$15 Million High-Value Homeowner Policy Loss Leads Court to Rule PURE’s Reference Provision Ambiguous

The Business Litigation Session of the Superior Court recently dealt with an insurance coverage dispute arising over the total fire loss of a 9,245 square foot home insured for over $5 million and its contents for $2.2 million in December 2020.

Privilege Underwriters Reciprocal Exchange (“PURE”) insured the destroyed home for its full reconstruction cost of the home and replacement cost of its contents.

After unsuccessful attempts to arrive at the reconstruction costs for the replacement of the damaged dwelling left the insureds and PURE $8 million apart, the homeowners filed for a declaratory judgment and money damages.

PURE responded to the insureds’ lawsuit with a motion to dismiss. PURE asserted that G.L. c. 175, § 99 barred the insureds’ lawsuit. This statute requires insureds to first proceed to reference before three referees for valuing a fire loss before filing any lawsuit against an insurer.

The Court found on PURE’s motion to dismiss that the reference language used by PURE in its policy’s mandatory Massachusetts endorsement did not comply with Massachusetts law.

The Court declined to dismiss the insureds’ lawsuit. Instead, the Court ordered the parties to a reference proceeding and allowed the insureds’ to proceed with their lawsuit. The Court adopted this unusual procedure because the insureds had only until December of 2022 to begin replacement construction within the two years allowed under the policy.

The policy language the Court found violated G.L. c. 175, § 99 appears on other insurers’ policy forms, and this Court and another court have ruled that the use of this form may amount to a waiver of policy reference by the insurers using the language in question.

The insured property was a 1905 hunting lodge built by hand with unique wood and stonework

Steven B. Deutsch and Joyce I. Greenberg are husband and wife (“Insureds”). In 1993, they purchased, for $400,000, a vintage 9,245 gross square foot Adirondack-style American Chestnut log home situated on a hill in the Berkshires around Great Barrington.

The log-and-stone home, which sat at the end of a 1500-foot driveway, was constructed in 1905 by a Pittsburgh banker as a hunting lodge.

According to the insureds, the home had unique construction consisting of a fully framed home built within an exterior log home. The home was made from locally sourced solid precious woods and stones, assembled by hand, piece by piece, by master craftsmen.

For the next twenty-nine years following their purchase, the insureds restored the property and made modern improvements to the home. They decorated the home with high-end furnishings, antiques, and collectibles from all over the world.

The Great Barrington property has a total fire loss

The vintage home was not their primary dwelling as the insureds usually live in New York. However, during the COVID-19 pandemic, they stayed in Great Barrington.

On the morning of December 29, 2020, while the insureds were in bed, they woke up hearing a noise and then saw flames on the second floor. They immediately called the fire department, but the fire had quickly spread, and the house and its contents suffered massive fire and smoke damage.

The PURE high-value homeowner policy issued to the insureds

Before the fire loss, the insureds had purchased from PURE a “High-Value Homeowners Policy” bearing Policy No. HO009322608 with a policy period of March 30, 2020, to March 30, 2021 (the “Policy”). The Policy affords “Dwelling” coverage with a limit of $5,679,540 and $2,271,817.00 on the dwelling’s contents as well as personal liability coverages. The annual premium for the policy was $7152.00

The Policy insured against “all risk of sudden and accidental direct physical loss or damage to the dwelling, contents and other structures unless an exclusion applie[d].”

The policy afforded coverage on a “reconstruction cost” basis. Under this provision, PURE agreed to “pay the reconstruction costof [the insureds’} dwelling, even if this amount is greater than the coverage limit [$5,679,540] . . .” However, to obtain the reconstruction cost benefit under the policy, the repair or rebuild of the home had to begin within two years of the date of loss.

The policy’s definition of “Reconstruction cost” stated:

“Reconstruction Cost” means the lesser of the amount required at the time of the loss to repair or replace a structure at the same location with materials and workmanship of like kind and quality. Reconstruction cost does not include deduction for depreciation or any amount required to comply with the enforcement of any ordinance or law. It also does not include any amount required for the excavation, replacement, or stabilization of land under or around a structure.

The policy also provided ordinance and law coverage under the policy’s “Rebuilding to Code” provision, which provided that if the insureds choose to rebuild their dwelling, PURE will cover:

The necessary cost for [the insureds] to comply with any law or ordinance requiring or regulating the: a. Construction; b. Demolition; c. Remodeling; d. Renovation; or e. Repair; of a covered property damaged by a covered loss, including removal of any resulting debris.

The policy also provided $2,271,817 in “contents” coverage for personal property, on a replacement cost basis, that the insureds’ or a family member owned or possessed.

The $8 million dispute over “Reconstruction Costs” of like-kind and quality

Two days after the fire, PURE and Davitt Design Build, an award-winning Rhode Island contract builder, inspected the property and declared it a total loss. According to the insureds’ allegations, PURE and Davitt’s observational estimate was that “the cost to rebuild this authentic Adirondack-style home with American Chestnut logs, a full stone foundation, ten fireplaces, and like in kind and quality workmanship and materials, could be upwards of $14,000,000 to $16,000,000.”

At this time, PURE also advised the insureds that its policy covered the full reconstruction cost of the home regardless of whether the reconstruction cost exceeded the policy’s $5,679,540 stated property damage limit. However, when the insureds received PURE’s reconstruction cost estimate on February 8, 2021, it assessed the reconstruction cost as $5,027,871.08, or $ 651,668.92, less than the policy’s property insurance limit.

Insureds’ architect put a like-kind and quality rebuild at $15 million

The insureds objected to PURE’s initial reconstruction estimate being based on reconstructing a house smaller by 2,000 sq. ft. and not providing workmanship and material of like-kind and quality similar to their destroyed property. In response, the insureds hired their own architect and a local builder familiar with the 19th and early-20th century great homes in the Great Barrington area to produce as-built plans with workmanship and materials of like kind and quality as required under the policy.

On June 22, 2021, the insured delivered to PURE their estimate for the reconstruction costs in conformity with their reading of PURE’s policy. The insureds’ as-built reconstruction plan ran 135 pages and estimated the total cost of the rebuild to a like-kind and quality standard would cost $15,014,009, including demolition and other site preparation services.

PURE takes another look and ups its low-ball estimate by forty percent

Following its receipt of the insureds’ reconstruction estimate, PURE had Davitt reinspect the property and prepare a revised estimate. On August 30, 2021, PURE provided the insureds with a revised estimate for the insured property’s reconstruction cost. This estimate increased PURE’s initial assessment of reconstruction costs by $2,240,262.11 to $7,268,133.19. This additional indemnity increased PURE’s initial estimate by 39.4%, but still far less than the as-built actual reconstruction costs estimate prepared by the insureds’ architect and builder.

Insureds sue PURE seeking declaratory judgment on reconstruction costs and reference

After further communications from PURE’s outside counsel, the insureds retained counsel and filed a five-count suit against PURE seeking declarations, among others, that PURE’s policy:”

Did not mandate disputes regarding the amount of loss to be determined by reference.The Policy did not require commencement of reconstruction within two (2) years where a reconstruction cost has not been determined.

The lawsuit also had counts for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of G.L. c. 93A and c. 176D for unfair claim practices and injunctive relief.

PURE moves to dismiss the insureds’ suit for their failure to file for reference

In response to the insureds’ lawsuit, PURE moved to dismiss, principally arguing that the insureds failed to demand reference to resolve the amount in dispute, which PURE argued was a condition precedent to filing suit under G.L. c. 175, § 99. Because the two-year statute of limitations would expire on December 29, 2022, a dismissal pending reference could create a bar to their action. See Agency Checklists’ article of November 24, 2015, “Arbitration Demand in Standard Fire Policy Does Not Toll Two-Year Limit to File Suit.”

Court finds PURE’s mandatory MA endorsement deviated from statutory requirements

In ruling on PURE’ motion to dismiss, the Court analyzed PURE’s policy and noted that while an insurance company may add to or modify some of the standard form policy’s clauses, G.L. c. 175, § 99 specifically states:

[N]othing herein contained shall authorize any addition to or modification of any clause of said standard form relative to… a reference of the amount of a loss to three referees or the limitation of actions or suits.

The Court found that PURE’s policy did not meet the statutory reference requirement because the policy’s endorsement titled “Special Provisions – Massachusetts” substituted the required mandatory reference provision with a statement that:

If you and us cannot agree on the amount of loss, we shall, upon receipt of your written request to do so, refer this matter to a three-member board of disinterested referees.

Thus, the provision PURE placed in its policy improperly allowed reference at the insured’s discretion instead of as a legal requirement.

Court states applying PURE policy’s “Conformity to Law” provision would “stand the law on its head”

In response to the Court’s observation that the PURE policy did not mandate reference, PURE argued that its policy’s Conformity to Law provision made the statutory reference provision a part of the policy. This Conformity to Law policy provision stipulated that:

[I]f any portion of this policy contradicts with state or municipal law, this policy is revised to conform to those laws.

Thus, PURE argued that the statutory reference provisions of G.L. c. 175, § 99 were automatically incorporated into the policy and barred the insureds’ lawsuit since reference was a statutory prerequisite to the insureds prosecuting their lawsuit.

The Court did not dispute PURE’s legal premise. However, it found the consequences of PURE’s argument inapposite, stating:

PURE is correct that the Legislature intended for the language from § 99 to be included in the Policy and prohibited PURE from failing to do so. But PURE did not comply with these directives. Its argument now — that the Court should read into the Policy the language that PURE unlawfully omitted and thereby penalize Plaintiffs — turns the law on its head.

The Court went on to state that what PURE was arguing would allow for a policy that, on the one hand, stated that reference was optional with the insured but would also provide, at the same time, by operation of law, that the policy required reference.

Such an interpretation, the Court noted, would create a policy ambiguity that would allow PURE the opportunity to benefit from the ambiguity by way of the insureds’ suit’s dismissal. However, the Court concluded that it could not adopt this interpretation. It reasoned that, according to established legal precedent, insurer-produced ambiguities in an insurance policy are always interpreted against the insurer rather than in its favor.

Court rules for reference to proceed simultaneously with the insureds’ lawsuit

Finally, the Court concluded that dismissal would still be improper even if the statutory language was incorporated in the policy by operation of law.

The Court ruled that while ordering reference would resolve the amount in dispute, the insureds could continue to pursue equitable relief in their suit with regard to the policy’s interpretation.

The Court also noted the insureds were required by the Policy to “begin” reconstruction by December 29, 2022, a deadline that, in the Court’s opinion, loomed because the insureds were not informed by PURE of a requirement of reference. Therefore, the insureds’ arguments that it would be unfair to permit PURE to profit from its own illegal behavior by punishing the insureds were convincing to the Court, and it found that the dismissal PURE requested was “unjustified.”

The Court’s final decision on PURE’s motion to dismiss puts case on two tracks

The Court’s final order on PURE’s motion to dismiss stated:

PURE’s motion to dismiss is DENIED, its request for an order compelling reference is ALLOWED, and its motion to stay is DENIED WITHOUT PREJUDICE. Plaintiffs’ motion to strike portions of PURE’s reply is DENIED AS MOOT.

Within 5 days of this Order, the parties shall participate in a full and complete conference pursuant to Rule 9C, Sup. Ct. R., and shall file a joint report outlining one or both parties’ proposals for a scheduling order that will permit the reference to proceed while this Court addresses any disputes over the interpretation of the Policy and any other appropriate issue.

A CAVEAT: Insurers may be waiving reference by nonstandard wording in the mandatory Massachusetts endorsement

In its decision on PURE’s motion to dismiss, the Court quoted from an earlier Superior Court involving a different insurer where the same issue arose.

In that earlier case, the carrier had modified the Massachusetts mandatory endorsement provision requiring reference before three referees or arbitrators with the same language, stating:

If you and we fail to agree on the amount of loss, we shall, upon receipt of your written request to do so, refer this matter to a three-member board of referees.

The judge deciding that case, who ultimately became the Chief Justice of the Supreme Judicial Court, found that, by adding this language, the insurer waived mandatory reference under the policy. Instead, this nonstandard language gave the insured the option to proceed by reference or to file a lawsuit.

The ruling from that prior case stated, in part:

[The insured argues] a reasonable interpretation of the substituted language grants to the insured the option of resolving a dispute as to loss through reference or through litigation, effectively waiving any right that [the insurer] may have had to resolve the dispute solely through reference. I agree that the language of this substituted provision, viewed in the context of other provisions in the Policy, reasonably permits this interpretation and, therefore, reasonably permits a finding of waiver by [the insurer].

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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.