National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

 
In American & Foreign Ins. Co. v. Jerry’s Sports Center, No. J-48-2009 (Pa. August 17, 2010), a gun shop was sued by the NAACP seeking to enjoin a public nuisance that the insured and others allegedly created by failing to prevent the illegal sale of firearms. Royal agreed to defend the case and hired defense counsel on behalf of the insured but did so under a comprehensive reservation of rights, including the right to recoup its costs of defense if it was later owed not to owe coverage. Royal thereafter filed an action for declaratory relief, in which the Court of Common Pleas ruled that the NAACP suit did not seek damages for any “bodily injury” suffered by the plaintiff. After this finding was affirmed in 2004 by the Pennsylvania Superior Court, the trial court further ruled that Royal was entitled to recoup $309,126 that it had paid to defense the case. On appeal, however, the Superior Court ruled that Royal had no such right. Royal appealed to the Supreme Court of Pennsylvania.

In affirming the Superior Court’s ruling that liability insurers have no right of recoupment, the Pennsylvania Supreme Court aligned itself with General Agents Ins. Co. v. Midwest Sporting Goods, 215 Ill. 2d 146, 828 N.E.2d 1092 (2005) (GAINSCO) where, under nearly identical facts, the Illinois Supreme Court had ruled that an insurer cannot recover defense costs pursuant to a reservation of rights absent an express provision to that effect in the insurance contract between the parties.

Further, as with GAINSCO, the Pennsylvania Supreme Court declared that the NAACP suit at least potentially set forth a claim for “bodily injury” triggering the insurer’s duty to defend. The court emphasized the fact that Royal’s claim personnel had never explicitly disclaimed any duty to defend and had, indeed, proceeded as if the claim triggered its duty to defend. As a result, it found that the trial court’s subsequent determination that Royal did not have a duty to defend did not have retroactive effect.

It would seem that this ruling that Royal had a duty to defend would have been the end of the story as, absent proof that discrete portions of the defense were solely attributable to non-covered causes of action a la Buss, no court has allowed an insurer to recoup costs of defense that it was contractually obligated to pay. Nevertheless, the Pennsylvania Supreme Court proceeded to address the equitable theories that other courts have adopted in permitting a right to recoup the cost of defending law suits that were found not to trigger an insurer’s defense duty. Thus, various courts have ruled an insured that receives a defense to claims that are not covered is unjustly enriched. Alternatively, some courts have permitted recovery on the grounds of quantum meruit or have found that an implied in fact contract is created when the insured accepts a defense on the basis of a reservation of rights that includes an asserted right to recoupment.

In this case, however, the Pennsylvania court ruled that Royal could not manufacture a right to recoupment by issuing a reservation of rights where no such right was contained in the policy itself. Further, the court held that the insured was not unjustly enriched by accepting the defense of a suit that was later found to fall outside of its insurance coverage. Indeed, the court found that the insured had little alternative, as rejecting the insurer’s proferred defense might have been treated as a breach of the insured’s duty to cooperate. There was also benefit to Royal as, in defending, the insurer was able to use it own chosen defense counsel, implement its own audit and litigation management procedures, protect against indemnity exposures and avoid bad faith claims.
A concurring opinion by Justice Saylor suggested that, in appropriate circumstances, an implied in fact contract might be created by the insured’s acceptance of the insurer’s defense that would allow a right of recoupment. He concluded, however, that the better course of action would be for insurers to explicitly include such provisions in their policies to give the insured advance notice

While the Pennsylvania court embraced the Illinois Supreme Court’s opinion in GAINSCO, the U.S. Court of Appeals for the Tenth Circuit took the opposite view, predicting that the Colorado Supreme Court would reject GAINSCO and would allow recoupment under such circumstances.
In Valley Forge Ins. Co. v. Health Care Mgt. Partners, Ltd., No. 09-1251 (10th Cir. August 16, 2010), a long-term care facility was sued by the federal for submitting fraudulent Medicare claims. CNA and Zurich denied that these claims were covered under their professional liability policies but nonetheless agreed to defend under a reservation of rights pending the outcome of a DJ filed to resolve their claimed obligations. The carriers’ position was sustained by the federal district court in Colorado and, on appeal, by the Tenth Circuit. See, Zurich-American Ins. Co. v. O’Hare Regional Center for Rehabilitation, 529 F.3d 916 (10th Cir. 2008). On remand, the District Court ruled in 2009 that Zurich and CNA were entitled to recoup all of the defense costs that they had paid in the interim.

On appeal to the Tenth Circuit, the insured argued that an insurer could not manufacture a right to recoupment that does not appear in its policy. Further, the insured argued that a trial was, in any event, necessary to determine what fees were recoverable.

In rejecting these arguments and affirming the insurers’ right of recoupment, the Tenth Circuit predicted that the Colorado Supreme Court would not follow GAINSCO. In particular, the court found guidance in the opinions of the state Supreme Court in cases such as Hecla Mining v. N.H. Ins. Co., 811 P.2d 1083 (Colo. 1991) and Cotter Corp. v. American Empire Surplus Lines Ins. Co., 90 P.3d 814 (Colo. 2004), in which insurers were directed to defend under a reservation of rights, even if a defense duty was not apparent from the underlying complaint. While acknowledging that the discussion of a right to recoupment in Hecla and Cotter might be mere dicta, the court held that these opinions were a sufficient basis under diversity rules for predicting that the Colorado Supreme Court would allow recoupment even where such a right is not set forth in the insurance contract itself.

The Tenth Circuit also declined to hold that an insurer must wait until the conclusion of the underlying law suit before presenting a claim for reimbursement of defense costs. This is indeed the procedure that the California Supreme Court set forth in Buss. Unlike California, however, Colorado allows insurers to bring an action for declaratory relief to determine their coverage duties ven while the underlying suit is still pending so long as the coverage issues are independent of the underlying liability claims and can be resolved without prejudicing the insured’s position in the underlying suit.

The Tenth Circuit declined to define the doctrinal basis for permitting recoupment, declaring that where the right derives in equity (unjust enrichment), contract (implied in fact) or just as a matter of public policy, Colorado clearly permits recoupment of defense costs.

Further, the court rejected the insured’s argument that disputed issues of fact remained with respect to how much the insurers could lawfully recoup or that certain of the defense costs at issue were excessive and unreasonable and thus beyond what any insured should be expected to pay for. The court held that the insureds had failed to present credible evidence disputing the reasonableness of these costs.

Neither of these opinions breaks significant new ground in the on-going battle over the issue of recoupment. Even so, there are a few interesting take-aways.

First, it remains the case that those courts whose states are most lenient in finding a duty to defend are also most likely to recognize recoupment as a palliative remedy for the insurer that is forced, often as a matter of public policy, to defend suits that on their face do not create a potential for coverage.

Second, a right to recoupment is only likely to arise if the insurer had no duty to defend. This is not to be confused with the separate issue of allocation, where defense costs are pro-rated at the outset of the litigation, or Buss, where the insurer must pay 100% of defense costs while the litigation is on-going but may be entitled to recoup some of its defense costs after the fact.

Finally, it is apparent from these and past cases that the manner in which claims are presented and defended can have an impact on the outcome of the parties’ rights. There seems little doubt that the Pennsylvania Supreme Court’s analysis of this issue was influenced by the fact that Royal took equivocal positions with respect to its claimed coverage obligations yet insisted that the case be defended through counsel of its own choosing, subject to its own litigation management procedures.

One is that policyholders will seek to cope with Boston Gas by redefining the injury for which they are seeking coverage. It is also apparent that these strategies may unwittingly cause both policyholders and insurers to re-argue legal doctrines on which they may have taken contrary positions years in the past.

In Boston Gas, the Supreme Judicial Court drew a distinction between long-tail losses and events that are specifically attributable to a discrete identifiable event. The court declared that:
In the ordinary case of a non-progressive injury (e.g., motor vehicle accident or one identified tar spill), the policy in place at the time the covered damage or injury took place would cover all consequential damages, even those taking place after the policy period. Progressive injuries like the environmental contamination in this case are different. Progressive injuries of this type are "indivisible injuries attributable to ongoing events without a single clear 'cause.'"
Whereas long-tail losses must be allocated, coverage for discrete identifiable events is only attributable to one particular policy year and thus does not give rise to any issue of orphan shares or policyholder responsibility for gaps in coverage.

Is it possible for policyholders to convert pollution claims into single-year events to avoid being saddled with responsibility for orphans shares? Two strategies seem apparent.

One strategy will be to devise empirical approaches to quantifying the amount of pollution in any given year. The SJC stated in Boston Gas that “time on the risk” is a default measure for allocation and need not be followed where a more precise and scientific basis exists for determining the amount of damages attributable to property damage during each year of a long-tail loss. Carriers should not be at all surprised if a year or two from now policyholder-oriented consultants such as Navigant begin producing reports purporting to establish that proportionately larger amounts of pollution occurred during covered periods of time or that a high percentage of the cost of cleaning up a given site was attributable to discharges of specific pollutants during a key period of time. Whether such reports satisfy a scientific standard of scrutiny or can withstand Daubert (Lanigan for us) challenges is another story, of course.

A more drastic approach may be to characterize long-tail losses as a one-year event. Such findings are not entirely without precedent, albeit not in Massachusetts. Several years ago, the Minnesota Supreme Court distinguished between claims involving hazardous waste site cleanups, for which it had required pro rata allocation in cases such as Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997) and Northern States Power Co. v. Fidelity & Cas. Co., 523 N.W.2d 657 (Minn. 1994) and bodily injuries suffered by women who had received silicone breast implants. Notwithstanding the ongoing nature of the injuries allegedly attributable to silicone breast implants, the Supreme Court ruled in In Re Silicone Implant Insurance Coverage Litigation, 667 N.W.2d 405 (Minn. 2003) that the continuation of pain and suffering attributable to such implantations were attributable to a specific, identifiable event and therefore did not require inter-policy allocation.

On the other hand, it is difficult to see how this analysis could apply in the context of most environmental liability claims, where contamination either occurred as the result of ongoing discharges from diverse sources over a period of years or decades or that involved ongoing property damage, as in the case of a plume of solvents or DNAPLs migrating through the subsurface.

The irony of any future debate on this point is that, in the past, policyholders have generally argued that the ongoing migration of pollutants from earlier discharges should be a new “trigger of coverage” whereas insurance companies had often argued that the continuation of earlier events was no more than a “loss in progress” and not an ongoing “trigger.” Compare EnergyNorth Natural Gas, Inc. v. Underwriters at Lloyd’s, 848 A.2d 715, 150 N.H. 828 (2004)( that “where the alleged migration of toxic waste is continuing, multiple exposures triggering exposures are also continuing) and American and Foreign Ins. Co. v. Sequatchie Concrete Services, 441 F.3d 341 (6th Cir. 2006)(continuation of loss does not trigger policies). See also Polarome International, Inc. v. Greenwich Ins. Co., No. A-0566-07T1 (N.J. App. December 17, 2008)(“the last pull of the trigger is the initial manifestation of a diacetyl-related personal injury”).

The reversal of burdens of proof that Massachusetts litigants may now make in the wake of Boston Gas foreshadowed to some extent by the Second Circuit’s opinion in Olin Corp. v. Certain Underwriters at Lloyd’s, London, 468 F.3d 120 (2nd Cir. 2006). In Olin, the Second Circuit declared that additional property damage caused by the passive migration or spread of contaminants that had already been discharged into the environment constituted “property damage” under New York law and that such years must be taken into account in determining the denominator for purposes of allocating the manner in which such losses are spread or assigned to policy years. On the other hand, the Second Circuit criticized London Insurer’s arguments view that contamination continues at a constant rate for an indefinite period of time. Further the court was troubled by the prospect that the continuation of property damage in later years would change the amount of coverage under each policy up to that point thus making coverage dependent on events occurring after the policy period. As a result, the court adopted an intermediate approach, holding that property damage occurs as long as contamination continues to spread, whether or not the contamination is based on active pollution or the passive migration of contamination into the soil and groundwater.

In Massachusetts, as elsewhere, it is the policyholder’s burden to present evidence that bodily injury or property damage has occurred during an insurer’s policy period in order to trigger coverage. The irony of Boston Gas is that it is insurers that likely now have the incentive of proving extensive periods of bodily injury or property damage.
 

MW Builders, the general contractor for the construction of the Candlewood Suites Hotel in Hillsboro Oregon, tendered the defense to and sought indemnity from subcontractor Portland Plastering and its insurer, Safeco, for claims for water damage caused by faulty work on the hotel’s exterior siding (EIFS). Safeco denied the tender and refused to defend or indemnify MW Builders. MW Builders settled with the hotel owner for $2 million, then filed a separate demand for arbitration against Portland Plastering. Safeco defended Portland Plastering at the arbitration, where the arbitrator determined that Portland Plastering was 31% at fault for the damages sustained by the hotel, awarding MW Builders $620,000 in damages, plus defense costs and attorney fees.

In the subsequent coverage action, the district court initially awarded MW Builders the full $620,000 arbitration award. On appeal, the Ninth Circuit held that Safeco was obligated to provide coverage for damage to the hotel, but not for the costs associated with replacing the EIFS. 267 Fed. Appx. 552, 555 (9th Cir. 2008). Because the arbitration award was not partitioned into costs associated with repair of the EIFS and other damages to the hotel, the Ninth Circuit remanded the issue to the district court for a determination of this issue. Id.

On remand, Magistrate Judge Acosta interpreted the Ninth Circuit’s instructions as requiring him to “calculate what portion of the $620,000 award is attributed to the hotel damage claim, excluding the EIFS repair claim.” Based on information submitted by the parties, the Magistrate Judge issued a Findings and Recommendation that MW Builders was entitled to recover 60% of the arbitration award, or $372,000.

Reviewing MW Builders’ objections to the Findings and Recommendation, the district court held that the Ninth Circuit’s instructions were ambiguous. Instead of relying on the Magistrate Judge’s interpretation of the instructions, the court adopted MW Builders’ proposed alternative interpretation, “that the Ninth Circuit remanded the case ‘for this court to conduct a factual inquiry into the extent of the covered damages sustained by the hotel to ensure that these damages were equal to or greater than $620,000.’”

Relying on this alternative interpretation of the Ninth Circuit’s instructions, the court concluded that the Magistrate Judge’s partition of the arbitration award unfairly rewarded Safeco. While the insured generally bears the burden of establishing what portion of a settlement is reasonably allocable to covered claims, there are exceptions to the rule that will shift the burden to the insurer. Shifting the burden of proof is appropriate where “circumstances in the underlying action should have compelled the insurer to seek an allocated verdict or advise the insured of the need for one, or the insurer failed to adequately apprise the insured of the importance of apportionment.”

The court concluded that this exception applied here, citing Safeco’s refusal to defend MW Builders, which compelled MW Builders to negotiate settlement of the claims against it, and noting, “[d]efendant Safeco subsequently retained counsel to defend Portland Plastering in the subsequent arbitration and neglected to seek an allocation of damages in the resulting Knoll award.”

Having placed the burden on Safeco to prove allocation of the arbitration award, the court relied on its alternate interpretation of the Ninth Circuit’s instructions to hold that Safeco could not meet its burden because “such an apportionment at this point in the litigation is unavoidably and unfairly speculative and arbitrary.” Finding no dispute that the total property damaged incurred by the hotel exceeded $620,000, the court awarded MW Builders the full arbitration award amount.

The MW Builders decision appears alarming at first glance, but its applicability may be limited. The outcome springs from the district court’s conclusion that the Ninth Circuit’s remand instructions were ambiguous. That conclusion allowed the district court to bypass Safeco’s evidence of how the arbitration award should have been allocated because the court had already concluded that the only remaining question was whether the hotel sustained covered damages greater than $620,000. Because of this, the district court’s foray into the question of burden of proof is puzzling, and may constitute mere dicta.

Despite the opinion’s questionable general applicability, the court’s decision does raise questions about burden of proof in allocation cases. The district court’s conclusion that Safeco should bear the burden of proof because it should have sought an allocated verdict or advised the insured of the need for one relies mainly on an unpublished Delaware case, Premier Parks, Inc. v. TIG Ins. Co., C.A. No. 02C-04-126, 2006 Del. Super. LEXIS 383 (September 21, 2006). Assuming that Safeco appeals the decision, the Ninth Circuit could resolve the issue by simply clarifying its instructions and remanding the case again.

The case in question involved leaks of home heating oil from an underground storage tank at property that was initially owned by John Clark and sold to Peter and Carol Tsairis in 1995. Between 1995 and 1999, Tsairis either did not have insurance or could not document the available coverage. Thereafter, they were insured by Metropolitan (1999-2002) and Franklin Mutual (2002-2005).

After contamination was discovered on the property, Franklin Mutual paid to clean up the pollution and sought pro rata reimbursement from Metropolitan. Franklin Mutual and Metropolitan agreed not to seek contribution from Tsairis for that portion of the pollution that occurred while he was uninsured. However, the insurers could not agree on the method of allocation as between them.
Metropolitan argued that all of the liability insurance from all policies covering the property during the entire period of contamination should be considered, regardless of who owned the property at the time. Franklin Mutual asserted that Metropolitan’s liability should reflect its pro rata allocation of the cleanup costs solely with respect to the period of time that their mutual insured (Tsairis) owned the property and that any insurance issued to Clark was irrelevant to these considerations.

At trial, the Superior Court ruled that Metropolitan had been on the risk for 36 months out of the 116 months between the time that Tsairis purchased the property and the date that contamination was discovered and therefore owed about a third of the overall cost of cleanup. Franklin Mutual was obliged to bear sole responsibility for the rest, including the share allocable to the uninsured period of time between 1995 and 1999.

On appeal, Metropolitan argued that its share should actually be substantially less (15.6%) because the court should have taken into account the insurance issued to the prior property owner (Clark). The Appellate Division disagreed.

Whereas the New Jersey Supreme Court has ruled in cases such as Owens-Illinois and Carter-Wallace that insurance for long-tail losses should be allocated in the proportion that the limits of coverage apply to the overall loss, the Appellate Division drew a distinction between the allocation rules applying to policies and those pertaining to the underlying liability of insured polluters. The latter responsibility is joint and several under the terms of the New Jersey Spill Act (NJSA 58:10-23.11, et seq.) whereas allocation among insurers is pro rata.

As a result, the Appellate Division agreed with the trial court that Metropolitan was obligated to reimburse Franklin Mutual for its pro rata share of the ten year period when its insured owned the property, without reference to the pollution or coverage applicable to the prior Clark period of ownership.

To the author’s knowledge, this is the first case in the United States that has addressed this particular issue. What is perhaps more striking is that Metropolitan chose to appeal a case in which the difference between what it agreed that it owed and what the trial court had ruled that it owed was only approximately $6,000.

Despite the trivial dollar amount at issue in this particular case, the principle at issue is of vital consequence in many large environmental coverage disputes, where much of the contamination may have pre-dated the insured seeking ownership period of coverage.   What the Appellate Division's analysis failed to discuss, however, is the apparent inconsistency between limiting the coverage denominator in such cases to the insured's period of ownership despite the fact that the insured's liability extends to pollution that pre-dates its acquisition of ownership. 

At the outset of oral argument, Justice Margot Botsford asked counsel for Century Indemnity (Guy Cellucci) where in the record there was any evidence that the pollution had commenced in 1908. She noted that the instruction to the jury and the jury’s finding had only concerned pollution during the Century Indemnity policy period (1951 and 1969). Cellucci responded that there was expert testimony for both parties that pollution had begun contemporaneously with the operation of the site.

Justice Botsford, who took an unusually active role in the argument, inquired whether the policy language that the Appeals Court had considered in Chicago Bridge had involved a different form (London Market) and different policy wordings. Cellucci agreed and stated that, in fact, the wording in the INA policies at issue here correspondence to the line of Illinois insurance cases where courts had applied allocation as opposed to the Chicago Bridge-type wordings that had found for “all sums.”

Indeed, Cellucci noted that the words “all sums” did not appear in the INA policy. Justice Robert Cordy archly observed that he hoped that the insurer’s argument did not hinge solely on that consideration. Cellucci responded that it was only a “minor point” but that it did bear observing that a policyholder could hardly have a reasonable expectation of coverage in the absence of policy wordings to support such an expectation.

Cellucci contended that Massachusetts jurisprudence requires that policy wordings be read together as a whole and not to the exclusion of one term or another. In this case, he argued that the “during the policy period” language clearly limited any insurer’s obligations to those damages attributable to loss during the stated policy period. Judge Botsford observed, on the other hand, that the policy wording was not necessarily all that clear.

Chief Justice Margaret Marshall inquired whether, given the $17 million limit in its 1966-69 policy, only Century Indemnity was on the hook for the insurance cleanup costs. Cellucci stated that this was the case and that the effect of this was to require Century Indemnity to sue other insurers for contribution. Botsford observed that in this event, the other insurers would surely argue that the claims against them were barred in light of settlements.

Justice Spina spoke up for the first time at that point noting that because “all sums” was based in part on the theory of joint and several liability, such claims might be barred by the Massachusetts statute governing claims against tortfeasors. Cellucci appeared to be confused on this point indicating that the issue was not tort law but the meaning of the insurance policies. Spina observed however that, “Any such construction of ‘all sums’ would become ‘muddied up’ by the introduction of joint tortfeasor concepts.”

Returning to his theme, Cellucci argued that the SJC should follow the approach of Massachusetts’ sister states in adopting pro rata allocation. He also emphasized that the issue had not been fully developed in Rubenstein or Chicago Bridge and, indeed, had barely been addressed by the trial court in Rubenstein (at this point, Justice Botsford, who was the trial judge of Rubenstein, appeared to nod her head vigorously).

Justice Spina asked what effect pro rata allocation would have on periods where there was no insurance. Cellucci responded that the policyholder would bear responsibility for periods of self-insurance as it had chosen not to buy insurance.

Justice Cordy wondered how allocation would spread loss and, in particular, whether the insured would be forced to pay a full retention for each triggered year. This led to a discussion of what the “occurrence” was. Justice Spina expressed the view that the reasonable expectation of the parties probably required payment of a separate retention per year. Cordy suggested that there might be other ways of assigning risk so that the insured only paid one full SIR.

Cordy commented that at some level there was a “fictional element” in all of the proposals and the only question was “how much fiction and which fiction we elect to adopt.”

Arguing for Boston Gas, David Elkind urged the Court to simply apply the wording of the policies. Justice Marshall archly responded that he could get at least six votes for this proposition but that the problem was somewhat more complicated than this simple statement. Elkind argued that Century Indemnity was conflating the concepts of “trigger” and “scope” and that the question with respect to “during the policy period” was not whether the policy responded but how much would be paid.

Botsford asked Elkind how he dealt with the “to which this policy applies” language in the policy. Elkind responded that this language dealt with other aspects of the policy and took note of the fact that the Century Indemnity policy contained provisions allocating defense costs but not indemnity. He also argued that since these were liability policies, coverage should track the nature of the insured’s liability.

Justice Cordy inquired whether the language in question was similar to the Century Indemnity policy that the New Hampshire Supreme Court had examined in its pro-insurer analysis in EnergyNorth v. Century Indemnity. Elkind was forced to concede this but suggested that most other states that had considered similar language had adopted an “all sums” approach. Justice Cordy took issue with him on this point and appeared to reject any suggestion that decisions such as Consolidated Edison involved principles of law differing from those applying to Massachusetts.

Justice Marshall took note of the fact that the policies in question were issued in the 1950s and 1960s and pre-dated the long-tail liabilities that have since emerged as the result of asbestos litigation and the adoption of statutes such as CERCLA. She wondered whether, outside of the long-tail claim situation, any business would have expected to obtain coverage in the manner proposed by Boston Gas.

A colloquy ensued with respect to the effect of “occurrence” language. Botsford asked whether the occurrence could take place during the policy period. Elkind responded that the “occurrence” was the causative event and not necessarily the continuing property damage. Botsford wondered whether separate wells that leaked on the site might still be one “occurrence.” Elkind agreed, noting the “conditions” language in the policy.

Botsford next raised a question with respect to the scope of the contra proferentum doctrine and asked whether the policies were manuscripted. Elkind responded that although these were not standard wordings there was no evidence of joint negotiation and it appeared that any manuscripted wording had solely been presented by INA.

Justice Spina broke in wondering “what the point” was since any resolution on the terms proposed by Boston Gas would merely necessitate a second round of complex and lengthy litigation between its insurers to resolve the issues of allocation. Elkind responded that it was not appropriate for the Court to worry about the equities of the situation and that it should solely interpret the wording of the policy.

Botsford also wondered what remedy was available to Century Indemnity. Elkind responded that it had substantial reinsurance for the amounts that it paid that might well entirely take care of its loss and that otherwise it was entitled to pursue claims for contribution and would in any event receive a set-off for settlements with the other insurers. Justice Cowin, who had been entirely silent up to that point, wondered whether Century Indemnity agreed that it had these rights. Justice Botsford noted that there would in any event be a fight about allocation in any subsequent ensuing contribution proceedings.

Wrapping up, Elkind argued that pro rata allocation should not be adopted and that in any event the extreme version proposed by Century Indemnity had only to date been followed by one state (Minnesota) and need not be followed here. Additionally, he argued that at most Boston Gas should be responsible for a single self-insured retention for the entire period of coverage.

Justice Ireland asked no questions throughout the argument. Justice Gants did not participate in the oral argument as his nomination to the SJC has not been approved by the Governor’s Council. He may yet participate in the decision, however, if his nomination is approved in January, as expected.

Based on the justices' questioning, the court does not seem satisfied with the insured's theories of "all sums" or "joint and several" liability.  On the other hand, they also do not feel that the policy wordings at issue are necessarily clear as applied to such claims.  It remains to be seen whether the SJC will follow the lead of  the New Jersey Supreme Court in developing extra-contractual rules for allocating long-tail losses or will find ambiguity due to the lack of clear policy wordings.  It is also unclear whether the court will adopt a broad standard for resolving future disputes or will simply deal with the crucial threshold question of whether allocation should be permitted to uninsured periods, leaving issues such as "collapsing bathtubs" and the like for future cases.

A decision is expected by April or May. 

This insurance coverage dispute arose out of dumping activity by Richard Towns between 1972 and 1987. Towns operated a waste hauling business. Over time, he culled some of the debris from his business and used it to fill in a steep embankment at his house. Some of the debris was also used to fill in a swimming hole in front of the property.

Towns sold his home in 1987. Thereafter, the new owners, concerned about the fill, contacted the Vermont Attorney General’s Office which ultimately issued an order to Towns directing him to engage an environmental consultant and clean up the property.

Towns initially sought coverage for the state’s claim from Vermont Mutual, which had insured him after he sold the property in 1987. Ultimately, the Vermont Supreme Court affirmed a lower court’s ruling that the Vermont Mutual policy did not cover the loss. Towns v. Northern Security Ins. Co., 726 A.2d 65, 67 (Vt. 1999).

Thereafter, Towns sued Northern Security, which had insured him between 1983 and 1987. Northern Security disputed its claimed obligations, citing the “business pursuits” exclusion in its homeowners’ policy and contending that the loss in question had “manifested” after its policies had expired. These arguments were for the most part rejected by a state trial court in a 2007 opinion although the court declared that Northern Security was only liable for its “time on the risk” (25%) as its coverage had only been in effect for four of the sixteen years that Towns had lived there.

On appeal, the Vermont Supreme Court agreed with the trial court that the “business pursuits” exclusion did not apply. Although the debris had been generated in the course of the insured’s business, the court held that what was relevant was the dumping activity, which is subject to the non-business exception to the exclusion. This point was contested by Chief Justice Greiber, who argued in a dissenting opinion that the sheer amount and duration of the fill activity was clearly integral to the insured’s waste hauling business.

The Supreme Court also rejected Northern Security’s reliance on the “own property” exclusion. In keeping with the approach followed by most courts, the court held that groundwater contamination was a public resource and not the insured’s “own property.” The court also rejected Northern Security’s argument that because the groundwater contamination was below state action levels, it did not satisfy the policy’s requirement of “property damage.”

The court suggested, however, that the exclusion might yet apply to any costs that were solely related to the insured’s property, as distinguished from the cost of preventing third-party property damage.

The court also rejected Northern’s argument that a manifestation trigger was appropriate, declaring instead that it would follow the majority rule which applies a continuous trigger to claims of this sort where the disposal activity and resulting damage was ongoing over a period of years.
On the other hand, the Supreme Court also sustained the lower court’s decision to limit the insurer’s obligation to that portion of defense and indemnity during its “time on the risk.” The court noted that a “time on the risk” method offers several policy advantages including spreading the risk to the maximum number of carriers, providing a ready means of identifying each insurer’s liability through a relatively simple calculation and avoiding the necessity for subsequent indemnification actions between or among insurers. In cases of this sort, the court held that as the policy was self-insured, it was fair and reasonable to require the insured to bear responsibility for that portion of total defense and indemnity for which he or she chose to assume the risk.

Vermont is an unusual state within which to litigate environmental coverage issues. Unlike states in southern New England, Vermont lacks the type of heavy industry that have historically generated significant numbers of environmental claims in the past. On the other hand, insurers for the most part have been denied the opportunity to include pollution exclusions by reason of regulations followed by Vermont regulators since the early 1970s. Even so, there has been a relative dearth of clear appellate case law construing the availability of insurance coverage for such claims.

The Towns opinion may ultimately be particularly important in two respects.  First, it reenforces the growing consensus in the Northeast and New England that "all sums" has no place in insurance jurisprudence.   Although the Massachusetts SJC has a proud tradition of forging its own path without regard for the views of sister states, it is less likely to view "time on the risk" as a made up argument by insurers where allocation has been approved by the Supreme Courts of Connecticut, New Hampshire, New Jersey, New York and now Vermont.

Second, this is the rare case (Security in Connecticut being another), where a court has explicitly applied  allocation principles to the duty to defend.  As many of these cases (e.g.  ConEd, EnergyNorth) have arisen in the context of excess policies, the focus of most cases has been on insurer's claimed indemnity duties.  Towns rightly affirms that the same analysis applies to the scope of an insurer's duty to pay or reimburse defense costs.

At issue in Boston Gas Co. v. Century Indemnity Co., No. 07-1452 (1st Cir. June 10, 2008) was a jury’s award of $6 million to a gas utility for the cost of cleaning up a former production facility in Everett, Massachusetts. Despite the fact that the site was operated from 1908 to 1969, the District Court instructed the jury that Boston Gas could assign its entire loss to an individual policy issued by Century Indemnity’s predecessor and need only pay a single $100,000 SIR.. Additionally, Judge Zobel issued a declaration that Century was liable for all future cleanup costs.

On appeal, the First Circuit expressed perplexity with respect to whether Massachussets law allows such “all sums” recoveries or would require some sort of allocation. The court was not persuaded that the Appeals Court’s 1998 opinion in Rubenstein, which the District Court had relied on, was particularly persuasive, describing the Appeals Court’s analysis as “cursory.”
As a result, the First Circuit has certified three allocation questions to the Supreme Judicial Court:

1. Should long tail losses be pro rated in some manner among all insurers “on the risk” so that the sued carrier is only liable for its fractional share?

2. If some sort of pro rata liability is called for in such circumstances, what allocation method or formula should be sued?

3. If a single insurer in such circumstances is subject to liability under more than one policy and each policy has a separate deductible or self-insured retention, how many self-insured retentions must be applied?

It will be interesting to see how these issues are briefed to the SJC and, in particular, whether the court will be asked to hold that allocation should be done on a “pure time on the risk” basis (back to 1908) or merely, as the First Circuit suggests, among the period of available insurance policies. The distinction may not matter much to Century Indemnity, given the fact that, as in Con Ed many years ago, the insured had SIRs in all of the applicable policies, but it will surely have major implications in other cases in the future.

In 2006, U.S. District Court Judge Rya Zobel (who some will recall as the author of the original “manifestation” trigger opinion in Eagle Picher) ruled that Century Indemnity could be liable for the insured’s entire cost of cleaning up a polluted MGP site near Boston Harbor despite the fact that its policies had only been in effect for a brief period of the overall time when pollution occurred. The crucial issue presented by the Boston Gas appeal is whether the First Circuit will take an independent view of “pro rata” versus “all sums” or will feel constrained to affirm Judge Zobel in light of rulings of the Massachusetts Appeal Court in Rubenstein v. Royal Ins. Co., 44 Mass. App. Ct. 842, 694 N.E.2d 381 (1998), review denied (Mass. 1999) and Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyds, 59 Mass. App. Ct. 646, 797 N.E.2d 424 (2003), further appellate review denied (Mass. 2004) adopting a theory of “joint and several” liability.

Massachusetts is among those jurisdictions whose highest state court has never addressed the issue of allocation. This is not for lack of opportunity. In both Chicago Bridge and Rubenstein, the insurers sought further appellate review but their requests were denied by the Supreme Judicial Court.  The court’s inaction on issues of allocation may reflect the fact that it is perfectly content with the analysis adopted by the Appeals Court.   Alternatively, as insurers might prefer, it may reflect the court’s view that neither case presented an appropriate vehicle decide this momentous issue,  given the inadequate factual record in Rubenstein and the peculiar issues of Illinois law and London Market insurance wordings considered in Chicago Bridge.

The key question presented by Boston Gas will be whether the panel feels constrained to follow the rulings of the Appeals Court or is free to make its own determinations with respect to this issue. In the complex dance between state and federal courts considering insurance issues, federal courts are bound to follow state law but are not necessarily bound to adopt the rulings of intermediate appellate courts if there are sufficient Erie “data points” that suggest to the federal court’s satisfaction that the state’s highest court would take a different view. Thus it was that between 1985 and 1990, Massachusetts insurers suffered with the Appeals Court’s declaration in Shapiro v. Public Service Mutual that pollution exclusions were ambiguous, a situation that remained unrectified until the Supreme Judicial Court weighed in in 1990 with Hazen Paper and Belleville.

On the other hand, recent coverage history is replete with cases in which state and federal courts took contradictory views of the same issues. Illinois, in particular, has been a problem in this regard as the Illinois Supreme Court and the Seventh Circuit took opposite views of the trigger of coverage in the Eljer sequence of cases. More recently, the Illinois Supreme Court concluded that TCPA claims trigger Coverage B under the CGL policy a few months after the Seventh Circuit declared that they obviously did not.

Although the First Circuit and Massachusetts courts have enjoyed a more cordial relationship over the years than other state and federal courts, it remains to be seen whether the First Circuit, even if it decides to ignore Rubenstein and Chicago Bridge, would adopt the insurer’s position in this case. Much may depend on which Judge writes the opinion. The senior jurist on the panel, Leonard Boudin, described the policyholder’s “joint and several” position as “crazy” although it also appeared that he had not yet read Chicago Bridge or Rubenstein. On the other hand, Judge Selya seemed entirely comfortable with adopting a theory of “joint and several” liability insofar as the insurer could not show that the injury occurring during its policy was somehow divisible from the overall environmental loss giving rise to the claims against Boston Gas. The third jurist, Judge Gelpi, who was only appointed to the U.S. District Court in Puerto Rico in 2006 and manifested a clear lack of understanding concerning Erie principles, gave no indication as to his views on the substantive coverage issues.

Apart from allocation, Boston Gas may also yield an interesting ruling concerning the effect of “owned property” exclusions in such cases. Massachusetts courts, like many states, ignore the owned property exclusion insofar as work is undertaken on the insured’s property to prevent or remediate off-site contamination. In this case, the U.S. District Court essentially gave an “all or nothing” instruction to the jury with the result that, having found that some of the work was necessary to remediate off-site property, the jury refused to limit the insured’s award in any respect for certain tasks that solely concerned property damage on the insured’s property. The issue on appeal, therefore, is whether even in cases where there is off-site damage, some portion of indemnity should be subject to the exclusion for tasks that are solely attributable to on-site contamination and in no way related to the prevention or remediation of off-site pollution.

The insurers' latest win came this morning in the New Hampshire Supreme Court.  On a certified question from the U.S. District Court, the court held in EnergyNorth Natural Gas, Inc. v. Certain Underwriters that indemnity claims arising out of the clean up of the insured's former gas site cannot be spiked in a single year to trigger a third layer excess policy issued by American Re in 1972.  Having adopted a "continuous trigger" 3 years ago in another EnergyNorth MGP case, the court this time held that the insured must bear the consequences of this extended period of property damage, as insurers are only responsible for that portion of the loss corresponding to the duration of their coverage. 

In a lengthy (for this court) opinion, the court concluded that pro rata allocation was (1) more consistent with its trigger of coverage analysis than "joint and several" liability; (2) gives insured's incentives to buy insurance and avoid environmental carelessness and (3) that joint and several is based on an untenable assumption, namely that at every point in a progressive, developing loss, the injury will be substantially the same.  Further, the court found that joint and several didn't resolve the issue of allocation, it merely postponed it by spawning another round of contribution litigation between the spiked carrier and other potentially triggered insurers that had avoided the insured's initial embrace.  

As any means of allocation spread the risk too thinly to reach AmRe's layer, the New Hampshire court (much like the NY Court of Appeals in ConEd) chose not to be much more specific about the details of allocation, although it expressed a strong preference for the "years times limit" approach pioneered by the New Jersey Supreme Court in Owens-Illinois.  Should that approach prove unfeasible, however, the court opined that lower courts should feel free to pro rate by years.

Owing to the fact that three justices were conflicted, only Justices Dalianis and Duggan (who wrote the opinion) sat, with the assistance of retired Justice Sherman Horton.  Fans of NHSC history will recall that it was Sherm Horton who, shortly before retiring, handed gas utilities their first appellate defeat by ruling in Concord Gas that the intentional discharge of tar waste into a body of water could not be an "occurrence."   How the wheel turns...

As is the case with many similar opinions, there are a host of details that remain to be worked out.  Notably, the court did not specify what denominator should be used.  Insofar as the court sought to align its trigger and allocation analyses, it would seem that this period should run from the date that the site was placed in operation (1852--which was the year that Franklin Pierce--New Hampshire's native son--became President of the United States).  The court's reference to OI suggests, however, that this period must take into account the amount of insurance a reasonable business would have bought and thus the question of whether insurance could have been purchased for casualty risks for some of that time.

While the court's statement that loss continued through manifestation implied that the denominator should extend until 2000, when this pollution was first documented, the Court's reference to OI again raises the possibility that later years containing pollution exclusions should be cut off, as policyholders in Minnesota have argument since Wooddale.