When does the clock start ticking on prejudgment interest after an insurer denies a claim that it is later found to owe? This $800,000 question was at the heart of the recent Massachusetts Appeals Court decision in PeoplesBank vs. Certain Underwriters at Lloyd’s, London.
The court clarified how the mandatory 12% interest applies when covered damages are finalized at different times. The Appeals Court split the difference, finding that interest on the bulk of a $2.5 million covered loss ran from the insurer’s 2018 coverage denial, but interest on a smaller, later-settled portion only started when that specific amount was paid in 2022. The case reveals how much money is at stake when the timing of coverage denials and damage resolutions.
Background: A Fire, A Builder’s Risk Policy, and A Mortgagee’s Claim
The case began with an August 2016 fire that damaged two buildings, Hubbard Hall and Rogers Hall, undergoing renovation in Northampton. The owner, Historic Round Hill Summit, LLC (“Historic”), had insured the project under a builder’s risk policy from Lloyd’s. PeoplesBank, holding the mortgage, was also covered under the policy’s standard mortgage holder endorsement.
Lloyd’s paid its limits for Rogers Hall, which was destroyed. However, it denied coverage for the smoke and water damage to Hubbard Hall, arguing coverage had ceased because the building was occupied by tenants at the time of the fire without Lloyd’s consent, violating a policy condition.
PeoplesBank claimed coverage under the mortgage holder endorsement, which protects the lender’s interest even if the insured’s actions void coverage, provided the lender meets certain conditions. In June 2018, PeoplesBank submitted a proof of loss for approximately $2.8 million for the Hubbard Hall damage.
On July 3, 2018, Lloyd’s denied the claim on July 3, 2018. Lloyd’s argued that the mortgage holder couldn’t claim independently if the underlying property wasn’t covered due to occupancy. Lloyd’s also reserved rights regarding the amount claimed.
The Coverage Fight: Breach Found, Damages Stipulated in Stages
PeoplesBank sued Lloyd’s in August 2018. After a trial, the Superior Court found in November 2020 that Lloyd’s had breached the contract. The court found that, based on the mortgage holder endorsement, PeoplesBank was entitled to coverage because it lacked knowledge of the occupancy. The endorsement read, in part:
“If we deny your claim because of your acts or because you have failed to comply with the terms of this Coverage Part, the mortgage holder will still have the right to receive loss payment if the mortgage holder… has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgage holder…”
The trial court pinpointed the breach date as July 3, 2018, the date of the wrongful denial. However, judgment wasn’t entered immediately, as the exact amount of damages, particularly costs related to disputed work by contractor Complete Restoration Solutions, Inc. (CRS), remained unresolved.
The parties settled the damages in two stages:
- April 27, 2021: The parties stipulated that the undisputed repair costs (excluding CRS) totaled $2,274,194.07.
- May 24, 2023: After Historic settled its separate, contentious dispute with CRS (Historic paid CRS $295,000 after alleging CRS’s original $600k+ bill was “wildly and fraudulently inflated”), PeoplesBank and Lloyd’s stipulated that the portion of the CRS settlement recoverable under the policy was $236,000.
This fixed the total covered loss at $2,510,194.07.
The $800,000 Question: When Did Interest Start?
Once the main damages were set, attention turned to interest. Massachusetts law (G.L. c. 231, § 6C) mandates 12% annual interest in contract cases, typically “from the date of the breach or demand.” Both sides took firm positions: • PeoplesBank: Wanted interest on the full $2.51M calculated from the July 3, 2018 breach date. • Lloyd’s: Argued interest shouldn’t start until 30 days after each respective stipulation (May 2021 for the $2.274M; June 2023 for the $236k). Lloyd’s relied on the policy’s “Loss Payment” clause, which states payment is due within 30 days after agreement is reached. They claimed applying interest from 2018 would be an unfair “windfall” to PeoplesBank, citing the Sterilite case, especially as the final amount was delayed partly by the CRS dispute.
The “Loss Payment” provision stated: “We will pay or make good any ‘loss’ covered under this Coverage Part within 30 days after:
- We reach agreement with you;
- The entry of final judgment; or
- The filing of an appraisal award.”
The trial judge chose a middle path, ordering interest on the entire amount to run from the date of the first stipulation, April 27, 2021, seeking to avoid a windfall. This cuts about $800,000 from the potential interest compared to PeoplesBank’s position.
The Appeals Court Ruling: A Split Decision on Interest Accrual
PeoplesBank appealed, arguing the lower court wrongly deviated from the statute’s mandate to use the breach date. The Appeals Court agreed, but only in part.
The Appeals Court recognized the standard rule: interest runs from the breach date (July 3, 2018). It also considered the Sterilite exception, where courts can adjust the start date to prevent a windfall if the damaged party wasn’t actually “out of pocket” until later. However, the Appeals Court treated the two amounts differently:
- Interest on $2,274,194.07 (Main Repairs): Runs from July 3, 2018 (Breach Date). The court found Sterilite didn’t apply here because the record showed this money, for the primary repairs, had largely been paid before Lloyd’s 2018 denial. Awarding interest from the breach compensates PeoplesBank for the loss of use of funds rightfully owed since 2018. Importantly, the court rejected Lloyd’s claim that the “Loss Payment” clause could delay interest accrual. The court said insurers can’t use such clauses after it has wrongfully breached the contract by denying coverage. To allow otherwise “would result in a windfall to Lloyd’s for its breach.” The court also threw out Lloyd’s waiver defense, noting the parties had explicitly agreed to resolve coverage before finalizing damages.
- Interest on $236,000 (CRS Settlement Amount): Runs from November 7, 2022 (Date CRS Paid). For the smaller CRS amount, the court applied Sterilite. This specific loss wasn’t fixed or paid until Historic settled with CRS in late 2022. Awarding interest on this sum from 2018 would be a windfall to PeoplesBank, as the funds weren’t expended until November 2022. Interest on this amount should start when that specific cost was actually paid.
The Appeals Court overturned the interest calculation and sent the case back for recalculation based on these two different start dates.
Implications for Insurers, Insureds, and Agents
This case clarifies how prejudgment interest works for insurers, policyholders, and the agents advising them in Massachusetts:
- For Insurers: The date of a coverage denial remains the critical starting point for potential prejudgment interest liability if that denial is later found wrongful. Relying on policy clauses about payment timing after a breach may not shield the insurer from interest accruing from the denial date, especially for losses already incurred by the insured/mortgagee. The Sterilite “windfall” exception is real but fact-specific, primarily applying to costs not actually paid until well after the breach.
- For Insureds: A successful coverage lawsuit can yield significant prejudgment interest at 12% annually, substantially increasing the total recovery, particularly if litigation is prolonged. This case shows that interest generally starts from the wrongful denial, maximizing compensation for the delayed payment on incurred losses.
- For Agents: Knowing how coverage denials, mortgage clauses, claim delays, and prejudgment interest work is vital when advising clients. The independent rights of mortgagees and the potentially massive impact of 12% interest accumulating over years are key factors in claim strategy and expectation setting. Delays in resolving damage amounts can impact the interest calculation, as seen with the CRS portion of the claim.
The interest in this case will significantly increase the $2.5 million recovered by PeopleBank. Furthermore, any unpaid portion of that prejudgment interest award itself may potentially accrue postjudgment interest until paid, further compounding the cost of the initial coverage denial.
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.
