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Peabody Essex Museum, Inc. v. United States Fire Ins. Co.

United States Court of Appeals, First Circuit

September 4, 2015

PEABODY ESSEX MUSEUM, INC., Plaintiff, Appellee/Cross-Appellant,
UNITED STATES FIRE INSURANCE COMPANY, Defendant/Third-Party Plaintiff, Appellant/Cross-Appellee,
CENTURY INDEMNITY COMPANY, Third-Party Defendant, Appellee

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Nancy Gertner, U.S. District Judge, Hon. Nathaniel M. Gorton, U.S. District Judge.

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Thomas M. Elcock, with whom Mitchell S. King and Prince Lobel Tye LLP were on brief, for appellant/cross-appellee.

Martin C. Pentz, with whom Jeremy A.M. Evans and Foley Hoag LLP were on brief, for appellee/cross-appellant.

Brian G. Fox, with whom Siegal & Park was on brief, for third-party defendant, appellee.

Before Howard, Chief Judge, Selya and Stahl, Circuit Judges.


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HOWARD, Chief Judge.

Some decades ago, a substantial oil spill occurred on the Salem, Massachusetts property of plaintiff Peabody Essex Museum (" the Museum" ). That pollution eventually migrated to the land of a down gradient neighbor, Heritage Plaza, which discovered the subsurface contamination in 2003. Heritage Plaza notified the Museum in late 2003, and the Museum gave prompt notice to both the state environmental authorities and its insurer, defendant United States Fire Insurance Company (" U.S. Fire" ). In 2006, the Museum filed a coverage suit against U.S. Fire and eventually secured a sizable judgment in 2013. The parties now challenge numerous district court rulings, and several of the insurance issues are governed by state law under Boston Gas Co. v. Century Indemnity Co., 454 Mass. 337, 910 N.E.2d 290 (Mass. 2009), a decision which rejected joint and several liability in progressive pollution cases in favor of pro rata allocation of indemnity, including for self-insured years on the risk.

After careful review, we affirm the challenged rulings related to insurance coverage but reverse a finding of Chapter 93A

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liability against U.S. Fire under Massachusetts law.


The surrounding facts are well-rehearsed in the district court orders below. See, e.g., Peabody Essex Museum, Inc. v. U.S. Fire Ins. Co., 623 F.Supp.2d 98 (D. Mass. 2009); Peabody Essex Museum, Inc. v. U.S. Fire Ins. Co., No. 06-11209-NMG, 2012 WL 2952770, at *1 (D. Mass. July 18, 2012). A brief synopsis is enough to set the stage.

The principal parties share a contractual relationship under a comprehensive general liability policy which, as pertinent here, had a policy period that extended from December 19, 1983 to December 19, 1985. Generally speaking, the policy covered property damage occurring during that two-year period as long as the damage arose out of a sudden and accidental discharge of pollutants.[1] Under the policy, U.S. Fire also promised to defend the Museum from any suit seeking damages against it on account of any covered property damage and to investigate any claim as it deemed expedient.

Once the Museum received notice of the pollution damage from Heritage Plaza in 2003 (" the private demand" ), it retained the Ropes & Gray law firm as legal counsel and ENSR International as an environmental consultant. The Museum confirmed the existence of subsurface oil pollution on its property and immediately notified the Massachusetts Department of Environmental Protection of the pollution. The Department, in turn, issued the Museum a Notice of Responsibility in early 2004 (" the public claim" ), and ENSR continued its site investigation work throughout 2004. In its Initial Site Investigation Report completed that November, ENSR identified several isolated spills that had occurred on the Museum's property over the years. ENSR concluded, however, that the likely cause of the pollution involved one or more of three oil storage tanks or their pipelines previously buried on the Museum's property: a 10,000-gallon tank had been installed in the early 1960s and removed in 1973, and two 10,000-gallon tanks had been installed in 1973 and removed in June 1986.

Meanwhile, the Museum notified U.S. Fire of both the private demand, in October 2003, and the public claim, in February 2004. U.S. Fire denied a duty to defend for the private demand but accepted defense for the public claim with a reservation of rights. Despite tendering both legal and environmental consultant bills to U.S. Fire in April 2005, the Museum received no payment for the defense of the public claim -- the one that U.S. Fire had agreed to defend. In June 2006, the Museum filed a four-count complaint against U.S. Fire in state court, alleging that U.S. Fire had breached its contractual duties to investigate the pollution claims and to defend and indemnify the Museum in connection with both the private demand and the public claim (counts I and II). The Museum also alleged that U.S. Fire had violated state consumer protection laws, Mass. Gen. Laws ch. 93A, § 2, and certain common law duties owed to its insured (counts III and IV). At the behest of U.S. Fire, the case was removed to federal court where it filed a third-party complaint for equitable contribution against another of the Museum's insurers, ACE Property & Casualty Insurance.

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The extensive, multi-phase litigation included several rounds of summary judgment proceedings and a jury trial resolving indemnity issues. About midway through the litigation, the Massachusetts Supreme Judicial Court (" SJC" ) decided Boston Gas Co., 454 Mass. 337, 910 N.E.2d 290, to which the district court moored its decision on allocation of liability between U.S. Fire and the Museum as self-insured on the risk after December 19, 1985.[2] In the end, the district court's 2013 judgment required U.S. Fire to pay the Museum over $1.5 million, including punitive damages under Chapter 93A, attorney's fees, costs, and statutory interest.

Our review of the various rulings on appeal is largely de novo, and we abide by the well-established summary judgment standards. Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). We are not restricted by the district court's analyses and may affirm on any independent ground made manifest in the record. See Jones v. Secord, 684 F.3d 1, 5 (1st Cir. 2012). Where appropriate, we identify other review standards along the way.


U.S. Fire first appeals the district court's 2007 order that it breached its duty to defend against the public claim, and thus state law required it to bear the trial burden of proving no coverage. See Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 610 N.E.2d 912, 922 & n.22 (Mass. 1993) ( " [A]n insurer that wrongfully declines to defend a claim [must bear] the burden of proving that the claim was not within its policy's coverage" including, in pollution cases, " the existence or nonexistence of a sudden and accidental discharge." ). Following this Polaroid burden-shifting rule, the district court set forth the anticipated trial procedure in which the Museum was expected to produce credible evidence demonstrating that an occurrence took place during the term of the insurance policy, and then U.S. Fire would bear the burden of proving no coverage. Electronic Order (Gertner, J., Dec. 19, 2007); see Peabody Essex Museum, 623 F.Supp.2d at 106-10 (clarifying how the Polaroid burden-shifting rule applies in the summary judgment context).[3]

U.S. Fire attacks this summary judgment order on several fronts, all aimed at foreclosing application of the Polaroid burden-shifting rule. This is understandable in light of the cascade of practical effects that Polaroid had throughout this litigation, especially given the dearth of evidence showing how the polluting event occurred. However, the district court's breach ruling -- grounded in U.S. Fire's categorical failure for approximately two years to make any payment for defense costs -- is unassailable on this record. Only a few snapshots of the undisputed facts are necessary to show why.[4]

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U.S. Fire agreed in March 2004 to honor its contractual duty to defend the public claim under a reservation of rights and then paid nothing to its insured until cornered by the Museum through its October 2007 motion for summary judgment. From the outset, U.S. Fire protested the hourly rate charged by Ropes & Gray but failed to pay even a partial payment despite repeated requests for some measure of payment. For example, in 2005, the Museum sent U.S. Fire the billing invoices from both Ropes & Gray and ENSR and, soon after, provided further detail for the ENSR bills.[5] Still, no money came. Then, U.S. Fire remained silent when directly asked in an August 2005 email whether it had paid any defense costs to date. According to the record, about a year passed before U.S. Fire informed the Museum that it was unable to confirm whether it had ever received any billing for defense costs.

The Museum filed suit against U.S. Fire in June 2006 and again sent copies of the Ropes & Gray bills to the insurer. The Museum also sent U.S. Fire additional legal bills at the end of 2006. Yet, another six months passed before U.S. Fire informed the Museum, in June 2007, that it had lost the billing information and asked for additional copies. The Museum promptly complied. After another three-month lapse without any payment in hand, the Museum filed a motion for summary judgment to enforce U.S. Fire's defense obligation. Finally, in conjunction with its objection, U.S. Fire sent its first payment to the Museum totaling $611.41. This amount represented what U.S. Fire considered to be a fair portion of the Ropes & Gray bills for the public claim: it unilaterally reduced the charged attorney's fees rate to $200 per hour, and further reduced to 40%[6] the revised total legal bills. No payment was offered for any of the 2004 ENSR bills which totaled roughly $70,000.00 at that time.[7]

U.S. Fire's persistent failure to make any payment toward defense costs despite having nominally accepted that duty may be treated as a wrongful refusal to defend upon receipt of notice of a claim. The SJC has said explicitly that " [a]n insurer which reserves its rights and takes no action in defense of its insured, when it knew, or should have known, of a covered claim, or which fails to investigate diligently, despite repeated claims of coverage and requests for a defense from an insured facing demands for immediate action, could be found to have committed a breach of the duty to its insured." Sarnafil, Inc. v. Peerless Ins. Co., 418 Mass. 295, 636 N.E.2d 247, 253 (Mass. 1994); accord Chi. Title Ins. Co. v. Fed. Deposit Ins. Corp., 172 F.3d 601, 604-06 (8th Cir. 1999) (holding that the insurer's failure to pay even what it had considered to be a reasonable sum for defense costs, despite having nominally

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accepted the tender of defense, constitutes a breach of the duty to defend).

None of the factual issues identified by U.S. Fire are material to the breach question here. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). First, it is immaterial that the individual employee who was managing the public claim does not recall ever having personally received the packet. U.S. Fire does not contest the validity of the Federal Express receipt signed by an employee of its third-party claims administrator and dated April 11, 2005, which indisputably shows that the 2005 billing packet was actually received by U.S. Fire's agent. See Bockser v. Dorchester Mut. Fire Ins. Co., 327 Mass. 473, 99 N.E.2d 640, 642 (Mass. 1951) (noting that a principal is generally bound by the actions of its agents); Chow v. Merrimack Mut. Fire Ins. Co., 83 Mass.App.Ct. 622, 987 N.E.2d 1275, 1279-80 (Mass.App.Ct. 2013) (same). Moreover, other undisputed documents show that the same individual claims adjuster did receive follow-up information about the ENSR bills that the Museum had sent that same summer. In short, any failure on the part of the company serving as U.S. Fire's third-party administrator for the public claim does not bear on the legal dispute between the insurer and its insured. Cf. Palermo v. Fireman's Fund Ins. Co., 42 Mass.App.Ct. 283, 676 N.E.2d 1158, 1163 (Mass.App.Ct. 1997) (emphasizing that proof of good faith has no relevance to the Polaroid burden-shifting rule).

The reasonableness of the Ropes & Gray hourly rate also is immaterial. It is U.S. Fire's prolonged failure to pay any portion of its acknowledged responsibility that gives rise to the breach here. See, e.g., Chi. Title Ins. Co., 172 F.3d at 604-06. Thus, any quibbling about the hourly rate simply relates to damages that are owed to the Museum.

U.S. Fire's plaint about the divisibility of the ENSR bills between defense and indemnity costs is similarly immaterial. U.S. Fire tacitly acknowledged in its 2007 papers (and also before us now) that some portion of the ENSR bills relating to the 2004 site work constitutes recoverable defense costs.[8] Yet, as with the legal fees, U.S. Fire made no attempt to pay a single cent, nor is there any record evidence that it made any effort to resolve the sizable remuneration issue.

U.S. Fire's apathy stands in sharp contrast to the Museum's multiple requests for some measure of contractual defense benefits in 2004 and 2005; its request for clarification in August 2005 of what " defense expenditures [its insurer may have paid] to date [and] on what terms" ; and its express reminder about the ENSR bills in its November 2006 correspondence. Cf. Vt. Mut. Ins. Co. v. Maguire, 662 F.3d 51, 56-58 (1st Cir. 2011) (holding as a matter of law that the insurer's diligent investigation efforts and readiness to comply negated allegations of breach, especially when compared to the insured's lackadaisical conduct).

We also reject U.S. Fire's attempt to transform its acknowledged duty to defend into a duty only to reimburse reasonable fees and costs. According to U.S. Fire, as soon as the Museum opted to retain control of its own defense for the public claim, the insurer no longer had a duty to defend and thus its subsequent conduct cannot amount to a defense breach ...

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