Indiana Appellate Court Examines Insurer's Liability For Environmental Clean-Up Costs
January, 2004
The Indiana Appellate Court recently analyzed a number of significant environmental liability insurance coverage issues in PSI Energy, Inc. v. The Home Ins. Co., 801 N.E.2d 75 (Ind. App.).
Facts
PSI Energy, Inc. (“PSI”) incurred substantial clean-up costs due to environmental contamination at six former manufactured gas plants (“MGPs”). PSI filed suit against its insurers seeking, in part, a declaratory judgment concerning the insurer’s obligations to PSI under insurance policies PSI purchased between 1950 and 1985. PSI operated MGPs in Bedford, Goshen, Greencastle, Lafayette, Seymour and Shelbyville, Indiana from the mid-1800’s to approximately 1950. In 1945, PSI sold the six MGPs to the Indiana Gas Company.
During the manufactured gas process at the various MGP sites, tar was produced. As the MGPs were dismantled, the underground containment structures, made of brick or concrete, were often left in place and continued to contain tar that was not extracted or properly disposed of at the time of the sale or closing of the MGP site. During the 1980’s and 1990’s, environmental investigations revealed that groundwater contamination was present at all of the six MGP sites. PSI alleged that after the MGP sites were dismantled, tar leaked from the underground containment structures into the soil and groundwater at and around the various sites and has occurred continuously from the time the MGPs were dismantled throughout the policy periods at issue. PSI alleged clean-up costs of $30 million.
PSI purchased comprehensive liability policies from multiple insurance companies from 1950 through 1985. In general, the policies provided that the insurers would pay “all sums” that PSI is legally obligated to pay as damages due to an “occurrence” of property damages or “accidental” property damage. In addition to the comprehensive liability policies, PSI also purchased excess liability coverage from the named insurers, however, PSI was not able to locate copies of various excess policies it purchased during the 1950’s through the 1970’s. All insurers generally refused to indemnify PSI for the environmental clean up costs it incurred from the remediation of the six MGP sites, asserting that the groundwater contamination resulted from intentional dumping of wastes during the MGP operations.
Analysis
The Indiana Appellate Court considered a number of issues including: 1) Did PSI timely provide notice of claims arising from the Shelbyville MGP site; 2) Was the property damage expected or intended by PSI; and 3) Whether coverage under the policies was triggered by the contamination at issue.
1. Notice
PSI’s insurers moved for summary judgment alleging that PSI failed to timely provide notice of claims arising from the Shelbyville site. The trial court denied the motions finding that the insurers did not suffer actual prejudice from the timing of the notice; the insurers were aware of the facts and circumstances of the sites; the insurers had the information in the complaint, were aware of the prior settlement and had interviewed witnesses, and the insurers had complete and thorough discovery. The insurers contended that PSI failed to present evidence to rebut the presumption of prejudice to the insurers’ ability to prepare an adequate defense. PSI asserted that its notice was timely.
PSI owned the Shelbyville MGP site from 1923 to 1945. In 1945, PSI sold the Shelbyville plant to Indiana Gas. In 1988, the Indiana Cities Water Corporation (“ICWC”) filed suit alleging that several defendants, including Indiana Gas, had contaminated or threatened to contaminate its underground water wells. Indiana Gas in turn filed a third part complaint against PSI alleging that PSI was responsible for the contamination and seeking reimbursement of Indiana Gas’s response costs. A settlement was entered into by several defendants, including PSI and Indiana Gas.
In 1989, the Indiana Department of Environmenal Management ("IDEM") joined PSI and Indiana Gas in an existing enforcement action regarding the Shelbyville MGP. IDEM alleged that PSI deposited contaminants or allowed contaminants to discharge into the groundwater, thus violating Indiana law. In November 1990, PSI notified its then current liability carrier of the lawsuit and the IDEM action. PSI alleged that it was not aware of the extent or timing of the groundwater contamination in 1990. At this time, only small amounts of contamination had been found and it was not aware of the extent to which it would have had to contribute to remediating the site. PSI also alleged that prior to May 1993, only minimal investigative work had been performed at the site.
After further investigation, PSI provided notice to its remaining liability carriers in late May 1993. In 1997, PSI and Indiana Gas settled their proportionate liabilities by entering into a site participation agreement and in 1998, PSI entered into an agreed order with IDEM. Given the lengthy site investigation and expert opinions as to when the groundwater contamination occurred, the court concluded that genuine issues of material fact existed with regard to whether PSI’s notice to its insurers was timely. Without substantial investigation, it was not possible for PSI to determine when the occurrences actually took place and this information was “essential to PSI’s determination of which insurers were potentially liable under the policies it had purchased between 1950 and 1985”. Thus, the insurers’ motion for summary judgment on the issue of notice was properly denied.
2. Expected or Intended Damage Provisions
PSI argued that its expectation or intent must be judged by its actual subjective knowledge at the time of the conduct giving rise to the property damage at issue. PSI also contended that the burden of proof was on the insurers to prove that PSI expected or intended the property damage and that only those insurers whose policies contained the words “unexpected,” “unintended,” “accidental,” or a similar limitation may rely on the defense. The insurers, on the other hand, argued that fortuity was a requirement under all of PSI’s liability policies regardless of whether the policies include “expected or intended” language. The insurers also asserted that PSI must establish that the property damage resulted from a fortuitous event and was neither expected nor intended. The insurers finally argued that they were entitled to summary judgment because “the undisputed facts establish that the property damage at issue arose from PSI’s deliberate and intentional acts during the manufactured gas process.”
a. Fortuity
PSI argued that those insurers whose policies did not specifically require an “accident” or do not define an “occurrence” as accidental damage or unintended or unexpected damage cannot assert the “expected or intended damage” defense. The insurers maintained that fortuity is an essential element and “coverage under the policies is only appropriate where the property damage is unexpected or unintended.”
The appellate court held that even if there is no express language in the policy, “there is an implied exception that denies liability insurance coverage for harm . . . intentionally inflicted by the insured.” Thus, all insurers were entitled to raise the “expected or intended damage” defense even if the applicable language was not expressly stated in their respective policies.
b. Burden Of Proof
PSI argued that the “expected or intended damage” defense is an exclusion and that under Indiana law, “an insurer seeking to deny coverage bears the burden of proving that any exclusion or other limitation in the policy unambiguously applies.” PSI also asserted that “this rule is not altered where the limiting language is contained in an occurrence definition.”
Noting that “fortuity is a concept inherent to insurance” and as such “the intended and expected damage language is more properly recognized as an exception rather than an exclusion” the court ultimately concluded that PSI bore the burden of proving that the property damage at issue was neither expected nor intended.
c. Subjective v. Objective Standard
PSI argued that “where an insurance policy excludes coverage for damages that is expected or intended, coverage should be barred only upon a showing of the policyholder’s actual subjective expectation or intent to injure.” PSI contended that the trial court erred in finding that an “objective reasonableness standard” applied. The insurers argued that Indiana law dictates that an objective standard should apply.
The court held that genuine issues of material fact existed as to whether PSI “expected” or “intended” to cause the property damage at issue in this case, finding that it was more appropriate to apply a subjective standard to determine whether PSI expected or intended to cause the contamination at issue. The court recognized that proving PSI’s intent would be difficult given that PSI has not operated the MGP sites for more than sixty years, but was confident that evidence of industry standards and testimony from former employees would be useful in resolving this issue.
d. Whether Insurers Are Entitled To Judgment As A Matter Of Law
The insurers argued they were entitled to summary judgment as a matter of law because “the undisputed facts establish that PSI knew that property damage was practically certain to occur by the fact that it manufactured gas and abandoned the tar to the environment.” PSI contended that the insurers did not submit any evidence that PSI intended to contaminate the groundwater, or knew that its actions would result in contamination.
The insurers relied on Energy North Natural Gas Inc. v. Continental Ins. Co., 781 A.2d 969 (N.H. 2001) as well as MGP industry literature from the early twentieth century describing how MGP waste caused pollution in waterways, groundwater and wells. This literature also advised against the usage of storing tar in masonry holder tanks due to the potential for leakage. The insurers also submitted newspaper articles regarding the pollution in streams near two of the MGPs and testimony of two former employees who stated that tar was disposed of in unlined pits at the Shelbyville MGP. The insurers’ experts concluded the contamination resulted from intentional dumping of MGP wastes while the MGPs were in operation. PSI, on the other hand, submitted an opinion from a groundwater scientist who concluded that groundwater and soil at the MGP sites were contaminated as a result of the leakage of tar and water/tar mixtures from the underground containment structures designed to hold these fluids.
Given the conflicting evidence presented by the parties, the court determined there were genuine issues of material fact and that the trial court properly denied the insurer’s motions for summary judgment.
3. Trigger of Coverage
a. The 1961 To 1973 Policies
The insurers argued that PSI’s claims do not trigger coverage because the policy requires that the occurrence must commence during the policy period and it was undisputed that the contamination at issue began before the inception of the policy periods at issue. These policies defined “occurrence” as “an event or a continuous or repeated exposure to conditions which unexpectedly results in personal injury, property damage or advertising liability during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence.” The court stated that Indiana courts are required to apply the “injury-in-fact” trigger of coverage approach, but disagreed with the insurers that PSI was required to specifically prove that new releases of contaminants caused property damage during the relevant policy periods. The court held that PSI had to prove that “subjectively unexpected and unintended contamination continued to cause damage during the relevant policy periods to trigger coverage under these policies.”
b. The 1973 To 1983 Policies
The policies issued by London Insurers and Home Insurance between 1973 and 1983 defined “occurrence” as “one happening, or series of happenings arising out of one event, taking place during the terms of this policy. These two insurers contended that the “initial one event in the causal chain” must occur during the policy period. The court pointed out that the definition in these two policies clearly required the “happening” or “series of happenings” to arise out of one event which takes place during the policy period, but found that if PSI could prove that subjectively unexpected and unintended leaks were occurring from the subsurface containment structures and caused contamination during the relevant policy periods, these leaks would constitute an event within the meaning of the policy language.
The court concluded that the coverage analysis in Allstate Ins. Co. v. Dana, 759 N.E.2d 1049 (Ind. 2001), was equally applicable here and required PSI to prove that the contaminants caused property damage during each policy period under which it sought coverage. Conflicting expert testimony about this issue created a genuine issue of material fact precluding summary judgment. The court did rule that for the 1973 to 1983 policies, PSI had to demonstrate that a “subjectively unexpected and unintended event, such as a leak from a subsurface containment structure, occurred and caused property damage during each policy period.” The court followed Dana and held that if the contamination at issue in this case continued into another policy period, the policy effective in that period would be triggered as well.
Learning Points:
All insurers are entitled to raise the “expected or intended damage” defense even if the applicable language is not expressly stated in their respective policies. The burden of proof is on the insured to prove the damage was neither expected nor intended, applying a subjective standard. The court followed the decision in Dana that once a covered occurrence takes place, the insurers are required to indemnify the insured for all sums related to that occurrence. If contamination starts in one policy period and continues to another policy period, coverage is triggered for both policies. ¨
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