In Emhart Industries, Inc. v. Century Indemnity Co., 559 F.3d 57 (1st Cir. 2009), the EPA designated the insured, Emhart, a Potentially Responsible Party (“PRP”) to remediate the contamination at a Superfund site in North Providence, Rhode Island. Emhart made a demand for coverage on its insurers, which included Century Indemnity Company, North River Insurance Company, and OneBeacon America Insurance Company. Emhart sought to recover its environmental-remediation and defense costs.
The Superfund site had been operated from 1944 to 1968 by various parties. Emhart is the corporate successor to the final operator of the site. In 1998, the EPA discovered dioxin on the site. On February 28, 2000, the EPA identified Emhart as one of five PRPs, requiring Emhart to pay costs of $947,140.89, as well as future costs and mandated the implementation of certain environmental remediation measures. Emhart is the only PRP that is financially viable, so that, under CERCLA’s strict joint and several liability, Emhart bore responsibility for the entire anticipated cost of remediation, which exceeded $100 million.
Century issued a primary CGL policy for the policy year February 15, 1969 to January 1, 1970, with a coverage limit of $100,000. Century also issued an excess policy for the policy year December 1, 1968 to January 1, 1970, with limited liability of $1 million in excess of the primary-policy limits. Unlike the Century primary policy, the Century excess policy contained a “waste products” exclusion, which provided that the policy “shall not apply to injury or destruction of property caused by intentional or willful introduction of waste products, fluids, or materials into any soil or inland . . . waters, irrespective of whether the insured possessed knowledge of the harmful effects of such acts.” Id. at 62.
OneBeacon issued an umbrella excess liability policy for the policy year April 24, 1969 to January 1, 1970, which provided coverage limits of $4 million in excess of the $1.1 million coverage provided by the Century primary and excess policies. The OneBeacon policy did not contain a “waste products” exclusion.
North River issued a “Commercial Comprehensive Catastrophe Liability Policy” for the policy year January 1, 1984 to December 31, 1984, with coverage limits of $15 million for property damage in excess of $1 million. The North River policy contained a standard pollution exclusion that excluded releases or dispersal that were “sudden and accidental.” Id. at 63.
The court affirmed the district court’s holding that Century had breached its duty to defend and was liable for the total cost of defense that Emhart had incurred in the underlying EPA actions. In reaching this result, the court held that the “pleadings test” under Rhode Island law governed the determination of whether Century owed a duty to defend Emhart. Id. at 65. This test “requires the trial court to look at the allegations contained in the complaint, and if the pleadings recite facts bringing the injury complained of within the coverage of the insurance policy, the insurer must defend irrespective of the insured’s alternate liability to the plaintiff.” Id.
The court found that the district court had correctly applied the pleadings test to the “charging documents,” the PRP Letter, and three Unilateral Administrative Orders for Removal Action. The court noted that these documents alleged that “hazardous substances were disposed of at the Site as part of the former operations of several chemical companies, and that Emhart is a successor to liability of several chemical companies which operated at the Site from approximately 1943 to approximately 1971.” Id. at 65. These documents further alleged that hazardous substances had been disposed of during the relevant policy periods but were silent as to whether such substances were discoverable at the site in 1969, so that it was unclear whether these documents alleged an “occurrence” under the Century policies. The court held that the district court had properly construed such silence against Century, finding a duty to defend because of “Century’s failure to establish the absence of such potential” recoveries. Id. at 66.
The court rejected Century’s contention that the pleadings test should not be applied in this case because its application necessarily entailed the litigation in the coverage case of issues that were to be decided in the underlying case. The court observed that Rhode Island courts had circumscribed the test only in very narrow circumstances that were not applicable. Id. at 68-69. The court further rejected Century’s argument that the Rhode Island Supreme Court had refused to extend the test to environmental proceedings. Id. at 69. On the contrary, in a multiple-insurer context, the test “can be used as a ‘weapon to be wielded at will’ against an individual insurer, essentially allowing an insured to pick its insurer for defense purposes.” Id. “This Court, sitting in diversity, will not overrule the Rhode Island Supreme Court based on policy arguments alone.” Id.
The court further affirmed the district court’s award of total defense costs, rejecting Century’s assertion that it was responsible only for its pro rata share of the underlying defense costs. The court affirmed the district court’s conclusion that the “all sums” language in the Century primary policy, which obligated Century to pay “all sums which the Insured shall become legally obligated to pay as damages because of property damage” and the language in the Century excess policy that provided that Century “will indemnify the Insured for ultimate net loss in excess of the retained limits,” placed “no limit on the amount of defense costs that could be allocated to Century.” Id. at 70-71.
The court rejected Century’s argument that the phrase “during the policy period” limited the amount of the coverage. Id. at 71. Rather, “even if the ‘during the policy period’ somehow could be extended to limit the total amount recoverable, such an interpretation would contravene the clear and unambiguous terms of the Policy and lead to an absurd result.” Id.
The court concluded that the “‘all sums’ and ‘ultimate net loss’ language of both Policies cannot admit to any limitation, temporal or otherwise.” Id. at 71. The “‘during the policy period’ language is employed to define an ‘occurrence’ under the policy.” Id. What is more, though the Century Excess Policy does not have a separate ‘occurrence’ definition, the “‘during the policy period’ language is used within the conditional clause defining an occurrence that triggers coverage: ‘if the limits of liability of the underlying insurance are exhausted because of property damage during the policy period.’” Id.
The court remarked that “construing the language in the way that Century proposes would also lead to absurd results,” requiring “the Court to divide the defense costs incurred in this case in such a way as to limit Century’s share to the damage caused by Metro-Atlantic during the brief period it purportedly contaminated the site. Id. at 72. Century had proposed “an allocation scheme based on the ratio of time covered by the Policies of ‘approximately one year’ as compared to the total time covered by the EPA action (approximately 58 years), greatly diminishing Century’s coverage.” Id. The court characterized “such an allocative mechanism” as “bordering on the arbitrary, since other schemes could be proposed.” Id. “More importantly, there is no connection between limiting coverage by the policy period and the amount of defense costs, which weighs strongly against reading the Policies in the way that Century proposes.” Id.
The court also rejected Century’s assertion that Rhode Island law required the allocation of damages on a pro rata basis, which it styled a “proportionate share setoff.” “There is no evidence in the record that other insurers have a duty to defend,” so that “any evidence proposed by Century would consist only of possible insurers, and thus would be too general to provide a basis for a setoff.” Id. at 73.
Emhart also contested the trigger of coverage applicable to the duty to indemnify under the Century policies and the OneBeacon policy. The First Circuit certified the question to the Rhode Island Supreme Court in CPC International, Inc. v. North Brook Excess & Surplus Insurance Company, 668 A.2d 647 (R.I. 1995). The Rhode Island Supreme Court answered:
The question certified by the First Circuit asks us to determine, under Rhode Island law, when there has been an ‘occurrence’ sufficient to trigger coverage under a general-liability policy when the insured sustains a chemical spill that results in a property loss that is not discovered until years after the spill took place. We answer that an ‘occurrence’ under a general-liability policy takes place when the property damage, which includes property loss, manifests itself or is discovered or in the exercise of reasonable diligence is discoverable.”
Id. at 78. The court thus rejected Emhart’s claim that the district court should have applied the “continuous trigger” standard, which triggers coverage under all policies in effect from the time of exposure to manifestation, thus presuming injury from the time of exposure to manifestation. Id.
The court also rejected Emhart’s argument tha, in regard to the sudden-and-accidental pollution exclusion in the North River policy, Emhart was entitled to coverage because it presented evidence of subsequent flooding that dispersed contaminants onto the site. The Court held that the district court correctly instructed the jury to focus solely on the initial dispersal. Id. at 81.
