Insured's Knowledge of Contamination Prior to Purchasing CGL Policy Bars Coverage For Subsequent Lawsuit
April, 2002
The Washington Supreme Court holds that contamination of the insured’s property of which the insured is aware prior to the purchase of CGL insurance, but which results in liability to a third party subsequent to the purchase, is not an “occurrence” triggering coverage and is barred by the known loss principle. Overton v. Consolidated Ins. Co., 38 P.3d 322 (Wash. 2002).
Facts
The Spokane Transformer Company, owned by Jerry Overton, operated an electrical transformer manufacturing and repair facility located in Spokane, Washington. Beginning in 1961, Spokane Transformer used various hazardous materials in its operations, including polybrominated biphenyls (PCBs).
In 1976, the Environmental Protection Agency (EPA) took soil samples from the Spokane Transformer site. Test results revealed elevated levels of PCB contamination. When Department of Ecology (DOE) regulators informed Overton of the test results, he denied the use of any fluids containing PCBs, and took no further action. In 1977, Spokane Transformer purchased a comprehensive general liability (CGL) policy from Industrial Indemnity Company. The policy named Spokane, Overton, and Spokane’s former owner (Boyce) as insureds. Two years later, Spokane Transformer purchased another CGL from Consolidated Insurance Company. By 1982, both policies had expired. There is no evidence that Spokane Transformer informed Industrial or Consolidated Insurance about the EPA test results when the policies were purchased.
In 1979, Spokane Transformer ceased operations and was liquidated. The site was sold to Paul and Mary Ann Gisselberg in 1981. The Gisselbergs later conducted their own environmental audit of the property as part of a refinancing arrangement and discovered the preexisting PCB contamination. The Gisselbergs initiated remedial measures to clean up the property and sent Overton, then a member of the Arizona House of Representatives, a demand letter advising that they would seek contribution from him as a potentially liable person. The Gisselbergs subsequently filed suit against Overton and Boyce for contribution towards the clean-up cost of the PCB contamination, and Overton tendered defense of the action to his insurers. Both insurers rejected the tender asserting, among other things, that the claim was a known loss since Overton had previous knowledge of the PCB contamination, and that the contamination was not a covered “occurrence” as defined by the policy.
Analysis
The Washington Supreme Court’s analysis focused on the policy definitions of “occurrence” and “property damage.” The policy defines “occurrence” as “an accident, including continuous or repeated exposure to conditions, which result in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” “Property damage” is defined as “physical injury to or destruction of tangible property which occurs during the policy period.” Based on these definitions, the Court found that the policy covers only (i) accidents which, (ii) during the policy period, (iii) result in property damage (iv) that is neither expected nor intended (v) from the standpoint of the insured. In assessing the “expected or intended” element, the Court determined that the dispositive issue is whether the insured had notice of property damage prior to purchasing the policy. While the phrase “neither expected nor intended” is determined from the standpoint of the insured, the Court found that since the record showed Spokane Transformer had notice of the defective condition, i.e., the PCB contamination, before purchasing the insurance policy, Spokane Transformer could not argue “excusable ignorance” of the pre-existing property damage.
The Washington Supreme Court next considered what must be “unexpected” in order for coverage to be triggered. Spokane argued that the unexpected harmful event is the third-party property damages (i.e. the costs of cleanup from the Gisselberg’s contribution suit). The Supreme Court flatly rejected this approach, which failed to recognize that the policy defines “property damage” as “physical injury to or destruction of tangible property.” The proper question, the Supreme Court opined, was whether Spokane Transformer expected the property damage (i.e. the actual loss, injury or deterioration of the property itself) that eventually resulted in the cost of cleaning up the Gisselberg’s property - - not whether Spokane Transformer expected or intended the cleanup cost itself. The Court further noted that neither the definition of “occurrence” nor the definition of “property damage” specify that the damaged property must be that of a third party; hence, an “occurrence” is determined “without consideration of whether the damage was to the insured’s own property or to that of a third party.” The Washington Supreme Court concluded that since Spokane Transformer was notified of the presence of PCBs on the subject property in 1976 - - well prior to purchasing the instant policies - - there was no “occurrence” as defined in those policies and also that “coverage was properly denied under the known loss principle.”
Learning Point:
In determining whether prior knowledge of contamination precludes coverage (based upon the “occurrence” definition at issue herein or the known loss principle), the focus of the analysis is not on when the insured knew of a third-party liability, but when the insured knew of facts and/or circumstances constituting “property damage” which could potentially give rise to such liability.
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