Case Briefs

NE High Court Weighs In On Allocation and Other Coverage Issues

The Supreme Court of Nebraska, applying state law, issued an important opinion on Feb. 5, addressing a variety of environmental coverage issues and adopting pro rata allocation of loss. Dutton-Lainson Co. v. Continental Insurance Co., No. S-09-164, 279 Neb. 365 (Neb. Feb. 5, 2010).

The Nebraska high court resolved cross-appeals by a policyholder and two of its insurers, affirming a lower court's decision and holding that: 1) the policyholder's failure to provide timely notice to one insurer about soil and ground water contamination prejudiced the insurer where the policyholder acknowledged its responsibility for contamination, performed the remediation without giving the insurer an opportunity to participate, and did not reasonably believe that further notification to the insurer would be useless; 2) the policyholder provided timely notice to the second insurer, and that insurer's subsequent denial of liability eliminated any requirement of additional notice with respect to further contamination; 3) contamination of three areas constituted one occurrence under the policies where all of the contamination shared a single underlying cause; 4) there was an occurrence within the meaning of the policies where the property damage occurred from exposure to continuous deposits of sludge or pollution, and the damage was not expected or intended by the policyholder; 5) a pro rata, time-on-the-risk allocation method was appropriate under the language of the policies, especially when the policyholder could not prove the amount of damages that resulted during the periods of coverage provided by each insurer; 6) a potentially-responsible-party (“PRP”) letter qualified as a “suit” under the terms of the policies, triggering the insurer's duty to defend; 7) the policyholder could not recover employee costs of more than $1 million for time spent on the investigation and remediation of contamination where the amount was calculated by relying on imprecise employee interviews; 8) where there were disputed and uncertain damages, the policyholder was not entitled to prejudgment interest; and 9) the policyholder was not entitled to recover attorney fees because it denied pretrial settlement offers that were larger than the final judgment amount awarded to the policyholder.

The Facts

From 1962 to 1982, the policyholder, a manufacturer, placed containers filled with solvents and sludge in local landfills. The sludge and solvents were eventually released from their containers, causing chemicals to seep into the soil and ground water at the landfill sites.

In addition, between 1948 and 1987, the policyholder spilled solvents during its regular manufacturing operations, which allowed chemicals to seep into the groundwater beneath the policyholder's operating premises and spread to adjacent property. In 1985, the EPA notified the policyholder that it was a PRP for the cost of cleaning up the contamination at the landfill sites. In 1992, the EPA informed the policyholder that it was a PRP for the contamination emanating from its operating premises. The EPA also identified a third area of contamination, and the EPA notified the policyholder that it was a PRP for the third site in 2001. Beginning in 1998, the policyholder entered into consent decrees with the EPA and performed extensive cleanup at the sites. Cleanup is expected to continue until 2017.

The policyholder was insured under various general liability policies issued by four insurers. Because two of those insurers issued the policyholder policies containing qualified pollution exclusions, they were not required to indemnify the policyholder for sums expended to defend against the EPA's investigation and to conduct the environmental cleanup. See Dutton-Lainson Co. v. Continental Insurance Co., No. S-04-1223, 271 Neb. 810 (Neb. June 23, 2006). Therefore, only the policyholder's potential recovery under the other two insurers' policies was the subject of the court's opinion.

The High Court's Decision

As noted, the Nebraska high court addressed a series of issues in its opinion. Most significantly, the Nebraska Supreme Court adopted pro rata time-on-the-risk allocation, refusing the policyholder's request that it hold each insurer jointly and severally liable for the total amount of the alleged damages. The court found that the policyholder's approach was not reasonable because it would equate liability for the entire occurrence to each policy even though the policies' coverage was issued for a limited time. The court reviewed key rulings from other jurisdictions on the allocation issue, and determined that “a pro rata, time-on-the-risk allocation satisfies the language of the policies.”

The court also affirmed the trial court's application of allocation to the time period during which the contaminants were deposited, as opposed to the estimated time of clean up.

The court also discussed a number of other points raised by the parties on appeal. Regarding notice issues, for instance, the record established that, in 1985, the policyholder first notified its insurers of its PRP designation for the landfill sites. In response, the first insurer informed the policyholder that it did not believe any “suit” within the meaning of the policy had been brought and, thus, it was premature to determine coverage.

Despite the insurer asking the policyholder to keep it “apprised of the EPA's investigation,” the policyholder never notified the insurer that it was a PRP for the contamination of the operating premises and the contamination of the third site. In fact, the insurer had no further contact with the policyholder until the policyholder filed its lawsuit in 2002. Finding this lack of notification prejudicial, the court noted that the policyholder “voluntarily entered into agreements acknowledging its responsibility for the contamination, spent significant sums to remediate, and performed the remediation without giving [the insurer] an opportunity to participate in discussions or formulate a course of action.” Moreover, the court noted that there was no evidence that the policyholder “reasonably believed that further notification to [the insurer] would be useless.”

Accordingly, the court held that the insurer was not required to provide coverage in connection with the contamination of the operating premises and the contamination of the third area.

In contrast, the court upheld a determination that the lack of further notice for the contamination of the operating premises and the contamination of the third site did not bar coverage from the second insurer. The policyholder had updated its notice to the second insurer by sending an additional letter in 1991. In response to this letter, the insurer informed the policyholder that it did not plan to take any action and denied any liability under the policy. The policyholder did not provide the insurer with any additional notice after the 1991 letter. The court explained that the insurer's denial of liability eliminated any further requirement of notice.

The court also addressed the number of occurrences at issue. The court held that the contamination of the three areas, which began in 1948 and continued until 1987, constituted one continuing occurrence under the policies because “all of the contamination was caused by the actions of [the policyholder],” and the “underlying cause of the damage was the use of [chemicals] in the manufacturing operation.”

One insurer cross-appealed the trial court's ruling that the policyholder's 1985 letter notifying the insurers of its PRP status triggered the insurer's duty to defend. The insurer argued that the PRP letter was not a “suit” under the terms of the policies, and that the policies differentiate between “claims” and “suits” and that the duty to defend applies only to suits. The court, however, affirmed the lower court's ruling, noting that the PRP letter advised the policyholder that it was immediately at risk, and that “an ordinary person would believe that the receipt of a PRP letter was in effect the commencement of a suit.”

The court also addressed other ancillary issues. In particular, the court held that the policyholder could not recover employee costs of more than $1 million for time spent on the investigation and remediation of contamination, because the policyholder's evidence of employee costs was “based on speculation and conjecture,” as the amount was derived only from a general estimate of employee costs based on imprecise employee interviews.

The court also affirmed the decision not to award the policyholder prejudgment interest under the controlling Nebraska statute because prejudgment interest is recoverable only when the claim is liquidated, and here there obviously was a dispute as to whether the policyholder was entitled to recover damages, and if so in what amount.

It also affirmed the refusal of declaratory relief for coverage of future costs, because the policyholder did not prove future expenses.

Finally, the court held that the policyholder was not entitled to attorney fees because the policyholder denied pretrial settlement offers from both insurers that were larger than the final judgments awarded to the policyholder.

Conclusion

The Nebraska high court's decision in Dutton-Lainson plows new ground under Nebraska law on a variety of issues of interest in environmental coverage law, most significantly in rejecting “all sums” or joint and several liability of insurers whose policies are triggered by ongoing contamination and adopting a pro rata time-on-the-risk allocation approach.

This month's Case Brief was written by Laura A.Foggan, Paul Dame and Jeremiah Galus. Foggan is a partner in the insurance practice and co-chair of the appellate practice of Wiley Rein LLP, where she represents insurers in coverage and other matters. Dame and Galus are associates in the firm.

NE High Court Weighs In On Allocation and Other Coverage Issues

The Supreme Court of Nebraska, applying state law, issued an important opinion on Feb. 5, addressing a variety of environmental coverage issues and adopting pro rata allocation of loss. Dutton-Lainson Co. v. Continental Insurance Co. , No. S-09-164, 279 Neb. 365 (Neb. Feb. 5, 2010).

The Nebraska high court resolved cross-appeals by a policyholder and two of its insurers, affirming a lower court's decision and holding that: 1) the policyholder's failure to provide timely notice to one insurer about soil and ground water contamination prejudiced the insurer where the policyholder acknowledged its responsibility for contamination, performed the remediation without giving the insurer an opportunity to participate, and did not reasonably believe that further notification to the insurer would be useless; 2) the policyholder provided timely notice to the second insurer, and that insurer's subsequent denial of liability eliminated any requirement of additional notice with respect to further contamination; 3) contamination of three areas constituted one occurrence under the policies where all of the contamination shared a single underlying cause; 4) there was an occurrence within the meaning of the policies where the property damage occurred from exposure to continuous deposits of sludge or pollution, and the damage was not expected or intended by the policyholder; 5) a pro rata, time-on-the-risk allocation method was appropriate under the language of the policies, especially when the policyholder could not prove the amount of damages that resulted during the periods of coverage provided by each insurer; 6) a potentially-responsible-party (“PRP”) letter qualified as a “suit” under the terms of the policies, triggering the insurer's duty to defend; 7) the policyholder could not recover employee costs of more than $1 million for time spent on the investigation and remediation of contamination where the amount was calculated by relying on imprecise employee interviews; 8) where there were disputed and uncertain damages, the policyholder was not entitled to prejudgment interest; and 9) the policyholder was not entitled to recover attorney fees because it denied pretrial settlement offers that were larger than the final judgment amount awarded to the policyholder.

The Facts

From 1962 to 1982, the policyholder, a manufacturer, placed containers filled with solvents and sludge in local landfills. The sludge and solvents were eventually released from their containers, causing chemicals to seep into the soil and ground water at the landfill sites.

In addition, between 1948 and 1987, the policyholder spilled solvents during its regular manufacturing operations, which allowed chemicals to seep into the groundwater beneath the policyholder's operating premises and spread to adjacent property. In 1985, the EPA notified the policyholder that it was a PRP for the cost of cleaning up the contamination at the landfill sites. In 1992, the EPA informed the policyholder that it was a PRP for the contamination emanating from its operating premises. The EPA also identified a third area of contamination, and the EPA notified the policyholder that it was a PRP for the third site in 2001. Beginning in 1998, the policyholder entered into consent decrees with the EPA and performed extensive cleanup at the sites. Cleanup is expected to continue until 2017.

The policyholder was insured under various general liability policies issued by four insurers. Because two of those insurers issued the policyholder policies containing qualified pollution exclusions, they were not required to indemnify the policyholder for sums expended to defend against the EPA's investigation and to conduct the environmental cleanup. See Dutton-Lainson Co. v. Continental Insurance Co. , No. S-04-1223, 271 Neb. 810 (Neb. June 23, 2006). Therefore, only the policyholder's potential recovery under the other two insurers' policies was the subject of the court's opinion.

The High Court's Decision

As noted, the Nebraska high court addressed a series of issues in its opinion. Most significantly, the Nebraska Supreme Court adopted pro rata time-on-the-risk allocation, refusing the policyholder's request that it hold each insurer jointly and severally liable for the total amount of the alleged damages. The court found that the policyholder's approach was not reasonable because it would equate liability for the entire occurrence to each policy even though the policies' coverage was issued for a limited time. The court reviewed key rulings from other jurisdictions on the allocation issue, and determined that “a pro rata, time-on-the-risk allocation satisfies the language of the policies.”

The court also affirmed the trial court's application of allocation to the time period during which the contaminants were deposited, as opposed to the estimated time of clean up.

The court also discussed a number of other points raised by the parties on appeal. Regarding notice issues, for instance, the record established that, in 1985, the policyholder first notified its insurers of its PRP designation for the landfill sites. In response, the first insurer informed the policyholder that it did not believe any “suit” within the meaning of the policy had been brought and, thus, it was premature to determine coverage.

Despite the insurer asking the policyholder to keep it “apprised of the EPA's investigation,” the policyholder never notified the insurer that it was a PRP for the contamination of the operating premises and the contamination of the third site. In fact, the insurer had no further contact with the policyholder until the policyholder filed its lawsuit in 2002. Finding this lack of notification prejudicial, the court noted that the policyholder “voluntarily entered into agreements acknowledging its responsibility for the contamination, spent significant sums to remediate, and performed the remediation without giving [the insurer] an opportunity to participate in discussions or formulate a course of action.” Moreover, the court noted that there was no evidence that the policyholder “reasonably believed that further notification to [the insurer] would be useless.”

Accordingly, the court held that the insurer was not required to provide coverage in connection with the contamination of the operating premises and the contamination of the third area.

In contrast, the court upheld a determination that the lack of further notice for the contamination of the operating premises and the contamination of the third site did not bar coverage from the second insurer. The policyholder had updated its notice to the second insurer by sending an additional letter in 1991. In response to this letter, the insurer informed the policyholder that it did not plan to take any action and denied any liability under the policy. The policyholder did not provide the insurer with any additional notice after the 1991 letter. The court explained that the insurer's denial of liability eliminated any further requirement of notice.

The court also addressed the number of occurrences at issue. The court held that the contamination of the three areas, which began in 1948 and continued until 1987, constituted one continuing occurrence under the policies because “all of the contamination was caused by the actions of [the policyholder],” and the “underlying cause of the damage was the use of [chemicals] in the manufacturing operation.”

One insurer cross-appealed the trial court's ruling that the policyholder's 1985 letter notifying the insurers of its PRP status triggered the insurer's duty to defend. The insurer argued that the PRP letter was not a “suit” under the terms of the policies, and that the policies differentiate between “claims” and “suits” and that the duty to defend applies only to suits. The court, however, affirmed the lower court's ruling, noting that the PRP letter advised the policyholder that it was immediately at risk, and that “an ordinary person would believe that the receipt of a PRP letter was in effect the commencement of a suit.”

The court also addressed other ancillary issues. In particular, the court held that the policyholder could not recover employee costs of more than $1 million for time spent on the investigation and remediation of contamination, because the policyholder's evidence of employee costs was “based on speculation and conjecture,” as the amount was derived only from a general estimate of employee costs based on imprecise employee interviews.

The court also affirmed the decision not to award the policyholder prejudgment interest under the controlling Nebraska statute because prejudgment interest is recoverable only when the claim is liquidated, and here there obviously was a dispute as to whether the policyholder was entitled to recover damages, and if so in what amount.

It also affirmed the refusal of declaratory relief for coverage of future costs, because the policyholder did not prove future expenses.

Finally, the court held that the policyholder was not entitled to attorney fees because the policyholder denied pretrial settlement offers from both insurers that were larger than the final judgments awarded to the policyholder.

Conclusion

The Nebraska high court's decision in Dutton-Lainson plows new ground under Nebraska law on a variety of issues of interest in environmental coverage law, most significantly in rejecting “all sums” or joint and several liability of insurers whose policies are triggered by ongoing contamination and adopting a pro rata time-on-the-risk allocation approach.

This month's Case Brief was written by Laura A.Foggan, Paul Dame and Jeremiah Galus. Foggan is a partner in the insurance practice and co-chair of the appellate practice of Wiley Rein LLP, where she represents insurers in coverage and other matters. Dame and Galus are associates in the firm.