Insurance Law Hawaii

Court Finds Duty To Defend Environmental Claim, But Defense Limited to $100,000

    While agreeing with the insured there was a duty to defend, the court determined the defense of an environmental claims was limited to $100,000. Casa Nido Partnership v. JAE Kwon, 2023 U.S. Dist. LEXIS 97701 (N.D. Calif. June 5, 2023). 

    In 1976, Casa Nido purchased the property and remains the current owner to this day. Catherine O'Hanks owned and operated a dry-cleaning facility at the property from 1960 to 1992. 

    In August 2016, Casa Nido learned of Tetrachloroethylene (PCE) subsurface contamination. Casa Nido stipulated that it did not know, nor had any reason to know, before 2016, of the existence of the subsurface contamination. Casa Nido alleged that due to equipment malfunction or improper usage, there were sudden and accidental spills and equipment overflows of PCE during the 32-year period that defendant O'Hanks operated the dry-cleaning business on the property. Casa Nido spent hundreds of thousands of dollars remediating the environmental damage. 

    Casa Nido was an additional insured under O'Hanks' policy with Sentry Insurance Company. The policies were effective from August 15, 1987 to August 15, 1990. Casa Nido sued O'Hanks and Sentry. Casa Nido alleged it was entitled to indemnification and contribution from O'Hanks under CERCLA.DO'Hanks counter-claimed against Casa Nido. Casa Nido tendere to Sentry, but Sentry determined there was no duty to defend or indemnify. 

    The court noted that whether the pollution occurred within the policy period depended on what the trigger of coverage was under the Sentry policies. Under the Dry-Cleaners Endorsement (DCE), the policies covered pollution-based property damage "[t]hat occurs during the policy period." Property damage occurred when it "first manifests itself." Under Montrose, the manifestation trigger was an objective "should have known" standard. Coverage was triggered at "that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered." Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 674 (1995). 

    The court interpreted the DCE language consistent with Montrose. At the very least, the language of the policy regarding occurrence was ambiguous and had to be read in the insured's favor. Under the policy and the DCE, "property damage" could '"occur" when there was a spill which resulted in contamination of the soil, Such property damage could occur each time there was such a spill. If discharges subsequent to the triggering discharge were continuous or repetitive of the triggering discharge, the subsequent discharges would be covered even if they first manifested outside of the policy period, as they would be considered part of a single occurrence that first manifested during the policy period. There was evidence sufficient to create an issue of fact regarding the nature and timing of the spills. 

    Therefore, Sentry had a duty to defend claims arising out of the discrete discharges and only those discrete discharges for which Casa Nido could establish a possibility of first manifestation during the policy period. If Casa Nido could demonstrate the mere possibility that a reasonable insured should have known of at least some PCE contamination during the policy period, and the contamination included a sufficiently discrete incident as to constitute an "occurrence" within the meaning of the DCE endorsement, there there was a potential for coverage, allowing Casa Nido to prevail on its motion for summary judgment as to Sentry's duty to defend. 

    The defense, however, was limited to the $100,000 limit in the DCE.

    Finally, the court granted Sentry's motion for partial summary judgment on the bad faith claim. It was reasonable for Sentry to rely on Montrose and deny Casa Nido's claims because the the manifestation trigger as defined by Montrose applied to the Sentry policies. 

    

Agent Not Responsible for Insured's Lack of Coverage

    The court dismissed the insured's complaint against the agent for alleged failure to procure proper coverage. Asphalt Recovery Specialists, Inc. v. Gallagher, 2023 U.S. Dist. LEXIS 73112 (D. Colo. March 23, 2023).

    Asphalt Recover Specialists, Inc. (ARS) engaged Arthur J. Gallagher & Co. to procure an environmental liability poilcy that would provide coverage for on-site cleanup of any pollultion or environment cleanup that may be required in ARS's asphalt recycling facility. ARS specifically requested that Gallagher procure a policy which would provide coverage for on-site removal of pollutants. Gallagher procured a policy from Weschester Surplus LInes Insurance Company. 

    Subsequently, the Colorado Department of Public Health and Environment required ARS's facility to close due to a pollution event. ARS removed solid waste from the facility at its own expense.

    Plaintiffs sued Gallagher, alleging that ARS was relying on Gallagher's expertise in procuring the insurance that would cover such waste removal. Gallagher moved to dismiss the complaint.

    The court granted the motion. ARS failed to establish that Gallagher had a duty to advise ARS of the nature, type and terms of necessary insurance required for providing a policy meeting the needs of the insured. There was no allegation that Gallagher promised to procure such a policy. Therefore, ARS failed to allege that Gallagher owed them a legal duty of care as a result of their request for a specific type of coverage.

    Further, ARS's complaint contained no allegations that insurance covering on-site removal of solid waste was generally available at the time that Gallagher procured the policy. Accordingly, the complaint failed to plausibly allege the damages and causation elements as to each of their negligence claims.

Rare Policy Language Gives Insured Rare Victory on COVID-19 Claim

    The Appellate Division of the New York Supreme Court affirmed the lower court's denial of a motion to dismiss the insured's business interruption claim arising from COVID-19 closures. New York Botanical Garden v. Allied Work Assur. Co. (U.S.), 2022 N.Y. App. Div. LEXIS 3792 (N.Y. App. Div. June 14, 2022). Our post on the lower court's decision is here.

    The insured was forced to cease operations after executive orders by the governor and mayor were issued in March 2020. The insured also had to reduce its in-person workforce by 100%. The insured's claim for business interruption and contingent business interruption were denied by Allied. The insured sued for a declaratory judgment.

    Allied issued a Pollution Legal Liability policy with unusual language for purposes of business interruption and COVID-19 claims. The policy defined "contingent business interruption" as "the necessary suspension of your business operations at a location owned  . . . as a result of an order by a government body denying access to the location . . . provided that" the suspension and the order must be "caused solely and directly by a pollution incident on, at or under an independent location." "Independent location" was defined as "a location that is not and was not at any time a location owned, leased, managed, operated or used by an insured."

    Allied agreed COVID-19 constituted a "pollution incident," but moved to dismiss. The lower court denied the motion and Allied appealed.

    The appellate court affirmed. Allied failed to establish that contingent business interruption coverage was available only if the insured was completely denied access to its property. The policy contemplated coverage for periods when the insured would have some temporary access to the property, including periods involving potential partial resumption of operations to mitigate damages, which for the insured included maintaining its extensive plantings. The cases relied upon by Allied involved civil authority coverage in property liability policies and periods of complete denial of access due to physical damage and were inapposite. 

    The appellate court also affirmed the decision not to dismiss the insured's claim for bad faith. 

Insurers Must Defend Allegations of Faulty Workmanship

    Granting the insured's motion for partial judgment on the pleadings, the court determined the insurers had a duty to defend. Suez Treatment Solutions, Inc. v. Ace Am. Ins. Co. & Liberty Mut. Fire Ins. Co., 2022 U.S. Dist. LEXIS 59044 (S. D. N. Y. March 30, 2022). 

    Suez Treatment Solutions, Inc. held policies from Chubb and Liberty Mutual Fire Insurance Company to cover its operations in connection with the development of a pollution treatment system in North Carolina. When the project ultimately failed, an underlying action sought damages from Suez, alleging breach of contract, negligence, and fraud. Suez filed this case seeking a declaratory judgment that Chubb and Liberty were each obligated to defend and indemnify Suez in the underlying case. 

    The City of High Point hired Suez to upgrade the facilities at its wastewater treatment plant staring in 2021. Because mercury levels were too high in emissions from sewage-sludge incinerators, Suez began working on the installation of a Mercury Removal System. After installation, a leak occurred in a component known as the heat exchanger. The leak caused the system to shut down and weeks-long repairs began. 

    The underlying complaint alleged that the day after the system shut down for repairs, Suez and its subcontractor left and did not instruct High Point on how the system should be monitored during the shutdown. The shutdown caused an increase of the carbon monoxide levels. High Point contacted Suez who instructed the plant to open an outlet damper to evacuate the heat. This action caused temperatures to increase, however. A fire ignited, and the burning carbon created high concentrations of toxic sulphur-dioxide gas. It was alleged that fire created health and safety hazards at the treatment plant and surrounding area. The fire was finally extinguished almost a month after the shutdown by dumping the carbon out of the unit. 

    According to the City, Suez did nothing to repair the unit for months. When attempts to repair were made, they were fruitless. Another fire occurred during the planned start-up, causing extensive damage to the system. 

    High Point sued for breach of contract, breach of warranties, negligence, negligent misrepresentation, fraud, and unfair and deceptive trade practices.  

    When a defense was denied, Suez sued Chubb and Liberty for a declaratory judgment. The Chubb policy was a Contractors Pollution Liability and Errors & Omission Policy that ran from July 24, 2016 to July 24, 2017. Liberty issued a CGL policy with a policy period from March 1, 2016 to March 1, 2017. Suez moved for partial judgment on the pleadings.

    Chubb relied upon a Products Liability Exclusion to deny coverage. The exclusion barred coverage for any suit against Suez "arising out of or related to" "[a]ny goods, products or equipment designed, manufactured, sold, supplied or distributed by [Suez]." The underlying complaint alleged that Suez supplied the mercury removal system that caused the loss and that Suez served as a sales force and distributor. Other underlying allegations, however, related to professional services rendered at the facility, therefore falling outside the scope of the Products Liability Exclusion and triggering a duty to defend. There was a question of fact with respect to whether the damages arose entirely from the "design, manufacture, sale, supply or distribution" of the mercury removal system by Suez, or if other actions taken by Suez - such as a failure to train or supervise - also gave rise to the damage at the High Point facility. Therefore, the Products Liability Exclusion did not, at this stage, preclude coverage as a matter of law. 

    Numerous issues of fact meant that Liberty also had a duty to defend. Liberty argued there was no occurrence because the damage arose from faulty workmanship. But Liberty read the underlying complaint too narrowly. The complaint alleged damage beyond the property Suez supplied, caused by an accident or repeated exposure to conditions. For example, the underlying complaint alleged that the fire damaged other components of the system.

    The business risk exclusions in Liberty's policy also did not bar coverage because issues of fact were present. Further, although the underlying complaint alleged "design and oversight responsibilities" were breached, the Professional Liability Exclusion did not bar coverage because the underlying complaint did not allege that the property damaged arose solely out of a failure to render professional services. 

    Therefore, the court granted Suez's motion against both Chubb and Liberty, granting declaratory relief with respect to the duty to defend. 

No Coverage for Recovery of Untapped Oil Barrels From Harbor

   The Ninth Circuit found that a pollution endorsement did not cover the cost of retrieving oil barrels that did not discharge pollutants. Guam Industrial Services, Inc. v. Zurich Am. Ins. Co., 2015 U.S. App. LEXIS 9045 (9th Cir. June 1, 2015).

   Guam Industrial's dry dock sank into the harbor. Various containers in which 113,000 gallons of oil were stored fell into the water. None of the containers were breached, however. The Coast Guard forced Guam Industrial to recover the containers, and the cost of the retrieval was $647,000.

   Guam Industrial sought coverage under two policies. A Hull and Machinery Policy was underwritten by Zurich and Star Indemnity and Liability Company. The policy covered damaged to the dry dock resulting from certain specified "perils" that included lightning, earthquake, pirates, and various types of accidents and malfunctions. The policy required a Navy Certification for the dry dock.

   Guam Industrial never acquired the certification, however, instead it obtained "commercial" certification from a private company. In October 2010, the commercial certification expired. The private company would not renew the certification unless significant repairs were made. The dry dock sank while it was undergoing the repairs. Coverage was denied under the Hull and Machinery Policy because of the breach of the requirement to obtain Navy Certification. 

   The second policy was an Ocean Marine Policy with Zurich. Through an endorsement, the policy covered "the discharge, dispersal, release, or escape" of any pollutants into the environment, provided the discharge was accidental. Zurich denied the claim because no actual discharge of pollutants occurred. 

   Guam Industrial filed suit. The district court granted summary judgment to the insurers on both policies. 

   The Ninth Circuit affirmed. Strict compliance with marine policy warranties was required, even when the breach of the warranty did not cause the loss. Even if the insurers waived their right to demand strict compliance with the Navy Certification because they had accepted commercial certification, the dry dock lacked even commercial certification when it sank.

   Regarding coverage under the Ocean Marine Policy, it was undisputed that no oil leaked out of the containers and into the water in the harbor. Although barrels or containers were discharged, dispersed, and released, oil was not. The oil remained sealed inside its containers at all relevant times.

   Judge Kozinski dissented with a relish that policy holder lawyers can appreciate. Judge Kozinski started his dissent as follows:

    If you slap a silk suit on a monkey, you still won't want to take it to the prom. And if you pour crude oil into a barrel, you sill won't want it in your hot tub. 

The dissent concluded by stating,

    No rational dry dock owner would buy a policy that covers government-ordered pollution clean-up if containment vessels filled with toxic waste break apart upon sinking but not if they remain intact. It's absurd. Zurich's denial of coverage is the type of slimy conduct that gives insurance companies a bad name. This opinion should serve as fair warning to those who would throw away good money doing business with Zurich. 

    Special thanks to Damon Key blogging colleague Robert Thomas (www.inversecondemnation.com) for flagging this case.

No Duty to Defend Under Pollution Policy

   The court found there was no duty to defend or indemnify under a pollution policy for claims arising from a building fire. URS Corp. v. Zurich Am Ins. Co., 2014 N.Y. Misc. LEXIS 222 (N.Y. Sup. Ct. Jan. 16, 2014). 

   Two firemen were killed while fighting a fire at the Deutsch Bank building in New York City. The owner of the building, URS, was sued by the estates of the two deceased firemen and other firemen who were injured by the fire.

    URS was an additional insured under a contractors pollution liability policy issued by Hudson Specialty Insurance Company. The policy promised to pay for damages to the insured "if the damages result from a pollution condition."  "Pollution condition" was defined as "the discharge, dispersal, release or escape of smoke, vapors, fumes, acids, alkalis, toxic chemicals, [etc.]" The policy explicitly noted that it did not provide commercial general liability coverage. Hudson denied coverage and URS sued. 

   Hudson moved to dismiss the complaint. Hudson argued it had no duty to defend because its policy was intended to indemnify the insured against claims for environmental harm. None of the alleged injuries in the underlying suits could plausibly be held to have arisen out of a "pollution condition" under the Hudson policy. URS argued two of the underlying actions alleged "toxic smoke." Further, the fire constituted a "release" of smoke or other contaminant, thereby qualifying as a pollution condition. Hudson responded that these claims fell within the scope of the CGL policies, not the pollution liability policy. 

   The court noted the interpretation of the language in the Hudson policy to define the scope of coverage was a question of first impression in New York. Interpretations of the pollution exclusion in CGL policies did exist, however, and were instructive. These cases supported the conclusion that the exclusion was meant to deal with broadly dispersed environmental pollution and not the confined environment found here.

   Therefore, Hudson's motion to dismiss the complaint was granted.

Duty to Defend Established Under Pollution Liability Policy

   The Fifth Circuit affirmed the district court's holding that the pollution liability insurer owed a duty to defend a generating plant sued by the EPA. Louisiana Generating L.L.C. v. Illinois Union Ins. Co., 2013 U.S. App. LEXIS 9837 (5th Cir. May 15, 2013).

   Louisiana Generating ("LaGen") was sued by the EPA for violations of the Clean Air Act and Louisiana environmental laws. The complaint alleged that the plant had emitted excess amounts of regulated pollutants into the air. Relief sought by the EPA included enjoining LaGen from operating its plants until they were in compliance with the federal and state laws, an order to remedy past violations, applying for proper permits, and ordering LaGen to take actions to remedy,mitigate and offset the harm to public health and the environment. 

   LaGen was insured by Illinois Union Insurance Company ("ILU") under a Custom Premises Pollution Liability Insurance Policy. ILU refused to defend, arguing none of the prayers for relief were covered by the policy. The district court disagreed and granted summary judgment to LaGen because there was a duty to defend.

   On appeal, ILU argued relief for property damage and remediation costs were unavailable to the EPA as a matter of law because the Clean Air Act only allowed the EPA to seek prospective relief and not monetary damages. The policy provided coverage for "Claims, remediation costs, and associated legal defense expenses . . . as a result of a pollution condition." The Fifth Circuit found that the EPA suit included allegations and prayers for relief that could potentially result in covered remediation costs. For example, the EPA complaint alleged a covered "pollution condition.  

   The Fifth Circuit also rejected ILU's argument that injunctive relief was excluded from coverage by the Fines and Penalties exclusion. The provision excluded coverage for "Payment of criminal fines, criminal penalties, punitive, exemplary or injunctive relief." The exclusion only applied to criminal and punitive fines and penalties, and did not exclude coverage for all injunctive relief.