James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Insurance Co.

LEIBSON, Justice,

concurring in part/dissenting in part.

I agree with the main premise in the Majority Opinion. The trial court erred when it decided to grant summary judgment on grounds “there was no occurrence and therefore no coverage.” The case should be reversed and remanded on this issue.

But, respectfully, the Majority Opinion paints with too broad a brush with respect to some of its reasoning, which obliges me to state my views separately and to dissent from certain portions of the Opinion.

As a general proposition, where not otherwise excluded by a specific pollution exclusion clause, the term “occurrence” as used in the standard Comprehensive General Liability (“CGL”) policy is broad enough to include environmental pollution liability. When adopted in 1966 the new CGL revised standard policy changed from accident-based coverage to occurrence-based coverage and defined “occurrence” so that it is no longer necessary for the event causing the injury to be sudden or accidental in character. Injuries which take place over a long period of time, which are cumulative in nature, even though not accidental (so long as the results are not intentional), are covered by the language of the insurance contract. As stated in Mealey’s Litigation Reports, Ins., Vol. 4: No. 28, Oct. 30, 1990, p. 27:

“[Tjhe fortuity of the accident or occurrence is to be assessed from the standpoint of the insured and not the injured party.... The unintended deleterious effects of pollution will be covered even though the result of intended conduct unless it can be shown that the effects were either expected or intended.... It would be a rare case ... where a court would find that an insured intended the harm or expected it.”

The policy language defines an “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in ... property damage neither expected nor intended from the standpoint of the insured.” The trial court, and the Court of Appeals, have misinterpreted the phrase “neither expected nor intended from the standpoint of the insured.” From its inception, the 1966 “revised standard comprehensive general liability insurance policy was meant to cover injuries and damage alleged against a policyholder unless the policyholder intended the damage that in fact happened.” See Anderson & Matthews, Winning the ‘Expected, or Intended’ Shell Game, Risk Management, Dec. 1988, and authorities quoted therein. Thus, for insurance indemnity purposes the insured’s act may be intentional but it is not excluded as “intended or expected” unless the insurer proves that the purpose or result of the act, as contrasted with the act itself, is intended or expected. As stated long ago by Justice Benjamin Cardozo in Messersmith v. American Fidelity Co., 232 N.Y. 161, 165 , 133 N.E. 432 (1921):

“Injuries are accidental or the opposite for the purpose of indemnity according to the quality of the results rather than the quality of the causes.”

CERCLA contemplates imposing cleanup and response costs upon environmental polluters without regard to whether the subsequent environmental pollution was even foreseeable, much less specifically in *282 tended. It makes no sense to place environmental pollution outside the scope of a covered “occurrence.” Therefore, I agree that unresolved factual issues relating to the insured’s subjective intent and expectation precluded summary judgment on this point in the case.

Further, I agree that the standard CGL policy covers all hazards of liability loss (other than automobile) without regard to whether the hazard was of a kind recognized as a basis for liability during the policy period. Therefore, the standard CGL policy covers a new liability created by legislation enacted after the policy period, as is the case here with the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), 42 U.S.C. § 9601 et seq., if the new liability otherwise qualifies as within the coverage. I think this is a big “if” so far as CERCLA is concerned for reasons I will enumerate.

A decision that environmental pollution may be an “occurrence” within the meaning of the policies in question is only a beginning to the present controversy; it does not dispose of it. An equally important consideration, one never considered by the trial court because it never got past the definition of “occurrence,” is whether a CERCLA clean-up order, issued or threatened, qualifies under an acceptable definition of what will constitute “property damage” under a CGL policy.

A footnote in the Court of Appeals’ Opinion explains the present state of this case as follows:

“Appellee insurers actually defended against this action on four grounds. They alleged not only (1) that the pollution damage was expected or intended from the appellant’s standpoint and hence, that it was not a covered ‘occurrence,’ but also (2) that the CERCLA claims did not involve sums which appellant was legally obligated to pay as ‘damages’ as required by the policy, (3) that by a separate ‘Pollution Exclusion Clause’ the policies excluded coverage for a gradual pollution such as this and finally, (4) that appellant failed to give them due and timely notice of its claims as required by the policies. As the trial court determined there was no covered ‘occurrence,’ it did not address the validity of appellees’ remaining defenses. Consequently, this opinion will only deal with the propriety of the trial court’s limited decision as to the ‘occurrence’ issue, and not with the validity of appel-lees’ remaining defenses.”

The Court of Appeals affirmed the trial court on the one issue underlying its summary judgment, which we have reversed. Therefore, it must be pointed out, and it should be understood, that the three remaining issues are revived in the present posture of this case, and, accordingly, the trial court must deal with these issues upon remand.

In an article by Stephen G. Jeffery, Indemnification of Super Fund Response Costs, Journal of Missouri Bar (March 1989), p. 110, the author states:

“In an insurance context, the term ‘damages’ refers to legal damages and does not include equitable monetary relief.... ‘Damages,’ as distinguished from claims for injunctive or restitutionary relief, includes only payments to third persons where those persons have a legal claim for damages....”

The Jeffery article then points out that “in resolving the question whether cleanup costs are considered damages under state law, the cases are divided.” It cites Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325 (4th Cir.1986), holding Hazardous Substance Superfund (“Superfund”) response costs represent only an economic loss to the environmental polluter as opposed to damages for injury or destruction of tangible property covered by CGL insurance; Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348 (4th Cir.1987), holding that under Maryland law the reimbursement of response costs amounts to equitable relief, a form of relief not damages in the legal sense; and Continental Ins. Co. v. Northeastern Pharmaceutical & Chemical Co., Inc. (NEPACCO), 842 F.2d 977 (8th Cir. 1988), cert. denied sub nom. Missouri v. Continental Insurance Companies, et al., 488 U.S. 821 , 109 S.Ct. 66 , 102 L.Ed.2d 43 *283 (1988), also denying coverage on grounds that federal and state government claims for Superfund clean-up costs are not “damages” and the insurers were not liable under their CGL policies. On the other hand, Jeffery also cites three cases deciding that “damages” includes clean-up costs: New Castle County v. Hartford Accident & Indemnity, 673 F.Supp. 1359 (D.Del.1987), Township of Gloucester v. Maryland Casualty Co., 668 F.Supp. 394 (D.N.J.1987), and Fireman’s Fund Ins. Co. v. Ex-Cell-O Corp., 662 F.Supp. 71 (E.D.Mich.1987). These courts reasoned that damage to the environment resulted in property damage, that the government has a property interest in the environment on behalf of its citizens, and that CGL insurance coverage therefore applies in this situation.

The point is that this “damages” question remains an important, unresolved issue in this case. Is the Superfund order no more than a government mandate to the insured to clean-up its own property (and/or neighboring property) because otherwise the government will do it for the insured and then require restitution or reimbursement of costs, or does the type of relief sought here amount to “damages” within the policies’ coverage?

CERCLA provides for recovery from the owner and operator of a facility, or from the previous owner and operator at the time of disposal of any hazardous substance, for three principal types of response costs ( 42 U.S.C. § 9607 (a)):

1) Costs of removal or remedial action incurred by the government, state or federal;

2) Necessary costs of response incurred by any other person; and

3) Damages for injury to, destruction of, or loss of natural resources.

As I understand the facts of this case: (1) EPA action has not yet reached beyond a clean-up order as to the Live Oak, Florida site, leaving the Brown Foundation with the option to “clean-up” there at its own costs rather than to pay response costs, and (2) there are letters from federal and state authorities regarding the Louisville, Kentucky and Brownville, Alabama sites warning of the imminence of similar cleanup orders for these two sites. If this is a fair characterization of the state of the record, whether the response costs which will follow qualify as “damages” within the meaning of a CGL policy coverage is indeed a serious and complex question which must be further developed and addressed at the trial court level before our Court could begin to consider it.

Next, I believe the Majority Opinion has misinterpreted and misapplied Cincinnati Ins. Co. v. Vance, Ky., 730 S.W.2d 521 (1987), in this case, and I dissent from so much of our holding as directs the trial court on remand to “require the insurers to pay for defense and indemnity unless they can prove that the insured subjectively expected or intended the property damage.” The insurers should be required “to pay for defense and indemnity” only if the final judgment in this declaratory judgment action establishes all of the elements necessary for policy coverage in favor of the insured.

Certainly I agree with the Majority Opinion that the insurance contract imposes on the insurer not only a duty to indemnify, but also a separate and equally important duty to defend. However, neither duty arises unless the claim against the insured falls within the policy coverage. This is the message of Cincinnati Ins. Co. v. Vance, supra, and, indeed, it seems so obvious that it should require no citation of authority. Of course I agree that an insurer must defend a claim allegedly within the policy coverage, and must do so even though the particular claim is false or fraudulent. Of course I agree that an insurer who undertakes the defense of the insured must proceed in good faith and cannot withdraw in circumstances where to do so would unfairly prejudice the insured. But none of these principles deny the insurer the right to make an independent judgment that there is no coverage and to refuse to provide a defense regardless of the allegations against the insured where the insurer can prove the policy does not *284 apply. 1

But all of these propositions put together miss the point. The Majority Opinion mis-characterizes the Vance case as having only “decided the separate question of whether an insurer’s breach of duty to defend estops it from later litigating its obligation to indemnify.” There is nothing in Vance to suggest there is a duty to defend where there is no policy coverage. Both obligations, the duty to defend and the duty to indemnify, exist only where there is coverage. Vance states:

“However, we disagree with the proposition that the allegations of a complaint against a putative insured compel a defense even where no coverage exists, or that an insurance company that rightfully elects to deny coverage and provides no defense is thereafter estopped from litigating the coverage issue.” [Emphasis original.] 730 S.W.2d at 523 .

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“The essence of our holding is that the coverage question will turn on the true facts as judicially determined and not on the claims of either party, or the allegations of the complaint against the putative insured. The insurance company may change this result by so acting as to create an estoppel, but its decision to deny coverage and the duty to defend, and to take no action, promptly communicated so that the putative insured will suffer no prejudice in making his own defense if he wishes to do so, does not cause an estoppel.” Id. at 524 .

In the present case we are told that one of the insurers should be liable at the least, regardless of coverage, to the extent that this insurer defended under a so-called “reservation of rights.” But we are also told that this reservation of rights expressly provides that the insurer would bear no costs of defense if there is in fact no policy coverage. The agreement to provide a defense under a reservation of rights is an agreement separate and apart from the insurance contract. It is not a decision made unilaterally by the insurer. Neither party is obliged to enter into this arrangement, and the obligations under a reservation of rights are those expressed and limited by its terms.

In my view of this case, the insurers owe both a duty to defend and a duty to indemnify, coextensively, unless the insurers can prove there is no coverage or unless, because of some reason related to bad faith and estoppel, the duty to defend should be imposed even though no coverage exists.

Thus, the threshold question here is whether there is coverage under the CGL policies at issue, a declaratory judgment question yet to be resolved. If upon remand it is determined that there is no coverage, there should be no liability for defense costs unless it is for some reason which has yet to be identified.

REYNOLDS, J., joins this opinion concurring in part/dissenting in part.

. If an insurer exercises such a right and there is a subsequent determination that there is indeed coverage, the insurer will be required to pay the insured for all of the consequences of its failure to defend.