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

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.