First Circuit Hears Oral Argument On Pollution Issues
The U.S. Court of Appeals heard oral argument last week in Emhart Ind. v. Century Ind. Co. a large and complicated insurance dispute that promises to say much about the future of environmental coverage jurisprudence in the Ocean State.
The dispute in Emhart involves a chemical manufacturer’s efforts to compel coverage for Superfund claims arising out of a former manufacturing facility in Rhode Island. After settling with most of its primary carriers, Emhart belatedly discovered that Century Indemnity’s predecessor (INA) had issued a primary liability insurance policy to it in the late 1960s. Only at the close of trial did the U.S. District Court (Smith, J.) declare that Century Indemnity had a duty to defend. Despite the absence of any statement in the underlying Notice of Responsibility from the U.S. EPA or other “charging documents” to the effect that pollution had become manifest during the INA policy period or otherwise satisfied Rhode Island’s “discoverability” standard for trigger of coverage, the court ruled that silence was sufficient to give rise to a potential for coverage triggering the policy under a Montrose-type analysis of the duty to defend.
Tthe Court is considering cross-appeals from a 93 page opinion of a Rhode Island District Court as to (1) whether a primary liability insurer’s failure to defend exposes it to an indemnity exposure without limits (notwithstanding a jury’s finding that the insurer’s policy was not actually triggered) and (2) whether the Rhode Island District Court erred in finding a duty to defend notwithstanding the absence of any statement in the “charging documents” suggesting that property damage had been “discoverable” within the policy period pursuant to Rhode Island’s “manifestation” analysis.
--The Century Indemnity Appeal
In its appeal (07-2806), Century Indemnity argued to the First Circuit that the District Court erred in finding a duty to defend in the absence of anything in the “charging documents” suggesting that pollution was discoverable during its policy period or that the insured had reason to test for pollution. The twist in this case is that Emhart denies that it was the source of this pollution and therefore was hard pressed at trial to present evidence as to the date when it had reason to look for pollution on its property.
In the alternative, Century Indemnity argued that if Rhode Island’s four corners “pleadings test” was to be applied so broadly, it should logically apply to all primary insurers such that Century Indemnity should only have been obligated to pay a pro rata portion of defense costs.
The panel questioned whether this was, in fact, inequitable as any insurer forced to bear the full costs of defense under such circumstances was free to seek contribution from other carriers. Counsel for Century Indemnity responded that this was bad public policy and would merely multiply the volume of litigation with respect to allocation issues.
Counsel for Emhart rejoined that the insurer had purchased a “defense” and that insurers were therefore obligated to defend, not merely to pay a portion of defense costs. As with Justice Boudin’s comment, Attorney Pirozollo argued that the insurer was free to seek recovery from other insurers for contribution. Pirozollo also argued that Rhode Island law was settled with respect to the scope of the “four corners” test even as applied to pollution claims as evidenced by the Rhode Island Supreme Court’s trigger decision in Truckaway. Justice Howard questioned, however, whether if Rhode Island law was so clear why the District Court (Smith, J.) hadn’t entered summary judgment against Century Indemnity early on rather than waiting until the conclusion of the trial to find that it had a duty to defend.
--Emhart's Cross Appeal
Turning to the second appeal before the Court, counsel for Emhart argued that the U.S. District Court had erred in failing to give literal application to the Rhode Island Supreme Court’s Conanticut rule. Under the Conanticut rule, an insurer that fails to defend is barred from raising indemnity defenses. In this case, the District Court questioned whether Conanticut was still good law, as it has not been followed in Rhode Island, has been criticized by out of state authority and is at odds with recent Rhode Island rulings holding that coverage cannot be created by estoppel. As a result, Judge Smith had refused to impose damages against INA beyond the insured’s costs of defense.
Emhart’s arguments met with skepticism from the First Circuit. Justice Boudin, who generally took the lead in the questioning, observed that the Conanticut rule had evolved in situations where policyholders had suffered grievous consequences as a result of an insurer’s failure to defend and questioned whether it made sense to extend the rule in this case where the insured was a large corporate conglomerate that had defended itself exactly in the same manner as would have been the case had an insurer been paying for independent counsel.
Counsel for Century Indemnity argued to the panel that unlike the facts in Conanticut, Emhart had not suffered any consequential damages. In the absence of such damages, applying Conanticut in this case would be equivalent to creating coverage through waiver or estoppel, which Rhode Island courts have made clear is not appropriate.
While appearing to be unimpressed by Emhart’s arguments, the panel did raise the possibility that the issue should be certified to the Rhode Island Supreme Court.
Given the exchange among the justices, it seems likely that Justice Boudin will write this opinion. It will be recalled that Boudin served on the panel that generated the Boston Gas opinion last June. A decision is unlikely before early 2009.
The First Circuit now has streaming audio of oral arguments: http://www.ca1.uscourts.gov/
