11th Circuit Holds Pollution Exclusion Applies to Carbon Monoxide Poisoning

In its recent decision in Scottsdale Insurance Co. v. Pursley, 2012 U.S. App. LEXIS 17437 (11^th Cir. Aug. 20, 2012), the United States Court of Appeals for the Eleventh Circuit, applying Georgia law, had occasion to consider the application of a total pollution exclusion in a general liability policy to an underling claim involving fatal inhalation of carbon monoxide.

Scottsdale insured Richard Pursley, a boat mechanic, under a general liability policy for liabilities arising out of his boat engine repair business.  It was alleged in the underlying wrongful death lawsuit that Pursley negligently performed repairs on plaintiff’s boat, which allowed for exhaust from an onboard generator to enter the boat’s engine room and ultimately into other parts of the boat, including the sleeping quarters.  One night following Pursley’s repairs, the plaintiff turned on the generator to operate the boat’s air conditioner, and then went to sleep.  He died that night of carbon monoxide poisoning.  Scottsdale denied coverage to Pursley in the subsequent wrongful death lawsuit on the basis of its policy’s total pollution exclusion, and commenced a declaratory judgment action against Pursley and the underlying plaintiff.  The United States District Court for the Northern District of Georgia ruled in favor of Scottsdale.

On appeal, the underlying plaintiff argued, among other things, that the lower court’s application of the pollution exclusion ignored the historical purpose of the exclusion as well as Georgia public policy.  The Eleventh Circuit, however, observed that in Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008), the Georgia Supreme Court held that the pollution exclusion applied to a carbon monoxide poisoning claim arising out of the insured’s maintenance of a rental house.   Specifically, the Reed court rejected the insured’s contention that the pollution exclusion is limited to matters considered traditional environmental pollution.  Thus, finding the underlying facts analogous to those in Reed, the Eleventh Circuit held that the exclusion applied to bar coverage.

California’s Supreme Court Addresses Trigger of Coverage and Stacking of Limits

By decision dated August 9, 2012, the Supreme Court of California handed down its long-anticipated holding in State of California v. Continental Insurance Company, 2012 Cal. LEXIS 7324, a ruling that now further defines California law concerning trigger of coverage, allocation of loss, and stacking of policy limits in matters involving continuous or progressive loss.

The State of California decision relates to insurance coverage for environmental contamination emanating from the Stringfellow Acid Pits waste site, which had been operated by the State from 1956 through 1972.  The insurance coverage dispute involved the State’s right to coverage under excess general liability policies issued during the period 1964 to 1976.  The State estimated site remediation costs could reach $700 million.  Each of the State’s insurers had policies requiring them “to pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law … for damages … because of injury to or destruction of property, including loss of use thereof.”  Relevant to the State of California decision was a trial court ruling that each of the insurers on the risk during the period 1964 to 1976 was liable for the total amount of the State’s loss, subject to its particular policy limits.  The court based its ruling on the “all sums” language in the policies.  The trial court further held, however, that the State could not recover insurance proceeds in each policy period, nor could it stack policy limits across multiple periods.  In other words, the trial court held that the State was confined to a single policy period in which to recover the entire loss.  On appeal, the California Court of Appeal reversed the lower court’s ruling with respect to stacking of policy limits, allowing the State to recover insurance proceeds in multiple policy years.

On appeal, the Supreme Court first addressed the issue of trigger of coverage, looking to its decisions in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4^th 645 (1995) and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4^th 38 (1997).  These decisions, noted the court, addressed issues of continuous or progressive damage happening during several policy periods.  Montrose, explained the court, articulated the general rule that as long as there is any damage during the policy period, i.e., an occurrence, then each insurer’s indemnity obligation persists until the loss is complete or terminates.  Aerojet, in turn, set forth the “all sums” rule that any insurer on the risk at the time of a continuous or progressive loss is obligated to pay the entire loss, not just the loss limited to the insurer’s specific policy period.  The State of California court held that while these decisions arose in the context, they also apply in the context of the insurers’ respective duties to indemnify.  In doing so, the court rejected the insurer’s argument that they should only be responsible for the loss that happened during their respective policy periods.  The court found no justification for a pro rata allocation methodology favored by the insurers, concluding that the phrase “all sums” in the policies’ respective insuring agreements required the insurers to pay all amounts for which the insured became legally liable, not just for property damage happening during their respective policy periods.  As the court stated:

We therefore conclude that the policies at issue obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy as “on the loss.”  The coverage extends to the entirety of the ensuing damage or injury and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.  (Internal citations omitted)

Turning to the issue of stacking of policy limits, the court noted the potential for a shortfall in insurance proceeds if the insured is limited to a recovering proceeds of only a single policy period.  Stacking limits across multiple policy periods, the court observed, avoids this problem:

The all-sums-with-stacking indemnity principle properly incorporates the Montrose continuous injury trigger of coverage rule and the Aerojet all sums rule, and “effectively stacks the insurance coverage from different policy periods to form on giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies.  Instead of treating a long-tail injury as though it occurred in one policy period, this approach treats all the triggered insurance as though it were purchased in one policy period.

The court further explained that:

The all-sums-with-stacking rule means that the insured has immediate access to the insurance it purchased.  It does not put the insured in the position of receiving less coverage than it brought.  It also acknowledges the uniquely progressive nature of long-tail injuries that cause progressive damage throughout multiple policy periods.  (Emphasis in original.)

In reaching its holding, the court rejected disapproved the decision in FMC Corp. v. Plaisted & Companies, 61 Cal.App.4^th 1132 (Cal. App. 1998) which held that stacking of policy limits was not permitted.  Thus, as a result of the California Supreme Court’s decision, stacking of policy limits across multiple policy periods is permissible and will be allowed absent specific anti-stacking language within a policy, or a statute to the contrary.  The court explained that such an approach is both equitable and fulfills the insured’s reasonable expectations.  The court further observed that an all-sums-with-stacking approach “ascertains each insurer’s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.”  The court did acknowledge, however, that insurers can avoid this allocation methodology by incorporating specific anti-stacking provisions into their policies.

Fifth Circuit Holds Excess Insurer Prejudiced By Late Notice

In its recent decision in Berkley Regional Ins. Co. v. Philadelphia Indemnity Ins. Co., 2012 U.S. App. LEXIS 15998 (5^th Cir. Aug. 2, 2012), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider how and under what circumstances an excess/umbrella insurer is prejudiced as a result of an insured’s failure to provide timely notice of occurrence or suit.

The insured, Towers of Town Lake Condominiums (“Tower”), had a $1 million primary policy with Nautilus and a $20 million excess/umbrella policy with Philadelphia.  Towers was sued when a dentist slipped and fell on its premises.  It placed Nautilus on notice of the suit, but did not give immediate notice to Philadelphia.  At a mediation held prior to trial, the plaintiff’s “bottom” demand was $215,000 and Nautilus’ “top” offer was $150,000.  The parties reached an impasse and the case, therefore, proceeded to trial.  A jury subsequently rendered a verdict in favor of the plaintiff in the amount of just under $1.7 million.  On the day of the verdict, Towers finally gave notice to Philadelphia.  Philadelphia thereafter denied coverage based on late notice.

The Philadelphia policy required prompt notice of any occurrence involving permanent disabilities, or otherwise involving a coverage issue that could result in a reservation of rights or disclaimer of coverage.  Additionally, the Philadelphia policy had a provision allowing it to associate in the defense, settlement and investigation of any underlying claim, at the discretion of Philadelphia.  Nautilus, suing on behalf of Towers, argued that Philadelphia’s late notice disclaimer was not valid as Philadelphia was not prejudiced by Towers’ untimely notice. The lower court held in Nautilus’ favor.  On appeal, the Fifth Circuit was asked whether as a matter of law “[d]oes the failure to give notice to an excess carrier until after an adverse jury verdict constitute evidence of prejudice that forfeits coverage?”    

Looking to Texas case law on late notice, the Fifth Circuit observed that the purpose of notice provisions are to protect the insurer’s right and ability to participate in the underlying suit and to minimize its potential loss.  While these cases generally involved primary insurers, the court could find no basis for drawing a distinction between the interests of primary insurers and excess insurers, explaining:

While their responsibilities are different and, thus, they may not suffer prejudice in all circumstances where a primary carrier would, [excess insurers] nonetheless have a contract with the insured and are entitled to rely upon the same contract principles [as do primary insurers].

The court noted that while it is not always easy to determine prejudice, certain bright lines can be drawn.  For instance, prejudice will be presumed where notice is first given after a default judgment.  The court further observed that notice given once the case is “over” is too late, citing to the Texas Supreme Court decision in National Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603 (Tex. 2008).  Nautilus nevertheless argued that Crocker was inapplicable because the case was defended by Nautilus.  In other words, a distinction should be drawn between a situation where a primary insurer does not have a chance to defend and where an excess insurer does not receive notice until after verdict.  The Fifth Circuit rejected this distinction, explaining:

[Nautilus] argues that this case is more like the “better late than never” cases and not like Crocker because no default was entered; rather, the case was litigated by competent counsel to a jury verdict.  We disagree … Philadelphia was not just notified “late,” it was notified after all material aspects of the trial process had concluded and an adverse jury verdict was entered.  It lost the ability to do any investigation or conduct its own analysis of the case, as well as the ability to “join in” Nautilus’ evaluation of the case.

Just as important for the court was that Philadelphia lost its opportunity to participate in the pretrial mediation: 

Mediation, by nature, is a dynamic process, and for that very reason, parties are expected (and usually ordered) to appear ready to negotiate and with “full” settlement authority … Thus, we cannot fully know what effect, if any, Philadelphia’s participation would have had on this process – e.g., convincing Nautilus to take [plaintiff’s] offer of $215,000, convincing [plaintiff] to come down further or accept Nautilus’ offer of $150,000, or even “dropping down” to pay the $65,000 difference between the parties’ offers (with or without a side agreement between itself and Nautilus to litigate who must ultimately pay that amount).  All of these rights were lost, leaving Philadelphia holding the bag for more than $700,000 in excess liability …

Finally, the court rejected Nautilus’ argument that Philadelphia’s rights were protected since it had an opportunity to participate in the appeal of the underlying verdict.  Given the posture of an appeal and the standard of review applicable to the appellate issues, the court observed that the “cows had long since left the barn when Philadelphia was invited to close the barn door.” 

Minnesota Court Addresses Coverage Under Title Insurance Policy

In its recent decision in Associated Bank, N.A. v. Stewart Title Guaranty Co., 2012 U.S. Dist. LEXIS 104528 (D. Minn. July 27, 2012), the United States District Court for the District of Minnesota had occasion to consider when a loss is valued for the purpose of coverage under a title insurance policy.

The underlying action in Associated Bank involved a fraudulent scheme allegedly propagated on an apparently unsuspecting borrower.  In 2007, Associated Bank loaned the borrower approximately $450,000 to help finance the borrower’s purchase of vacant land.  In return for the loan, the bank received a signed promissory note secured by a mortgage.  Associated Bank, in turn, purchased title insurance from Stewart Title, which among other things, insured against “the invalidity or unenforceability of the lien of the insured mortgage upon the title.”  The policy obligated Stewart Title to defend Associated Bank “incurred in defense of the title or the lien of the insured mortgage.” 

It was subsequently determined that the borrower did not knowingly sign the promissory note and, in fact, had no knowledge of the mortgage given to Associated Bank.  He claimed that at the time he signed the promissory note, it was blank and that he had been led to believe by other parties that the note was for an unrelated real estate investment.  While the borrower did not attend the closing on the mortgage, Associated Bank failed to attend as well and thus did not learn of the alleged fraud until long after the fact.  The other parties to the scheme allegedly received and converted the loan proceeds without the borrower’s knowledge. When monthly loan payments on the mortgage were not paid, Associated Bank initiated a foreclosure action.  The borrower thereafter commenced a third-party action against the various parties that defrauded him, but he also asserted in his answer to Associated Bank’s complaint the affirmative defense that the promissory note and mortgage were obtained by fraud, and thus unenforceable.

In light of this affirmative defense, Associated Bank tendered the matter to Stewart Title, claiming that it was entitled to a defense in light of the borrower’s allegation that the mortgage was unenforceable.  Associated Bank also advised of a mediation scheduled in the matter. Stewart Title, however, did not respond to Associated Bank’s communications.  Associated Bank subsequently settled with the borrower.  By that time, the market value of the property secured by the mortgage was worth $126,000.  Notwithstanding, the borrower agreed to pay Associated Bank the amount of $175,000.  Associated Bank subsequently brought a declaratory judgment action against Stewart Title, seeking recovery of its attorneys’ fees associated with the underlying action, as well as the difference between the unpaid portion of the original mortgage, approximately $450,000, and the $175,000 Associated Bank was paid pursuant to the settlement.   

With respect to the indemnity portion, Associated Bank argued that its loss should be measured at the time the loan was initiated, not at the time the foreclosure action concluded.  Stewart Title, on the other hand, contended that Associated Bank did not recognize a loss until the foreclosure action resolved, at which time it was determined with finality that the mortgage would not be repaid.  By then, the property had declined in value from $450,000 to $126,000.  Stewart Title argued, therefore, that “the loss sustained by Associated Bank on its loan was not due to the invalidity of the Mortgage, but rather due to a decline in the value of the Property securing the loan,” and as such, was uninsurable.

While the court could find no Minnesota case law directly on point, it noted the majority view in other jurisdictions that a mortgagee’s loss cannot be measured until the note has not been repaid and the security for the mortgage is shown to be inadequate.  The court found this rule to be consistent with the purpose of title insurance, explaining:

A title insurance policy "does not guarantee either that the mortgaged premises are worth the amount of the mortgage, or that the mortgage debt will be repaid." … Rather, the "insurable value of a mortgage on real estate is the fair market value of the realty which secures the mortgage, and is not controlled by the original purchase-price of the mortgage."

The court observed that had the borrower not challenged the validity of the mortgage, and Associated Bank simply allowed to proceed with the foreclosure, it likely only would have been able to sell the property for $126,000, which was the market value of the property at the time.  Having recovered $175,000 as a result of the settlement, the court agreed that Associated Bank did not sustain a loss for which Stewart Title was obligated to indemnify.

The court nevertheless concluded that Associated Bank was entitled to a defense from Stewart Title.  Notwithstanding the fact that the borrower questioned the validity of the title in an affirmative defense, rather than a counterclaim or other form of direct claim, the affirmative defense asserted a claim adverse to Associated Bank’s title, thus triggering Stewart Title’s defense obligations under the policy.