ESSENTIAL UTILITIES, INC. v. SWISS RE CORPORATE SOLUTIONS ELITE INSURANCE CORPORATION

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

ESSENTIAL UTILITIES, INC., et al. :

: CIVIL ACTION

v. : NO. 22-1559

:

SWISS RE GROUP, et al. :

M E M O R A N D U M

EDUARDO C. ROBRENO, J. FEBRUARY 1, 2023

This action involves alleged breaches of insurance

contracts. Plaintiffs, Essential Utilities and Aqua Illinois

(“Plaintiffs”), contend that Defendant Swiss Re Corporate

Solutions Elite Insurance (“SRCS Elite”), with whom Plaintiffs

have excess insurance policies, is obligated to defend

Plaintiffs in two underlying lawsuits involving lead that

leached into a public water supply.

Both parties have moved for judgment on the pleadings. SRCS

Elite has moved for judgment on Count I of the amended complaint

for breach of contract and Count V of the amended complaint for

declaratory judgment.1 Plaintiffs move for partial judgment on

Count V of the amended complaint regarding SRCS Elite’s duty to

defend in the underlying lawsuits.

1 In Count V, Plaintiffs seek a declaration that, inter alia,

they are insured under SRCS Elite’s policies, that the

underlying claims are covered by the policies, and that SRCS

Elite has a duty to assume the defense costs and provide a

defense.

For the forthcoming reasons, the Court will deny SRCS

Elite’s motion and grant Plaintiffs’ motion.

I. BACKGROUND

A. The Underlying Lawsuits

Plaintiffs provide drinking water to the residents of the

Village of University Park, Illinois. In December 2017,

Plaintiffs switched the source of the drinking water and

introduced new water treatment chemicals. In May 2019, testing

showed unacceptable levels of lead in the water. Two lawsuits

were filed against Plaintiffs.

First, on September 3, 2019, Village residents filed a

class action against Plaintiffs alleging that Plaintiffs

negligently caused lead to leach from the solder and plumbing

into the water supply, causing “damages to persons and

property.” ECF No. 26, ¶ 19 (amended complaint). Second, on

September 9, 2019, the Attorney General of Illinois brought an

action against Plaintiffs for injunctive and other relief

alleging harm to the public health and welfare of the residents

due to the lead infiltration.

B. The Insurance Policies

Plaintiffs had a five-million-dollar pollution liability

insurance policy from Chubb Insurance which protected against

claims of bodily injury and property damage, including those

raised in the underlying lawsuits described above. The Chubb

policy has been exhausted and Chubb has paid five million

dollars in indemnity payments and legal defense expenses in

connection with the two lawsuits.

Plaintiffs also had two excess general liability insurance

policies through SRCS Elite with ten-million-dollar coverage

limits in excess of the Chubb policy. These two policies were

effective for consecutive annual periods from 2017 to 2019.

Having exhausted the Chubb policy, the parties now disagree

whether the SRCS Elite policies provide additional coverage in

connection with the two underlying lawsuits.

II. LEGAL STANDARD2

Pursuant to Federal Rule of Civil Procedure 12(c), “[a]fter

the pleadings are closed – but early enough not to delay trial –

a party may move for judgment on the pleadings.” Fed. R.

Civ. P. 12(c). If the moving party “establishes that ‘there are

no material issues of fact, and [the moving party] is entitled

to judgment as a matter of law,’” a motion for judgment on the

pleadings should be granted. Zimmerman v. Corbett, 873 F.3d 414,

417 (3d Cir. 2017) (quoting Sikirica v. Nationwide Ins. Co., 416

F.3d 214, 220 (3d Cir. 2005)). “In considering a motion for

judgment on the pleadings, a court must accept all of the

allegations in the pleadings of the party against whom the

2 The parties agree that Pennsylvania law applies and have

argued their respective positions based on that law.

motion is addressed as true and draw all reasonable inferences

in favor of the non-moving party.” Id. at 417-18. Thus, the Rule

12(c) standard mirrors that of a motion to dismiss under Rule

12(b)(6). Id. at 417. “Where both parties file motions for

judgment on the pleadings, each party’s right to a judgment must

be determined from a consideration of the party’s own motion as

though no motion had been filed by the other party.” 61A Am.

Jur. 2d, Pleading § 499 (citing State at Inf. McKittrick ex rel.

Martin v. Stoner, 146 S.W.2d 891 (Mo. 1941)). Thus, the Court

will analyze the parties’ motions individually, especially given

that they both seek judgment on one of the same Counts of the

amended complaint.

Contract interpretation is a question of law to be

determined by the court. Kvaerner Metals Div. of Kvaerner U.S.,

Inc. v. Com. Union Ins. Co., 908 A.2d 888, 897 (Pa. 2006). The

court will give effect to any clear and unambiguous policy

terms, but when a term is ambiguous, “the policy is to be

construed in favor of the insured.” Donegal Mut. Ins. Co. v.

Baumhammers, 938 A.2d 286, 290 (Pa. 2007) (quoting Kvaerner

Metals Div., 908 A.2d at 897).

The insured has the burden of establishing coverage under

an insurance policy. Nationwide Mut. Ins. Co. v. Cosenza, 258

F.3d 197, 206 (3d Cir. 2001) (citing Erie Ins. Exch. v.

Transamerica Ins. Co., 533 A.2d 1363, 1366 (Pa. 1987)). The

burden shifts to the insurer, however, to show that the loss

falls within a specific policy exclusion. Erie Ins. Exch., 533

A.2d at 1366 (quoting Miller v. Boston Ins. Co., 218 A.2d 275,

277 (Pa. 1966)). Thereafter, the burden shifts back to the

insured to show that an exception to the exclusion applies.

Jugan v. Econ. Premier Assurance Co., 728 F. App’x 86, 90 (3d

Cir. 2018) (citing TIG Specialty Ins. v. Koken, 855 A.2d 900,

915 (Pa. Commw. Ct. 2004)); Consol. Rail Corp. v. ACE Prop. &

Cas. Ins. Co., 182 A.3d 1011, 1027 (Pa. Super. 2018). “[P]olicy

exclusions are to be construed narrowly in favor of coverage.”

Mut. Benefit Ins. Co. v. Politsopoulos, 115 A.3d 844, 852 n.6

(Pa. 2015)).

III. DISCUSSION

A. SRCS Elite’s Motion for Judgment on the Pleadings

SRCS Elite seeks judgment on Counts I and V of the amended

complaint which assert a breach of the SRCS Elite policies and

seek declaratory relief.

SRCS Elite argues that the policies’ pollution exclusion

bars the coverage sought and that there are no applicable

exceptions to the exclusion; thus, there can be no breach of

contract.3 The Pollution Exclusion provides that:

3 The pertinent terms of the two policies are the same. Thus,

the Court will cite only one of the policies for the sake of

simplicity. Specifically, the Court will cite the policy entered

This insurance shall not apply to [inter alia]:

2. Any damage, loss, cost or expense arising out of any

request, demand, order or statutory or regulatory

requirement that any “Insured” or others test for,

monitor, clean-up, remove, contain, treat, detoxify or

neutralize, or in any way respond to, or assess the

effects of pollutants . . . .

ECF No. 21-2, p. 71.4 There are exceptions to this exclusion

however, including that:

This exclusion does not apply and the “Insured” is not

subject to the Self-Insured Retention stated in the

Schedule above if the “retained limits” for the

pollution liability risks described above exists or

would have existed but for the exhaustion of such

“retained limits.” For purposes of this paragraph,

coverage provided under this Policy will follow the

terms, definitions, conditions, exclusions and

limitations of the first underlying insurance as

described in the “scheduled underlying insurance.”

Id.5

into by the parties in 2018, which is located at ECF No. 21-2,

with reference to the relevant ECF page number(s).

4 This pollution exclusion is on a schedule attached to the

SRCS Elite policies and replaces the pollution exclusion found

earlier therein. Compare ECF No. 21-2, p. 71 (the superseding

pollution exclusion) with pp. 16-18 (the original pollution

exclusion). For the purposes of these motions, the Court assumes

the exclusion is applicable in that the underlying lawsuits

allege “damage[s] . . . “arising out of [a] request . . . that

[the] “insured” . . . in any way respond to . . . the effects

of pollutants.” ECF No. 21-2, p. 71.

5 There is also a separate exclusion that only applies after

the “Self-Insured Retention” of ten million dollars has been

paid by Plaintiffs. See ECF No. 21-2, p. 70 (the “Self-Insured

Retention” schedule) and p. 71 (the pollution exclusion). The

parties agree that this condition has not been met.

Thus, while the SRCS policies typically would not apply to

damages arising out of a demand that the insured, inter alia,

“in any way respond to . . . the effects of pollutants,” they

will apply if the relevant “retained limits” have been paid by

Plaintiffs in relation to the underlying lawsuits. Moreover, if

this exception applies, Plaintiffs need not first pay the “Self-

Insured Retention” of ten million dollars before the SRCS Elite

policies apply. See id. at 70-71.

The policies define “retained limit” as

1. The total applicable limits of “scheduled underlying

insurance” and any applicable limit of “other insurance”

providing coverage to the “insured”; or

2. The amount shown in the Declarations as the Self-

Insured Retention applicable to each “occurrence” that

results in damages not covered by “scheduled underlying

insurance” or “other insurance.”

Id. at 26.

Regarding the first definition of “retained limit, the SRCS

Elite policies do list “scheduled underlying insurance,” but the

parties agree that it is not applicable here and therefore

cannot be exhausted or used to reach the “retained limit.” See

id. at 30 (listing the “scheduled underlying insurance”). “Other

insurance” is defined under the SRCS Elite policies as:

a policy of insurance providing coverage for damages

covered in whole or in part by this policy. “Other

insurance” does not include “scheduled underlying

insurance,” the amount shown in the Declarations as the

Self-Insured Retention or any policy of insurance

specifically purchased to be excess of this policy and

providing coverage that this policy also provides.

Id. at 25. The parties disagree whether the exhausted Chubb

policy is “other insurance” and on the meaning of “retained

limit.”6

Thus, under the first definition of “retained limit,” if

the exhausted Chubb policy is “other insurance,” and alone can

comprise the “retained limit,” then the SRCS Elite policies will

apply to protect Plaintiffs.

1. The Chubb Policy Is “Other Insurance”

SRCS Elite argues that the Chubb policy is not “other

insurance” because the Chubb policy and SRCS Elite policies do

not cover the exact same risks, noting that the Chubb policy

explicitly includes pollution coverage while the SRCS Elite

policies specifically exclude it.7

However, as noted by Plaintiffs, the definition of “other

insurance” in the SRCS Elite policies only requires that the

Chubb policy cover some of the same damages as the SRCS Elite

policies to qualify as “other insurance.” Here, both the Chubb

6 The second definition of “retained limit” only applies if

there is no applicable “scheduled underlying insurance” or

“other insurance” and Plaintiffs have paid the ten-million-

dollar “Self-Insured Retention.” As stated, Plaintiffs have not

paid the “Self-Insured Retention.”

7 The Court notes that defense counsel has previously

identified the Chubb policy as likely “other insurance” in

correspondence with Plaintiffs’ counsel. ECF No. 26-8, p. 4.

policy and the SRCS Elite policies cover damages for bodily

injury and property damage and the SRCS Elite policy

specifically covers pollution loss in certain situations that

trigger the exception to the pollution exclusion. ECF No. 26-4,

p. 43 (Chubb policy); ECF No. 21-2, pp. 7 & 71 (SRCS Elite

policy). Damages for both property loss and bodily injury are

sought in the underlying lawsuits.

Thus, the Court concludes that the Chubb policy is “other

insurance” under the SRCS Elite policies because the Chubb

policy provides coverage for damages covered at least in part by

the SRCS Elite policies.

2. The Definition of “Retained Limit”

The parties offer two competing interpretations of

“retained limit.” SRCS Elite contends that there is no existing

“retained limit” that would trigger the exception to the

pollution exclusion. Plaintiffs argue that since the exhausted

Chubb policy is “other insurance,” it sets the “retained limit”

and triggers the pollution exclusion exception. The Court

concludes that a plain reading of the term “retained limit”

shows that Plaintiffs have proffered the correct interpretation.

SRCS Elite argues that for the first definition of

“retained limit” to apply, all “scheduled underlying insurance”

and all “other insurance” must be exhausted before the SRCS

Elite policy covers any excess loss. Because it is undisputed

that the “scheduled underlying insurance” listed in the SRCS

policies is inapplicable here, according to SRCS Elite, those

coverages can never be exhausted and the first definition can

never be met. SRCS Elite further argues that Plaintiffs fail to

meet the second definition of “retained limit” because that

definition requires Plaintiffs to have satisfied the ten million

dollar “Self-Insured Retention,” which they have not done. Thus,

according to SRCS Elite, there are no existing “retained limits”

and the exception to the pollution exclusion does not apply.

Plaintiff correctly notes that SRCS Elite’s interpretation

ignores the word “applicable” in the “retained limit”

definitions. On its face, the first definition of “retained

limit” concerns not all but only the “applicable limits” of

“scheduled underlying insurance” and any “applicable limit” of

“other insurance.” Here, there are no applicable limits in any

of the “scheduled underlying insurance” but there is a five-

million-dollar applicable limit of the exhausted Chubb policy,

which is “other insurance.” Thus, the first definition of

“retained limit” is met after factoring in all applicable

“scheduled underlying insurance” limits (zero) and all

applicable “other insurance (one).

Ignoring the word “applicable” in these definitions also

creates an absurd scenario where SRCS Elite would never be

obligated to honor their policies assuming there was at least

one inapplicable “scheduled underlying insurance” or “other

insurance” listed in or related to its policy.

SRCS Elite incorrectly asserts that Plaintiffs’

construction leads to surplusage because both definitions would

be satisfied where the “scheduled underlying insurance” is

inapplicable, so long as there is applicable “other insurance.”

This depiction is facially inaccurate. A plain reading of the

term shows that the first definition of “retained limit” is

satisfied when there is applicable “scheduled underlying

insurance” or applicable “other insurance,” while the second

definition can only be satisfied in the absence of both.

SRCS Elite also argues that Plaintiffs’ interpretation of

“retained limit” contradicts the second sentence of the

pollution exclusion exception making Plaintiff’s interpretation

illogical. As stated previously, the pollution exclusion

exception is triggered when “retained limits” exist. See ECF No.

21-2, p. 71. The second sentence of the exception continues that

when “retained limits” exist, “[f]or purposes of this paragraph,

coverage provided under this Policy will follow the terms,

definitions, conditions, exclusions and limitations of the first

underlying insurance as described in the ‘scheduled underlying

insurance.’” Id. (emphasis added). SRCS Elite notes that in a

situation like this, where the “retained limit” is only

comprised of “other insurance,” and there is no applicable

“scheduled underlying insurance,” under the exception language

there are no terms for the SRCS policies to follow.

Indeed, this is a conundrum. However, rather than proving

SRCS Elite’s position, it indicates ambiguity within the

pollution exclusion which the Court must resolve in Plaintiffs’

favor, and prevents the Court from granting judgment on the

pleadings in favor of SRCS Elite. Donegal Mut. Ins. Co., 938

A.2d at 290. SRCS Elite seeks to alter the plain meaning of the

term “retained limit” to fix its infirm pollution exclusion

language. However, it is the pollution exclusion that requires

reformation, not the “retained limit” definition.

Courts will “endeavor to find an interpretation” of an

ambiguous term that avoids absurd or ineffective results. Laudig

v. Laudig, 624 A.2d 651, 654 (Pa. Super. 1993) (quoting Pocono

Manor Ass’n v. Allen, 12 A.2d. 32, 35 (Pa. 1940)). Here,

Plaintiffs provide a reasonable interpretation of the pollution

exclusion exception that alleviates the incongruity between it

and the definition of “retained limit”: to the extent coverage

under the exception is triggered by “retained limits” consisting

only of “other insurance,” that coverage should follow the

terms, definitions, conditions, exclusions and limitations of

the applicable “other insurance.” See Am. Auto. Ins. Co. v.

Murray, 658 F.3d 311, 321 (3d Cir. 2011) (“Ambiguous provisions

in an insurance policy must be construed against the insurer and

in favor of the insured; any reasonable interpretation offered

by the insured, therefore, must control.” (quoting Med.

Protective Co. v. Watkins, 198 F.3d 100, 104 (3d Cir. 1999))).

The Court further notes that the original pollution

exclusion in the policies, which was superseded by the infirm

version discussed above, provides that the exceptions to the

exclusion:

apply to the extent that such coverage is provided by

“scheduled underlying insurance” or would have been

provided but for the exhaustion of the applicable limits

of such “scheduled underlying insurance” by the payment

of “loss” covered by this policy; provided, however,

that coverage provided by this policy will be no broader

than coverage provided by such “scheduled underlying

insurance.”

ECF No. 21-2, p. 17 (emphasis added). Unlike the superseding

pollution exclusion, this original version was only triggered by

the existence of “scheduled underlying insurance.” The

superseding exclusion, however, is broader and the exception is

controlled by the existence of “retained limits” which includes

“other insurance,” not just “scheduled underlying insurance.”

Thus, had SRCS Elite intended the exception to be triggered only

by “scheduled underlying insurance,” it certainly could have

done so (having done so originally).

It is only imprecise drafting in the superseding pollution

exclusion that leaves the parties without guidance regarding

what terms control in the event the exception is triggered. The

pollution exclusion is ambiguous, and the Court will therefore

construe it in favor of Plaintiffs. Donegal Mutual Ins. Co., 938

A.2d at 290. And to prevent the policies from being ineffective,

the Court adopts Plaintiffs’ construction of what terms apply

when the “retained limit” is set solely by “other insurance.”

Am. Auto. Ins. Co., 658 F.3d at 321. Otherwise, the definition

of “retained limit” is plain on its face and Plaintiffs have

proffered the correct interpretation of that term. Thus, the

Court will deny Defendant’s motion for judgment on the pleadings

on Counts I and V of the amended complaint.

B. Plaintiffs’ Motion for Judgment on the Pleadings

Plaintiffs seek judgment on the pleadings regarding SRCS

Elite’s duty to defend Plaintiffs in the underlying lawsuits.

The polices describe the duty to defend as follows:

We will have the right and duty to defend the “insured”

against any “suit” claiming damages for “bodily injury,”

“property damage” or “personal and advertising injury,”

even if meritless, false or fraudulent, to which this

insurance applies when:

1. the applicable limits of “scheduled underlying

insurance” have been exhausted by payment of “loss” to

which this policy applies and the total applicable

limits of “other insurance” have been exhausted; or

2. damages claimed for “bodily injury,” “property

damage” or “personal and advertising injury” are

a. not covered by “scheduled underlying insurance”

or any “other insurance,” and

b. the applicable Self-Insured Retention has been

exhausted by payment of “loss” covered by this

policy.

ECF No. 21-2, p. 9.

The parties disagree on the meaning of the duty provision

and their arguments mirror those made in relation to “retained

limits,” discussed above. As a result, Plaintiffs again proffer

the correct interpretation of this language and, thus, are

entitled to judgment on the pleadings regarding SRCS Elite’s

duty to defend in the underlying actions.

“[A]n insurer’s potential duty to defend is ‘determined

solely by the allegations of the complaint in the [underlying]

action.’” Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660, 678

(3d Cir. 2016) (quoting Kvaerner Metals Div., 908 A.2d at 896).

Here, the Court concludes that a reading of the complaints in

the underlying actions clearly indicate that they seek damages

and injunctive relief in relation to bodily injury and property

damage.8 See ECF No. 26-2, ¶¶ 55, 69 (the class action complaint

alleging that the lead leaching “has threatened the health of

Plaintiffs and Class members, and exposes them to injury and the

8 The SRCS Elite policies define “bodily injury” as “bodily

injury, sickness or disease” including “mental anguish or mental

injury resulting from ‘bodily injury’” and define “property

damage” as “physical injury to tangible property, including all

resulting loss of use of that property” and “loss of use of

tangible property that is not physically injured.” ECF No 21-1,

pp. 23 & 26.

fear of future injury” and “Aqua’s actions and inactions . . .

interfered with their use and enjoyment of [the Class Members’]

properties”); ECF No. 26-3, p. 28 (the State of Illinois

complaint, alleging that Plaintiffs “caused the release of lead

into the Public Water System, thereby threatening harm to

Village residents and interfering with their use and enjoyment

of the water”).

Regarding the parties’ interpretations, Plaintiff

interprets the language of the first duty trigger as meaning

that the duty to defend arises when the applicable limits of

“scheduled underlying insurance” have been exhausted by the

payment of “loss” and the total applicable limits of “other

insurance” have been exhausted. Thus, Plaintiffs contend that

since there are no applicable limits from any of the “scheduled

underlying insurance” (as discussed above) and the total

applicable limits of the Chubb policy (which is “other

insurance”) have been exhausted, SRCS Elite’s duty to defend has

been triggered. This is the correct, plain, and literal

interpretation of the policy language.

Regarding the first duty trigger, SRCS Elite makes an

argument similar to the one rejected above. It contends that all

“scheduled underlying insurance” must be exhausted, regardless

of whether it is applicable, before its duty to defend arises.

Here, given that the “scheduled underlying insurance” can never

be exhausted because it does not apply to this situation, SRCS

Elite argues that the duty can never arise under the first

trigger provision. Alternatively, under the second duty trigger,

SRCS argues that the duty can be triggered if there is no

“scheduled underlying insurance” but Plaintiffs have paid the

ten million dollar “Self-Insured Retention” (which the parties

agree has not happened).

As discussed above, this interpretation conflicts with the

clear language of the policies in that it ignores the word

“applicable.” Even as to the second duty trigger, SRCS ignores

that it is only applicable when there is neither applicable

“scheduled underlying insurance” nor applicable “other

insurance.” Again, SRCS Elite’s interpretation of the duty to

defend provision guarantees that SRCS’s duty would never trigger

assuming the existence of any inapplicable “scheduled underlying

insurance” or “other insurance.”

SRCS Elite also argues that because “loss” is defined

differently under its policies and the Chubb policy,9 the Chubb

policy was not exhausted by payment of “loss” as defined in the

SRCS Elite policies. This argument is largely inapplicable since

9 SRCS Elite contends that the Chubb policy defines loss as

including, inter alia, attorneys’ fees, while the SRCS Elite

policies define “loss” as sums paid in settlement or in

satisfaction of a judgment, and do not include attorneys’ fees.

See ECF No. 21-2, p. 24.

SRCS Elite owes Plaintiffs a duty to defend under the first duty

trigger provision. Regarding “other insurance,” the duty to

defend language does not reference “loss.” It merely provides

that the duty is triggered when the total applicable limits of

“other insurance” have been exhausted, which has happened in

this case. The additional requirement that the limits be

exhausted by “loss” is reserved exclusively for when there is

either applicable “scheduled underlying insurance,” or when

there is neither applicable “scheduled underlying insurance” nor

applicable “other insurance,” which is not the case here.

In that Plaintiffs have proffered the plain meaning of the

duty to defend provision, and have shown that it has been

triggered by the exhaustion of the Chubb policy, they are

entitled to judgment as a matter of law on the issue of SRCS

Elite’s duty to defend.

IV. CONCLUSION

Because the exception to the pollution exclusion in the

SRCS Elite policies creates coverage for the underlying lawsuits

and because SRCS Elite owes Plaintiffs a duty to defend, SRCS

Elite’s motion for judgment on the pleadings will be denied and

Plaintiffs’ motion for judgment on the pleadings will be

granted.

An appropriate order follows.