Federal Judge Nukes Insurer On Duty to Defend Standard
A new federal district court opinion in Massachusetts has taken a curious twist on conventional rules governing the duty to defend. Massachusetts, like most states, imposes a duty to defend where the underlying claims present a “potential” for coverage whether or not the actual facts in evidence at trial would sustain the allegations presented in the complaint. In Whittaker Corp. v. American Nuclear Insurers, however, U.S. District Court Judge Richard Stearns declared that a duty to defend may arise base upon the “potential for coverage” in a case where there was a dispute between the parties as to whether the policy contained an exclusion that would clearly have precluded any defense duty.
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.
