No Coverage for Food Plant that Paid $2M to Avoid Shutdown and Potential Business-Interruption Claim

Ken’s Foods would likely have filed a $10 million business-interruption claim had it not spent $2 million to upgrade its wastewater treatment system, the company’s lawyer says.

That doesn’t mean its insurer has a common-law duty to reimburse the company for that cost, the Massachusetts Supreme Judicial Court ruled Friday.

The state’s high court answered a certified question from the 1st Circuit Court of Appeals to resolve a novel question of law: Does Massachusetts recognize a common-law duty for insurers to cover costs incurred by an insured party to prevent an imminent covered loss, even if those costs are not covered by the policy?

The answer is no.

“In sum, Ken’s Foods seeks reimbursement that is not allowed by the plain, express terms of the policy, in both the coverage provisions and the exclusions,” the unanimous opinion says. “Here, we are also dealing with ‘sophisticated commercial parties’ capable of, and responsible for, their own contractual risk allocation.”

Ken’s Foods is headquartered in Marlborough, Massachusetts but it manufactures salad dressings, sauces and marinades at plants in Nevada, Indiana and Georgia. In December 2018, a wastewater plant at its facility in McDonough, Georgia malfunctioned and began discharging into a stormwater pond and then into waterways owned by the state. The Georgia Environmental Protection Division fined the company $30,500 because of the unauthorized discharge.

Ken’s Foods had an environmental coverage policy from Steadfast Insurance Co. with a $10 million limit for each event and a $25,000 deductible. Attorney Lawrence G. Green, who represented Ken’s, said the company would have lost $10 million in the first month if it had shut down the plant.

Instead of shutting down and filing a business-interruption claim, Ken’s brought a temporary wastewater treatment plant to the site and trucked some of the wastewater to other treatment facilities. Ken’s also negotiated an “allowance” with Henry County officials to accept pre-treated wastewater that otherwise would have exceeded acceptable levels of pollutants.

Ken’s asked Steadfast to reimburse it for those costs. The insurer paid approximately $882,000 for expenses that were related to cleaning up the discharged pollutants, but refused to pay the cost of the temporary wastewater treatment plant and other expenses that it said were not covered by its policy.

Ken’s filed suit, seeking $2.9 million in costs and treble damages because of Steadfast’s alleged bad faith refusal to pay the claim. Steadfast filed a countersuit.

A US District Court Judge granted summary judgment in favor of the insurer. Ken’s appealed. The 1st Circuit found that there was no case law in Massachusetts on the question of whether insurers have a common law duty to reimburse policyholders for the cost of projects that avoid a shutdown that would lead to an even more expensive business-interruption claim, so it asked the Supreme Judicial Court for guidance.

The state high court said in its decision that the plain language of the policy written by Steadfast covers only mitigation costs necessary to prevent imminent endangerment to public health or welfare or the environment.

“A pollution liability insurance policy is a contract between two private parties that should be interpreted according to its plain terms, which reflect the benefit of the bargain struck by the parties, including their allocation of risk,” the opinion says.

Green said he’s disappointed with the decision. He said he is not aware of any pollution insurance products on the market that would compensate a policyholder for money expended to avoid a business interruption. Green said his client could not afford to shut down the plant and reopen it only after the permanent wastewater treatment upgrades were completed.

“It would have been a business disaster for Ken’s Foods to have done that,” he said. “They would have lost millions and millions of dollars.”