Auto-Owners Ins Co v. Whitewood Properties, (4th Cir. 2004)

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UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

A UTO -O WNERS I NSURANCE C OMPANY , Plaintiff-Appellee,

v. D EBRA J. P OTTER ; R OBERT F. P OTTER ;

N ICHOLAS E. P IGGOTT ; K ARIN

P IGGOTT ; E DWARD F. F ITZGERALD ;

K AREN L. F ITZGERALD ; S USAN

W ILLIAMS ; B RIAN E ASON ; J ANET

E ASON ; C HARLES N. R EGISTER ;

N ANCY P. R EGISTER ; D OUGLAS

B AREFOOT ; A NGELA B AREFOOT ; J OHN

J OSEPH B IANCHINO ; K AREN M ARIE

B IANCHINO ; D ANIEL B LACKMAN ;

H OLLY B LACKMAN ; R ONALD E. B RAY ;

S USAN M. B RAY ; C LYDE C ORSON ; No. 03-1457 M ARY C ORSON ; R ICHARD A L C OX ;

B ARBARA S. B OOB ; J AMES W. D ELUCA ; M ARY H. D ELUCA ; K ENNETH

D EMOSS ; R EGINA D EMOSS ; D AVID R. D IETZ ; H ELEN L. D IETZ ; D IANE

D ILLON ; J ESSE M. D INGLE ; L YNN K. D INGLE ; D AVID M. G OODWYN ;

V ALERIE C. W ASHINGTON ; J OYCE

G RIFFIN -K EENE ; S ABOOR H AKEM ;

W ENDY D. H AKEM ; J OHNNY M. H UMPHREY ; S USAN V. H UMPHREY ;

D WAUN A. H UMPHRIES ; K RISTY G. H UMPHRIES ; G REGORY J. J ONES ;

K YMBERLY A. J ONES ; M ILTON W AYNE

K ING , S R .; J OYCE S. K ING ;

D AVID S AMUEL L EINFELDER ; S ANDRA

I VESTER L EINFELDER ; S TEPHANIE

E DWARDS M ASSENGALE ; M ICHAEL R. M C K AY ; J ILL L. M C K AY ; R OBERT

W ILLIAM M OORES ; V ICTORIA M ORGAN

M OORES ; R OBERT P. N ENNO ; C ARINE

M. N ENNO ; S TEVEN D. P ARKER ;

K AREN D. P ARKER ; J OSEPH J. R ACHIS ;

S USAN T. R ACHIS ; M ARK T. R ADER ;

S UE N. R ADER ; R AMIRO R OBLES , J R .;

P ATRICIA B EATRICE R OBLES ; J IHAD A. S HAWWA ; H OWAYDA S HAWWA ; J OHN

F. S TEHMAN ; M ICHELLE A. S TEHMAN ;

A MANDA T ALLEY ; S TEPHEN T URNER ;

L OLITA F IELDS ; S HAWN M. W AGNER ;

J ODI A. W AGNER ; C ATHY W HITE ; D ALE S. W IGGINS ; M ARY W IGGINS ;

A NJANETTE I RENE W OOTEN , Defendants-Appellants,

and W HITEWOOD P ROPERTIES ,

I NCORPORATED , d/b/a Neuse Crossing

Utilities Company, d/b/a Neuse

Crossing Utilities Company

Properties; J AMES D. A DAMS , J R ., Defendants, and T HE H ARLEYSVILLE I NSURANCE

C OMPANIES , Third party Defendant.

A UTO -O WNERS I NSURANCE C OMPANY , Plaintiff-Appellee,

v. W HITEWOOD P ROPERTIES ,

I NCORPORATED , d/b/a Neuse Crossing

Utilities Company, d/b/a Neuse

Crossing Utilities Company

Properties; J AMES D. A DAMS , J R ., Defendants-Appellants,

and D EBRA J. P OTTER ; R OBERT F. P OTTER ;

N ICHOLAS E. P IGGOTT ; K ARIN

P IGGOTT ; E DWARD F. F ITZGERALD ;

K AREN L. F ITZGERALD ; S USAN

W ILLIAMS ; B RIAN E ASON ; J ANET

E ASON ; C HARLES N. R EGISTER ; No. 03-1543 N ANCY P. R EGISTER ; D OUGLAS

B AREFOOT ; A NGELA B AREFOOT ; J OHN

J OSEPH B IANCHINO ; K AREN M ARIE

B IANCHINO ; D ANIEL B LACKMAN ;

H OLLY B LACKMAN ; R ONALD E. B RAY ;

S USAN M. B RAY ; C LYDE C ORSON ;

M ARY C ORSON ; R ICHARD A L C OX ;

B ARBARA S. B OOB ; J AMES W. D ELUCA ; M ARY H. D ELUCA ; K ENNETH

D EMOSS ; R EGINA D EMOSS ; D AVID R. D IETZ ; H ELEN L. D IETZ ; D IANE

D ILLON ; J ESSE M. D INGLE ; L YNN K. D INGLE ; D AVID M. G OODWYN ;

V ALERIE C. W ASHINGTON ; J OYCE

G RIFFIN -K EENE ; S ABOOR H AKEM ;

W ENDY D. H AKEM ; J OHNNY M. H UMPHREY ; S USAN V. H UMPHREY ;

D WAUN A. H UMPHRIES ; K RISTY G. H UMPHRIES ; G REGORY J. J ONES ;

K YMBERLY A. J ONES ; M ILTON W AYNE

K ING , S R .; J OYCE S. K ING ; D AVID

S AMUEL L EINFELDER ; S ANDRA I VESTER

L EINFELDER ; S TEPHANIE E DWARDS

M ASSENGALE ; M ICHAEL R. M C K AY ;

J ILL L. M C K AY ; R OBERT W ILLIAM

M OORES ; V ICTORIA M ORGAN M OORES ;

R OBERT P. N ENNO ; C ARINE M. N ENNO ; S TEVEN D. P ARKER ; K AREN

D. P ARKER ; J OSEPH J. R ACHIS ; S USAN

T. R ACHIS ; M ARK T. R ADER ; S UE N. R ADER ; R AMIRO R OBLES , J R .; P ATRICIA B EATRICE R OBLES ; J IHAD A. S HAWWA ; H OWAYDA S HAWWA ; J OHN

F. S TEHMAN ; M ICHELLE A. S TEHMAN ;

A MANDA T ALLEY ; S TEPHEN T URNER ;

L OLITA F IELDS ; S HAWN M. W AGNER ;

J ODI A. W AGNER ; C ATHY W HITE ;

D ALE S. W IGGINS ; M ARY W IGGINS ;

A NJANETTE I RENE W OOTEN , Defendants, and T HE H ARLEYSVILLE I NSURANCE

C OMPANIES , Third party Defendant. Appeals from the United States District Court

for the Eastern District of North Carolina, at Raleigh. W. Earl Britt, Senior District Judge. (CA-01-819-5-BR)

Argued: February 26, 2004

Decided: July 27, 2004

Before LUTTIG, WILLIAMS, and GREGORY, Circuit Judges.

Vacated and remanded by unpublished opinion. Judge Gregory wrote

the opinion, in which Judge Luttig and Judge Williams joined. COUNSEL ARGUED: Jonathan Drew Sasser, ELLIS & WINTERS, L.L.P.,

Raleigh, North Carolina, for Appellants. Walter Edgar Brock, Jr.,

YOUNG, MOORE & HENDERSON, P.A., Raleigh, North Carolina,

for Appellee. ON BRIEF: Kurt J. Olson, Tyler L. Randolph,

MAUPIN TAYLOR, P.A., Raleigh, North Carolina; Reed J. Hol-

lander, NELSON, MULLINS, RILEY & SCARBOROUGH, L.L.P.,

Raleigh, North Carolina, for Appellants. John A. Yeager, WIL-

LINGHAM & COT , P.C., East Lansing, Michigan, for Appellee.

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c). OPINION GREGORY, Circuit Judge:

Debra J. Potter and other residents (hereinafter "Potter Appellants")

in the Neuse Crossing subdivision in Wake County, North Carolina,

brought suit in state court against the housing developer, Whitewood

Properties, Inc., d/b/a/ Neuse Crossing Utilities Company, its presi-

dent and others (collectively "Whitewood") to recover for damage to

their homes and persons caused by water allegedly containing con-

taminants. Appellee Auto-Owners Insurance Company ("Auto-

Owners"), Whitewood's insurer, filed an action in federal district

court seeking a declaratory judgment that it had no obligation to

defend or indemnify Whitewood because of various exclusions in the

insurance policy at issue. The district court granted summary judg-

ment for Auto-Owners, holding that the insurance policy's pollution

exclusion clause barred coverage and all duties to defend Whitewood.

The Potter Appellants appeal the grant of summary judgment, con-

tending that the district court incorrectly applied governing North

Carolina law, W. Am. Ins. Co. v. Tufco Flooring E., Inc. , 409 S.E.2d

(N.C. Ct. App. 1991). While we conclude that the district court

correctly applied three of Tufco 's "four independent" holdings, we

find that it erred in failing to properly apply the fourth holding. There-

fore, we vacate the district court's grant of summary judgment for

Auto-Owners, and we hold that the pollution exclusion clause does

not serve as a complete bar to insurance coverage for the Potter

Appellants' state court claims. Accordingly, we remand to the district

court so that it may consider the scope of the pollution exclusion

clause as well as the other exclusions which Auto-Owners argued are

applicable in its declaratory judgment action. I. Whitewood began developing the Neuse Crossing subdivision in

7, and formed the utilities company implicated here to provide

water and sewer for the development. In March 2001, the Potter

Appellants filed suit in state court against Whitewood, alleging that

Whitewood provided contaminated water from its four wells, causing

the Potter Appellants bodily injury and property damage. According

to the Potter Appellants, the water contained excessive concentrations

of manganese, iron, calcium, arsenic, barium, chloride, hard water

constituents, and total dissolved solids, and such contaminants caused

skin problems, adverse health effects, damage to household goods,

and diminution of property values. In their state court First Amended

Complaint, the Potter Appellants asserted claims for fraudulent and

negligent misrepresentation, breach of implied warranty of habitabil-

ity, trespass, nuisance, negligence, negligence per se, negligent inflic-

tion of emotional distress, civil conspiracy, unfair and deceptive trade

practices, and medical monitoring.

Whitewood demanded coverage from its insurers, Auto-Owners

and the Harleysville Insurance Companies, 1 who had issued White-

Harleysville has been dismissed from the action by stipulation.

wood commercial general liability ("CGL") policies for the years in

question. Auto-Owners issued a series of nearly identical one-year

policies from December 8, 1997 to December 8, 2000. The Auto-

Owners policy requires the insurer to pay those sums Whitewood is

legally obligated to pay as a result of "bodily injury" or "property

damage" caused by an "occurrence" within the scope of the policy's

coverage. J.A. 97, 164, 231 (1997-98, 1998-99, 1999-2000 coverage

forms, respectively). The "occurrence" at issue is Whitewood's distri-

bution of allegedly contaminated water.

The policy includes two aggregate limits for coverage, a general

aggregate limit and a limit for "Products-Completed Operations."

"Products-completed operations" are not coverages separate from the

CGL; rather, they delineate the CGL's scope of coverage, making

clear that insurance coverage continues to apply to work that has been

completed. Section V ("Definitions") of the CGL coverage form pro-

vides:

a. "Products-completed operations hazard" includes all

"bodily injury" and "property damage" occurring away from

premises you own or rent and arising out of "your product"

or "your work" except:

  (1) Products that are still in your physical posses-

sion; or

  (2) Work that has not yet been completed or aban-

doned.

b. "Your work" will be deemed completed at the earliest of

the following times: . . .

  (3) When that part of the work done at a job site

has been put to its intended use by a person or

organization other than another contractor or sub-

contractor working on the same project.

J.A. 106, 173, 240 (1997-98, 1998-99, 1999-2000 coverage forms,

respectively). In this case, Whitewood's product was water and its operations consisted of providing water to the Potter Appellants.

When Whitewood sought insurance coverage for the damage

caused by the alleged contamination, both insurers initially denied

coverage. Auto-Owners later agreed to defend Whitewood under a

reservation of rights. Subsequent to that agreement, however, Auto-

Owners brought this diversity action in federal court, pursuant to 28 U.S.C. 2201 and Fed. R. Civ. P. 57, seeking a declaration that it was

not required to indemnify or defend Whitewood under the CGL poli-

cies. In its declaratory judgment action, Auto-Owners asserted seven

counts as to why the policy did not provide the coverage sought by

Whitewood. The Potter Appellants filed a motion to dismiss the

declaratory judgment complaint. The district court converted the Pot-

ter Appellants' motion to dismiss into one for summary judgment,

and denied that motion. However, the court granted summary judg-

ment on Auto-Owners' declaratory judgment claim, holding that the

pollution exclusion clause in Auto-Owners' policies precluded the

coverage sought by Whitewood. In so holding, the court did not reach

the applicability of any other proffered exclusion.

The CGL's pollution exclusion clause upon which the district court

based its holding excludes from CGL coverage:

  (f)(1) "Bodily injury" or "property damage" arising out of

the actual, alleged, or threatened discharge, dispersal, seep-

age, migration, release or escape of pollutants:

  (a) At or from any premises, site or location which

is or was at any time owned or occupied by, or

rented or loaned to, any insured;

  (b) At or from any premises, site or location which

is or was at any time used by or for any insured or

others for the handling, storage, disposal, process-

ing or treatment of waste . . . . or

  (d) At or from any premises, site or location on

which any insured . . . [is] performing operations:

. . .

  (i) if the pollutants are brought on or to the

premises, site or location in connection with

such operations . . . or (ii) if the operations are to test for, monitor,

clean up, remove, contain, treat, detoxify or

neutralize, or in any way respond to or assess

the effects of pollutants. J.A. 97-98, 165, 232 (1997-98, 1998-99, 1999-2000 coverage forms,

respectively). The court found the pollution exclusion clause unam-

biguously applied to the events at issue, and barred coverage as well

as any duty to defend on the part of the insurer. After the grant of

summary judgment, Auto-Owners terminated coverage and ceased its

defense under the reservation of rights. The Potter Appellants appeal

from the district court's grant of summary judgment, while their

action against Whitewood remains pending in state court. II. We review the district court's grant of summary judgment de novo.

Xoom, Inc. v. Imageline, Inc. , 323 F.3d 279, 282 (4th Cir. 2003).

Issues of law in dispute are reviewed de novo. Id. In this appeal, we must interpret the terms of an insurance policy

as a matter of North Carolina law. The goal of construction of insur-

ance policies, like with all contracts, is to arrive at the intent of the

parties when the policy was issued. Gaston County Dyeing Mach. Co. v. Northfield Ins. Co. , 524 S.E.2d 558, 563 (N.C. 2000) (citations

omitted). The terms of the policy are to be given their ordinary mean-

ing, unless the context indicates a different meaning was intended. Id. Furthermore, the terms are to be harmoniously construed and every

provision is to be given effect if possible. Id. The meaning of language used in the policy is a question of law. Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co. , 172 S.E.2d

, 522 (N.C. 1970). If there are doubts or ambiguities in the policy,

they must be resolved in favor of the insured. Pa. Nat'l Mut. Cas. Ins. Co. v. Associated Scaffolders & Equip. Co. , 579 S.E.2d 404, 406

(N.C. Ct. App. 2003) (citation omitted); see also Waste Mgmt. of Car-

olinas, Inc. v. Peerless Ins. Co. , 340 S.E.2d 374, 378 (N.C. 1986);

accord Gaston County Dyeing . The insured bears the initial burden

of establishing that a loss comes within the scope of a policy's cover- age, however, the insurer bears the burden of proving that an exclu-

sion is applicable. Nationwide Mut. Ins. Co. v. McAbee , 150 S.E.2d

, 497-98 (N.C. 1966). III. A. The Potter Appellants argue that the district court erred in interpret-

ing state law on pollution exclusion clauses by failing to apply the

four independent holdings of the North Carolina Court of Appeals in

W. Am. Ins. Co. v. Tufco Flooring E., Inc. , 409 S.E.2d 692 (N.C. Ct. App. 1991), review allowed , 413 S.E.2d 555 (N.C. 1992), and review

denied as improvidently granted , 420 S.E.2d 826 (N.C. 1992) , and

overruled on other grounds by Gaston County Dyeing , 524 S.E.2d

. We find, as both parties largely acknowledge, that there is no

clearly controlling precedent from the North Carolina Supreme Court

that resolves the instant case, thus "our judicial chore is to determine

the rule that the North Carolina Supreme Court would probably fol-

low, not fashion a rule which we, as an independent federal court,

might consider best." Kline v. Wheels by Kinney, Inc. , 464 F.2d 184,

(4th Cir. 1972) (internal quotation marks and citation omitted).

In doing so, where Tufco is directly on point, we are obliged to follow

it. See, e.g. , West v. Am. Tel. & Tel. Co. , 311 U.S. 223, 236-37 (1940)

("[A] federal court is not free to reject the state rule merely because

it has not received the sanction of the highest state court, even though

it thinks the rule is unsound in principle or that another is prefera-

ble."); Assicurazioni Generali, S.p.A. v. Neil , 160 F.3d 997, 1002-03

(4th Cir. 1998) (stating "only if the decision of a state's intermediate

court cannot be reconciled with state statutes, or decisions of the

state's highest court, or both, may a federal court sitting in diversity

refuse to follow it") (citations omitted).

The Potter Appellants argue that Tufco clearly controls this case

and its four independent holdings dictate that North Carolina law pre-

cludes application of the pollution exclusion provision in this

instance. See Br. of Appellants at 18 ("Even if one assumes that the

products/completed coverage is subject to the pollution exclusion

clause, the District Court fails to address the other three independent

reasons adopted Tufco [sic] for concluding that the pollution exclu-

sion clause did not apply."). Auto-Owners contends that the district

court properly applied governing state law, and that Tufco is factually

distinguishable. We briefly review Tufco before addressing the par-

ties' contentions.

In Tufco , the North Carolina Court of Appeals considered whether

a pollution exclusion clause, with wording substantially similar to that

at issue here Ð although having a different scope of applicability Ð

excluded property damage resulting from the use of a floor resurfac-

ing product. See 409 S.E.2d at 695-700. The insured, a flooring com-

pany, resurfaced the floor of a Perdue chicken plant. During the

resurfacing, some chicken, which had been stored in a cooler adjacent

to one of the areas undergoing treatment, became spoiled. Apparently

unaware of the adulteration, Perdue sent the chicken to its distribu-

tors, but upon receipt the customers notified Perdue that the chicken

was unfit for consumption. After disposing of $500,000 in chicken,

Perdue sued the insured for its loss, asserting that the chicken was

damaged as a result of fumes released by the chemicals used in resur-

facing. Id. at 693. The flooring company sought insurance coverage

for Perdue's claims, but the insurer asserted that the CGL's pollution

exclusion clause barred coverage for the loss.

The Tufco trial court rejected the insurer's contention, and the

Court of Appeals affirmed, holding that the pollution exclusion clause

was inapplicable on "four independent grounds." Id. at 695. First, the

court held that the clause was "expressly inapplicable to and overrid-

den by the `completed operations' coverage in the policy." Id. Sec-

ond, it held that the policy applied to the claim was ambiguous and

had to be construed against the drafter/insurer. Id. Third, it held that

the flooring material did not constitute a "pollutant" under the clause.

Id. Finally, it held that the pollution exclusion clause "applies only to

discharges into the environment, and none occurred here." Id. Appellants maintain that all four grounds constitute controlling

North Carolina law, and the district court erred by refusing to apply

that precedent. We first note that although Appellants argue that

"[t]he District Court failed to apply North Carolina law," Br. at 7

(emphasis removed), and that "the District Court refused to follow the

controlling state precedent of Tufco ," id. at 18 (emphasis removed),

the district court devoted considerable attention to Tufco in its opin- ion. See Dist. Ct. slip op. at 12-20 (discussing Tufco ) (J.A. 527-35).

Furthermore, we find that the district court's analysis of Tufco 's first

three holdings was substantially correct. However, we conclude that

the district court erred in failing to properly consider Tufco 's fourth

independent ground, and for that reason we must vacate and remand.

We discuss the district court's application of Tufco 's "four indepen-

dent grounds" in turn. 1. Based on Tufco 's first ground, Appellants argue that the products-

completed operations coverage in the Auto-Owners policy overrides

the pollution exclusion clause. We need not linger long on this argu-

ment, however, because the policy in the instant case is clearly distin-

guishable. See Erie Ins. Exch. v. St. Stephen's Episcopal Church , 570

S.E.2d 763, 766 (N.C. Ct. App. 2002) (noting that "[c]ase law inter-

preting and applying insurance coverage exclusions is varied and

heavily dependent upon individual factual circumstances"). As the

district court recognized, while products-completed operations cover-

age was triggered because Whitewood had started supplying water to

the homes, the policy's plain terms demonstrate that the products-

completed operations coverage does not trump the pollution exclusion

clause.

The pollution exclusion clause in the Tufco policy applied only to

work in progress. Here, the district court rightly held that the CGL

was not so limited. The Tufco policy included a "Broadening of Cov-

erage" flyer, wherein the insurer "expressed its intention not to subject

the completed operations coverage to the pollution exclusion clause."

Tufco , 409 S.E.2d at 697. Here, however, the policy had no such pro-

vision extending the completed operations coverage. By contrast,

Appellee provides examples of other policies which do indeed contain

such an exception to the pollution exclusion clause, though Auto-

Owners never issued Whitewood such a policy. See Br. of Appellee

at 36-37. Thus, we conclude that the district court correctly deter-

mined that Tufco 's first holding is inapplicable to the policy at issue

in this case. 2

Furthermore, even if the Auto-Owners policy was more comparable

to that at issue here, it is questionable whether Tufco 's first holding has

. Appellants argue that the application of the pollution exclusion

clause would create an inherent ambiguity in the CGL policy, there-

fore the policy must be interpreted to provide coverage. In Tufco , the

North Carolina Court of Appeals found that the "pollution exclusion"

clause at issue did not exclude coverage because the CGL policy was

inherently ambiguous. 409 S.E.2d at 697. It noted that when an insur-

ance policy provides coverage for a particular activity, but that activ-

ity is later excluded, an improper ambiguity arises which must be

construed against the insurer. See id. The court stated:

Tufco is in the business of installing industrial flooring, and

Tufco purchased a commercial liability policy to protect it

from liabilities arising from the very type of activity at issue

here. . . . West American was aware of the type of activity

in which Tufco was engaged. . . . To allow West American

to deny coverage for claims arising out of Tufco's central

business activity would render the policy virtually useless to

Tufco.

Id. any continued viability. Initially, the North Carolina Supreme Court

granted review of the Court of Appeals' decision , see W. Am. Ins. Co. v. Tufco Flooring E., Inc. , 415 S.E.2d 555 (N.C. 1992), but the court ulti-

mately did not review the case, finding that its discretionary review had

been improvidently granted. See W. Am. Ins. Co. v. Tufco Flooring E. ,

S.E.2d 826 (N.C. 1992). However, in Gaston County Dyeing , the

North Carolina Supreme Court overruled Tufco 's analysis of North Caro-

lina law concerning the "date of discovery" rule, holding that the Court

of Appeals incorrectly held that "`for insurance purposes property dam-

age "occurs" when it is first discovered of manifested.'" 524 S.E.2d at

(quoting Tufco , 409 S.E.2d at 696). Tufco 's "date of discovery" hold-

ing had been essential to the Court of Appeals' determination that the

completed operations coverage was triggered in the first instance.

Indeed, the district court in the instant case recognized that had the North

Carolina Court of Appeals applied the Gaston rule in Tufco , "it is

unlikely that the court would have found the completed operations haz-

ard applicable . . . ." Dist. Ct. slip op. at 12-13 n.6 (J.A. 527-28).

Here, the Potter Appellants argue that the Auto-Owners policy is

equally ambiguous. They contend that Whitewood was in the business

of providing water, and insurance coverage is provided for those

operations, thus if the policy were read Ð on the basis of the pollu-

tion exclusion clause Ð to exclude coverage for claims arising from

Whitewood's central business activity, the policy would be meaning-

less. Applying Tufco 's second independent holding in this instance,

it is, of course, correct that when an ambiguity arises in an insurance

policy, the policy must be given the interpretation most favorable to

the insured. Grant v. Emmco Ins. Co. , 243 S.E.2d 894, 897 (N.C. 8). However, "if the meaning of the policy is clear and only one

reasonable interpretation exists, the courts must enforce the contract

as written." Gaston County Dyeing , 524 S.E.2d at 563 (internal quota-

tion marks and citations omitted). Here, we find that on the face of

the policy, the pollution exclusion clause and its interplay with

"completed-operations" coverage are not ambiguous. Indeed, the

structure of the policy evidences no tension between the two provi-

sions.

As noted above, the CGL coverage forms specify that they provide

coverage for "bodily injury" and "property damage," J.A. 97, 164,

, however, the coverage forms contain several explicit exclusions.

Notably, the pollution exclusion clause excludes CGL coverage for

injury or damage arising from "actual, alleged or threatened discharge

dispersal, seepage, migration release or escape of pollutants . . . ."

J.A. 98, 165, 232. 3 There is, however, no explicit or structural indica-

tion otherwise that the pollution exclusion does not apply to products-

completed operations coverage. In fact, as the district court recog-

nized, the policy contains other exclusions in which products-

completed operations coverage is specifically mentioned. See Dist.

Ct. slip op. at 20 (J.A. 535) (citing CGL Coverage A, j.). Paragraph

j. excludes from coverage various types of property damage, however,

it also details situations in which the exclusion does not apply, includ-

Additionally, the policies contain a separate "Pollution Exclusion

Endorsement," which specifies that under the CGL coverage pertaining

to "Personal and Advertising Injury Liability," "personal injury" arising

from "actual, alleged or threatened discharge, dispersal, seepage, migra-

tion, release or escape of pollutants" is not covered under the policies.

J.A. 107, 174, 241.

ing products-completed operations: "Paragraph (6) of this exclusion

does not apply to `property damage' included in the `products-

completed operations hazard.'" J.A. 99, 166, 233.

Furthermore, other policy exclusions apply only to products-

completed operations coverage, demonstrating that such coverage is

subject to more , not fewer exclusions than the general coverage, thus

belying Appellants' arguments that products completed operations

coverage is somehow broader than the CGL coverage overall. See

J.A. 97-99, 164-66, 231-33 (Coverage A. Bodily Injury and Property

Damage Liability, Exclusion l.) ("This insurance does not apply to:

. . . `Property damage' to `your work' arising out of it or any part of

it and including in the `products-completed operations hazard'"); id. at 100, 167, 234 (Coverage C. Medical Payments, Exclusion f.)

("We will not pay expenses for `bodily injury' . . . [i]ncluded within

the `products-completed operations hazard'.").

Accordingly, we conclude that the plain terms of the pollution

exclusion clause as well as the structure of the CGL policy demon-

strate that if the pollution exclusion was not intended to apply to the

products-completed operation coverage, the policy would have so

stated. Because we find that no ambiguity existed in the interplay

between these contractual terms, see Nationwide Mut. Ins. Co. v. Mabe , 467 S.E.2d 34, 40 (N.C. 1996) (holding where policy is not

ambiguous, the court must enforce the policy as written and may not

remake the policy under the guise of interpreting an ambiguous provi-

sion), we need not further entertain Appellants' argument that the

CGL is ambiguous because it purportedly does not provide coverage

for claims arising out of Whitewood's central business activity. See

Br. of Appellants at 30-33 (arguing that the policy must be interpreted

in light of the "reasonable expectations" of the insured, and that

"Whitewood reasonably expected coverage for claims arising out of

its central business activity, the distribution of water to the residents

of Neuse Crossing"); Tufco , 409 S.E.2d at 697 ("To allow [insurer]

to deny coverage for claims arising out of Tufco's central business

activity would render the policy virtually useless to Tufco."); but see

Br. of Appellee at 36 (arguing that the policy does give effect to the

coverage sought by the insured in that it protects against numerous

types of risk that exist for Whitewood's central business activities, including "flooding, premises liability . . . ruptured water lines, dam-

ages from accidents during construction"); id. (noting that the bulk of

the insurance premium paid by Whitewood was for commercial prop-

erty coverage, not liability coverage). 3. Appellants also assert that the district court failed to address

Tufco 's third independent holding. Under Tufco 's third ground, the

court held that the pollution exclusion clause was inapplicable

because the flooring material's vapors were not a "pollutant" because

when the raw material came onto the site, it was not an "irritant or

contaminant." 409 S.E.2d at 609. The court concluded that when

Tufco purchased its insurance, it understood "`pollutant' . . . as an

unwanted impurity, not as the raw materials which Tufco purchased

to do its job." Id. In this vein, Appellants argue that Auto-Owners' denial of cover-

age for the "water operations and product on the incongruous basis

that it constitutes a `pollutant' (because it contained substances other

than pure H 2 O molecules, which any drinking water does) flies in the

face of logic and directly contradicts the terms of the policy and the

parties' intent as manifested by those terms." Br. at 30; see also id. at 40 ("The policies' definitions of `pollutants' [citations] is so over-

broad . . . as to make the pollution exclusion clause ambiguous."); id. at 40-41 ("Water is a `liquid' and would constitute an `irritant' any

time it was involved in an unwanted or undesired event or a `contami-

nant' any time it contained anything other than pure H 2 0 molecules.").

We need not analyze whether under the policy, the definition of "pol-

lutants" is overbroad, nor do we find Tufco 's third holding applicable,

because the language of the Potter Appellants' state court complaint

makes clear that the materials complained of were "pollutants." The

pollution exclusion clause states: "Pollutants means any solid, liquid,

gaseous or thermal irritant or contaminant , including smoke, vapor,

soot, fumes, acids, alkalis, chemical and waste." J.A. 107 (emphasis

added). Here, the Potter Appellants' complaint makes clear that,

unlike the substances in Tufco , the manganese, iron, sediment, cal-

cium, "`hard water' constituents" and other contaminants were never

wanted in their homes or on their land. See, e.g. , Compl. 1 ("This

is a lawsuit brought by residents . . . to recover for contamination of

their homes and persons.") (emphasis added); id. 3 (referring to

"contamination"); id. 77 (alleging that defendants did not "correct

the contamination, warn Plaintiffs of the contamination, remediate the

contamination"); id. 113 (stating "high levels of other contaminants

were found"); id. 136-37 (alleging "excessive levels of contami-

nants in the water" caused injury and property damage). Therefore,

we reject Appellants' claims that Tufco 's third independent ground is

inapplicable to this case, because the materials which the Potter

Appellants repeatedly refer to as "contaminants" were "something

creating impurity, something objectionable and unwanted," rather

than "raw materials which [Whitewood] purchased to do its job."

Tufco , 409 S.E.2d at 698. 4. The pollution exclusion clause at issue excludes coverage for bod-

ily injury or property damage "arising out of the actual, alleged or

threatened discharge, dispersal, seepage, migration, release or

escape of pollutants ." J.A. 98, 165, 232 (emphasis added). In inter-

preting this language, the district court explicitly "reject[ed] the argu-

ment that any discharge must have been into the environment to come

within the meaning of the pollution exclusion clause. The language

of the policy does not support such an interpretation." Dist. Ct. slip.

op. at 13-14 n.8 (J.A. 528-29).

Appellants argue that such determination is flatly contrary to North

Carolina law as expressed in Tufco 's fourth independent holding, "the

pollution exclusion does not deny coverage to Tufco for Perdue's

claims . . . because the pollution exclusion applies only to discharges

into the environment ." Tufco , 409 S.E.2d at 699 (emphasis added). In

Tufco , the North Carolina Court of Appeals considered the operative

terms of the pollution exclusion clause Ð e.g. , "discharge," "dis-

persal," "release," and "escape" Ð and determined that they are "envi-

ronmental terms of art," thus the pollution exclusion clause was

inapplicable to the non-environmental damage at the Perdue plant. Id. at 699-700. Auto-Owners counters, arguing that Appellants' argu-

ments as to the district court's erroneous application of Tufco are

flawed in two main respects: (1) Tufco is an incorrect statement of

North Carolina law, and the pollution exclusion clause should not be

interpreted using technical terms; and (2) under either the plain or technical terms of the pollution exclusion clause, a "discharge, dis-

persal, seepage, migration, release or escape of pollutants" has, in

fact, occurred. a. As a general rule in North Carolina, "the terms of an insurance con-

tract must be given their plain ordinary, and accepted meanings unless

they have acquired a technical meaning in the field of insurance or

unless it is apparent that another meaning was intended." Cherokee

Ins. Co. v. Aetna Cas. & Sure. Co. , 264 S.E.2d 913, 915 (N.C. Ct. App. 1980) (citing Grant , 243 S.E.2d 894); accord N.C. Ins. Guar.

Ass'n v. State Farm Mut. Auto. Ins. Co. , 446 S.E.2d 364, 367 (N.C. Ct. App. 1994). Auto-Owners argues that the Tufco court erroneously

failed to give the terms of the pollution exclusion clause their ordi-

nary meaning, and the district court in this case rightly "rejected the

Tufco reasoning." Br. of Appellee at 18. Yet Appellants argue that

Tufco 's use of the environmental terms of art in interpreting the pollu-

tion exclusion clause is a clear statement of North Carolina law which

the district court was bound to follow.

In resolving this issue, we first recognize that courts nationwide are

divided over whether the terms of pollution exclusion clauses apply

only to traditional environmental damage, or whether they apply to

non-environmental damage as well. Compare Tufco , 409 S.E.2d 699-

; Belt Painting Corp. v. TIG Ins. Co. , 763 N.Y.S.2d 790, 795-96

(N.Y. 2003) (applying Tufco 's limitations on scope of pollution

exclusion clause); Am. States Ins. Co. v. Koloms , 687 N.E.2d 72, 81-

(Ill. 1997) (holding that pollution exclusion clause did not extend

beyond the traditional environmental arena), and Atl. Mut. Ins. Co. v. McFadden , 595 N.E.2d 762, 764 (Mass. 1992) (holding terms of the

exclusion clause were environmental terms of art), with Cincinnati

Ins. Co. v. Becker Warehouse, Inc. , 635 N.W.2d 112, 122 (Neb. 2001)

(rejecting Tufco 's holding that discharge must be into the environ-

ment); McKusick v. Travelers Indem. Co. , 632 N.W.2d 525, 531-32

(Mich. Ct. App. 2001) (refusing to "engraft" environmental limitation

onto the terms); Peace ex rel. Lerner v. Northwestern Nat. Ins. Co. ,

N.W.2d 429, 444-46 (Wis. 1999) (rejecting view that terms like

"discharge" are environmental terms of art); Mid-Continent Cas. v. U.S. Fire Ins. Co. , 1 S.W.3d 251, 253 (Tex. Ct. App. 1999) (holding

polluted or contaminated drinking water fell within the pollution

exclusion clause), and Nat'l Union Fire Ins. Co. of Pittsburgh v. CBI

Indus., Inc. , 907 S.W.2d 517, 522 & n.8 (Tex. Ct. App. 1995) (stating

that most courts have found the pollution exclusion clause to be abso-

lute).

To determine whether "discharge" and the other terms at issue are

to be accorded their plain meaning, or treated as terms of art, our task

is to apply the law as we believe the Supreme Court of North Carolina

would. Kinney , supra . Having recognized that courts are divided con-

cerning the construction of the pollution exclusion clause and the

meanings of terms like "discharge," we note that "[u]nder North Caro-

lina law, if an insurance contract term is capable of one or more inter-

pretations, the one most favorable to the insured applies." Haw River

Land & Timber Co. v. Lawyers Title Ins. Co. , 152 F.3d 275, 283 (4th

Cir. 1998) (citing Mills v. State Life & Health Ins. Co. , 135 S.E.2d

, 590 (N.C. 1964)); see also Wachovia Bank & Trust Co. , 172

S.E.2d at 522 ("If such a word has more than one meaning in its ordi-

nary usage and if the context does not indicate clearly the one

intended, it is to be given the meaning most favorable to the policy

holder, or beneficiary, since the insurance company selected the word

for use.") (internal citations omitted) . Further, in conducting this anal-

ysis, we are to follow the precedent of the North Carolina intermedi-

ate appellate court unless it conflicts with North Carolina Supreme

Court precedent or statute. Neil , supra .

In this instance, we conclude we are bound to follow Tufco 's deter-

mination that the clause at issue constitutes a series of terms of art. See 409 S.E.2d at 699-700 ("[T]he terms `discharge' and `release' are

terms of art in environmental law . . . . Consequently, we find that any

`discharge, dispersal, release, or escape' of a pollutant must be into

the environment in order to trigger the pollution exclusion clause and

deny coverage to the insured."). First, we conclude as much because

Tufco 's holding is not directly contradicted by North Carolina state

law, and the other North Carolina state cases applying the pollution

exclusion clause have done so within the context of traditional envi-

ronmental pollution. See Waste Management , 340 S.E.2d at 380-81;

Home Indem. Co. v. Hoechst Celanese Corp. , 494 S.E.2d 774 (N.C. Ct. App. 1998); but see Whiteville Oil Co. v. Federated Mut. Ins. Co. ,

F. Supp. 241, 246 (E.D.N.C. 1995) (Britt, J.) (holding that pollu- tion clause was unambiguous and barred coverage where gas station

fumes permeated a restaurant). Additionally, because the terms "dis-

charge, dispersal," etc. are not defined in the policy, "[i]n the absence

of such definition, nontechnical words are to be given a meaning con-

sistent with the sense in which they are used in ordinary speech,

unless the context clearly requires otherwise ." Wachovia Bank &

Trust Co. , 172 S.E.2d at 522 (emphasis added) (internal citations

omitted). Here, the North Carolina Supreme Court's holding in Waste

Management demonstrates that the context requires otherwise, and

the North Carolina Supreme Court's language is in accord with the

Tufco holding. In Waste Management , the court reasoned that the pur-

pose of the pollution exclusion is to avoid "the yawning extent of

potential liability arising from . . . discharge of hazardous substances

into the environment ," and provided no indication that the pollution

exclusion clause has acquired a different purpose or meaning. 340

S.E.2d at 381 (emphasis added); accord Tufco , 409 S.E.2d at 699; see

also MacKinnon v. Truck Ins. Exch. , 73 P.3d 1205, 1216 (Cal. 2003)

("[T]hese terms [such as `discharge,' `dispersal,' etc.] used in con-

junction with `pollutant,' commonly refer to the sort [of] conventional

environmental pollution at which the pollution exclusion was primar-

ily targeted."); id. ("[T]here appears to be little dispute that the pollu-

tion exclusion was adopted to address the enormous potential liability

resulting from anti-pollution laws enacted between 1966 and 1980.").

Accordingly, we hold that the district court erred by failing to give

"discharge, dispersal, seepage, migration, release or escape" 4 their

technical meanings as environmental terms of art, and we must exam-

ine the materiality of such error.

We reject Auto-Owners' factual argument that because the pollution

exclusion clause here at issue contained the additional terms "seepage"

and "migration" it is distinguishable from that in Tufco . Other courts

which have joined Tufco in holding the pollution exclusion clause is

comprised of terms of art have done so even where the clause contains

the additional terms. See, e.g. , Belt Painting Corp. , 763 N.Y.S.2d at 795-

; Gainsco Ins. Co. v. Amoco Prod. Co. , 53 P.3d 1051, 1065 (Wyo.

2); see also United States v. Shell Oil Co. , 841 F. Supp. 962, 969

(C.D. Cal. 1993) (discussing use of terms "seepage" and "migration"

within the CERCLA context); Vermont v. Staco, Inc. , 684 F. Supp. 822,

-33 (D. Vt. 1988) (same).

b. Auto-Owners argues that even if the pollution exclusion clause is

interpreted as a set of environmental terms of art, there has nonethe-

less been a "discharge, dispersal, seepage, migration, release or

escape of pollutants" which bars coverage in this case. We find that

the occurrence and the resulting personal injury and property damage

allegedly suffered by the Potter Appellants are certainly not the proto-

typical environmental harms that a pollution exclusion clause is gen-

erally intended to protect against Ð e.g. , a traditional response

scenario where the insured is remediating a spill or toxic release, or

monitoring such work Ð but seem more akin to an instance in which

an adulterated product has been supplied to consumers. However, the

Potter Appellants' inartful pleading lends Auto-Owners' position

some viability, because some Ð but not all Ð portions of the com-

plaint appear to fall within the ambit of the pollution exclusion clause.

See Waste Management , 340 S.E.2d at 377 (stating that to determine

whether insurance coverage is available, court must construe policy,

its exclusions and exceptions, and determine "whether events as

alleged in the pleadings and papers before the court are covered by

the policies"); Doe v. Jenkins , 547 S.E.2d 124, 127 (N.C. Ct. App. 1) (comparing allegations of plaintiff's complaint to language of

insurance policy exclusions to determine that insured was not indem-

nified).

For example, Tufco 's holding that traditional environmental dam-

age was not at issue rested on the fact that the discharges were not

"into or upon land, the atmosphere or any water course or body of

water," 409 S.E.2d at 699 (internal quotation marks and citations

omitted), but were "confined to a cooler within a chicken processing

plant." Id. at 700. Here, however, the Potter Appellants' complaint

contains allegations which expressly sound as claims of traditional

environmental discharge. See, e.g. , Am. Compl. 199 (alleging the

insured caused "physical invasion and trespass onto Plaintiffs' prop-

erty of substances including sediments and contaminants in Plaintiffs'

domestic water supply"); id. 202 (alleging "entry of mineral con-

taminants onto the surface of their property"); id. 225(d) ("[c]ausing

or allowing to be caused the discharge of iron, manganese, calcium

and other contaminants from the water supply into the homes and onto the property of Plaintiffs") (emphasis added). Furthermore, the

Potter Appellants' negligence per se count alleges violations of state

and federal environmental law. Id. 221(a)-(b) (alleging violations of

the North Carolina Department of Environment and Natural

Resources, Environmental Health section of the code pertaining to

water quality standards for concentrations of iron and manganese); id. (c)-(e) (alleging violations of the state environmental code's

groundwater quality standards ); id. 221(f)-(g) (alleging levels of

contaminants in public water systems violative of EPA's regulations

on drinking water). Thus, insofar as the Potter Appellants pled claims

of traditional environmental discharge, the pollution exclusion clause

bars insurance coverage.

By contrast, where the Potter Appellants allege that they suffered

property damage and personal injury as a result of Whitewood's dis-

tribution of an adulterated product and the insured's attendant negli-

gence and breach of warranties, the pollution exclusion clause is not

likely to serve as a bar. See, e.g. , Am. Compl. 215(a) (asserting

Whitewood operated a defective water supply system); id. 215(b)

(alleging Whitewood allowed the water supply system to become

overloaded); id. 215(c) (alleging a failure to repair defects in the

water supply system); id. 216 ("Defendants' negligence was the

proximate cause of damages"); see also id. 236(b)-(e) (alleging fail-

ures to disclose); compare J.A. 240 (insurance contract provides that

for the purposes of the "products-completed operations hazard," "your

product" includes "[w]arranties or representations made . . . with

respect to the fitness, quality, durability, performance or use of `your

product'"). Considering these claims within the amended complaint

under North Carolina's "comparison" test, see Waste Management ,

S.E.2d at 377, whereby we take the contents and allegations of

the controlling pleading as true and compare them to the insurance

policy provisions to establish whether any of the allegations would

give rise to coverage, we conclude that such claims Ð if not other-

wise barred by separate exclusions, infra Ð provide a sufficient basis

upon which Whitewood can invoke Auto-Owners' duty to defend.

Under North Carolina law, the duty to defend is broader than the duty

to indemnify. Pa. Nat'l Mut. Cas. Ins. Co. , 579 S.E.2d at 406 (cita-

tions omitted). An insurer has a duty to defend when the pleadings

state facts demonstrating that the alleged injury is covered by the pol-

icy. Id. at 407. As here, the mere possibility that the insured is liable

and that the potential liability is covered may suffice to impose the

duty to defend. Waste Management , 340 S.E.2d at 377.

While Whitewood's duty to defend is implicated by such allega-

tions, the record on appeal does not allow us to conclusively deter-

mine precisely which of the Potter Appellants' claims against

Whitewood Auto-Owners would be required to indemnify, and those

to which the pollution exclusion clause and other exclusions would

serve as a bar. Accordingly, in vacating the district court's entry of

summary judgment, we remand to the district court for further consid-

eration of these issues and determination of the applicability of the

CGL exclusions. Specifically, the district court must determine: (1)

whether other exclusions upon which the district court has never ruled

might bar coverage and foreclose the duty to defend, notwithstanding

this court's decision regarding the pollution exclusion clause issue,

and (2) assuming the duty to defend attaches, which of the Potter

Appellants' claims Auto-Owners would ultimately be required to

indemnify. IV. For the reasons stated above, we vacate the district court's grant of

summary judgment and remand for further proceedings not inconsis- tent with this opinion. VACATED AND REMANDED

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