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Insurance Law

Environmental Coverage Summary: 2013 – Environmental Cases Addressing Other Significant Issues

Other cases decided in 2013 addressed certain issues that were typical of environmental coverage actions past, present and future. These issues include choice of law, what constitutes an "occurrence," the number of occurrences, and what constitutes "damages." We summarize key decisions below.

A. Choice of Law: Place Of Contracting Or Location Of Contamination?

In Northern Assur. Co. of America v. Thomson, Inc., 996 N.E.2d 785 (Ind. App. 2013) [enhanced version available to subscribers], the court found that the most significant contacts test required application of the law where the contaminated sites are located, not where the party making the insurance claim is located.

Although the original insured was located in California, the insured's successor company was located in Indiana, where the insured filed a lawsuit seeking coverage for environmental cleanup costs at three sites - two in California and one in the United Kingdom. The insured's decision to file in Indiana was indeed strategic, given that Indiana law would treat environmental response costs as insurable "damages," whereas California law would likely not treat such response costs as insurable "damages."

In analyzing choice of law, the Indiana appellate court utilized Indiana's choice of law rules, which apply the law of the jurisdiction with the "most intimate contact" or "most significant relationships" to the subject matter of the dispute, pursuant to Restatement (Second) of Conflict of Laws, § 188 [enhanced version available to subscribers]. Under this approach, the Indiana appellate court concluded that the law of California, where the original policies were issued and where two of the sites were located, had the "most intimate contact" to the action. The court downplayed the factor that the insured's successor company was in Indiana, explaining that the insured's assets (and liabilities) were acquired in 2000, "decades after the policies were issued and years after most of the alleged pollution would have occurred." Thomson, 996 N.E.2d at 797 [enhanced version available to subscribers].

See also, Doe Run Resources Corp v. Certain Underwriters at Lloyd's London, 400 S.W.3d 463, 472-74 (Mo. App. 2013) [enhanced version available to subscribers] (law of Missouri applied because the insured's operations and the underlying sites were located there); Narragansett Electric Co. v. American Home Assur. Co., 921 F. Supp. 2d 166, 179-80 (S.D.N.Y. 2013) [enhanced version available to subscribers] (although insured was a Rhode Island public entity with its principal place of business in Rhode Island, primary policy issued to several affiliated corporations identified one Massachusetts address; under New York's choice of law rules, Massachusetts was the principal location of the insured risk and the "balance of contacts" supported the application of Massachusetts law to an environmental coverage action involving contamination at a manufactured gas plant facility).

B. Trigger: Property Damage Triggers Coverage When It Occurs, Not When It Is Discovered

In Narragansett Electric Co. v. American Home Assur. Co., 921 F. Supp. 2d 166 (S.D.N.Y. 2013) [enhanced version available to subscribers], the U.S. District Court for the Southern District of New York held that the particular definition of "occurrence" at issue required only for the property damage to be caused during the policy period, and not that the property damage be discovered during the period.

In Narragansett Electric, the Commonwealth of Massachusetts filed suit against the insured, the Narragansett Electric Company (Narragansett) in 1987, alleging that Narragansett's predecessor and other defendants were strictly liable for property damage caused by the release of hazardous substances at a site located in Attleboro, Massachusetts. The Commonwealth claimed that the insured's predecessor generated thousands of tons of by-products and wastes from its production of manufactured gas between the 1890s and 1950s.

In its lawsuit seeking coverage from its primary insurer that issued coverage in 1985 for defense and indemnity, and its excess carriers that issued coverage generally between 1945 and 1986 for indemnity, Narragansett argued that property damage occurred at the site during each year between 1945 and 1986. The primary insurer denied coverage, arguing that, even assuming the underlying lawsuit may have alleged damage during its policy period, its pollution exclusion precluded coverage for the underlying lawsuit, and filed a motion to dismiss the insured's amended complaint. The excess insurers also filed a motion to dismiss the insured's amended complaint, arguing that the underlying claim did not constitute an "occurrence" that would trigger their policies' duty to indemnify.

With respect to the primary insurer's duty to defend, the policy defined "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the Insured." Narragansett Electric, 921 F. Supp. 2d at 181 [enhanced version available to subscribers]. Analyzing this language with the underlying action's allegations, the court held that, under Massachusetts law, "property damage need not be discovered or manifested during the policy period for there to be an 'occurrence' under the policy language. . .Rather, the inquiry is whether the property damage, as defined in the policy, 'occurred' within the policy period and within the meaning of the word 'occurrence'." Id. (internal citations omitted). The court concluded that the primary insurer did not dispute that the underlying action alleged damage occurring during its policy period. Id.

Regarding whether the excess insurers had a duty to indemnify, the court noted that these policies defined "occurrence" as "one happening or series of happenings, arising out of or due to one event taking place during the term of this contract." Id. at 187 [enhanced version available to subscribers]. In interpreting this definition, the court determined that the excess policies required the insured to "plausibly allege a causative event, which occurred during an applicable policy period." Id. The court noted that under Massachusetts, Rhode Island or New York law, the policy language "requires a causative event other than property damage during the policy period." Id. The insured argued that the migration of environmental contamination was due to events, including the release of contaminants, from the following: (1) dissolution and breakdown of the chemical components of waste materials during the policy period; (2) sand and gravel quarry operations during the policy period; and/or (3) residential excavation during the policy period. While the court was not persuaded that the first possibility sufficiently alleged an "event" under the policy period, it was satisfied that "excavation activities" via sand and gravel operations or residential operations were distinct events from property damage. The court therefore concluded that "releases of hazardous substances during excavation operations plausibly allege events under the [excess insurer] policies at the motion to dismiss phase." Id. at 190 [enhanced version available to subscribers].

C. An Insured's Institutional Contamination Problem At Multiple Sites, Over Time, Can Constitute A Single "Occurrence"

In Certain Underwriters at Lloyd's, London v. Southern Natural Gas Co., Nos. 1110698 and 1110769, [enhanced version available to subscribers] (Ala., June 28, 2013), the Alabama Supreme Court held that a single chain of causation, even causing multiple and disparate injuries, constitutes one occurrence.

In Southern Natural Gas, the insured learned in 1989 that a lubricating oil used in its air-compressor engines at compressor stations along a natural gas pipeline contained polychlorinated biphenyl, or PCBs. The insured sought coverage from its excess and umbrella insurer, London Market Insurers (LMI), who issued policies from 1949 through 1987. LMI argued, inter alia, that the PCB contamination occurring at different compressor stations at different times constituted multiple occurrences under LMI's policies, thereby requiring the insured to satisfy a separate retention for each instance of contamination. The insured argued that, because the pipeline contamination resulted from its "integrated operations" at all the compressor stations, it could all be treated as a single occurrence.

The trial court entered an order finding that, "the PCB-remediation program constituted a single occurrence under the policies." Southern Natural Gas, [enhanced version available to subscribers] at *10. While the court noted that evidence at trial indicated that some compressor stations had traces of PCBs in different places, it also noted that, pursuant to United States Fire Ins. Co. v. Safeco Ins. Co., 444 So.2d 844, 846 (Ala. 1983) [enhanced version available to subscribers], the definition of "occurrence" could have "multiple and disparate impacts on individuals and that injuries may extend over time," but unless there is a "separate, intervening cause" to "break the chain of causation," there would only be one "occurrence." Id. at *14. The Alabama Supreme Court concluded, "[b]ased on the arguments before us, we cannot say that there was a separate intervening cause" to support a finding of more than one "occurrence." Id. at *17.

D. Remediation To Prevent Further Environmental Harm Constitutes Insurable "Damages"

Also in Certain Underwriters at Lloyd's, London v. Southern Natural Gas Co., Nos. 1110698 and 1110769, [enhanced version available to subscribers] (Ala., June 28, 2013), the court found that the insured's self-imposed remedial activities at the compressor stations to prevent further migration of the PCBs into the groundwater constituted insurable "damages" for which the insured was legally liable.

In Southern Natural Gas the insurers, LMI, argued that the insured's self-motivated cleanup costs were not "damages" the insured was legally obligated to pay because the expenditures were not the result of any order by a state or federal agency. The Alabama Supreme Court held that environmental-remediation costs were indeed damages the insured was legally obligated to pay. The court also noted that the insured presented evidence at trial that it was required under federal law to report PCB contamination to the United States Environmental Protection Agency, and that the Mississippi Commission on Environmental Quality had required Sonat to clean up the compressor stations in Mississippi. Additionally, the court noted LMI asserted, as an affirmative defense, that the insured had failed to mitigate or minimize damage, which conflicted with its argument that these remedial costs do not constitute "damages." The court concluded that the insured "presented evidence indicating that it had a legal obligation to remediate the PCB contamination at its compressor sites, and we will not limit its damages to those arising out of a suit, claim or action by a third party." Southern Natural Gas, [enhanced version available to subscribers] at *22.

Other 2013 decisions addressing what expenditures constitute "damages" include: Northern Assur. Co. of America v. Thomson, Inc., 996 N.E.2d 785, 799 [enhanced version available to subscribers] (Ind. App. 2013) (under California law, "damages" limited to "money damages ordered by a court and do not include expenses incurred as a result of responding to the cleanup orders of an administrative agency;" insurer therefore not required to indemnify insured); But see, Siltronic Corp. v. Employers Ins. Co. of Wausau, 921 F. Supp. 2d 1099, 1109 (D. Or. 2013) [enhanced version available to subscribers], (primary insurer's payments to state and federal environmental agencies are deemed a "payment of judgments or settlements" to exhaust that insurer's policy limits).

Ellen J. Zabinski is a partner of Bates Carey Nicolaides LLP who focuses her practice on insurance coverage matters. She has defended numerous insurers involved in complex insurance coverage litigation pending throughout the country in both state and federal courts. Adam H. Fleischer is a partner of Bates Carey Nicolaides LLP with a national reputation for innovative advocacy in complex insurance and reinsurance coverage issues with respect to the pre-litigation, litigation and appellate stages. Copyright (c) 2013 by Ellen J. Zabinski and Adam H. Fleischer. Responses are welcome.

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