In Union Pacific Railroad v. Certain Underwriters at Lloyd’s London, No. 22931, 2009 WL 2412128 (S.D. Aug. 5, 2009), the court interpolated a reasonableness requirement into a notice of loss provision. Based on this interpretation and on its finding of prejudice, the court held that Continental’s excess liability policy did not afford coverage for an environmental remediation claim.
In 1910, Chicago & Northwestern Railway Company (C&NW) constructed a roundhouse on its property in Huron, South Dakota. Between 1910 and 1986, C&NW variously used the roundhouse as a service and repair facility for locomotives and for refueling operations. C&NW constructed a system for the disposal of waste that comprised three separation ponds, underwater pipes, and storm sewers. Nonetheless, wastewater contaminated with oils and other contaminants would sometimes overflow into a drainage ditch that ultimately emptied into a river from which the City of Huron obtained its drinking water.
C&NW obtained excess liability policies from Continental for the years 1958 through 1961, 1961 through 1964, and 1964 through 1967. Each policy provided coverage for losses in excess of $500,000. Each policy contained the following notice of loss provision:
The Insured shall give written notice to the Company of any loss and, as soon as practicable after the loss the Insured shall render to the Company proof of loss, signed and sworn by the Insured.
2009 WL 2412128, at *1.
In 1986, C&NW sold the property to DM&E. In 1990, C&NW established a $500,000 environmental reserve for the potential remediation of pollution at the Huron site. On February 15, 1994, the EPA notified C&NW that it would be held responsible for the cleanup of environmental contamination at the Huron site.
In 1995, Union Pacific purchased all of C&NW’s assets and assumed its environmental obligations. Between 1995 and September 1997, Union Pacific entered into contracts with consultants and contractors for the cleanup of the site. On September 18, 1997, after substantially completing the cleanup, Union Pacific notified Continental of its liability for the Huron site. Union Pacific informed Continental that it had expended $5 million to remediate the site.
Continental denied coverage for the claims on the ground that Union Pacific had failed to provide timely notice of the loss. Union Pacific contended that under the notice of loss provision it was under no duty to provide notice to Continental within a specified time frame, contending that the phrase “as soon as practicable” imposed a time limitation only on the proof of loss requirement.
The court rejected Continental’s interpretation of the notice of loss provision, remarking that such an interpretation “would create an absurd result.” 2009 WL 2412128, at *4. “It is ridiculous and unreasonable for UP to think that Continental would allow it to provide notice whenever it determined appropriate, whether it was immediately after the loss or fifty years from the date of the loss.” Id. Rather, the “more probable scenario, and the one we find convincing, is that the parties intended for a reasonableness factor to be read into the policy regarding notice, as demonstrated by the ‘as soon as practicable’ time frame applied to providing proof of loss.” Id.
The court concluded that in the absence of a time constraint, the notice of loss provision was ambiguous. Nonetheless, the court stated that the ambiguity should not be construed in favor of Union Pacific because the policies were manuscript policies. 2009 WL 2412128, at *5. In such cases, “the preference for strict enforcement against the insurance company is dispelled.” Id. The court thus interpreted the provision to require that Union Pacific provide Lloyd’s with reasonable notice of loss.
In determining when Union Pacific had notice of the loss, the court concluded that it was necessary to take into account that the Continental policies were excess liability policies that would not be implicated until Union Pacific had incurred losses in excess of $500,000. Thus understood, Union Pacific had such notice in August 1995 when its consultants estimated the cost of the cleanup to be between $2.3 and $3.5 million, which “clearly would have informed C&NW/UP that there was the potential that the excess liability insurance policies would be implicated, as the policies provided coverage for losses in excess of $500,000.” 2009 WL 2412128, at *6.
“South Dakota law requires that an insurer show actual prejudice caused by an untimely notice, and not just mere allegations of prejudice in order to prevail.” 2009 WL 2412128, at *7. The court noted that it had not yet addressed what proof was necessary to show prejudice, explaining that there were two principal approaches. “Some courts have presumed prejudice as a matter of law.” Id. “Other courts have held that a mere lack of opportunity to investigate a claim or involvement in the underlying remediation and negotiations with regulatory authorities does not amount to actual prejudice; instead, the insurer must show that its interests were actually harmed.” The court found it unnecessary to determine which standard to apply because under either approach, “Continental had been prejudiced.” Id.
The court concluded that Continental had been prejudiced because Union Pacific’s notice deprived Continental of its rights of assignment and subrogation. “Continental lost its ability to dispute responsibility for the contamination and to investigate whether a third party, such as DM&E, which owned the subject property in 1986, could have potentially been responsible for any portion of the loss.” 2009 WL 2412128, at *8. “In addition, Continental has been deprived of both an opportunity to investigate and an opportunity to be involved in negotiations with the EPA as well as the remediation process.” Id.
The court rejected Union Pacific’s invocation of the affirmative defense of anticipatory repudiation. Union Pacific argued that because in previous coverage disputes Continental had refused to pay this type of claim, Union Pacific had no obligation to notify Continental. The defense failed because “anticipatory repudiation applies to the contract at issue, not previous dealings.” 2009 WL 2412128, at *10.
