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

(1) Does application of the sudden and accidental pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site?

The trial court ruled the relevant discharge was the discharge to the landfill, not the later discharge from the facility, following Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882. The appellate court reversed, and the Supremes agreed, holding that on these facts, relevant was the release of pollutants from containment not to the containment. This was because the State was being held liable, as the entity that sited, designed, built, and operated the facility with its evaporation ponds, for failing to contain the pollutants; it was not being held liable for pollluting the evaporation ponds.

The Supreme Court found the earlier landfill case (Standum) consistent because, there, the liability of the insured (a manufacturer of liquid wastes deposited on the soil at the landfill) was being held liable for disposing wastes at the landfill. The crucial issue for application of the coverage question, according to California’s highest court, was examining the basis for the insured’s liability.

(2) If pollution is caused by both non-covered events and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is not covered?

The Supreme Court agreed with the appellate court on this issue as well and disapproved of Golden Eagle Refinery Co. v. Associated Int. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184, to the extent those earlier decisions are incompatible.

In Stringfellow, there were many claimed causes of the pollution, including underground leaking, and two major overflow incidents, the latter which the State claimed were sudden and accidental. The State admitted it could not differentiate the damage caused by the different sources of contamination, nor could it differentiate the different work that had been necessitated by the pollution based on its cause.

Under the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, where there is indivisible harm from both a covered and non-covered cause, the insured is entitled to full coverage. This is a unwelcome decision for insurers who argued, consistent with Golden Eagle, that the insured should have the burden of proving what part of the damage was caused by a covered event. Even so, the insured still has to prove there is a covered cause of the damage, and that the covered cause was a substantial factor in the property damage. The covered cause cannot be speculative or have only contributed trivially to the property damage. Furthermore, the Supreme Court explained, the insurer can counter the insured’s evidence of a covered cause that is a substantial factor in causing indivisible harm, by evidence that damages are divisible and that only a limited portion of those damages resulted from covered causes.

(3) If the insured takes remedial steps to prevent harm that might have been an accident and covered, is the remedial action covered?

In what may be the most surprising aspect of this decision, the Court ruled that there could be coverage for damage caused not by an accident but by deliberate preventative steps taken by the insured to avoid an accident (here, another flooding) to happen. Whether the action taken in fact avoided a covered event was a factual issue still to be tried.

The Court reasoned that policies cover costs to prevent harm, and that this result would be consistent with an insured’s reasonable expectations., and would encourage measures to mitigate and prevent damage. The Court cites no policy language in support of its holding which appears to emphasize public policy over contract interpretation.

Plaintiff’s primary argument was that the policy was “irremediably ambiguous” because the retroactive date was meaningless to the property at issue, one of 17 properties, because the tanks at that location were installed after the retroactive date. Plaintiff argued this created an ambiguity because there was a potential for coverage based on a leak from before the tanks were installed. Plaintiff argued that because of this ambiguity the policy should be interpreted to cover tanks and prior tanks at a scheduled location so long as the release happened after the retroactive date.

The Oregon Court of Appeals rejected this argument. Following Oregon’s interpretative rules, the Court found that the policy was not ambiguous. The Court found that Plaintiff’s proposed interpretation was not plausible because it is directly contradictory to policy language that the policy was location and storage tank specific. Since Plaintiff’s proposed interpretation contradicted specific policy language, it was by definition not reasonable.

The Court also rejected an argument that the insurer was barred from taking its position by the doctrine of judicial estoppel. Plaintiff argued that because the insurer had taken a contrary position in a case in Alaska, that it should be estopped from asserting that the policy does not apply to older tanks at a scheduled location. The Court found that since the insurer did not prevail in the Alaska case, that judicial estoppel does not apply.
 

According to the tentative, the court is leaning towards confirming California follows an “all sums” approach to an individual insurer’s liability (once its policy is proven to provide cover) for property damage that continues over many years. The court is also inclined to rule the insured can “stack” the insurance policies. That is, the insured is permitted to stack policies across policy periods. The appellate court opined that FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132(which held multiple policies’ occurrence limits could not be stacked) was not well-reasoned. While not criticizing the trial court for feeling it was bound by the FMC decision, the appellate court intends (unless persuaded otherwise) to hold FMC was wrong.

On other issues, the appellate court appears inclined to rule for the insurers. The court’s tentative indicates it agrees with the trial court’s finding of only one occurrence and that policy limits for multi-year policies were per occurrence not annual.

Meanwhile, briefing has been completed on other important pollution-coverage issues pending before the California Supreme Court in the Stringfellow case. Before the Supremes are the following issues: (1) Does application of the pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site? (2) If pollution is caused by both uncovered intentional actions and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is an uncovered act?

The Court of Appeal had rejected the insurers' contention, based on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882, that the relevant release for purposes of applying the "sudden and accidental" pollution exclusion was the deposit of waste into the site. The Court distinguished Standun because the insured in Standun was held strictly liable as a waste generator that purposefully and regularly disposed of waste at the site.  Here, the court held, the State's liability for the negligent design, construction and operation of the Stringfellow Site shifted the focus from the initial deposit to subsequent releases from the site.

The Court of Appeal also concluded Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184 are incompatible with the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94. The court held, applying Partridge, that the State would be entitled to full coverage even if damage was partially caused by an excluded event and the damage was indivisible.

We will report further as these courts issue final rulings on the various aspects of the case.

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.

The case involved the sale of two properties by Robert Goodstein, a receiver appointed by the King County Superior Court to wind up the dissolved partnerships of the owners of the properties. The owners operated a scrap metal salvage yard for forty-five years at one of the properties which caused ground pollution. At the other site the owners recycled scrap metal and electrical equipment for approximately twenty years resulting in hazardous waste byproducts containing high concentrations of soluble lead. In 1996 and 1998 Goldstein sold the properties. The sales agreements for both properties disclosed the lands were polluted and required that the purchasers take over the responsibility for any cleanup required by the government. The agreements did not however require the purchasers to remediate the property on their own.



Industrial issued primary and excess policies to the owners between 1980 and 1986. On September 28, 1990 Goodstein wrote Industrial advising that the Washington State Department of Energy had identified both properties as contaminated. The letter stated, “We write to notify you that [the owners] may make a claim for cleanup and related costs under the insurance policies you issued” and that Goodstein “may make a more formal claim for coverage and cleanup costs.” In a letter dated October 22, 1990 replying to Industrial’s acknowledgment that it had received the September 28, 1990 letter, Goodstein wrote “we are not presently making any claims under these policies.” Industrial heard nothing more about the claim and closed its file in December 1992. Some eight years later Goodstein wrote Industrial indicating that the properties had been sold and demanded Industrial pay the difference between the appraised contaminated value of the properties and the value of the sites in an uncontaminated state which he calculated as totaling about $5.3 million. Industrial denied coverage and, four years later, Goodstein filed suit seeking a declaration that Industrial breached both its duties to defend and indemnify under the subject policies.



The Ninth Circuit first determined that the district court did not abuse its discretion by declining to consider additional evidence submitted at the summary judgment level by Goodstein that he had entered into an oral agreement with the purchaser of one of the properties to cross-assign rights to insurance coverage that created a damages claim “since [the buyer] paid the costs to remediate the property.” Finding the evidence Goodstein submitted concerning this issue did not indicate a definitive agreement had been reached, the Ninth Circuit found that it was insufficient to prove the existence of an enforceable contract under Washington law.



As to the duty to indemnify, the Ninth Circuit found that Industrial did not have a duty to indemnify Goodstein for several reasons. First, it found that while Goodstein likely received a significantly reduced price for the sale of the properties, a Washington court would not find that loss covered under the policy as Goodstein failed to ensure that the polluted properties would be cleaned up promptly as the purchase agreements contained no cleanup condition. Thus, Goodstein was essentially seeking compensation from Industrial when he had not taken any action to ensure “either by procuring cleanup services himself or by requiring the buyer of the contaminated land to do so” that the harm caused by the owners polluting activities had been remedied. Indeed, the court pointed out that one of the properties had been cleaned up by the purchaser while the other property remained polluted “almost ten years after the sale and over fifteen years after the government first identified the land as containing hazardous waste.” Second, the policy language did not support a finding that the claim for diminution in value constituted “property damage” as Washington State courts had previously found that diminution in property value does not constitute “physical injury to tangible property” under language identical to that of the Industrial policy. The court similarly found that diminution in value did not fall within the realm of “damages” that the “insured shall become legally obligated to pay” because of “property damage” as Goodstein did not expend, constructively or otherwise, any money for remediation because “the sale was not conditioned on remediation that the buyer would perform with the money saved from the reduced purchase price.”



As to the duty to defend, the court reversed the district court’s grant of summary judgment to Industrial rejecting Industrial’s argument that Goodstein never invoked the duty to defend. The court found that under Washington law, the “filing of a lawsuit itself constitutes a request for payment of defense costs under the policy” and thus Goodstein invoked the duty to defend by filing the lawsuit. Because Industrial failed to demonstrate actual and substantial prejudice, it failed to support any finding of late notice under Washington law.

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.