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

The discussion of allocation is particularly interesting.  It appears that the court was assuming that only years in which disposal activity actually took place should be triggered.  As a result, it ruled that if each of the sites was treated as a separate occurrence, the insured would lose CNA's coverage, since the disposal activity at some sites ended before its policies were issued.  Conversely, the court rejected CNA's argument that the trial court should have tacked 30 years onto the denominator for allocation, as the clean up won't be finished until 2017.   The Supreme Court ruled that the trial court correctly looked to the period (1947-87) when the contaminants were deposited, rather than the estimated time for the clean up.  So is this an "exposure" trigger ruling?  

The court also suggests that it might have agreed with Dutton that a "joint and several" approach was appropriate if the insured could have shown the amount of damage allocable to each year in question.   But isn't the basic premise underlying the policyholders argument that long-tail claims involve indivisible injuries that all of their insurer are jointly liable for if they owe anything at all? 

The "occurrences" analysis is also interesting.  Even though the sites in question were operated independently of each other, the court ruled that they all involved the same underlying cause, namely the insured's manufacturing processes, without which the insured would not have had waste TCE/TCA that had to be disposed of.  This is, at least to the best of my knowledge, the first state supreme court in which separate waste sites have been held to arise out a single "occurrence."  Given the growing number of rulings on this issue, the limited case authority cited (two opinions from the Third Circuit and an old federal trial opinon from Massachusetts) is odd indeed.

Bottom line:  a great result but one that reflects some incomplete analysis that may create headaches for carriers in other cases in the future.

Nuclear liability risks have been excluded from CGL policies since the 1950s. In response to this gap in coverage, the Nuclear Energy Liability Insurance Association provides coverage pursuant to special policy forms. In this case, the Nuclear Metals Division of Whittaker Corporation sought coverage under an ANI policy for the cost of responding to a U.S. EPA clean up directive concerning its nuclear metals manufacturing facility in Concord, Massachusetts.

According to ANI, it had issued an environmental endorsement (Endorsement 112) in 1990 adding coverage for certain environmental liabilities but stating that the policy would not cover “environmental clean up costs or on-site clean up costs.” A copy of Endorsement 112 was reflected in the ANI file but not in the insured’s own copy. Although ANI argued that it was its standard procedure to send a copy of its policy to the agents of all of its insureds, Judge Stearns found that evidence of a general procedure was not proof that the insured itself had received this policy. Furthermore, although the general rule in Massachusetts is that an insured is charged with its agent’s knowledge of the terms and conditions of a policy, the court took note of the fact that Condition 13 to this policy stated that, “Notice to any agent or knowledge possessed by any agent or by any other person shall not effect a waiver or change in any part of this policy.”

Judge Stearns concluded that it was ANI’s burden to prove the existence of this exclusion and that whether or not the policy contained the endorsement presenting this exclusion was a question of fact that must be resolved at trial. While denying the parties’ cross-motions for summary judgment with respect to the case as a whole, Judge Stearns granted the insured’s motion for summary judgment on the issue of the duty to defend, finding that as there was a possibility that the policy did not exclude coverage for environmental clean up costs, “It is at least plausible that the Policy will cover EPA’s demand for environmental testing and remediation.”

There are two puzzling aspects to Judge Stearns’ analysis. First, the general principle cited by the court with respect to the parties’ respective burdens of proof has to do with the application of policy terms, not their existence. Thus, it is the general rule in Massachusetts that insureds bear the burden of proving claims within a policy’s insuring agreement at which point the burden of proof shifts to an insurer to establish that coverage is precluded by reason of exclusions, conditions or other limitations to coverage. Judge Stearns appears to have confused this rule with the separate principle that an insured bears the burden of proving the existence and material terms of an insurance policy.

Second, the potential for coverage arises from the question of whether the underlying facts fall within the scope of coverage. The court should not have granted summary judgment on this issue while questions of fact remained to be resolved concerning the actual wording of the policy.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The insured in Dreaded, Inc. v. St. Paul Guardian Ins. Co., had received cleanup demands from the Indiana Department of Environmental Management in November of 2000 and again in August 2003 but failed to alert its CGL carriers to these claims until March 2004. St. Paul thereafter agreed to provide a defense under a reservation of rights but declined to reimburse its insured for costs incurred prior to March 2004. The trial court entered summary judgment for St. Paul, declaring that even if a showing of prejudice was required, a delay of three and a half years in tendering the underlying claims was unreasonable as a matter of law and gave rise to a presumption of prejudice.

In December 2007, the Indiana Court of Appeals reversed, declaring that although the insured’s delay was unreasonable, the insured had raised sufficient facts to rebut any presumption that St. Paul had been prejudiced by its delay. The court took note of the fact that St. Paul did nothing after receiving notice to alter the manner in which the case was being defended and retained the same attorneys and environmental consultants. Further, the court was persuaded by evidence presented by the insured that its defense up to that point had been reasonable and appropriate. As a result, the Appeals Court held that the trial court should not have granted summary judgment to St. Paul.

On April 29, 2009, however, the Indiana Supreme Court held that although the “presumption of prejudice” rule applied with respect to an insured’s failure to give notice of an accident, in this case what was at issue was the insurer’s duty to defend. The court ruled that an insurer cannot defend a claim of which it has no knowledge and that, “The insurer’s duty to defend simply does not arise until it receives the foundational information designated in the notice requirement. Until an insurer receives such enabling information, it cannot be held accountable for breaching this duty.” As a result, the Supreme Court ruled that the insurers were not liable for reimbursing Dreaded for its pre-tender costs.

It should be admitted that some of the confusion that courts have engendered in this area arose in part from the advocacy of insurance coverage lawyers who relied on case precedents involving the voluntary payment prohibition and other breaches of the cooperation clause as a basis for arguing that insurers had no duty to reimburse for costs incurred prior to the date of tender. See, e.g. Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 976 (4th Dept. 2000).

This new opinion from the Indiana Supreme Court should remind us, however, that the stronger argument in such cases is that the requirement of tender is a condition precedent to any defense obligation arising as a matter of contract and that, as no defense obligation can exist prior to a lawsuit being tendered for defense, an insurer should have no obligation to reimburse pre-tender defense costs.
 

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. 

(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.

On the most recent decision (State of Calif. v. Continental Ins. Co.), we reported in October that the California appellate court had issued a tentative decision prior to oral arguments. The court’s final decision is consistent with the indication of its leanings. The lengthy decision contains the following rulings:

• "All sums" rule applies - In a continuous loss situation, each insurer that covers any part of the claim has an obligation to pay the entire claim, and then seek reimbursement from other insurers.  This was suggested by earlier cases and is the approach taken by many courts around the country.
• The insured can stack policy limits across policy periods (absent policy language on the issues) - There was nothing in the policies or law that precluded stacking of policies across applicable policy periods. This is a rejection of FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132.  
• Self-insured retentions (“SIRs”) must be paid under each excess policy (dicta) - If multiple policies each with an SIR are implicated, the court should require each SIR to be paid prior to coverage being available under the excess policy.
• Distinction between deductibles and SIRs (dicta) - Deductibles are typically found in personal liability policies whereas SIRs are found in commercial policies. In policies with SIRs, limits are paid after payment of SIR but deductibles reduce policy limits.
• Only a single occurrence was at issue – There were not four occurrences (i.e., (1) escape of contaminants through fractures in the rocks; (2) escape through the barrier; (3) escape through the underground streambed; and (4) an overflow from the pit).  The single occurrence was the continuing exposure to the conditions (plural) at the site which combined to cause on-going contamination when the waste was put into the site.  The court likened the site to a sieve with multiple holes; each hole is not a separate occurrence.  The overflow from the pit did not constitute a separate occurrence because the State failed to show it resulted in separate damage.
• No annualization of limits - There was no language in the multi-year policies indicating the limits were intended to apply annually.
• The trial court's "set off" ruling is moot in light of the reversal of the trial court's no-stacking ruling and the size of the total loss.
• Mitigation of damages doctrine did not apply - This defense is not available to insurers who claim the insured failed to take steps which would have reduced its damages (and inured to the insurer's benefit).
• The trial court did not abuse its discretion in declining to apply the ancient documents or business records exceptions to the hearsay rule. Documents located in the excess insurers underwriting file could not be properly authenticated and presented in order to meet the requirements of those evidentiary rules.

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.

--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/

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.

In the ensuing coverage litigation, the Los Angelese Superior Court ruled for CNA in 2006, holding that the worker's suit for injuries caused by exposure to the methylene chloride were clearly subject to the APE in a 2002 American Casualty policy as arising out of a discharge of pollutants on or from the insured's premises.  This finding was affirmed by the Second District of the Court of Appeal on January 29.

The court ruled that “an ordinary insured would reasonably expect that the release of methylene chloride into a public sewer is environmental pollution.”   In keeping with other recent opinions such as Ortega Rock Quarry and Garamendi v. Golden Eagle, the court held that the insured's discharge of methylene chloride into the sewer was a widespread dissemination of a pollutant into the environment.  The court rejected the insured's argument that such exclusions do not apply to "one-time, negligent" discharges or should be limited to "catastrophic events such as large scale industrial pollution   The court also held that the fact that the sewer in question was sealed merely limited the scope of injury and did not alter the fact that there had been a release into the environment.. Finally, the Second District held that the operator of a furniture stripping business should have been well aware of the need to handle such chemicals carefully.

Although not discussed in the opinion, the Second District's analysis is in keeping with the First District's opinion late last year in Cold  Creek Compost, Inc. v. State Farm Fire & Casualty Co., A114623 (Cal. App. November 20, 2007), in whichh the Court of Appeal ruled that neighbors’ nuisance claims due to exposure to offensive odors, dust and noise from the insured’s composting operations are subject to an absolute pollution exclusion. The First District declared that “the widespread dissemination of offensive and injurious odors from a commercial compost facility is ‘environmental pollution’ under MacKinnon and thus excluded from coverage...”

It will be interesting to see if the California Supreme Court takes an appeal from one of these cases.  Meanwhile, it appears that the rumors of the demise of the absolute pollution exclusion  in California were exaggerated after all.

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 Sixth Circuit first affirmed the district court’s grant of summary judgment to PMA as to the 1967 to 1972 policies, finding that the policyholder failed to establish by clear and convincing evidence the existence and terms of the lost policies under Pennsylvania law. Relying only on a document filed with the district court by PMA which indicated the policyholder had coverage in 1967 (which PMA disputed as a typo in its filings), PMA’s computer records which indicate the 1972 policy was a "renewal" and the testimony of a former PMA employee that stated the pollution exclusion was not approved by the Pennsylvania Commissioner of Insurance until 1970, the court found the policyholder failed to meet its burden of proving the terms and conditions of the policies under Pennsylvania law.

As to the 1972 to 1978 policies, the policyholder argued that the underlying lawsuit fell within the “sudden and accidental” exception to the pollution exclusion. Agreeing with PMA that under Pennsylvania law “sudden and accidental” encompasses discharges which are both unexpected and "abrupt in time," the court affirmed the district court’s grant of summary judgment to PMA as the evidence produced by the policyholder could only be interpreted by a reasonable jury that discharges were “frequent, continuous and highly predictable.” As to the bad faith claim, the Sixth Circuit similarly affirmed the district court judgment finding that, under Pennsylvania law a bad faith claim may not be stated unless the “insurer lacked a reasonable basis for denying benefits.” Because the court affirmed the finding that the underlying lawsuit did not fall within the scope of the policies, PMA had a reasonable basis for denying benefits and did not act in bad faith. 

The Supreme Court rejected the insured’s contention that pollution was not the efficient proximate cause of the oil spill, holding that the exclusion in question included not only losses caused by listed events but also losses “consisting” of the listed conditions. The court observed that “although contamination or pollution can be a cause of loss, it is most often an effect of other causes, that is a ‘loss consisting of’ rather than a cause.”

The court also refused to find that the circumstances of the spill could be viewed as an “explosion” so as to trigger the policy’s personal property coverage holding that, “whatever the force of the discharge of the oil, the tank did not rupture because of the internal pressure of the oil” so as to fit within the common case law or dictionary meaning of an “explosion.”

This is hardly the first time that homeowners have sued to get first party coverage for pollution claims.  Indeed, prior to the widespread use of ACC clauses, several courts had ruled that coverage was required, notwithstanding first party pollution exclusions, if the negligence of a third party was a contributing cause.  Thus, in Jussim v. Massachusetts Bay Ins. Co., 415 Mass. 24 (1993), the Supreme Judicial Court of Massachusetts found first party coverage for the cost of cleaning up fuel oil that migrated into the insured's well after a fuel oil dealer negligently delivered a load of oil into a neighbor's basement.  The court ruled that the pollution exclusion did not defeat coverage where the "efficient proximate cause of the loss" was the negligence of a third party, "even though the final form of the property damage, produced by a series of related events, appears to take the loss outside of the terms of the policy."

The Sperling opinion takes a very different approach since the exclusion in question applies not only to loss caused by pollution but damage that "consists" of pollution.

However, the Second District of the California Court of Appeal has since declared that the Superior Court erred in failing to apply the law of California, which takes a broader view of the duty to defend than Texas. Writing for the court, Justice Croskey declared that Civil Code Section 1646, which requires that a contract be interpreted according to the law and usage of the place where the contract is to be performed, compelled the application of California law, as California was the state where RLI would be obligated to perform its defense obligations under the policies and that the contracting parties knew this at the time that the policy was issued as the RLI policy includes several endorsements reflecting the existence of a covered risk located in California. The court then went on to hold that RLI’s duty to defend was triggered under California law.

This focus on the place of performance is not unheard of. For instance, New Jersey courts have applied different choice of law rules in pollution cases depending on the nature of the underlying issue and have adopted the current domicile of the insured as applying to issues involving the obligation to give timely notice since the insured was located in that jurisdiction at the time that the notice obligation arose. See . Unisys Corp. v. INA, 154 N.J. 217, 712 A.2d 649 (1998). On the other hand, the California court’s approach seems more of a fig leaf for adopting a place of the tort approach since construing the “place of performance” as the jurisdiction where the insurer is required to provide a defense necessarily means that the jurisdiction where the underlying litigation is pending will be the state whose law controls. As far as the author knows, this approach is unprecedented (although hardly the first time that California courts have leaped into the abyss).

The opinion is also worthy of note in that it was written by Justice Croskey, whose views on insurance are often viewed as being close to gospel in California. Of late, however, Croskey has authored several opinions that are far from mainstream.

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.