In Emhart Indus., Inc. v. Century Indemn. Co., No. 07-2806 (1st Cir. March 13, 2009)[here], the First Circuit found a duty to defend a CERCLA case until the point at which it was determined there was no duty to indemnify.
From 1944 to 1968, Metro-Atlantic operated a chemical plant at the nine acre site. In 1964, Metro-Atlantic manufactured hexachlorophene for less than one year. Dixon is a byproduct of the hexachlorophene manufacturing process. In 1968, Metro-Atlantic merged with Crown Chemical Corporation to form Crown-Metro and thereafter ceased operations at the site. Emhart eventually became the corporate successor to Crown Metro.
The EPA discovered dioxin on the site in 1998. In 2000, it issued a Notice of Potential Liability under CERCLA, identifying Emhart as a Potentially Responsible Party. The Notice required Emhart to pay costs of $947,140 incurred to date, as well as future costs, and to remove contaminated soil and river sediments. The EPA also issued three Unilateral Administrative Orders for Removal Action requiring certain remedial work be performed on the site. The anticipated costs of remediation were likely to exceed $100 million.
Emhart sought coverage from Century under policies issued to Crown-Metro. Eventually, Century located a primary policy issued to Crown-Metro in February 1969 and an excess policy in effect from December 1, 1969 to January 1, 1970. Emhart sued when coverage was denied. A six week trial was conducted on the issue of indemnity. The jury entered a verdict that there was no duty to indemnify.
Thereafter, the district court awarded summary judgment to Emhart on Century's duty to defend under both the primary and excess policies. Under the "pleadings test" applicable in Rhode Island, the EPA's charging documents alleged claims that were potentially covered. The district court further found that Century had breached its duty, and damages in the amount of $4.2 million, the total defense costs of the underlying EPA action, were awarded. The district court ruled, however, that Century's duty to defend ceased as of the October 19, 2006 jury verdict. Further, Emhart was not entitled to total indemnity costs as damages for Century's breach of its duty to defend.
The First Circuit affirmed in all respects. The Court agreed that the pleadings test was applicable despite Century's argument to the contrary.
Century also argued the district court erred in allocating to Century the total defense costs incurred prior the jury verdict. Century advocated use of the "time-on-the-risk" scheme of allocation, which would limit the defense costs based on the ratio between the periods of Century's coverage (approximately one year) and the entire period of dioxin exposure alleged by the EPA (approximately fifty-eight years). The First Circuit agreed with the district court that the "all sums" language in the primary policy and the "ultimate net loss" language on the excess policy placed no limit on the amount of defense costs that could be allocated to Century.
Next, the Court considered Emhart's cross-appeal, contending the district court erred in limiting the damages to only those defense costs accrued as of the date of the jury verdict. The First Circuit agreed the jury's findings of fact proved there was no duty to indemnify under the policies, thereby negating any duty to defend. Emhart also argued it was entitled to full indemnity costs as damages. The First Circuit disagreed because Emhart had not proven any contract damages beyond the costs of defense.
Finally, the First Circuit rejected Emhart's challenge to jury instructions on the applicable trigger. Emhart contended the jury should have been instructed using either the "continuous trigger" or "injury-in-fact" standard. The issue on the verdict form read, "Was dioxin contamination discoverable in the exercise of reasonable diligence during the policy periods?" The First Circuit determined the "injury-in-fact theory" and "continuous trigger" were incorporated in the instructions and verdict form.
