Hecla Mining Co. v. New Hampshire Insurance Co.

Justice MULLARKEY

dissenting:

I respectfully dissent from the majority’s opinion. I do not believe that this is an appropriate case in which to determine the insurers’ duties to defend based solely on the allegations of the underlying complaints. Although the insurers filed this declaratory judgment action, this case is before us as a result of Hecla’s motion for summary judgment. I would reverse the trial court order granting Hecla’s motion for summary judgment because dispositive issues of fact remain to be resolved before a court can decide whether the insurers have duties to defend in this ease.

On remand, the trial court would have discretion either to proceed with discovery in the declaratory judgment action and to resolve the issue of the insurers’ duties to defend or to hold the declaratory action in abeyance until the underlying claim against *1093 Hecla is resolved. Under the first approach, the trial court could permit the parties to proceed with discovery to develop a more complete factual record which will enable the trial court to determine whether the damages from Hecla’s alleged releases constitute an occurrence within the insurance policies and, if so, whether the releases fall within the pollution exclusion clauses of the policies. If, in the alternative, the trial court held the declaratory action in abeyance, I would require that Hecla be provided with a defense to the underlying claim until the underlying claim is resolved. Then the insurers could seek reimbursement for defense costs along with a determination of their duties to defend and to indemnify Hecla.

I.

I acknowledge that the general rule for determining an insurer’s duty to defend requires examining the allegations of the underlying complaint in comparison with the terms of the insurance policy. See, e.g., Lee v. Aetna Casualty & Surety Co., 178 F.2d 750, 751 (2d Cir.1949) (“[I]t is the claim which determines the insurer’s duty to defend; and it is irrelevant that the insurer may get information from the insured, or from anyone else, which indicates, or even demonstrates, that the injury is not in fact ‘covered.’ ”); Travelers Indent. Co. v. Dingwell, 414 A.2d 220, 227 (Me.1980) (insurer had duty to defend because the complaint “disclose[d] a potential for liability within the coverage and contain[ed] no allegation of facts which would necessarily exclude coverage.”) (emphasis in original); Technicon Electronics Corp. v. American Home Assurance Co., 74 N.Y.2d 66, 78 , 544 N.Y.S.2d 531, 533 , 542 N.E.2d 1048, 1050 (1989) (“The duty to defend insureds ... is derived from the allegations of the complaint and the terms of the policy.”).

Many cases, however, have held that an insurer’s duty to defend is determined based on evidence gained by looking beyond the allegations of the complaint. See, e.g., American Motorists Ins. Co. v. General Host Corp., No. 88-1503, — F.2d - (10th Cir. March 21, 1991) (Westlaw 35967) (concluding, based on “extensive findings of fact in [an underlying case] indicating that the pollution at issue ... was intended by defendants,” that the pollution was not “accidental” and granting insurer’s motion for summary judgment that it did not have a duty to defend or indemnify); Great Lakes Container Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pennsylvania, 727 F.2d 30 (1st Cir. 1984) (“Under New Hampshire law, the complaint and the policy alone may be sufficient for a determination of no coverage. Independent evidence, of course, may be needed if the complaint in the underlying action does not on its face establish lack of coverage.”) (citations omitted); Atlantic Mut. Fire Ins. Co. of Savannah v. Cook, 619 F.2d 553, 555 (5th Cir.1980) (“[I]n a declaratory action to determine an insurer’s duty to defend, the court may take evidence for the purpose of deciding the insurer’s duty to defend in this regard, where the facts alleged in the [underlying] petition are sufficient to establish ... liability on the part of the insured but are silent as to the facts or characterization thereof relied upon for a policy exclusion.”) (construing Alabama law); Boyce Thompson Institute for Plant Research, Inc. v. Insurance Co. of N. Am., 751 F.Supp. 1137 (S.D.N.Y.1990) (denying summary judgment on the issue of an insurer’s duty to defend, despite controlling authority that the duty to defend is determined by allegations of the underlying complaint, because further factual development was warranted to determine whether damage, as alleged in the complaint, occurred while the premises were being used as contemplated by the policy); American States Ins. Co. v. Maryland Casualty Co., 587 F.Supp. 1549, 1553 (E.D.Mich.1984) (declaratory judgment action by insurer where, despite state authority that the duty to defend is determined based on allegations of the complaint, court looked to “subsequent discovery and testimony at trial” to discern the “continuous nature of the insured’s dumping” and held that the insurer had no duty to defend or indemnify); Kepner v. Western Fire Ins. Co., 109 Ariz. 329 , 509 *1094 P.2d 222 (1973) (holding, despite authority for the general proposition that the duty to defend is determined based on the allegations of the complaint, that an insurer had no duty to defend where the underlying claim was covered by the policy based on the facts pleaded in complaint but other facts not appearing in the complaint excluded coverage); Barmet of Indiana v. Security Ins. Group, 425 N.E.2d 201 (Ind. Ct.App.1981) (holding, based on factual determinations made by trial court in declaratory judgment proceeding, that insurer had no duty to defend because discharges were not sudden and accidental); Bituminous Casualty Corp v. Bartlett, 307 Minn. 72 , 240 N.W.2d 310 (1976) (holding, based on deposition which revealed that defective materials were used and construction was contrary to workmanship standards, that insurer had no duty to defend because damages should have been expected by the insured); Transamerica Ins. Co. v. Sunnes, 77 Or.App. 136 , 711 P.2d 212 (1985) (insurer did not have duty to defend or indemnify in case submitted to the court on parties’ stipulation of facts). See also City of Johnstown v. Bankers Standard Ins., 877 F.2d 1146 (2d Cir.1989) (“[W]e hold that the insurers did not meet their burden of showing that they had no duty to defend the City in the CERCLA action. This is so whether that duty is measured against the underlying CERCLA complaint alone or against the record as a whole.”) (citations omitted) (emphasis added).

Several rationales have been offered for looking beyond the allegations of the underlying complaints to determine whether an insurer has a duty to defend. Two of these rationales are summarized well in Kepner, 109 Ariz. at 331 , 509 P.2d at 224 : (1) under modern pleading rules, the complaint serves a notice function and is framed prior to discovery which crystallizes the facts of the case; and (2) in many cases, proof of alleged facts will not determine the obligation of the insurer under the policy.

Both of these rationales are present in this case. Both the underlying CERCLA complaint and the third-party complaint in this case merely served notice functions. The third-party complaint also was framed prior to discovery, before the third party complainants could know facts that would permit more specific allegations. 1

Moreover, because the complaint against Hecla merely notified Hecla of a strict liability claim under CERCLA, the complaint’s allegations did not need to specify either that Hecla intended or expected to pollute or that alleged releases were not sudden and accidental. As the majority notes, any party with an ownership interest in the site responsible for the release of contaminants can be held strictly liable under CERCLA regardless of fault or intent. Maj. op. at 1085, n. 1. See also 42 U.S.C. § 9607 . Thus, there is no need for the third party to allege facts in its complaint concerning the insured’s intent which, if proven, would result in a denial of coverage. It is immaterial for purposes of liability under CERCLA whether pollution damage was unexpected or unintended or whether alleged releases were sudden and accidental.

In addition, third-party complaints were filed against more than 200 other defendants in this case. It is entirely implausible to expect the third-party complainants to have sufficient knowledge to allege the intent of more than 200 defendants and the nature of those defendants’ alleged releases. The naming of so many defendants in the third-party complaint in this case, however, is a necessary result of CERCLA. CERCLA is designed to require defendants to seek contribution from the potential myriad of other defendants who also may be held strictly liable for the pollution or contamination at issue. See R. Findley & D. Farber, Environmental Law 183 (1988) (“[Under CERCLA], joint and several liability is the general rule. The government thus is relieved of the obligation to join all *1095 potentially responsible parties (PRPs) and to prove their individual contributions to the hazardous waste sites. The burden of proving divisibility of harm is on the defendant seeking to limit his liability. In this situation, the subject of contribution among PRPs is of great importance, especially to those against whom the government initially chooses to proceed for recovery of response costs.”). This makes the determination of an insurer’s duty to defend based on allegations in a third-party complaint seeking contribution under CERCLA particularly inappropriate.

The second rationale from Kepner also applies to this case. Because CERCLA is a strict liability statute, proof of the alleged facts required to establish the liability of Hecla will not determine the obligation of the insurers under the policies at issue. It is not necessary for the third-party complainants to establish whether any pollution damage was unexpected or unintended, or whether any alleged releases were sudden and accidental, to establish Hecla’s liability. Mere ownership during relevant time periods would suffice to establish liability. 2

II.

The facts of this case illustrate the peril of always determining an insurer’s duty to defend based solely on the allegations of the complaint. Defense of CERCLA actions can be extremely costly. Thus, Industrial Indemnity took the step of filing a declaratory judgment action to determine its duty to defend and indemnify and New Hampshire intervened in the action. Rather than proceeding with discovery to determine the two insurers’ duties to defend or indemnify, however, Hecla refused to answer interrogatories and produce documents as requested by Industrial Indemnity and New Hampshire, citing the rule that an insurer’s duty to defend is determined based on the allegations of the complaint. Hecla’s Motion for a Protective Order; Hecla’s Opposition to Plaintiff’s Motions to Compel and For An Extension of Time. 3 Hecla moved for summary judgment, relying on the same rule. The majority then resolves all questions of coverage in favor of Hecla even though Hecla moved for summary judgment and even though Hecla refused to cooperate with discovery to develop facts revealing whether Hecla’s conduct brings the claim within the insurance policies and exclusions in this case. No case has gone so far in precluding an insurer from proving that it had no duty to defend.

III.

Colorado has approved of the use of declaratory judgment actions brought by the insurer to determine the insurer’s duty to defend prior to the trial of the underlying action. Troelstrup v. Dist. Court, 712 P.2d 1010 (Colo. 1986). In Troelstrup , we said:

*1096 It is beyond dispute that an insurance company has the right to seek a declaration of its rights and duties under a policy of insurance.... Resolution of the issue as framed in the declaratory action will result in a determination of [the insurer’s] duty to defend [the insured] in the underlying ... action. The existence or nonexistence of this duty “is a proper and sufficient ground for invoking the jurisdiction of the courts under the declaratory judgment act, and presents a justiciable controversy.”

Troelstrup, 712 P.2d at 1012 (citations omitted). We also have held that it was not an abuse of the trial court’s discretion to delay a declaratory judgment action on an insurer’s duties to indemnify and defend until after the trial of the underlying action. Hartford Ins. Group v. Dist. Court, 625 P.2d 1013, 1018 (Colo.1981).

In both Troelstrup and Hartford Ins. Group , we emphasized the discretion of the trial court with respect to declaratory judgment actions. Troelstrup, 712 P.2d at 1012 ; Hartford Ins. Group, 625 P.2d at 1016 . In addition, the trial court in Hartford Ins. Group , where we approved of the delay of the declaratory proceeding until after trial of the underlying action, found that the pleadings in the underlying action “clearly indicate[d] a duty to defend.” Hartford Ins. Group, 625 P.2d at 1016 . Conversely, we pointed out in Troelstrup that “the nature and character of the alleged facts giving rise to [the complainant’s] ... case established] a reasonable likelihood that the alleged tortious conduct of [the insured] [was] excluded from coverage.” Troelstrup, 712 P.2d at 1012 . Finally, in both cases we compared the prejudice to the respective parties, including the burden on the insured in defending the declaratory action on the issue of coverage and the burden on the insurer in defending the underlying claim. Troelstrup, 712 P.2d at 1012-13 ; Hartford Ins. Group, 625 P.2d at 1016-17 .

Colorado also has approved of factual determinations in such declaratory judgment actions. Section 13-51-113 of the Declaratory Judgment Act provides as follows:

When a proceeding under this article involves the determination of an issue of fact, such issue may be tried and determined in the same manner as issues of facts are tried and determined in other civil actions in the court in which the proceeding is pending.

See also Baumgartner v. Schey, 143 Colo. 373, 378 , 353 P.2d 375, 377 (1960) (authorizing trial by jury of disputed questions of fact in declaratory judgment proceedings where “the action in which declaratory relief is sought would have been an action at law had it been permitted to mature without the intervention of declaratory procedure.”). 4 Colorado’s Declaratory Judgment Act thus contemplates that contracts will be interpreted in light of facts determinable at the time. Cf. McDonald’s Corp. v. Rocky Mountain McDonald’s, Inc., 42 Colo.App. 143, 145 , 590 P.2d 519, 521 (1979) (“Although the Uniform Declaratory Judgments Law and C.R.C.P. 57(e) provide that a contract may be interpreted prior to breach, these provisions are inapplicable where the dispute requires an interpretation in light of extrinsic facts which are not yet determinable.”) (citation omitted) (emphasis added). Finally, it is settled in Colorado that where a party moves for summary judgment in a declaratory judgment proceeding determining the scope of coverage under an insurance policy, “the party moving for summary judgment has the burden of demonstrating ‘clearly the absence of any genuine issue of fact’ in order to prevail.” O’Herron v. State Farm Mut. Auto. Ins. Co., 156 Colo. 164, 172 , 397 P.2d 227, 231 (1964). See also Boyce Thompson Institute for Plant Research, Inc., 751 F.Supp. at 1144 (“[Insured’s] motion for summary judgment [with respect to insurer’s duty to defend] must be denied as *1097 premature because a factual question exists which further discovery may resolve.”).

IV.

The cost and duration of declaratory proceedings to determine an insurer’s duty to defend can vary greatly. In some cases, the complaint and underlying facts dictate clear results. In other cases, resolution is less clear. The burden and the potential prejudice to the parties in determining the duty to defend before or after resolution of the underlying claim also will vary between cases. Thus, in view of the trial court’s substantial discretion with respect to declaratory judgment actions, I would permit the trial court to decide in this case whether currently to proceed with further discovery to find facts necessary to resolve the insurers’ duties to defend or to postpone resolution of the declaratory judgment action until after the underlying claim is resolved.

In making such a determination, the trial court can weigh the relative prejudices and burdens on the insured and the insurers. If the trial court finds that resolution of a declaratory judgment action prior to the underlying action would not unduly prejudice the insured, the trial court may order immediate resolution of the declaratory judgment action. On the other hand, if the trial court concludes that litigating the declaratory judgment proceeding prior to the underlying action would overly prejudice the insured, either because of the cost and duration of the litigation, or out of concerns of estoppel in the underlying action, the trial court may postpone resolution of the declaratory judgment action until after the underlying proceeding is resolved.

I also would hold that, in the event the trial court decided to postpone resolution of the declaratory proceeding, the insurers would be required to provide Hecla with a defense of the underlying action but that the insurers may seek reimbursement for their defense costs after the underlying action is resolved. 5 By requiring an insurer to provide the defense (although subject to reimbursement), we ensure that the insured does not bear the burden of providing its own defense. The insured also will not be forced to reimburse the insurer for costs of the defense unless the insurer can prove that the insured’s conduct was outside the scope of the policy. This comports with reasonable expectations of both the insured and the insurer. In this case, for example, Hecla could not reasonably expect to be provided with a defense to intentional conduct that clearly falls outside the policy’s coverage.

In addition, the burden placed on the insured in defending against a potential claim by the insurer seeking reimbursement for defense costs after the underlying action is much less than the burden on the insured where the insured is required to establish the insurer’s duty to defend prior to resolution of the underlying action. The parties will have the benefit of further pleadings, discovery, and, in some cases, trial records and findings, on which they can rely to help determine factual issues relating to the duty to defend. The resources necessary to litigate the issue of the duty to defend after the resolution of the underlying claim may therefore be reduced greatly. It also is likely that, after resolution of the underlying claim, the insured and insurers will be involved in a declaratory judgment action regarding the insurer’s duty to indemnify. 6 The issue of the insurer’s duty to defend can be resolved in the same declaratory proceeding. Thus, it is much less of a burden on an insured to litigate the issue of an insurer’s duty to defend after resolution of the underlying action while simultaneously litigating the issue of the duty to indemnify than it is to litigate the duty to defend *1098 issue in a separate action prior to resolution of the underlying action.

V.

The result reached by the majority can be expected where a court too rigidly adheres to the rule of determining an insurer’s duty to defend based on the allegations of the underlying complaint regardless of the type of claim asserted in the underlying complaint, the insured’s conduct in the declaratory judgment proceeding, or who moved for summary judgment. In my opinion, however, this result unfairly prejudices the insurers and rewards evasive tactics by the insured. The trial court order granting Hecla’s motion for summary judgment should be reversed.

On remand, the trial court can decide, within its discretion, whether to proceed with discovery so the trial court can make the factual findings necessary to decide whether New Hampshire and Industrial Indemnity have a duty to defend, or, in the alternative, to hold the declaratory judgment proceeding with respect to the insurers’ duties to defend in abeyance until the underlying claim is resolved. In the latter situation, I would require the insurers to provide Hecla with a defense in the underlying action subject to reimbursement pending resolution of the insurers’ duties to defend in a declaratory proceeding following resolution of the underlying claim. 7

Accordingly, I respectfully dissent.

ROVIRA, C.J., and KIRSHBAUM, J., join in this dissent.

. I do not believe that a complaint that merely alleged "intentional" or “knowing” discharges, for example, would remove an insurer’s duty to defend based on those allegations. Despite such allegations, an insured might be able to prove that its conduct fell within the terms of the policy, thus creating the insurer’s duty to defend.

. The chance that facts determining the insurers’ duty to defend would be proved in the underlying CERCLA action is further reduced by various provisions of CERCLA which are designed specifically to encourage settlements. See, e.g., R. Findley & D. Farbes, Environmental Law 186 ("[S]ection 122(a) directs that '[w]hen-ever practicable and in the public interest,’ settlement agreements should be sought in order to expedite effective remedial actions at superfund sites and to minimize litigation. Section 122(e) includes a new procedural element designed to facilitate agreements among PRPs. It calls for the President to prepare a 'non-binding preliminary allocation of responsibility’ (NBAR), allocating percentages of the total response costs at a site among the PRPs, after completion of a 'remedial investigation and feasibility study.' ’’). The fact that the statute is designed to foster settlements reduces further the chance that a determination of the intent, expectedness, suddenness or accidental nature of alleged damages or discharges would be determined in the underlying CERCLA case.

. Cf. Boyce Thompson Inst. for Plant Research, Inc., 751 F.Supp. at 1144 (“Coloring our analysis [regarding the denial of insured’s motion for summary judgment with respect to the insurer’s duty to defend] is the fact that discovery [has not concluded]. Thus, evidence which could resolve these questions [with respect to the insurer’s duty to defend] could very well emerge in the near future now that the issues have been focused.”). See also Kepner, 109 Ariz. 329, 331 , 509 P.2d 222, 224 (one rationale for looking beyond the allegations of the complaint to determine an insurer’s duty to defend is that "the complaint serves a notice function and is framed before discovery proceedings crystalize the facts of the case.") (emphasis added).

. We also looked beyond the allegations of the complaint to support our approval of the use of the declaratory judgment proceeding prior to the trial of the underlying action in Troelstrup. Troelstrup, 712 P.2d at 1012 ("Moreover, the pleadings produced subsequent to the complaint arguably supported [the underlying complainant’s] actions.”).

. Because the majority holds in this action that the insurers have a duty to defend, the insurers apparently cannot seek reimbursement for the costs they incur in defending Hecla in the underlying CERCLA action.

. This most likely Will be the situation in the present case. The majority correctly holds that "[a]ny determination of whether Industrial [Indemnity] or New Hampshire have a duty to indemnify Hecla is premature, and should not be made until the underlying claims are resolved.” Maj. op. at 1086 n. 5.

. The issue of whether the insurers would be involved in a conflict of interest requiring them to provide independent counsel, possibly of Hecla’s choosing, or to obtain Hecla's consent to allow the insurers to conduct the defense is not before us. I would therefore leave this issue to the trial court to resolve.