When is "knowingly" bad conduct still an "occurrence"? Apparently, more frequent than you thought in Texas.

Posted on July 5, 2008 by Chris Martin

Last Monday, a three-judge panel of the Fifth Circuit considered one of the implications of the Texas Supreme Court’s landmark decision last year in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 22 S.W.3d 1 (Tex. 2007), in its decision in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp. --- F.3d ----, 2008 WL 2487054 (5th Cir. 2008).  In doing so, the Fifth Circuit considered a deceptively simple question: could an insured’s "knowing" violation of the Texas Deceptive Trade Practices Act still be an “occurrence” under a commercial umbrella policy?  In this case, the panel considered National Union’s claim it had no duty to indemnify its insured after the jury in the underlying tort case awarded the claimant $36 million against the insured after having found a “knowing” violation of the Texas Deceptive Trade Practices Act.  In the subsequent coverage case, National Union argued the insured’s actions, which the jury in the underlying suit found to be “knowing,” could not be an “occurrence” under the general liability policy because it could not constitute an “accident.”  Relying on Lamar Homes, the Fifth Circuit stated the “knowing” finding by the jury in the underlying lawsuit did not control the coverage issue because “knowing” in the context of the DTPA only meant “deliberate.”  And, as applied to the case at bar, the Fifth Circuit interpreted the Texas Supreme Court's recent holding Lamar Homes as holding that a “deliberate” act could still be an “occurrence” unless the injury was "highly probable" or the insured "intended or expected the harm that was suffered."  As such, the Fifth Circuit rejected National Union’s argument that a “knowing” violation of the DTPA could never constitute an “occurrence.”  The panel went on to instruct that the coverage lawsuit should include and seek to resolve issues that were not expressly adjudicated in the underlying lawsuit, such as whether the injury caused by the insured was "highly probable, expected or intended."

 

Lamar Homes was bad enough for the insurance industry, but this is getting ridiculous.  The Texas Supreme Court's treatment of the "occurrence" issue in Lamar Homes was in a totally different context than the one addressed by the Fifth Circuit in this case.  The statutory definition of "knowing" under the Texas DTPA puts the conduct on par with an intentional tort in order for it to be properly characterized as "knowing" conduct under the DTPA.  Under the statute, it's a necessary predicate to recover treble damages (the DTPA's own version of punitive damages.)  So, it's the antithesis of an insurable "occurrence."   The Fifth Circuit's decision further highlights the need of liability carriers in Texas to bring declaratory judgment actions when underlying tort cases involving their insureds generate material coverage questions,   Unfortunately, the Fifth Circuit's recent decision in Puget Plastics means that (at least in the federal courts) the resolution of the underlying tort case is just the beginning of the coverage case even when the underlying jury finds the insured's conduct to have been committed "knowingly."  
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Fifth Circuit Applies Pollution Exclusion to Explosion Caused by Gas Vapors

Posted on June 25, 2008 by Diane Polscer

Another court has determined that the total pollution exclusion is in fact “total.” In Noble Energy Inc. v. Bituminous Casualty Company, 2008 U.S. Dist. LEXIS 11757 (5th Cir. June 2, 2008), the court addressed the applicability of a pollution exclusion to bodily injury from an explosion. Workers were disposing of sediment and water from Noble’s petroleum storage tanks from two tanker trucks. Combustible vapors from the sediment and water caused the diesel engines in the truck to race which led to an explosion and fire. The sediment and water waste included gas condensate. Three employees were killed and several others injured. Bituminous Casualty argued that the pollution exclusion in its policy barred coverage for the claims.

The policy included a pollution exclusion that defined pollutant as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Following Texas law, the Fifth Circuit determined that the exclusion was unambiguous. The Court first determined that the allegations in the complaint that combustible vapors emanating from the sediment and water qualified as a “pollutant.” The Court then found that the alleged injuries arose out of the discharge, release or escape of that pollutant. The Court rejected an argument that the vapors were not “acting as a pollutant,” but as an accelerant for the fire. The Court found inapplicable cases finding that liability must be based on a substance’s polluting qualities for the exclusion to apply. The Court noted that unlike other cases, the Bituminous policy defined pollutant, and did not restrict its application to pollutants entering the land, atmosphere, or water. Finally, the Court noted that the injury did arise out of the “hazardous quality of the vapors.” This last point seemed to be a throwaway for the Court since it had already determined that it was not the “quality” of the substance that mattered.

The Court also rejected arguments by the insured that pollution exclusion should not apply because that would be contrary to the reasonable expectation of the insured. The Court observed that that was not the test in Texas for unambiguous policy terms. The Court similarly rejected an argument that the hostile fire exception applied. The hostile fire exception only applied where there is a pre-existing fire that causes pollution, not where the pollutant itself causes a fire. The Court also rejected arguments that the vapors were not discharged into the environment because they were confined to the area of intended use. The Court found that the pollution exclusion was not restricted to situations where environmental harm occurred. In rejecting all of the insureds arguments that the scope of the exclusion should be limited, the court clearly held that liability from any substance that falls within the definition of pollutant is excluded by this form of the pollution exclusion. This decision may help to reinforce that the most recent version of the pollution exclusion is actually “total.”

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