomplished, the burden then “shifts to the nonmoving party to establish
the existence of an issue of fact that could affect the outcome of the litigation
and from which a reasonable [factfinder] could find for the nonmoving
party.” Rogers v. Fair, 902 F.2d 140, 143 (1st Cir. 1990).
Counts I & II – Declaratory Judgment
Duty to Indemnify
At the heart of the dispute over the applicability of the fungi/bacteria
and pollution exclusions to the Papsis settlement are the parties’ conflicting
interpretations of two cases – Travelers Insurance Co. v. Waltham
Industrial Laboratories Corp., 883 F.2d 1092 (1st Cir. 1989), and Rass Corp.
v. Travelers Cos., Inc., 90 Mass. App. Ct. 643 (2016) – that explain the steps
to be taken in determining whether an insurer has a duty to indemnify an
insured in a lawsuit pursuant to a relevant policy exclusion.
In Travelers, the insurer sought declaratory judgment that it had no
duty to defend or indemnify an insured who was sued by its landlord and by
the Massachusetts Water Resources Authority (MWRA) for damage caused
by the discharge of corrosive chemicals. See 883 F.2d at 1093. Both lawsuits
ultimately settled prior to trial, and the insurer argued that a pollution
exclusion to the insured’s policy applied to defending and settling the suits.
See id. The district court agreed and granted the insurer summary judgment.
On appeal, the First Circuit considered the duty to indemnify in a
settlement context, stating that “the duty to indemnify must be determined
[on] the basis of the settlement and, since this was a summary judgment
proceeding, the undisputed facts.” Id. at 1099. The First Circuit affirmed the
district court’s conclusion that the insurer had no duty to indemnify the
insured for the settlement with the MWRA, but remanded the case for trial
on the issue of whether the insurer had a duty to indemnify the insured for
the settlement with the landlord. Id. Specifically, the First Circuit concluded
that there was a dispute of material fact as to whether the contaminated
sludge discovered in the crawl space of the insured’s business fell within the
pollution exclusion of the insurance policy. Id. This was, the First Circuit
intimated, because the sludge was presumably “a factor in the settlement
sum paid to” the landlord. Id. at 1100.
In Rass, as in Travelers, the litigation “did not proceed to judgment,
but settled.” 90 Mass. App. Ct. at 650. Because the insurer’s “liability under
the policy and, in turn, its duty to indemnify [the insured] for covered losses
were not determined on the record in the underlying case,” the
Massachusetts Appeals Court stated that it was “left to determine an
insurer’s duty to indemnify by looking to the basis for the settlement; i.e.,
whether any portion of the settlement was made in compensation for the acts
alleged in the underlying complaint, and, if so, whether those acts are
covered under the policy language.” Id., citing Travelers, 883 F.2d at 1099.
The Appeals Court continued: “The relevant inquiry in determining an
insurer’s obligation in these circumstances is ‘how the parties to the
settlement viewed the relative merits of the plaintiff’s claims at the time of
the settlement.’” Id. at 651, quoting Windt, Insurance Claims & Disputes,
§ 6.31, at 310-311 (6th ed. 2013).
Defendants attempt to distinguish Rass from the present case, arguing
that Rass applies solely to the “irrelevant question of how to allocate between
insurer and insured a settlement that accounted for both covered and
noncovered claims.” Defs’. Opp’n (Dkt # 91) at 2. However, a closer look at
the language in the Windt treatise quoted extensively by the Appeals Court
in Rass clearly establishes that Rass’s holding is intended to extend to denial
of insurance coverage in all cases that end in settlement:
Following a settlement as to which the insurer denies coverage,
the existence of coverage should depend on what claims were
settled; that is, it should depend on why the money was paid. The
actual merit of each of the plaintiff’s claims against the insured is
not directly relevant. The only question should be how the
parties to the settlement viewed the relative merits of the
plaintiff’s claims at the time of the settlement . . . . Neither the
insurer nor the insured should be allowed to try the plaintiff’s
claim in the coverage suit.
Windt, supra at § 6.31, at 310-311.
To sum it up, an insurer’s duty to indemnify an insured for an
underlying case that has settled rather than going to trial must be ascertained
through the lens of the settlement and (at the summary judgment stage) any
Guided by this understanding, the court readily concludes that the
settlement of the Papsis lawsuit falls within the Policy’s bacteria exclusion
and thus is not covered. The undisputed facts show that Papsis remained
unwavering in his claim that his injuries were caused by his exposure to
bacteria in the toxic sewage that backed up into his workspace.
settlement reached at mediation was intended to compensate Papsis for the
infection to his foot, which was the only injury asserted in his lawsuit.
Recalling that the Policy’s bacteria exclusion precludes coverage for “bodily
injury” that “would not have occurred, in whole or in part, but for the actual,
alleged or threatened . . . exposure to . . . any ‘fungi’ or bacteria on or within
a building or structure,” there could be no plainer example of the type of case
to which the exclusion was meant to apply. CSFR at 8.
Moreover, although there is some evidence in the record suggesting
that defendants’ counsel believed that there were weaknesses in Papsis’s case
prior to the mediation, see id. at 24-26, they nonetheless cautioned the
defendants that they faced “‘significant exposure,’ based on the sympathetic
nature of Papsis’[s] severe injuries, with a possible jury verdict of $3-4
million and a settlement value of $1-1.75 million.” Id. at 25. Defendants took
the warning to heart, insisting that Berkley “make reasonable settlement
offers to Mr. Papsis at the upcoming mediation (and at all other times).” Id.
Duty to Defend
Similarly, Berkley had no duty to defend in the Papsis lawsuit. “In
determining the duty to defend, ‘the process is one of envisaging what kinds
of losses may be proved as lying within the range of the allegations of the
complaint, and then seeing whether any such loss fits the expectation of
protective insurance reasonably generated by the terms of the policy.’”
Travelers, 883 F.2d at 1100, quoting Sterilite Corp. v. Continental Cas. Co.,
17 Mass. App. Ct. 316, 318 (1983). Here, the only losses conceivably lying
within the scope of the allegations of Papsis’s Complaint are those that
resulted from his exposure to bacteria in the overflow of the raw sewage.
Consequently, the court will grant summary judgment for Berkley on Count
II of the Amended Complaint, which seeks a declaratory judgment that
Berkley did not owe defendants a duty to defend and settle the Papsis lawsuit
because of the application of the Policy’s bacteria exclusion. 2
Count III – Equitable Restitution
“Restitution is an equitable remedy by which a person who has been
unjustly enriched at the expense of another is required to repay the injured
party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997). “In order to prevail on
its claim for reimbursement of . . . insurance benefits it paid to [defendants]
under a reservation of rights, [Berkley] must establish not only that
[defendants] received a benefit, which is not disputed, but also that such a
benefit was unjust.” Met. Life Ins. Co. v. Cotter, 464 Mass. 623, 644 (2013);
see Global Investors Agent Corp. v. Nat’l Fire Ins. Co., 76 Mass. App. Ct. 812,
Unlike the bacteria exclusion, the court concludes that defendants
have established a genuine dispute of material fact as to whether the
pollution exclusion applies to the Papsis lawsuit. Specifically, the summary
judgment record, when construed in the light most favorable to defendants,
demonstrates that there is some ambiguity as to whether the sewage was a
“pollutant” under the terms of the Policy. See, e.g., CSFR at 19-23; Defs.’
Opp’n at 15-18. Thus, the court will deny summary judgment on Count I of
the Amended Complaint, which seeks a declaration that Berkley did not owe
defendants a duty to defend and settle the Papsis lawsuit because of the
Policy’s pollution exclusion. However, because – as discussed above – the
Papsis lawsuit plainly falls under the bacteria exclusion of the Policy, the
court need not resolve the applicability of the pollution exclusion to grant
Berkley’s requested relief.
826 (2010) (whether a benefit is unjust “turns on the reasonable
expectations of the parties”).
As the court discussed in greater detail in its memorandum and order
denying defendants’ motion for judgment on the pleadings, see Dkt # 78, the
parties should reasonably have expected that Berkley would seek
reimbursement from defendants pursuant to its explicit reservation of rights.
Unlike in cases such as Cotter, 464 Mass. at 644, or Medical Malpractice
Joint Underwriting Association of Massachusetts v. Goldberg, 425 Mass.
46, 58-59 (1997), where insurers defended and indemnified insureds under
a nonbinding, unilateral reservation of rights, Berkley was effectively forced
by defendants to pay for the cost of defending and settling the Papsis lawsuit
because defendants threatened to sue Berkley if it did not do so. As the court
pointed out, “defendants ‘whipsawed’ Berkley into exercising its only feasible
option: paying the full settlement amount and maintaining its unilateral
reservation of its right to seek reimbursement.” Mem. and Order on Defs.’
Mot. for J. on the Pleadings (Dkt # 78) at 7. “It would be fundamentally
unfair to strip an insurer facing such a predicament of any legal recourse,”
and it would be fundamentally unjust for defendants to retain the benefit of
Berkley’s coverage of the Papsis lawsuit given that Berkley was under no
obligation to defend or indemnify defendants, even though it was forced by
defendants to do both. 3 Id. at 8. Consequently, the court will allow summary
judgment in Berkley’s favor on Count III of its Amended Complaint. 4
For the foregoing reasons, Berkley’s motion for summary judgment is
ALLOWED as to Counts II and III and DENIED as to Counts I, IV, and V.
Pursuant to Count II of the Complaint, the court declares that Berkley does
not owe coverage for the Papsis claims by reason of the fungi or bacteria
exclusion in the Policy. Further, the court concludes that Berkley is entitled
to be reimbursed by defendants for the legal fees and costs that it has
The Massachusetts Supreme Judicial Court has not yet squarely
addressed “whether an insurer may seek reimbursement for the costs of a
defense undertaken pursuant to a unilateral reservation of rights.” Cotter,
464 Mass. at 641 n.1. However, given that defendants’ unfair behavior in
forcing Berkley to defend the Papsis lawsuit bears a flavor of extortion, the
court concludes that allowing defendants to retain the benefit of Berkley’s
defense coverage would be manifestly unjust. See Holyoke Mut. Ins. Co. v.
Vibram USA, Inc., 2o17 WL 1336600, at *8 (Mass. Super. Ct. Mar. 21, 2017)
(“In order to prove that it is unjust for an insured to retain defense costs
advanced in respect of a third-party claim under a reservation of rights, an
insurer must do more than prove that a court ultimately held that the claims
were uncovered. . . . If a policy holder engaged in misrepresentations or other
wrongful conduct . . . , retention of defense costs might well be ‘unjust.’”).
As Counts IV and V of the Amended Complaint turn on conditions
precedent that have not yet occurred (namely, court rulings that there is
coverage under Hanover Insurance policies for which Granite is an
additional insured and that Lessing’s has a duty to reimburse Granite), they
are not yet ripe for disposition. Therefore, the court will deny summary
judgment on these Counts.
incurred in defending the Papsis lawsuit, as well as the cost of settling the
Papsis lawsuit on defendants’ behalf.
/s/ Richard G. Stearns
UNITED STATES DISTRICT JUDGE
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