Can You Find Your Gold Mine in Oklahoma? Interpreting Comprehensive Liability Insurance Policies That Include Pollution Exclusions

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1 Can You Find Your Gold Mine in Oklahoma? Interpreting Comprehensive Liability Insurance Policies That Include Pollution Exclusions LeAnne Burnett Crowe & Dunlevy, P.C. 20 North Broadway, Suite 1800 Oklahoma City, OK (405) (405) (direct) Two federal environmental laws dramatically changed the way our society and the law viewed environmental contamination. Responsibility that had never before existed was imposed on business and industry with the passage of the Resource Conservation and Recovery Act ("RCRA"), 1 42 U.S.C et seq., and the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), 42 U.S.C et seq. 2 In a nutshell, RCRA regulates and tracks the life cycle of hazardous waste making owners and operators of facilities, transporters, and generators adhere to specific requirements. CERCLA provides authority to force clean up of releases or threatened releases of hazardous substances that may endanger the public health or the environment. Liability under 1 Congress enacted RCRA to address the problems associated with the growing volume of municipal and industrial waste. RCRA amended the Solid Waste Disposal Act of CERCLA was enacted on December 11, 1980, and amended by the Superfund Amendments and Reauthorization Act ("SARA") on October 17,

2 CERCLA is without regard to fault and without regard to the age of spill or release. Moreover, remedial actions and removal actions under CERCLA tend to be expensive. Some potentially responsible parties or "PRPs" would say remediation costs are virtually unlimited. Therefore, folks who were subject to liability for pollution sought help in paying for remediation and/or defending ensuing litigation, and one of the places they looked was to their Commercial General Liability ("CGL") policy. The "pollution exclusion" is a standard exclusion clause found in CGL policies for several decades. Such exclusions were first introduced by United States insurers in 1970 as an industry response to litigation arising out of loss due to escape of pollutants into the environment. Before the pollution exclusion was introduced, insurers who wanted to avoid coverage for pollution claims had to rely upon the standard exclusions found in their CGL policies, which did not fit losses resulting from pollution very well. There are numerous iterations of pollution exclusions in CGL policies, but they generally follow one of two forms. The exclusion introduced in 1970 excluded losses that were "sudden and accidental." It is agreed that this insurance does not apply to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water, but this exclusion does not apply if such discharge, 2

3 dispersal, release or escape is sudden and accidental. 3 While there has been extensive litigation over the interpretation of various words and phrases in the exclusion, the most frequent disputes have arisen over the meaning of "sudden and accidental." The "sudden and accidental" exclusion is rarely found in policies issued today. After many court decisions interpreting "sudden and accidental" to provide coverage in situations involving the discharge of pollution over time, 4 the insurance industry introduced the "absolute pollution exclusion." The mid-1980s clause eliminated the "sudden and accidental exception." This insurance does not apply to: 1. Pollution Liability a. "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants: 1. At or from premises owned, rented or occupied by an insured; 2. At or from any site or location used by or for an insured or others for the handling, storage, disposal, processing or treatment of waste; 3. Which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for an insured or any person or organization for whom the insured may be legally responsible; or 3 Another version of the clause excludes pollution coverage except for "a sudden, unintended and unexpected happening." 4 Oklahoma's interpretation of "sudden and accidental" excludes coverage of pollution over time. See Kerr-McGee Corp. v. Admiral Ins. Co., 1995 OK 102, 905 P.2d 760, discussed infra. 3

4 4. At or from any site or location on which an insured or any contractors or subcontractors working directly or indirectly on behalf of an insured are performing operations; a. if the pollutants are brought on or to the site or location in connection with such operations; or b. if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants. b. Any loss cost, or expense arising out of any governmental direction or request that you test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. "Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. Sub-paragraphs 1 and 4(a) of paragraph a. of this exclusion do not apply to "bodily injury" or "property damage" caused by heat, smoke or fumes from a hostile fire. As used in this exclusion, a "hostile fire" means one which becomes uncontrollable or breaks out from where it was intended to be (at para. 4). This "absolute pollution" exclusion has resulted in its own body of case law. INSURANCE POLICIES AS CONTRACTS Oklahoma Statutes provide specific rules of contract interpretation. For example, a contract is to be interpreted as a whole: "The whole of a contract is to be taken together so as to give effect to every part, if reasonably practical, each clause helping to interpret the others." 15 O.S And, if possible, each part of a contract must be used to help 4

5 interpret the other parts: "The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning, unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed." 15 O.S A meaning of a contract is to be taken from its "four corners" without regard to extrinsic evidence unless the contract is ambiguous. Oklahoma law is settled on the subject of ambiguity in contracts. "The interpretation of an insurance contract and whether it is ambiguous is a matter of law for the Court to determine and resolve accordingly." Dodson v. St. Paul Ins. Co., 1991 OK 24, 812 P.2d 372, 376. Unless the insurance contract is ambiguous, it should be construed according to its terms, as is true of any other contract. Frank v. Allstate Ins. Co., 1986 OK 42, 727 P.2d 577. An insurance policy, like any other contract of adhesion, is liberally construed, consistent with the object sought to be accomplished, so as to give a reasonable effect to all of its provisions, if possible. Short v. Okla. Farmers Union Ins. Co., 1980 OK 155, 619 P.2d 588, 589; Lester v. Sparks, 1978 OK 68, 583 P.2d 1097; National Life and Accident Ins. Co. v. Cudjo, 1956 OK 305, 304 P.2d 322; County Fire Ins. Co. of Philadelphia v. Harper, 1952 OK 211, 249 P.2d 705, 707; Friend v. Southern States Life Ins. Co., 1920 OK 252, 194 P. 204 (1920). 5

6 In Wiley v. Travelers Ins. Co., 1974 OK 147, 534 P.2d 1293, 1295, the Oklahoma Supreme Court observed that: Parties to insurance contract are at liberty to contract for insurance to cover such risks as they see fit and are bound by the terms of contract and courts will not undertake to rewrite terms thereof. The construction of an insurance policy should be a natural and reasonable one, fairly constructed to effectuate its purpose, and viewed in the light of common sense so as not to bring about an absurd result. The terms of the parties' contract, if unambiguous, clear, and consistent, are accepted in their plain and ordinary sense, and the contract will be enforced to carry out the intention of the parties as it existed at the time the contract was negotiated. 15 O.S Dodson, 812 P.2d at 376. The interpretation of an insurance contract and whether it is ambiguous as a matter of law for the Court to determine and resolve. Id. Construction should not be forced or strained. Id. No provision is to be taken out of context and narrowly focused on to create and then construe an ambiguity. Id. If the insurance policy language is susceptible to two constructions, without resort to and following application of the rules of construction, then a genuine ambiguity exists. Id. at When an ambiguity exists, the contract is to be interpreted consistent with the parties intentions, and most favorably to the insured. Id. at

7 STRUCTURE OF A CGL POLICY A Comprehensive General Liability ("CGL") policy's coverage is established in its general declaration, limited by its provisions, and risks covered and excluded are identified by the policy. The policy exclusions are read seriatim, and each exclusion eliminates coverage and operates independently against the general declaration of insurance coverage and all prior exclusions by specifying other occurrences not covered by the policy. Dodson, 812 P.2d at 377, citing Paul Illinois Bankers Life Assurance Co. v. Tennison, 1949 OK 260, 213 P.2d 848; United States Fidelity and Guaranty Co. v. Walker, 1958 OK 145, 329 P.2d 852, 854. Subsequent exclusions can further limit or even remove a covered risk from the general declaration of insurance coverage. Dodson, 812 P.2d at 377, citing C.P.A. Co. v. Jones, 1953 OK 345, 263 P.2d 731; Wiley v. Travelers Ins. Co., 1974 OK 147, 534 P.2d 1293; Shepard v. Farmers Ins. Co., Inc., 1983 OK 103, 678 P.2d 250. In case of doubt, exclusions exempting certain specified risks are construed strictly against the insurer. Dodson, 812 P.2d at 377, citing Aetna Insurance Co. v. Zoblotsky, 1971 OK 20, 481 P.2d 761; Continental Casualty Co. v. Beaty, 1969 OK 89, 455 P.2d 684; American Motorist Ins. Co. v. Biggs, 1963 OK 87, 380 P.2d

8 POLLUTION EXCLUSIONS INTERPRETED BY OKLAHOMA COURTS The vast majority of the Oklahoma cases, both state and federal, that have interpreted pollution exclusions in CGL policies arose out of the liability for cleanup of the Hardage Superfund Site. HARDAGE BACKGROUND In 1972, Royal N. Hardage opened a hazardous waste disposal site near Criner, Oklahoma. The Oklahoma State Department of Health permitted the Hardage Site as an Industrial Hazardous Waste Land Disposal Facility in September Until shortly before the site closed in November 1980, the Hardage Site was the only landfill in Oklahoma licensed for disposal of industrial hazardous wastes. Between 2972 and 1980 approximately 400 companies generated over eighteen million gallons of wastes that were disposed of at Hardage. 5 Activities at the Hardage Site resulted in environmental contamination. The contamination occurred through surface runoff from the containment area, deliberate placement of wastes outside the containment area, and the escape of substances from the containment area to areas at the site that did not provide containment protection. Macklanburg-Duncan Co. v. Aetna Casualty and Surety Company, 71 F.3d 1526, 1530 (10 th Cir. 1995) 5 Hardage closed for a few months, and during that time the Oklahoma Department of Health instructed companies to send their Hazardous Industrial Wastes to the Mosely Road Landfill site. 8

9 In 1986 the EPA filed a CERCLA action against Royal Hardage and thirty-one companies who generated and disposed of waste at the Hardage landfill. Most of the defendants organized as the Hardage Steering Committee, eventually stipulated to liability under CERCLA, and sued approximately 180 third-party defendants that had disposed of waste at Hardage. OKLAHOMA INSURANCE CASES: WESTERN DISTRICT OF OKLAHOMA During the years that the defendants disposed of waste at the Hardage landfill, each company also purchased various CGL policies from several insurance companies. The relevant coverage language in each policy was substantially similar, and obligated the insurer to defend and indemnify the insured for liability claims for damages based on bodily injury or property damage caused by an occurrence. The policies defined an occurrence as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." Policies also included pollution exclusions. All three Western District of Oklahoma cases were decided on Motions for Summary Judgment. Oklahoma Publishing Company v. Kansas City Fire and Marine Insurance Company, 805 F.Supp. 905 (W.D.Okla. 1992); Macklanburg-Duncan Co. v. Aetna Casualty and Surety Company, 910 F.Supp. 548 (W.D.Okla. 1993); and Downtown Airpark, Inc. v. The 9

10 Continental Insurance Company, 1993 WL (W.D.Okla. 1993). In each case District Judge Wayne Alley held that "sudden and accidental" requires a discharge that is both abrupt and unexpected or unintended by the insured. He found that the discharges occurred over a number of years as part of the insured's disposal plan. He concluded that routine discharges over a period of years cannot be viewed as "sudden." Likewise, purposeful conduct such as sending waste to a landfill cannot be deemed "accidental" conduct. The Tenth Circuit consolidated the cases on appeal (Macklanburg- Duncan Co. v. Aetna Casualty and Surety Company, 71 F.3d 1526 (10 th Cir. 1995)), then waited to make its ruling until the Oklahoma Supreme Court considered the certified appeal of summary judgment motions in Kerr-McGee Corporation v. Admiral Insurance Co., 1995 OK 102, 905 P.2d 760. OKLAHOMA INSURANCE CASES: Kerr-McGee Corporation v. Admiral Insurance Co., 1995 OK 102, 905 P.2d 760 In the Kerr-McGee case, Kerr-McGee sued 29 of its CGL insurance carriers and excess carriers to recover the costs of pollution cleanup at nine different sites. Four of the sites were Kerr-McGee plant facilities. Five sites were where Kerr-McGee regularly disposed of its industrial waste. Each site was to be tried separately, with the Hardage Landfill site being the first scheduled for trial. The defendants provided insurance coverage from 1958 to On Motion for Summary Judgment the trial court determined that 10

11 the pollution exclusion did not bar coverage. The trial court certified its decision for immediate appeal. A number of courts had addressed the issue of whether the pollution exclusion clause is ambiguous. Holdings varied as to whether the term "sudden" is susceptible to more than one meaning. Some courts had construed "sudden" to mean unexpected, unintended, or unforeseen. See, e.g. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1092 (Colo. 1991), and other cases cited in Kerr-McGee Corporation, 905 P.2d at 762, fn. 1. That was the conclusion of the trial court in the Kerr-McGee case. Other courts had concluded that "sudden" has a temporal element that connotes abruptness or immediacy. See, e.g. Dimmit Chevrolet, Inc. v. Southeastern Fidelity Ins. Corp., 636 So.2d 700 (Fla. 1993), and other cases cited in Kerr-McGee Corporation, 905 P.2d at 762, fn. 21. The Oklahoma Supreme Court looked at the rules of contract interpretation, specifically that (1) the whole of a contract is to be taken together to give practical effect to each clause; and (2) the words of a contract are to be given their ordinary and popular meaning. Kerr-McGee Corporation, 905 P.2d at 763. The court then reasoned that the ordinary meaning of "sudden" "necessarily includes an element of time." Id. If sudden meant "unexpected or unintended" as the trial court determined, then it would add nothing to the term "accidental," which is used in 11

12 conjunction with "sudden" in the exclusion. 6 Id. The court reasoned that each term must be read as a separate condition for coverage under the policy. Id. The term "accidental" was also a matter of debate. The insurance companies argued that the term applied to the disposal of pollutants, and that intentional disposal of waste at a landfill is not "accidental." Kerr- McGee argued that the damage caused to third parties had to be accidental, even if the disposal was intentional. The court held that long term disposal of industrial waste is neither sudden nor accidental. The Oklahoma Supreme Court further held that "sudden" and "accidental" in pollution exclusion clauses are unambiguous terms, so no resort to extrinsic evidence is needed. Finally, the court held that the trial court erred in granting summary judgment to Kerr-McGee. OKLAHOMA INSURANCE CASES: TENTH CIRCUIT'S REVIEW OF WESTERN DISTRICT OF OKLAHOMA'S DECISIONS Macklanburg-Duncan Co. v. Aetna Casualty and Surety Company, 71 F. 3d 1526 (10 th Cir. 1995) was the Tenth Circuit's consolidated appeal in which it the Court waited to rule until the Oklahoma Supreme Court ruled in Kerr-McGee Corporation v. Admiral Insurance Co., 1995 OK 102, 905 P.2d 6 The Oklahoma Supreme Court had interpreted the term "accidental" in a case involving claims for attorney fees and expenses under an insurance contract. United States Fid. & Guar. Co. v. Briscoe, 1951 OK 386, 239 P.2d 754. The court defined accidental as "happening by chance or unexpectedly." The court relied on that definition when deciding the Kerr-McGee appeal. See Kerr-McGee, 905 P.2d at

13 760. The Tenth Circuit considered a single narrow issue: "whether, under Oklahoma law, the ongoing, numerous waste discharges at the Hardage Site by Double Eagle and Downtown Airpark were 'sudden and accidental' within the exception to the pollution exclusion clause of the CGL policies." Macklanburg Duncan Co., 71 F.3d at The Tenth Circuit ruled: "Kerr- McGee governs the appeals by HSC and Downtown Airpark and mandates that we affirm the district courts' entry of summary judgment in favor of the insurance companies. OTHER INSURANCE CASES Oklahoma Supreme Court: Bituminous Casualty Corp., v. Cowen Construction, Inc., 2002 OK 34, 55 P.3d 1030 (CGL pollution exclusion not limited in scope to "environmental pollution," and applied to exclude coverage for poisoning from lead released into kidney dialysis center constructed by contractor.) Tenth Circuit: Examples of Tenth Circuit cases include Quaker State Minit-Lube, Inc. v. Fireman's Fund Insurance Company, 52F.3d 1522 (10 th Cir. 1995) (Utah law) (interpretation of sudden and accidental) and Broderick Investment Company v. The Hartford Accident & Indemnity Company, 954 F.2d 601 (10 th Cir. 1992) (Colorado law) (interpretation of "discharge," and "arose out of." 13