The Massachusetts reference process is a creature of statute designed to provide an expeditious method to resolve disputes over the amount of loss covered by a property insurance policy. While a reference panel cannot decide coverage issues, its calculation of the amount of loss is “conclusive and final” under the governing statute, and courts have concluded that such an award is not subject to challenge except on grounds such as fraud, collusion, or bias. The United States District Court for the District of Massachusetts recently affirmed the finality of a reference award in Bearbones, Inc. v. Peerless Indemnity Ins. Co., Civil Action No. 3:15-cv-30017 (KAR) (D. Mass. Oct. 17, 2017).

Bearbones involved a burst water pipe at a commercial bakery in Pittsfield, Massachusetts that caused physical damage to the bakery’s building and business personal property and interrupted its business operations. After receiving notice of the loss, Peerless conducted an investigation and issued payments totaling $32,496.08 for building and business personal property losses.

Unable to reach an agreement on the total amount of the loss, the bakery and Peerless eventually referred the matter to three disinterested referees, in accordance with the policy. The reference panel issued a reference award totaling $89,212.24. After the award was issued, Peerless paid the bakery an additional $42,227.38, which represented the total of the reference award, less previous payments, and less one-half of the third referee’s bill for services.

The bakery filed a lawsuit in Massachusetts state court challenging the reference award, which Peerless removed to federal court. The bakery disputed the amount owed under the policy, alleging that its covered losses exceeded $1 million. The bakery also asserted that the timing, amount, and form of Peerless’ payments constituted unfair or deceptive acts or practices in violation of Mass. Gen. Laws ch. 93A, §11 (“Chapter 93A”). United States Magistrate Judge Katherine Robertson granted the Peerless’ motion for summary judgment dismissing both claims.

The bakery’s breach of contract claim was essentially a facial challenge to the amount of the reference award. As noted by Magistrate Judge Robertson, “[h]ere, Plaintiffs [have] not challeng[ed] the panel’s construction of a term in the Policy or whether coverage exists; they [have] challeng[ed] the panel’s determination of the amount of loss.” Because a reference panel’s determination of the amount of loss is final except in limited circumstances not alleged in this case, the court concluded that the breach of contract claim failed as a matter of law.

The decision is also noteworthy for its rejection of the bakery’s consumer protection act claim.  Chapter 93A prohibits “unfair methods of competition and unfair or deceptive acts or practices.”

The bakery alleged that Peerless’ payments prior to the reference award were so low as to constitute a Chapter 93A violation. The bakery pointed to the $42,227.38 difference between the Peerless’ initial payments and the reference award. Magistrate Judge Robertson rejected this argument, concluding that “the mere fact that an insurer pays an insured an amount less than is ultimately awarded in reference” does not render the insurer liable under Chapter 93A. Moreover, Peerless’ payment was much closer to the reference award than the bakery’s claim for an additional $1 million, and the bakery withheld information pertaining to its business income and expenses, which impeded Peerless’ ability to calculate the loss.

The bakery also alleged that Peerless’ delay of fifty-six days prior to issuing its first payment was an unfair or deceptive act or practice under Chapter 93A. After surveying the relevant case law, Magistrate Judge Robertson found no support for the notion that fifty-six days was unreasonable or that any such delay was part of an extortionate plan by Peerless.

Finally, as a distinct basis for its Chapter 93A claim, the bakery alleged that Peerless wrongfully included the bakery’s mortgagee, Lee Bank, on certain of the checks Peerless issued to the bakery. Lee Bank was not listed as a mortgagee in the policy, but it was undisputed that Lee Bank held a mortgage on the building, and that Peerless was aware of that fact. The court noted that if Peerless had not listed Lee Bank as a loss payee on the checks, Peerless could have been subject to liability to the bank for that omission. The court held that the inclusion of Lee Bank on the checks was not an unfair or deceptive act or practice in violation of Chapter 93A.

In summary, Bearbones stands for three important propositions relevant to the adjustment and resolution of property insurance claims:

  • When a dispute between a policyholder and its insurer over the amount of loss or damage has been resolved through the statutory reference procedure, neither party may re-litigate the amount of loss in court absent proof of circumstances such as fraud, collusion, or bias;
  • Where a reference panel renders an award that exceeds the amount previously paid by the insurer—even by a substantial sum—the underpayment generally does not trigger liability under Chapter 93A; and
  • When an insurer knows a lender holds a mortgage on insured property, it is not an unfair or deceptive act or practice for it to include the lender as a loss payee on payments for building damage, even if the lender is not listed as a mortgagee on the policy.