Emhart Industries, v. Home Insurance, (1st Cir. 2009)
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United States Court of Appeals
For the First Circuit
Nos. 07-2806
07-2821
EMHART INDUSTRIES, INC.,
Plaintiff-Appellee, Cross-Appellant,
v.
CENTURY INDEMNITY COMPANY, as an indirect successor to
Insurance Company of North America,
Defendant-Appellant, Cross-Appellee,
HOME INSURANCE COMPANY; NORTH RIVER INSURANCE CO.;
ONEBEACON AMERICA INSURANCE COMPANY; US FIRE INSURANCE CO.,
Defendants, Cross-Appellees,
LIBERTY MUTUAL INSURANCE COMPANY,
Defendant.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. William E. Smith, U.S. District Judge]
Before
Torruella, Boudin, and Howard,
Circuit Judges.
John L. Altieri, Jr., with whom Boutin & Altieri, P.L.L.C.,
Lawrence A. Nathanson, and Siegal & Park, was on brief for Century
Indemnity.
Jack R. Pirozzolo, with whom John A. Shope, Sarah Cooleybeck,
Kirk G. Hanson, David E. Cole, Jeremy A.M. Evans, and Foley Hoag
LLP, was on brief for Emhart Industries.
Kevin J. O'Connor, with whom Peter C. Netburn, and Hermes,
Netburn, O'Connor & Spearing, P.C., was on brief for OneBeacon
America.
Mark T. Nugent, with whom John T. Harding and Morrison Mahoney
LLP, was on brief for North River.
March 13, 2009
TORRUELLA, Circuit Judge. This insurance coverage
dispute arises from efforts by the Environmental Protection Agency
("EPA") to remediate contamination at the Centredale Manor
Superfund site (the "Site") in North Providence, Rhode Island.
In 2000, the EPA designated Plaintiff-Appellee/Cross
Appellant Emhart Industries, Inc. ("Emhart") a Potentially
Responsible Party ("PRP") for the cleanup costs of the Site under
the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. Consequently,
Emhart made a demand for coverage on its insurers, which include
Defendant-Appellant/Cross-Appellee Century Indemnity Company
("Century"), and Defendants/Cross-Appellees The North River
Insurance Company ("North River") and OneBeacon America Insurance
Company ("OneBeacon"). Emhart later sued Century, OneBeacon, and
North River, among others, to cover its cleanup and defense costs.
After trial, a jury found that Century, OneBeacon, and
North River did not owe Emhart coverage for cleanup costs.
However, the district court awarded summary judgment for Emhart on
its claim that Century owed it a duty to defend in the EPA matter.
The district court later found that Century breached that duty and
assessed the total costs of defense of the underlying EPA action as
damages, but only up to the date of the jury's finding that Century
did not owe a duty to indemnify.
Century appeals the allowance of summary judgment in
Emhart's favor as to Century's duty to defend. In the alternative,
Century contends that it should not be saddled with the entirety of
the defense costs incurred up to the jury finding. Emhart
cross-appeals, contending that the duty to defend continues, that
it is entitled to total indemnity costs for Century's breach of the
duty to defend, and that the district court committed various
errors with respect to the jury verdict.
After careful consideration, we affirm the district court
with respect to all issues on appeal.
I. Background
The following derives from the extensive record, which
includes the parties' stipulations, trial testimony, and other
evidence submitted at trial and at a post-trial evidentiary
hearing.
A. Factual Background
1. The Contamination of the Site
The Site totals a little over nine acres. It is bordered
on the west by the Woonasquatucket River and on the east by a
drainage swale that empties into a wooded wetland to the south.
The Site is a flood plain for the river.
From 1944 to 1968, Atlantic Chemical Company, which later
became Metro-Atlantic, Inc. ("Metro-Atlantic"), leased a portion of
the Site, where it operated a chemical plant. Beginning in 1964,
and for a period of less than one year, Metro-Atlantic manufactured
hexachlorophene, a substance used in pHisoHex disinfecting soap.
Dioxin is a byproduct of the hexachlorophene manufacturing process.
Even at very low levels, dioxin poses significant risks to human
and ecological health.
During this time, from 1952 to 1969, an unrelated
company, New England Container Corporation ("NECC"), operated a
steel drum reconditioning facility on a portion of the Site. NECC
refurbished drums from at least two companies that manufactured and
sold 2,4,5-trichlorophenol, which yields dioxin when combusted.
Refurbishing of the drums requires the dumping of the chemical
residue inside the drums and then incinerating the insides. Other
fires and incineration at the NECC facility may have contributed to
the dioxin contamination. Flooding also may have dispersed dioxin
onto the Site from other areas.
In 1968, Metro-Atlantic merged with Crown Chemical
Corporation to form Crown-Metro, Inc. ("Crown-Metro"), and
thereafter ceased operations at the Site as of the merger date.
Through a series of mergers and acquisitions, Emhart became the
corporate successor to Metro-Atlantic and Crown-Metro.
2. The EPA Action
The EPA first discovered dioxin on the Site in 1998. On
June 21, 1999, the EPA issued a Request for Information to Emhart
concerning the Site pursuant to § 104(e) of CERCLA, 42 U.S.C.
§ 9604(e), and pursuant to the Resource Conservation and Recovery
Act ("RCRA"), 42 U.S.C. § 6927.
On February 28, 2000, after preliminary studies and
investigations, the EPA sent Emhart a Notice of Potential Liability
under CERCLA for the Site (the "PRP Letter"), identifying Emhart as
a PRP. Among other things, the PRP Letter required Emhart to pay
costs of $947,140.89 incurred to date, as well as future costs, and
mandated such actions as constructing a soil cap, implementing
flood control measures, and removing contaminated soil and river
sediments. The PRP Letter also identified five other PRPs,
including NECC, but Emhart remains the only PRP that is financially
viable. Liability under CERCLA is strict as well as joint and
several.
On April 12, 2000, the EPA issued to Emhart and others a
Unilateral Administrative Order for Removal Action (the "UAO")
requiring that certain remedial work be performed on the Site. The
EPA has also issued a second and third Unilateral Administrative
Order for Removal Action (the "second UAO" and "third UAO,"
respectively). The anticipated cost of remediation is likely to
exceed $100 million.
3. Century and Emhart
From the beginning of the EPA action, Emhart and Century
scuffled over coverage. Some of this scuffling is relevant to this
appeal.
On July 21, 1999, shortly after issuance of the Request
for Information, Emhart's broker sent a letter giving notice of the
Request for Information to Century and other "Interested
Underwriters," seventeen in all. The letter demanded that each
recipient provide "defense and indemnification" and advised the
insurers that Emhart had already secured outside counsel, Swidler
Berlin, to provide a "prompt and proper" defense. The letter
identified four excess policies issued by Century, but did not list
the Century policies at issue in this case. The broker also
forwarded, along with the Request for Information, a memorandum
detailing the various mergers and transactions that resulted in
Emhart's succession to the rights of Crown-Metro under the
policies. As with the Request for Information, on March 14, 2000,
Emhart forwarded copies of the PRP Letter to the same group of
insurers. On April 21, 2000, Emhart sent copies of the UAO to the
same group. Emhart has also engaged in individual communications
with one of its insurers, Liberty Mutual. Liberty Mutual would
later settle with Emhart for $250,000.
On November 22, 2000, after issuance of the UAO, Emhart's
attorney wrote Century seeking information, for the first time,
regarding policies issued to Crown-Metro. The letter attached a
1969 excess policy which Emhart had recently located, and requested
that Century conduct a review of its records for any other policies
it may have issued to Crown-Metro. The 1969 policy attached to
that letter is the Century excess policy ("the Century Excess
Policy") at issue in this case.
Initially, by letter dated December 12, 2000, Century
refused to perform a broad search and denied coverage on the
Century Excess Policy, stating that, because Crown-Metro had merged
into Emhart after the expiration of the Century Excess Policy,
Emhart was not entitled to coverage. On January 3, 2001, Emhart
responded by reiterating its request for a broad search. Emhart
also reiterated facts (facts previously provided in the memorandum
accompanying its mass notices) that it was a corporate successor to
Crown-Metro, and asked Century to reconsider its position on
corporate succession.
On January 11, 2001, Century informed Emhart that it
reversed its position, and stated that Emhart may have succeeded to
Crown-Metro's insurance policies. However, Century insisted that
Emhart had to provide proof of exhaustion of the underlying policy
(which neither party had located yet) in order to obtain the
benefits of the Century Excess Policy.
Emhart subsequently filed this lawsuit on January 25,
2002. On August 29, 2002, Century commenced a new search for
possible policies, prior to any discovery requests made by Emhart.
During this second search, in October 2002, Emhart served document
requests and interrogatories relating to, among other things, any
Century policies insuring Crown-Metro.
The second search finally identified the Century primary
policy ("the Century Primary Policy") sometime around January 2003,
but it was not disclosed to Emhart until July 10, 2003.
Consequently, on January 27, 2004, Century moved to amend its
answer to add a counterclaim seeking a declaration that it had no
duty to defend or indemnify under the Century Primary Policy.
Century then denied coverage two days later, on January 29, 2004.
Emhart's counterclaim-in-reply sought a declaration that Century
owed duties to defend and indemnify under the Century Primary
Policy.
B. The Policies
There are four policies at issue in this appeal: (1) the
Century Primary Policy, (2) the Century Excess Policy, (3) an
umbrella excess policy issued by OneBeacon (the "OneBeacon
Policy"), and (4) an excess policy issued by North River (the
"North River Policy").
1. The Century Primary Policy
Century issued the Primary Policy to Crown-Metro in
February 1969, two months after Crown-Metro's merger with Metro-Atlantic and concurrent termination of all Metro-Atlantic
operations at the Site. The Century Primary Policy was in effect
from February 15, 1969 to January 1, 1970, with a coverage limit of
$100,000. The insuring agreement of the 1969 primary policy
provides:
The Company will pay on behalf of the Insured
all sums which the Insured shall become
legally obligated to pay as damages because of
. . . property damage to which this insurance
applies, caused by an occurrence and the
Company shall have the right and duty to
defend any suit against the Insured seeking
damages on account of such . . . property
damage, even if any of the allegations of the
suit are groundless, false or fraudulent . . .
but the Company shall not be obligated to pay
any claim or judgment or to defend any suit
after the applicable limit of the Company's
liability has been exhausted by payment of
judgments or settlements.
The Policy provides that "[t]his insurance applies only to . . .
property damage which occurs during the policy period." "Property
Damage" is defined as "injury to or destruction of tangible
property."
The Policy defines "occurrence" as "an accident,
including injurious exposure to conditions, which results, during
the policy period, in . . . property damage neither expected nor
intended from the standpoint of the Insured."
2. The Century Excess Policy
The Century Excess Policy was in effect during the period
from December 1, 1968 to January 1, 1970. The limits of liability
are $1 million in excess of the $100,000 of coverage provided under
the Century Primary Policy.
The Excess Policy, which is substantially similar to the
Century Primary Policy, provides that it "will indemnify the
insured for ultimate net loss in excess of the retained limit."
Moreover, it provides that:
If limits of liability of the underlying
insurance are exhausted because of . . .
property damage . . . during the period of
this policy [Century] will have the right and
duty to defend any suit against the Insured
seeking damages on account of such . . .
property damage . . . even if any of the
allegations of the suit are groundless, false
or fraudulent, and may make such investigation
and settlement of any claim or suit as it
deems expedient.
Unlike the Century Primary Policy, the Century Excess Policy
contains a "waste products" exclusion, providing that the Policy
"shall not apply to . . . [i]njury to or destruction of property
caused by intentional or willful introduction of waste products,
fluids or materials . . . into any soil or inland or tidal waters,
irrespective of whether the insured possessed knowledge of the
harmful effects of such acts."
3. The OneBeacon Policy
The OneBeacon Policy, issued to Crown-Metro under the
name of the Employers' Surplus Lines Insurance Company, was an
umbrella policy with limits of $4 million in excess of the $1.1
million coverage provided by the Century Primary and Excess
Policies. This Policy was in effect from April 24, 1969 to
January 1, 1970. The OneBeacon Policy incorporates the terms and
conditions of the Century Excess Policy with respect to the duty to
defend and duty to indemnify. However, unlike the Century Excess
Policy, there is no exclusion for "waste products."
4. The North River Policy
The North River Policy, a "Commercial Comprehensive
Catastrophe Liability Policy," insures Emhart and its predecessor.
The policy period ran from January 1, 1984 to December 31, 1984.
The North River Policy provided $15 million of property damage
coverage in excess of $1 million. Under the policy, North River
agrees to pay on behalf of the Insured the
ultimate net loss in excess of the retained
limit hereinafter stated, which the Insured
may sustain by reason of the liability imposed
upon the Insured by law or assumed by the
Insured under contract, for . . . Property
Damage Liability . . . arising out of an
occurrence.
Similarly to the Century and OneBeacon Policies, an "occurrence" is
defined as "[i]njurious exposure to conditions which results in
. . . Property Damage neither expected nor intended from the
standpoint of the Insured." The North River Policy also contains
a pollution exclusion. Of significance to this appeal, the
pollution exclusion contains a standard exception for releases or
dispersals that are "sudden and accidental."
C. Procedural History
After the filing of the suit and the various
counterclaims, Emhart moved twice for summary judgment with respect
to Century's duty to defend. The district court denied both of
Emhart's motions, in orders dated May 17, 2005 and August 4, 2006.
The May 17, 2005 order resulted from an extensive report
and recommendation by a magistrate judge issued on February 15,
2004. That report, which the district court adopted in full,
focused on the Century Excess Policy, and denied summary judgment
as to indemnification and defense costs "[u]ntil a determination of
[Century's] obligation under [the Century Primary Policy] has been
made." The report also found separately that New York law applied
to the North River Policy.
The August 4, 2006 order resulted from rulings made on
the bench by the district court the previous day. With respect to
Century's duty to defend, the district court ruled from the bench
that such a duty turns on Century's duty to indemnify, and
subsequently denied summary judgment because of factual disputes
regarding the duty to indemnify.
In the fall of 2006, the district court conducted a six-week trial on the issue of indemnity. On October 19, 2006, the
jury returned a verdict, responding to questions concerning issues
pertinent to whether Century, OneBeacon, and North River owed a
duty to indemnify. With respect to Century and OneBeacon, the jury
found that the dioxin contamination was not "discoverable in the
exercise of reasonable diligence" during the relevant policy
periods. With respect to North River, the jury found that the
pollution exclusion barred coverage. The effective result of the
verdict, which the district court would memorialize in a later
final judgment, was to find that Century, OneBeacon, and North
River owed no duty to indemnify.
After trial, the district court returned to the issue of
whether Century owed a duty to defend, ordering the parties to file
supplemental briefing. In an order dated May 1, 2007, the district
court awarded summary judgment in Emhart's favor, holding that
Century owed Emhart a duty to defend under both the Century Primary
Policy and Century Excess Policy. The district court further held
that Century's duty to defend ceased as of the date of the
October 19, 2006 jury verdict. In the same order, the district
court found that Emhart had not shown that OneBeacon owed a duty to
defend, as it had not shown that the Century Excess Policy was
exhausted. The district court then scheduled an evidentiary
hearing to determine the extent of Emhart's defense costs, the
amount of those costs that Century should bear, whether Century
breached its duty to defend under either (or both) Policies, and
the appropriate damages if Century did breach its duty.
In June and July 2007, the district court conducted a
post-trial evidentiary hearing on the issues identified in its
May 1, 2007 order. On September 26, 2007, the district court
issued a memorandum and order that addressed these issues, provided
its reasoning for its rulings in the May 1, 2007 order, and
addressed other pre- and post-trial motions. See Emhart Indus.,
Inc. v. Home Ins. Co., 515 F. Supp. 2d 228 (D.R.I. 2007).
In its memorandum and order, the district court
explained, in an early footnote, its reluctance to address the duty
to defend issue until after the trial on the duty to indemnify. It
stated:
This odd chronology is in great part due to
the complexities of this case, and in some
small measure to this writer's reluctance to
find a duty to defend at all. As the reader
will see below, the Rhode Island Supreme Court
has not had occasion to apply its relevant
precedents to circumstances quite like these.
Id. at 233 n.8. Nevertheless, the district court held that Century
owed a duty to defend under both Policies because they satisfy the
"pleadings test" under Rhode Island law, since "the charging
documents," in this case the PRP Letter, the UAO, the second UAO,
and the third UAO, alleged claims that were "potentially within the
. . . risk of coverage." Id. at 237-43 (Primary Policy); id. at
243-46 (Excess Policy). In so ruling, the district court noted
that "[t]he application of the pleadings test here may seem unduly
burdensome on Century, but Rhode Island precedents are clear." Id.
at 246.
Ruling that Century had a duty to defend, the district
court further found that Century had, in fact, breached its duty,
and that Century owed damages in the amount of approximately $4.2
million, the total costs of defense of the underlying EPA action
and related proceedings up to the date of the jury verdict finding
no coverage. Id. at 250-57. Of significance to this appeal, the
district court also held that Emhart was not entitled to total
indemnity costs as damages for Century's duty to defend. Id. at
263.
The September 26, 2007 memorandum and order also
addressed other issues pertinent to this appeal. The district
court rejected OneBeacon's claim that it was entitled to
reformation of the OneBeacon Policy to include the "waste products"
exclusion found in the Century Excess Policy, but, in any event,
found no coverage since the Century Policies had not been
exhausted. Id. at 246-50. The district court also explained its
prior rejection of Emhart's request for a "continuous trigger" jury
instruction, rather than a "discovery/manifestation/discoverability
trigger" instruction, holding that such a "continuous trigger"
instruction had not yet been adopted by Rhode Island courts. Id.
at 265. The district court likewise rejected Emhart's request to
certify the instruction issue to the Rhode Island Supreme Court.
Id. The district court further rejected Emhart's claim that it
failed to use an "objective" standard in its trigger jury
instruction. Id. With respect to the North River Policy, the
district court rejected Emhart's claim that Rhode Island law
applied to the Policy, instead relying on the magistrate judge's
report to hold that New York law applied. Id. at 266. The
district court further rejected Emhart's claim that the court erred
in its instruction concerning the "sudden and accidental" exclusion
in the North River Policy. Id. at 267-68.
On November 17, 2007, the district court issued a final
judgment that consolidated and memorialized its various findings
and rulings. This appeal and cross-appeal followed.
II. Discussion
The parties present several issues in this appeal and
cross-appeal. We address each in turn.
A. Century's Duty to Defend
1. Application of the Pleadings Test
In its appeal, Century challenges the district court's
allowance of summary judgment in Emhart's favor, holding that
Century owed a duty to defend to Emhart under both the Century
Primary Policy and the Century Excess Policy. We review a district
court's award of summary judgment de novo. First Marblehead
Corp. v. House, 473 F.3d 1, 5 (1st Cir. 2006). We may affirm
summary judgment on any ground manifest in the record. See CMI
Capital Mkt. Inv., LLC v. González-Toro, 520 F.3d 58, 60 (1st Cir.
2008).
Century contends that the district court erred in
applying the "pleadings test" to both Policies to determine whether
Century owed a duty to defend. The "pleadings test" under Rhode
Island law "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 ultimate liability to the plaintiff." Shelby Ins. Co. v.
Ne. Structures, Inc., 767 A.2d 75, 76 (R.I. 2001) (internal
quotation omitted); see also Employers' Fire Ins. Co. v. Beals, 240
A.2d 397, 402-03 (R.I. 1968). "[I]n other words, when a complaint
contains a statement of facts which bring the case within or
potentially within the risk coverage of the policy, the insurer has
an unequivocal duty to defend." Beals, 240 A.2d at 403.
As background, the district court, despite some
reluctance, addressed whether Century owed a duty to defend by
applying the pleadings test to the "charging documents" in this
case, which the district court identified as the PRP Letter and the
first, second, and third UAOs. Emhart, 515 F. Supp. 2d at 237.
The documents alleged that "[h]azardous 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. (quoting the UAO,
and noting that the other charging documents echo these
allegations). Although the charging documents alleged "hazardous
substances were disposed of" during the relevant policy periods,
they were silent as to whether such substances were "discoverable
at the Site in 1969," which the district court found to be a
requirement to allege an "occurrence" under the Century Policies.
See id. at 238; see also CPC, Int'l, Inc. v. Northbrook Excess &
Surplus Ins. Co., 668 A.2d 647, 649 (R.I. 1995) (holding that "an
'occurrence' under a general liability policy takes place when
property damage, which includes property loss, manifests itself or
is discovered or in the exercise of reasonable diligence, is
discoverable."). The charging documents were silent on the issue
of discoverability because it is irrelevant for purposes of
determining CERCLA liability. See generally 42 U.S.C. § 9607
(a)(2).
The district court construed such silence against
Century, and found a duty to defend because of "Century's failure
to establish the absence of any such potential" for coverage.
Emhart, 515 F. Supp. 2d at 239. Moreover, the district court
rejected Century's plea to look at extrinsic evidence outside the
charging documents to show the absence of coverage, noting that the
"duty to defend exists, if at all, 'regardless of the actual
details of the injury or the ultimate grounds on which the
insured's liability to the injured party may be predicated.'" Id.
at 240 (quoting Beals, 240 A.2d at 402).
On appeal, Century does not contend that the district
court misapplied the pleadings test. Rather, it argues that the
district court's decision to use the pleadings test was error. In
essence, Century builds upon the district court's rumination that
"the Rhode Island Supreme Court has not had occasion to apply its
relevant precedents to circumstances quite like these," id. at 233
n.8 (emphasis added), to argue that the Rhode Island Supreme Court
would not apply its "relevant precedents" to a case like this.
Century argues that extending the application of the
pleadings test to this case would contravene the purposes of the
test, which Century maintains are twofold: (1) to ensure a prompt
defense of the suit and (2) to avoid litigating in the coverage
case an issue to be decided in the merits case. For support,
Century relies on Beals, a Rhode Island Supreme Court case that
provided one of the first articulations of the pleadings test. See
240 A.2d at 402. Beals involved a declaratory judgment action
brought by the insurer over whether it owed a duty to defend and
indemnify to an insured, a child who caused injuries to a
schoolmate with a pencil. Id. at 399. Noting that a declaratory
judgment action is "[o]ftentimes . . . the most expeditious and
fairest method by which" to determine coverage, the Court
nevertheless upheld the trial court's dismissal of the action to
avoid a "'dress rehearsal of an important issue to be tried in the
injury suit.'" Id. at 400-01.
As to a prompt defense of the suit, Century points out
that Emhart was able to select its own counsel, Swidler Berlin,
well before it sent any notice to any insurer, that it incurred
approximately eighteen months worth of expenses prior to locating
the Century Policies at issue in this case, and that, rather than
having to rely on a single insurer, Emhart had multiple insurers to
choose from to provide a defense. According to Century, Emhart did
not require a prompt defense, but reimbursement. As to avoidance
of litigation of merits issues, Century argues that there was no
risk of litigating in the coverage case an issue to be decided in
the EPA action, since, as noted by the district court, "the
charging documents" were "silent with respect to whether dioxin was
discoverable at the Site in 1969," the determinative fact for
purposes of coverage. Emhart, 515 F. Supp. 2d at 238. With
neither purpose met, Century argues that the Rhode Island Supreme
Court, per Beals, would not apply the pleadings test to this case.
Century reads too much into Beals. In Beals, the Rhode
Island Supreme Court addressed whether the trial court abused its
discretion in dismissing the declaratory judgment action, since,
under Rhode Island law, the granting of a declaratory judgment is
"purely discretionary." 240 A.2d at 400-01. As put by the Rhode
Island Supreme Court, "[t]he narrow issue raised by this appeal is
whether or not the trial justice in denying insurer's request for
a declaratory judgment so abused his discretion as to warrant a
reversal of his actions." Id. at 400. It was in the context of
this "narrow issue" that the Rhode Island Supreme Court discussed
its concern with "expeditious" resolution of the coverage issue and
the need to avoid a "dress rehearsal" of any merits issues. Only
after finding that the trial court did not abuse its discretion did
the Rhode Island Supreme Court make a "comment relative to the duty
owed by an insurer to the insured" and discussed the "pleading
test." Id. at 402. Thus, the "purposes" that Century identifies
go to the appropriateness of declaratory relief, not the
appropriateness of applying the pleadings test.
In fact, in Beals and subsequent case law, the pleadings
test has only been circumscribed in very narrow circumstances not
applicable here. As articulated in Beals, the pleadings test
applies when the policy provides coverage "even if any of the
allegations of the suit are groundless, false or fraudulent." See
id. at 399 (quoting language of policy at issue); see also id. at
402 ("As a general rule, where the particular policy requires
insurer to defend even if the suit is groundless, false or
fraudulent, the insurer's duty to defend is ascertained by laying
the tort complaint alongside the policy . . . . ") (emphasis
added). Both Century Policies contain this "groundless, false or
fraudulent" language verbatim.
The one exception, identified by both parties, Peerless
Ins. Co. v. Viegas, 667 A.2d 785 (R.I. 1995), is inapposite. In
Peerless, which involved allegations of sexual molestation of a
minor, the Rhode Island Supreme Court looked beyond the pleadings,
which alleged "negligence," to infer as a matter of law that the
alleged conduct was intentional, and thus subject to the
"intentional act" exclusion of the homeowners policy at issue in
the case. Id. at 788-89 ("A plaintiff, by describing his or her
cat to be a dog, cannot simply by that descriptive designation
cause the cat to bark."). Unlike in Peerless, the charging
documents in this case did not contain a misstated cause of action
(or similar allegations), which would have required that the
district court find a potential for coverage as a matter of law.
Nevertheless, Century argues that the case law does not
support imposition of the pleadings test here. Century points out
that the Rhode Island Supreme Court has only applied the "pleadings
test" in tort cases involving a single insurer.
[1]
Admittedly, the
circumstances of this case bear little resemblance to the single-insurer tort cases that Century inventories. Likewise, the Rhode
Island Supreme Court has not explicitly applied the pleadings test
to the CERCLA context with multiple insurers. Nevertheless, we
agree with the district court that "the precedents are clear,"
Emhart, 515 F. Supp. 2d at 246, that the pleadings test applies to
the Century Policies at issue.
However, Century maintains that the Rhode Island Supreme
Court has, in fact, refused to extend the "pleadings test" to
environmental proceedings when it had the opportunity to do so,
citing three cases: Truk-Away of Rhode Island, Inc. v. Aetna Cas.
& Sur. Co., 723 A.2d 309 (R.I. 1999); Textron, Inc. v. Aetna Cas.
& Sur. Co., 723 A.2d 1138 (R.I. 1999) ("Textron-Gastonia");
Textron, Inc. v. Aetna Cas. & Sur. Co., 754 A.2d 742 (R.I. 2000)
("Textron-Wheatfield").
In Truk-Away, which arose from an EPA CERCLA action
relating to contamination of a landfill, the insurers moved for
summary judgment on both the duty to defend and the duty to
indemnify. 723 A.2d at 310. With respect to the duty to defend,
the insurers contended that "the EPA order did not contain any
allegations of loss that occurred during the effective periods of
the now-expired policies." Id. at 311-12. The trial court allowed
the insurers' motions for summary judgment as to the insured's
claims on the duty to indemnify and the duty to defend. Id. at
310, 312 & n.5. On appeal, the Rhode Island Supreme Court affirmed
the trial court, and held that "a careful review of the pleadings,
memoranda, and affidavits reveals to us, as it apparently did for
the trial justice, that the plaintiffs merely discuss the existence
of general solid waste disposal at the site between 1969 and 1985,"
but no occurrence within the relevant policy periods to trigger
coverage. Id. at 313 (emphasis added). Century relies on this
"affidavits" language to assert that, in Truk-Away, the Rhode
Island Supreme Court eschewed the pleadings test and engaged in
fact finding to resolve the duty to defend issue.
Century also claims that the court similarly did not
apply the pleadings test in Textron-Gastonia and Textron-Wheatfield. Century claims that in Textron-Gastonia, the Rhode
Island Supreme Court purportedly resolved the duty to defend issue
on the basis of affidavits and deposition testimony relating to
discoverability. See 723 A.2d at 1144. In Textron-Wheatfield,
Century claims that the Court reversed and remanded the suit
without specific direction to apply the pleadings test to the duty
to defend issue. See 754 A.2d at 747.
Century's reliance on Truk-Away, Textron-Gastonia, and
Textron-Wheatfield is unavailing. As to Truk-Away, Century asks us
to read the Rhode Island Supreme Court's reliance on "a careful
review of the pleadings, memoranda, and affidavits," 723 A.2d at
313, in disposing of both the duty to defend and duty to indemnify
to mean that the Court looked at outside materials to determine the
insurer's duty to defend. This is too strained a reading. More
plausibly, the Rhode Island Supreme Court found no evidence of an
occurrence within the relevant policies' coverage periods anywhere,
including the "affidavits," but also the "pleadings." In fact, the
Rhode Island Supreme Court described the defendant insurers' motion
for partial summary judgment as to the duty to defend this way:
"[T]he defendants asserted that they had no present duty to defend
the plaintiffs because the EPA order did not contain any
allegations of loss that occurred during the effective periods of
their now-expired policies." Id. at 311-12 (emphasis added). This
language in Truk-Away strongly suggests that both the defendant
insurers and the Rhode Island Supreme Court anticipated the
application of the pleadings test to determine the insurers' duty
to defend, since this language frames the duty to defend issue as
turning on the allegations contained in the charging documents, in
that case the EPA order.
Century attempts to rehabilitate Truk-Away by arguing
that the EPA charging documents there were only silent as to
whether there was an occurrence, since there was some evidence of
"general solid waste disposal at the site" within the relevant
policy periods. See id. at 313. According to Century, had the
Rhode Island Supreme Court in Truk-Away applied the "pleadings
test," then the Court would have construed this silence against the
insurers in that case, and at least found a duty to defend up to
the allowance of summary judgment in the insurers' favor as to the
duty to indemnify, essentially adopting the approach taken by the
district court in this case.
Again Century reads too much into Truk-Away. In Truk-Away, the Rhode Island Supreme Court did not just find "silence."
Instead, the Court found that even if such disposal was reasonably
discoverable during the policy period, "[i]t is clear that the EPA
order was concerned exclusively" with contamination outside the
relevant policy periods. See id. at 313 (emphasis added).
Accordingly, the charging documents in Truk-Away were not only
silent as to coverage, but contained no potential for coverage
whatsoever.
Century also reads too much into Textron-Gastonia and
Textron-Wheatfield. In Textron-Gastonia the Rhode Island Supreme
Court did not apply the pleadings test because the duty to defend
was not at issue. Instead, the case concerned recovery for costs
incurred in a voluntary cleanup, and, thus, there was no suit to
defend. See Textron-Gastonia, 723 A.2d at 1140-41 (instituting
voluntary cleanup effort at Gastonia site upon discovery of
contamination of on-site soil). Likewise, in Textron-Wheatfield,
the Rhode Island Supreme Court did not address the duty to defend
at all. See 754 A.2d at 744 (discussing issues on appeal as
whether the court "incorrectly applied the trigger-of-coverage
doctrine" under Rhode Island law and (2) whether the trial court
"erred in holding that the pollution-exclusion clauses" precluded
coverage). Century points to pleadings in both Textron-Gastonia
and Textron-Wheatfield that suggest that the duty to defend was one
of the issues presented to the Rhode Island Supreme Court. Even if
true, the Rhode Island Supreme Court never discussed the duty to
defend issue in either case. Such silence does not sufficiently
support Century's claim that the Rhode Island Supreme Court would
not apply the pleadings test in the CERCLA context.
Century also asserts a number of policy arguments against
the imposition of the pleadings test to this case. For example,
Century argues that, in the multiple insurer context, the pleadings
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. We need not address these concerns
here, since the doctrine is clear, and this Court, sitting in
diversity, will not overrule the Rhode Island Supreme Court based
on policy arguments alone. It was not error for the district court
to apply the "pleadings test" to this case.
2. Allocation of Defense Costs
Century contends in the alternative that the district
court erred, as a matter of law, in allocating to Century the total
defense costs incurred prior to the jury verdict. We review this
ruling of law de novo. See Salve Regina Coll. v. Russell, 499 U.S.
225, 232 (1991) (holding that Courts of Appeals must review de novo
district courts' determinations of state law).
As background, the district court, in awarding total
defense costs for Century's breach of the duty to defend, rejected
Century's claim that Century was "only responsible for a 'pro rata
share' of the underlying defense costs." Emhart, 515 F. Supp. 2d
at 254. In particular, the district court declined to adopt an
alternative scheme of allocation proposed by Century based upon the
"time-on-the-risk," which, according to Century, would limit the
defense costs "based on the ratio between the periods of Century's
coverage [approximately a year] . . . and the period of dioxin
exposure alleged by the EPA (fifty-eight years)." Id. at 254-55.
In rejecting the scheme, the court relied upon 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 which further provided that Century "shall have the
right and duty to defend any suit against the Insured seeking
damages on account of such . . . property damage." Id. at 255.
The district court also relied upon language in the Century Excess
Policy that provided that Century "will indemnify the Insured for
ultimate net loss in excess of the retained limit," further
providing, mirroring the language in the Primary Policy, that
Century "will have the right and duty to defend any suit against
the Insured seeking damages on account of such . . . property
damage." Id. Taken together, the district court interpreted the
"all sums" and "ultimate net loss" language contained in the
Policies as placing no limit on the amount of defense costs that
could be allocated to Century. See id. at 254-55 ("Nothing in this
language limits Century's defense obligation . . . .").
For further support of this "all sums" approach, the
district court relied upon the Rhode Island Supreme Court's
decision in Ins. Co. of N. Am. v. Kayser-Roth Corp., 770 A.2d 403
(R.I. 2001). In Kayser-Roth, the Rhode Island Supreme Court
imposed most of the indemnity costs on the breaching insurer
despite "the existence of Kayser-Roth's other insurance." See id.
at 414; see also Emhart, 515 F. Supp. 2d at 255 (applying Kayser-Roth for "'all sums' method," although noting that the Rhode Island
Supreme Court did not endorse this approach "in direct terms").
Based on this authority in Kayser-Roth, the clear and
unambiguous terms of the "all sums" and "ultimate net loss"
language of the Policies, and the rule that any ambiguities should
be "strictly construed against the insurer," see Sentry Ins. Co. v.
Grenga, 556 A.2d 998, 999 (R.I. 1989), the district court adopted
this "all sums" approach. According to the district court, the
clear and ambiguous terms of the Policies, combined with the Rhode
Island case law, "is enough to defeat Century's complex (and, based
on its ultimate result here, ridiculous) allocation scheme."
Emhart, 515 F. Supp. 2d at 255.
Century argues that the district court committed error in
using an "all sums" approach to allocate defense costs. Century
first contends that the district court, in relying on the "all
sums" and "ultimate net loss" language, ignored the language
stating that the Policies "appl[y] only to . . . property damage
which occurs during the policy period." Century argues that this
"during the policy" language limited the amount of defense costs
recoverable.
We do not agree that the "during the policy period"
language in the Policies limits the amount of recovery. Century
relies on Textron, Inc. v. Aetna Cas. & Sur. Co., 638 A.2d 537
(R.I. 1994) ("Textron-BMI") for the proposition that such language
does limit recovery. There, Textron, a "named insured," acquired
a company after the relevant policy period. Id. at 538. Textron
sought coverage for the acquired company's conduct during the
policy period, arguing that Textron's insurance should cover the
acquired entity's conduct. Id. at 539. The Rhode Island Supreme
Court rejected Textron's claim, interpreting the "during the policy
period" language of the policy at issue to exclude the acquired
company from the "named insureds" since, during the policy period,
Textron "had no relationship to the site or to the polluter." Id.
at 540-43. In so holding, the Rhode Island Supreme Court viewed
"the policies in their entirety and us[ed] the plain, ordinary, and
usual meaning of the words" to refuse to extend coverage to Textron
when, during the policy period, it "had no relationship or
connection to" the party that actually caused the damage during the
policy period. Id. at 541. Century contends that the "during the
policy period" language in the Policies similarly restricts the
extent of coverage when reading the Policies as a whole.
We view the matter differently. Textron-BMI only
addressed whether the "during the policy period" language prevented
Textron from recovering for damage caused by a party not named as
an insured. It did not address the issue of whether such "during
the policy period" language limited the amount recoverable for a
breach of the duty to defend.
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 Policies and lead to absurd results. The Rhode Island Supreme
Court has eschewed "engag[ing] in mental or verbal gymnastics to
hurdle over the plain meaning of the policy's language." Am.
Commerce Ins. Co. v. Porto, 811 A.2d 1185, 1193 (R.I. 2002). As
stressed by the Court in Textron-BMI, both the "rules of contract"
and the "rules of common sense" apply in construing an insurance
policy. See Textron-BMI, 638 A.2d at 541.
The "all sums" and "ultimate net loss" language of both
Policies do not admit to any limitation, temporal or otherwise.
Instead, under the Century Primary Policy, the "during the policy
period" language is employed to define an "occurrence" under the
policy. Similarly, although 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." (emphasis added). While
the Rhode Island Supreme Court has not addressed this precise
issue, the Massachusetts Appeals Court has taken the above
"trigger" interpretation as the more reasonable one under Illinois
and Massachusetts law. See Chi. Bridge & Iron Co. v. Certain
Underwriters at Lloyd's London, 797 N.E.2d 434, 436, 440-41 (Mass.
App. Ct. 2003) (holding that "property damage taking place during
the policy period is what triggered [the insurer's] obligation to
indemnify, but the policy did not confine the extent of coverage to
the policy period in which the property damage occurred.").
Construing the language in the way that Century proposes
would also lead to absurd results. It would require 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. Century
proposed before the district court an allocation scheme based on
the ratio of time covered by the Policies (approximately one year)
as compared to the total time covered by the EPA action
(approximately fifty-eight years), greatly diminishing Century's
coverage. Such an allocative mechanism borders on the arbitrary,
since other schemes could be proposed. Tellingly, Century does not
propose such a scheme (or any scheme) in this appeal.
[2]
But 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.
Century also argues that the district court failed to
follow Rhode Island precedent by refusing to allocate damages on a
pro rata basis, which would involve dividing Emhart's total defense
costs among Emhart's multiple insurers. Century contends that this
approach, which it dubs "proportionate share setoff," is mandated
by two Rhode Island Supreme court decisions. The first, Peloso v.
Imperatore, involved the breach of a duty to defend by two
concurrent insurers. 434 A.2d 274, 277 (R.I. 1981). The insured
subsequently brought suit against those two insurers for
reimbursement of defense costs. The trial court allocated damages
proportionally among both insurers, and the Rhode Island Supreme
Court affirmed, holding that "it is proper to prorate defense costs
between concurrent insurers when . . . both insurers have
wrongfully refused to defend an insured." Id. at 279. It noted
that failure to prorate would "promote a rule whereby '[t]he
insurer who wrongfully breached its duty to defend would be awarded
a bonus for having done so, by having another company bear the
cost.'" Id. (quoting Marwell Constr., Inc. v. Underwriters at
Lloyd's, London, 465 P.2d 298, 313 (Alaska 1970)).
The second case is Kayser-Roth. Century emphasizes the
fact that the Kayser-Roth court discussed with approval a Third
Circuit case, Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440
(3d Cir. 1996). In Koppers, the Third Circuit reversed and
remanded the trial court's imposition of the total costs of defense
on an excess insurer without reducing it by the amount of the
insured's settlements with other insurers. Id. at 1456. Reviewing
Pennsylvania precedent, the Third Circuit held that
non-settling excess insurers are jointly and
severally liable for the full amount of the
loss in excess of: the sum of (1) the policy
limits of the directly underlying, 'exhausted'
primary policies, and (2) the combined pro
rata shares of other settling (primary and
excess) insurers.
Koppers, 98 F.3d at 1455 (emphasis added); see also Kayser-Roth,
770 A.2d at 414 (quoting this language). Although the Kayser-Roth
Court did not apply this Koppers rule, it noted that "a setoff may
be applied in an appropriate case." 770 A.2d at 414. Century
contends that Peloso and Kayser-Roth compel the use of a
proportionate share set-off approach to this "appropriate" case.
We disagree. Unlike in Peloso, there is only one
breaching party in this case, Century. Accordingly, the concern
with a breaching party receiving "a bonus for having done so" is
not implicated in this case. Peloso, 434 A.2d at 279. Moreover,
for whatever reason, Century did not implead other possible
breaching insurers to split the defense costs.
As to Kayser-Roth, we disagree with Century's reading of
the case. In Kayser-Roth the Rhode Island Supreme Court addressed
the narrow issue of whether a non-settling insurer who breached
both the duty to defend and the duty to indemnify, First-State, was
entitled to a set-off based on settlements reached by other
insurers. See 770 A.2d at 412. The trial court allowed a narrow
set-off based on a known settlement, but precluded First State from
introducing evidence of other insurers who could have covered
Kayser-Roth's losses, in part because the proffered documents had
"no probative value," and in part because First State was precluded
from obtaining settlement documents due to alleged discovery
misconduct. See id. at 413. Although the Rhode Island Supreme
Court discussed the set-off rule in Koppers, it relied upon the
"two different principles" that Koppers was based on: "contract
principles and equitable principles." See id. at 414. Applying
these principles, the Rhode Island Supreme Court affirmed the
district court's imposition of the near total costs to First State
because of the lack of evidence of other set-offs and
considerations of policy not pertinent here. Id. at 414.
Thus, it is difficult to see how Kayser-Roth supports
Century's claim that the district court erred. In fact, the
opposite is true. As in Kayser-Roth, the district court applied
contract principles by imposing the total defense costs to Century,
a breaching insurer, due in this case to the "all sums" language of
the Policies. See id. at 414 (noting with approval that, in
Koppers, the Third Circuit applied the same approach due to the
"all sums" language in policies at issue). Moreover, as in Kayser-Roth, the district court applied equitable principles in giving
Century a set-off for the Liberty Mutual settlement, the only known
settlement. See Emhart, 515 F. Supp. 2d at 256-57.
Century argues that, unlike in Kayser-Roth, there was no
misconduct committed by Century that would have precluded Century
from proving other set-offs. Accordingly, Century argues, it is at
least entitled to a remand to prove those set-offs. We disagree.
As an initial matter, Century had such an opportunity to prove
additional set-offs and failed to do so. Moreover, because there
is no evidence in the record that other insurers had a duty to
defend, any evidence proposed by Century would only consist of
possible insurers, and thus would be too general to provide a basis
for a set-off. See Kayser-Roth, 770 A.2d at 413 (rejecting
evidence of other potential set-offs in part because proffered
documents had "no probative value"). Finally, both Kayser-Roth and
Koppers focus on set-offs based on prior settlements, not just
possibilities of coverage. In fact, the Koppers language quoted by
Kayser-Roth, and highlighted by Century, states that the insurer is
entitled to a set-off based on "the combined pro rata shares of
other settling (primary and excess) insurers." Koppers, 98 F.3d at
1455 (emphasis added); see also Kayser-Roth, 770 A.2d at 414
(quoting this language). This is exactly what the district court
did in this case.
In sum, we find no error in the district court's
allocation of defense costs.
B. The Duty to Defend and Its Breach
1. Limitation of Duty to Defend and Damages Up
to Jury Verdict
In its cross-appeal, Emhart argues that the duty to
defend continues. Accordingly, Emhart contends that the district
court erred in limiting the damages from Century's breach of the
duty to defend to only those costs accrued as of the date of the
jury verdict. Emhart also contends that the district court erred
by holding that OneBeacon did not have a duty to defend under the
OneBeacon Policy. As with all rulings of law, we review de novo.
The district court held that "[a]ny duty to defend Emhart
in the present case . . . ceased as of the date the jury found in
favor of the insurers on the issue of indemnity." Emhart, 515 F.
Supp. 2d at 249 & n.22. The district court acknowledged that,
generally, "[a]n indemnity finding favorable to an insurer does not
erase that insurer's defense obligations, as long as the pleadings
test has been satisfied." Id. at 242 n.18. However, the district
court held that such a duty ends upon "a finding that the claims do
not fall within the risk of coverage; here, the date of the jury's
verdict." Id. (citing Shelby, 767 A.2d at 77); see also id. at 249
n.22 (citing a number of cases supporting the proposition that a
duty to defend ends when it is shown that there is no potential for
coverage).
We agree with the district court's analysis. Emhart
argues that the duty to defend continues because the risk of
coverage contained in the EPA charging documents remains. In
particular, Emhart asserts (without pointing to anything in the
record) that the EPA has not decided the scope of CERCLA liability
for the Site, and, consequently, the EPA remains free to make
additional allegations and findings that may affect the insurers'
duties to indemnify. According to Emhart, the possibility for
coverage, and the resultant duty to defend, remains.
We reject Emhart's claim. Under Rhode Island law,
questions of coverage, including the duty to defend, may be
addressed in a separate declaratory judgment action. See Conanicut
Marine Servs., Inc. v. Ins. Co. of N. Am., 511 A.2d 967, 971 n.10
(R.I. 1986). The parties brought such a declaratory action in this
case, and the jury's findings of fact proved that indemnification
coverage was not possible, thereby negating any duty to defend.
See, e.g., Shelby, 767 A.2d at 77 ("The plaintiff has a duty to
defend the underlying action at trial until there has been a
finding of fact that the cause of the collapse was excluded from
coverage under the policy or until settlement has been reached.").
Emhart attempts to distinguish this case law. It claims
that although, as a general proposition, a duty to defend can be
determined through a separate declaratory judgment action, in this
case the EPA is not bound by the district court's findings.
According to Emhart, "[t]his [is] not a case where a declaratory
judgment was used to negate coverage on grounds completely
unrelated to the underlying allegations, such as late notice to the
insurer."
However, this case is closer to a "late notice" situation
than Emhart asserts. Although the EPA is not bound by the district
court's findings, the EPA will not make any determination with
respect to the discoverability of the pollutants at issue in this
case, because such a determination is completely unrelated to
CERCLA liability. See Emhart, 515 F. Supp. 2d at 238 (noting that
"[o]f course . . . the charging documents are silent with respect
to whether dioxin was discoverable at the Site in 1969"); see also
42 U.S.C. § 9607(a) (indicating that liability is strict). As in
a "late notice" declaratory judgment action, the only way to
resolve the issue of discoverability is through a separate
declaratory judgment action, which is exactly what happened in this
case.
Even so, Emhart contends that the jury verdict did not
preclude coverage. Emhart maintains that Metro-Atlantic is not
responsible for the pollutants. NECC is. Consequently, the jury
may have determined that the pollutants were not "discoverable in
the exercise of reasonable diligence during the policy periods"
because Metro-Atlantic was not responsible for those pollutants, as
it would have no reason to test for pollution unless it had
contributed to the pollution itself.
Emhart misstates the basis for the duty to defend. The
Century Policies do not provide an all-encompensing defense.
Instead, the duty to defend under the Policies only arises when,
under the pleadings test, the charging documents allege claims that
fall "within or potentially within the risk coverage of the
policy." Beals, 240 A.2d at 403. Here, the charging documents in
the EPA action provided such a "potential[]" until the jury verdict
showed that any dioxin contamination was not reasonably
discoverable, thereby removing all doubt. The fact that Emhart may
be innocent of that dioxin contamination is completely irrelevant
to discoverability.
2. OneBeacon's Duty to Defend
In its cross-appeal, Emhart also contends that OneBeacon
owes a prospective duty to defend, that the duty to defend
continues and that the limits of the Century Policies are likely to
be reached. Because Emhart's claim is premised on its prior claim
that the duty to defend continues, we reject it. For the same
reasons, we do not address OneBeacon's claim that the OneBeacon
Policy is entitled to reformation.
3. Indemnity as Damages
Emhart also argues in its cross-appeal that it is
entitled to full indemnity costs as damages. It relies on
Conanicut Marine Servs., Inc. v. Ins. Co. of N. Am., 511 A.2d 967
(R.I. 1986), in which the Rhode Island Supreme Court awarded total
indemnity costs as damages for a breach of the duty to defend. We
review de novo.
Conanicut was a slip-and-fall case where a customer
injured herself at a marina and sued for damages. The marina
unsuccessfully sought a defense from its insurer. The marina later
settled the claim for $18,000, and then sued the insurer to recover
the settlement amount. In affirming judgment for the marina, the
insured, the Rhode Island Supreme Court held that:
where an insurer refuses to defend an insured
pursuant to a general-liability policy, the
insurer will be obligated to pay, in addition
to the costs of defense and attorneys' fees,
the award of damages or settlement assessed
against the insured.
Id. at 971 (emphasis added). The Conanicut court noted that
indemnity as damages would apply even if the judgment or settlement
exceeds the policy limits. Id. at 971 & n.9; see also Asermely v.
Allstate Ins. Co., 728 A.2d 461, 464 (R.I. 1999) (insurer who
refuses to settle a claim within policy limits is liable for excess
judgments).
Emhart pressed its claim for indemnity as damages under
Conanicut to the district court, but the court refused. The
district court engaged in a lengthy discussion of possible
exceptions Century could claim to avoid indemnity as damages,
rejecting all and noting that "[t]his leaves Century standing on a
precipice." See Emhart, 515 F. Supp. 2d at 260.
[3]
The district court, however, ultimately refused to apply
Conanicut on two grounds. First, the district court predicted that
Rhode Island courts would not apply Conanicut in circumstances like
these, relying on case law that allows a court to "'overrule' an
outmoded decision by predicting that the state's highest court
would, if presented with the opportunity, do the same." See id. at
261 (citing, among other cases, Quint v. A.E. Staley Mfg. Co., 172
F.3d 1, 17 (1st Cir. 1991)). The district court based that
prediction on a number of grounds. It noted that a number of
courts have rejected the use of "estoppel" in this context; that
is, estopping an insurer from disclaiming a duty to indemnify where
the insurer has breached the duty to defend. Id. (citing cases).
Moreover, Rhode Island state courts have similarly rejected the use
of estoppel to extend the scope of insurance coverage. See id. at
261-62 (citing cases). Rhode Island state courts have not applied
Conanicut since it was promulgated, and courts in other
jurisdictions have rejected applying a similar Conanicut rule in
the CERCLA context. Id. at 262 (citing cases). Taken together,
the district court concluded that it was unlikely that the Rhode
Island courts would apply Conanicut on an "estoppel" rationale to
this context. Id. at 262.
Second, the district court ruled that, under Rhode Island
law, "the proper measure of damages for breach of contract is that
which the injured party can tie to the breach itself." Id. at 263.
Since "Emhart has not proven any contract damages beyond the costs
of defense," the district court held that Emhart was not entitled
to indemnity. Id.
We agree with the second ground. Both parties spill a
lot of ink on the first ground, arguing back and forth over whether
Rhode Island courts would extend Conanicut to this case, citing
numerous authorities. However, in its briefing Emhart contends
that "Conanicut is not based on principles of estoppel or waiver,"
and, accordingly, it is only entitled to "the full amount which
will compensate the insured for all the detriment caused by the
insurer's breach of the express and implied obligations of the
contract." Conanicut, 511 A.2d at 971 (quoting Comunale v. Traders
& Gen. Ins. Co., 328 P.2d 198, 202 (Cal. 1958)) (emphasis added).
Thus, Emhart argues that Conanicut is entirely consistent with
existing Rhode Island precedent, and does not require this Court to
address whether it is "outmoded" in the least.
Of course, Emhart cannot, and does not, show that the
entire cost of the cleanup was caused by the breach. To get around
this, Emhart conceives of Conanicut as "implicitly" promulgating a
"bright line" rule that applies given the inherent difficulty in
determining the damages caused by a breach of the duty to defend.
As Emhart admits, Conanicut itself does not contain any such
"bright line" language. Emhart only points to an unpublished
opinion that rationalizes a similar rule in this way. See Total
Petroleum, Inc. v. Hartford Acc. & Indem. Co., No. 96-1736, 1997 WL
704932, at *3 (6th Cir. Nov. 7, 1997) (unpublished decision) ("One
basis for this rule seems to lie in the law's reluctance to allow
the insurer to benefit from the uncertainty created when it
renounces its duty.").
Even if Conanicut could be read as imposing a bright line
rule for the imposition of damages, which we doubt, at a minimum
Emhart would still have to provide some showing that Emhart's
failure to defend caused it damage with respect to its liability in
the EPA proceedings. As with all breaches of contract, the burden
is on the breached party to prove damages. See George v. George F.
Berkander, Inc., 169 A.2d 370, 373 (R.I. 1961) (affirming trial
court's determination that "the complainant had failed to sustain
the burden of proving that he had incurred any damage by reason of
the breach.") (emphasis added). There is nothing in the record to
suggest that Emhart incurred any damages from Century's breach
beyond its defense costs, thus triggering such a bright line rule.
Moreover, in the absence of some showing of damage,
applying Conanicut "mechanical[ly]," see Emhart, 515 F. Supp. 2d at
260, would risk conflicting with Rhode Island and Supreme Court
precedent, since the only remaining rationale for imposition of
damages would be estoppel or punitive. As noted earlier, Rhode
Island courts have refused the application of "estoppel" to extend
insurance coverage. See, e.g., Zarrella v. Minn. Mut. Life Ins.
Co., 824 A.2d 1249, 1260-61 (R.I. 2003) (holding, without
discussing Conanicut, that the "doctrine of equitable estoppel
shall not apply . . . to enlarge the scope of insurance benefits").
It would also put this Court in the thorny position of determining
whether such an award, to the tune of close to $100 million, would
violate the Due Process Clause. Cf. State Farm Mut. Ins. Co. v.
Campbell, 538 U.S. 408 (2003) (striking down $145 million punitive
damages award against insurance carrier, where jury held that
plaintiff was entitled to only $1 million in compensatory damages).
The district court was therefore correct to demand some
evidence of a relationship between Century's breach and Emhart's
damages, thus avoiding significant issues concerning Rhode Island
precedent, not to mention constitutional law. Cf. United States v.
Vilches-Navarrete, 523 F.3d 1, 10 n.6 (1st Cir. 2008) ("The maxim
that courts should not decide constitutional issues when this can
be avoided is as old as the Rocky Mountains and embedded in our
legal culture for about as long."). We accordingly find no error.
C. The Jury Verdict
In its cross-appeal, Emhart also raises various
challenges to the jury verdict.
1. "Continuous Trigger" or "Injury-in-Fact"
Instruction
Emhart challenges the district court's jury instruction
with respect to the appropriate "trigger of coverage" for the duty
to indemnify under the Century Policies and the OneBeacon Policy.
Emhart contends that the district court should have instructed the
jury using a "continuous trigger" or "injury-in-fact" standard. A
"continuous trigger" standard "charges a loss to policies in effect
from the time of exposure to manifestation," and, thus, presumes
injury from the time of exposure through manifestation. Emhart,
515 F. Supp. 2d at 256. In contrast, an "injury-in-fact" standard
triggers coverage only when an "injury" occurs during the policy
period.
A refusal to give an instruction is "'reversible error
only if the requested instruction was (1) correct as a matter of
substantive law, (2) not substantially incorporated into the charge
as rendered, and (3) integral to an important point in the case.'"
Seahorse Marine Supplies, Inc. v. P.R. Sun Oil Co., 295 F.3d 68, 76
(1st Cir. 2002) (quoting United States v. DeStefano, 59 F.3d 1, 2
(1st Cir. 1995)).
We reject Emhart's claim. All three Policies trigger
coverage based upon an "occurrence" during the relevant policy
periods. This Court certified the question of what trigger applies
to such occurrence policies to the Rhode Island Supreme Court in
CPC Int'l, Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d
647 (R.I. 1995). As put by the Rhode Island Supreme Court:
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 property damage, which includes property
loss, manifests itself or is discovered or in
the exercise of reasonable diligence, is
discoverable.
Id. at 649 (emphasis added). The district court relied on CPC to
instruct the jury in this case, stating the issue on the verdict
form as follows: "With respect to the Century Primary, Century
Excess, and OneBeacon Policies, was dioxin contamination
discoverable in the exercise of reasonable diligence during the
policy periods?" Since the parties did not dispute that the dioxin
contamination at issue in this case failed to manifest itself and
was not discovered during the Century and OneBeacon policy periods,
the district court focused solely on whether the dioxin
contamination was "discoverable in the exercise of reasonable
diligence during the policy periods." See Emhart, 515 F. Supp. 2d
at 238.
We start backwards. Emhart contends that it was entitled
to an "injury-in-fact" instruction, but that is exactly what the
district court provided. In devising what the district court
called a "discovery/manifestation/discoverability trigger" for
occurrence-based policies, see id. at 265, the CPC Court explicitly
incorporated an "'injury-in-fact' theory." CPC, 668 A.2d at 649;
see also id. at 649-50 (finding support for test in Eagle-Picher
Indus., Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12, 24 (1st Cir.
1982), which interpreted "occurrence" under the policy to mean "no
more than that [the] injury must result during the policy period."
(emphasis added)). The CPC court simply provided a more technical
definition of "injury-in-fact" in this context, one that not only
requires damage, but that the damage be manifest, discovered, or
discoverable. Thus, an "injury-in-fact" theory was "substantially
incorporated into the charge as rendered." Seahorse Marine
Supplies, 295 F.3d at 76.
Emhart's claim concerning the "continuous trigger"
standard also falters. Here Emhart contends that the plain terms
of the Policies permit recovery so long as there is an occurrence,
defined under the Policies as "injurious exposure to conditions,
which results, during the policy period, in . . . property damage
. . . neither expected nor intended from the standpoint of the
insured." Based on this language, Emhart argues that all that was
needed was a showing of "exposure to conditions" causing "property
damage" during the relevant policy periods, which Emhart provided.
However, substantially similar terms were used in the
policy at issue in CPC, where an "occurrence" was defined as "[a]n
accident, event or happening including continuous or repeated
exposure to conditions which results, during the policy period, in
. . . Property Damage . . . neither expected nor intended from the
standpoint of the Insured." CPC, 668 A.2d at 649. The Rhode
Island Supreme Court interpreted this language to mean that "there
can be no occurrence under the policy without property damage that
becomes apparent during the policy period." Id. (emphasis added).
Thus, it concluded that "'[p]roperty damage' and 'occurrence' are
. . . inextricably intertwined." Id. Under the Policies in this
case, "property damage" and "occurrence" are also "inextricably
intertwined," since, as in the policy in CPC, there is no
"occurrence" unless there was "property damage . . . during the
policy period." Accordingly, Emhart fails to show why CPC would
not apply to the "occurrence"-based Policies in this case.
Next, Emhart claims that the "considered dicta" of the
Rhode Island Supreme Court supports the use of a "continuous
trigger" standard. See Honey Dew Assocs., Inc. v. M & K Food
Corp., 241 F.3d 23, 27 (1st Cir. 2001) (absent a definitive ruling
by the state's highest court, the federal courts may refer to
"considered dicta" to ascertain how the state court would rule).
Emhart cites Textron-Gastonia, where the court found coverage based
on the discovery/manifestation/discoverability trigger and, thus,
did "not address the continuous trigger-of-coverage standard." 723
A.2d at 1141. Emhart also cites Truk-Away, where the insured
pressed a "continuous-trigger" standard, but the court found no
coverage since there was no evidence of property damage, continuous
or otherwise, during the policy periods. 723 A.2d at 313.
Even if this so-called "considered dicta" supported the
use of a "continuous trigger" standard, Emhart would still have to
distinguish CPC, which is the definitive ruling with respect to
triggers of coverage for "occurrence"-based policies. See Textron
-Wheatfield, 754 A.2d at 745-46 (reiterating CPC discoverability
standard, noting that "the 'discoverability' trigger in [CPC]
descends from a long and venerable line of insurance cases.");
Textron-Gastonia, 723 A.2d at 1144 ("Textron's burden . . . is not
met by merely establishing evidence to suggest that the
contamination was present during the policy period. Rather, CPC
requires that the contamination not only exist during the period of
coverage, but also be discoverable in the exercise of reasonable
diligence.") (emphasis added). Emhart has not done so, and,
accordingly, we find no error.
2. "Objective" Standard
Emhart argues in the alternative that the district court
erred in instructing the jury to consider whether Crown-Metro
subjectively had a reason to test for contamination. "We review
jury instructions de novo. We reverse the giving of an instruction
if it (1) was misleading, unduly complicating, or incorrect as a
matter of law, and (2) adversely affected the objecting party's
substantial rights." SEC v. Happ, 392 F.3d 12, 28 (1st Cir. 2004)
(citations and quotation marks omitted).
The district court used the following trigger instruction
with respect to Century and OneBeacon:
Under the circumstances of this case, the
Century and OneBeacon policies can be
triggered only if property damage was
discoverable in the exercise of reasonable
diligence during the policy periods.
That is, whether by exercising
reasonable diligence Crown-Metro, the
successor to Metro-Atlantic, could have
discovered the dioxin contamination during the
policy periods applicable to the Century and
OneBeacon policies. Note that Emhart does not
need to show that property damage was actually
discovered during the policy periods.
With respect to the question of whether
the property damage was discoverable in the
exercise of reasonable diligence, you must
consider two issues. The first is was dioxin
contamination capable of being detected at the
site during the policy periods. This requires
Emhart to show that dioxin contamination
actually existed at the site during the policy
period as well as the existence of technology
and expertise that could have detected that
dioxin contamination.
The second issue is did Crown-Metro
have a reason to test for dioxin contamination
at the site during the policy period or other
contamination that would have led to the
discovery of dioxin contamination at the site
during the policy period.
Considering all of the evidence then,
you must decide whether Crown-Metro, in the
exercise of reasonable diligence, could have
discovered the dioxin contamination.
Emhart objects to this language: "The second issue is did Crown-Metro have a reason to test for dioxin contamination at the site
during the policy period or other contamination that would have led
to the discovery of dioxin contamination at the site during the
policy period." (emphasis added).
We see no error. The Rhode Island Supreme Court has
described the discovery/manifestation/discoverability trigger in
precisely those terms. See, e.g., Textron-Wheatfield, 754 A.2d at
745 ("the insured had reason to test for the property damage");
Textron-Gastonia, 723 A.2d at 1144 ("Textron must have had some
reason to test for the contamination"). Moreover, throughout the
instruction the district court emphasized that the contamination
was discoverable in the "exercise of reasonable diligence," which
entails taking an objective perspective. (emphasis added).
3. Choice of Law for North River Policy
We turn to the North River Policy. Emhart argues that
this Court should certify the question of what state law would
apply to the North River Policy, which does not have a choice-of-law provision. Emhart contends that Rhode Island law applies to
the Policy. However, based on the magistrate judge's report in
this case, the district court applied New York law to the North
River Policy.
In the report, the magistrate judge applied a 2004
precedent, DeCesare v. Lincoln Benefit Life Co., 852 A.2d 474, 483-84 (R.I. 2004), to determine what choice-of-law principles apply to
the North River Policy. DeCesare held that "[i]n the absence of a
contractual stipulation about which law controls, Rhode Island's
conflict-of-laws doctrine provides that the law of the state where
the contract was executed governs." Id. at 483-84. On that basis,
the Magistrate Judge applied New York law, since the parties
stipulated that the North River Policy was executed in New York.
We see no basis for certifying the issue to the Rhode
Island Supreme Court. DeCesare remains good law, and nothing
subsequent to DeCesare holds to the contrary. At best, Emhart only
shows that pre-DeCesare precedent may apply an "interest-weighing"
analysis. See, e.g., Gordon v. Clifford Metal Sales Co., 602 A.2d
535, 538-39 (R.I. 1992) (applying "interest-weighing" analysis
based upon Title 6 of the Rhode Island Uniform Commercial Code).
Thus, we find the law "sufficiently clear" to make "certification
. . . both inappropriate and an unwarranted burden on the state
court." See In re Citigroup, Inc., 535 F.3d 45, 62 (1st Cir.
2008).
4. "Sudden and Accidental" Exclusion
Finally, and in the alternative, Emhart claims that the
district court committed error in its instruction concerning the
"sudden and accidental" exclusion of the North River Policy. As
with our review of the previous jury instructions, we review de
novo.
The "sudden and accidental" exclusion allows for coverage
if a "discharge, dispersal, release, or escape" that otherwise
satisfies the pollution exclusion of the North River Policy was
"sudden and accidental." The jury found that the "sudden and
accidental" exclusion did not apply in this case.
Emhart objects to the following language in the
instruction:
Moreover, once you've determined when the
initial release occurred, intervening events,
although they might be sudden and accidental,
cannot be considered for purposes of the
exception to the exclusion.
Thus, for instance, where the initial
release discharged pollutants onto the land,
an intervening fire or flood cannot satisfy
the sudden and accidental exception. Instead,
you must determine whether the initial
discharge event was itself sudden. It may be
the case, however, that the fire was the
initial discharge event, assuming that the
fire caused the at-issue property damage, in
which case it would be proper to determine
whether this event was sudden.
(emphasis added). Emhart claims that the district erred in
focusing solely on the initial dispersal, and that it is entitled
to coverage because it presented evidence of subsequent flooding
that "dispersed" the contaminants onto the Site.
Emhart relies on a single case, Farm Family Mut. Ins. Co.
v. Bagley, 409 N.Y.S. 2d 294 (App. Div. 1978), where the New York
Appellate Division distinguished between "discharge" and
"dispersal," and held that "the word 'dispersal' may refer to the
original release or it may refer to a secondary dissemination after
the original release." Id. at 296 (quoting Webster's Third New
World Dictionary) (emphasis added). The district court relied on
a more recent case, Northville Indus. Corp. v. Nat'l Union Fire
Ins. Co., 679 N.E.2d 1044 (N.Y. 1997), where the New York Court of
Appeals, when interpreting the same policy language, did not make
the distinction and, instead, held that "[t]he focus . . . is on
the initial release of the pollutant, not on . . . the timespan of
the eventual dispersal of the discharged pollutant in the
environment." Id. at 1048. Emhart tries to parse Northville,
arguing that it is factually distinct and that its pronouncement is
dictum. We see no indication that Northville would not apply to
this case. See Employers Ins. of Wausau v. Duplan Corp., 1999 WL
777976, at *11-12 (S.D.N.Y. Oct. 20, 1999) (holding, following
Northville, that "sudden and accidental" precluded liability for
subsequent dispersals of discharged contaminants due to fires and
floods).
III. Conclusion
For the foregoing reasons, we affirm the district court
in all respects.
Affirmed.
Costs to the prevailing parties.
Footnotes
[1] 'These cases are: Howard v. Guidant Mut. Ins. Group, 785 A.2d 561
(R.I. 2001) (insurer had no duty to defend because allegations that
disclosure of sexual relations resulted in injury were excluded by
sexual misconduct language of policy); Progressive Cas. Ins. Co. v.
Narraganset Auto Sales, 764 A.2d 722 (R.I. 2001) (applying
pleadings test and ruling automobile insurer selected by insured
had duty to defend tort claim against insured); Shelby Ins., 767
A.2d (duty to defend tort claim continued for single insurer
selected because answer raised possibility of coverage); Allstate
Ins. Co. v. Russo, 641 A.2d 1304 (R.I. 1994) (applying pleadings
and finding homeowners' insurer had no duty to defend tort claim
for misrepresenting financial institution's solvency); Mellow v.
Med. Malpractice Joint Underwriting Ass'n of R.I., 567 A.2d 367
(R.I. 1989) (applying test where malpractice insurer refused to
defend insured and where allegation that injury caused by privacy
violation was potentially covered); Hingham Mut. Fire Ins. Co. v.
Heroux, 549 A.2d 265 (R.I. 1988) (single selected insurer had duty
to defend underlying tort claim filed by motorist); Flori v.
Allstate Ins. Co., 388 A.2d 25 (R.I. 1978) (insurer had duty to
defend tort action where pleadings alleged negligence, insured
requested an actual defense from insurer, and insurer refused to
defend citing policy exclusion); Beals, 240 A.2d (negligence claim
based on injuries to a child struck by a pencil held by a
schoolmate).
[2] 'In fact, as the district court noted, to adopt this "time-on-the-risk" allocation borders on adopting a "continuous trigger"
theory of coverage, in which the existence of dioxin "triggers"
coverage every year. See Emhart, 515 F. Supp. 2d at 256. However,
as the district court noted, and as we discuss in more detail
below, "the Rhode Island Supreme Court has adopted a separate, more
circumscribed trigger theory." Id. (citing cases).
To take a simple example, suppose that, over a 40-year period,
there were three "occurrences" of dioxin contamination, one in year
1, one in year 20, and one in year 40. According to Century, if
the "policy period" of the Primary and Excess Policies occurred
during year 1, then Century would only be liable for 1/40th of the
defense costs, rather than a more equitable 1/3rd. More
importantly, under Rhode Island Law, "occurrence-based" policies
that covered years without an occurrence, such as year 5, would not
have to extend coverage at all, so it is unclear why such insurers
would have to share in the costs.
[3] 'Much of the district court's discussion of these exceptions
depended on the back and forth between Century and Emhart over
locating the Century Primary Policy. Since we affirm the district
court in holding that Conanicut does not apply on other grounds, we
do not need to discuss this back and forth in any detail.
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