Michigan Court Holds Tank Repair Costs Not Covered Under UST Policy

In its recent decision in H & M Petro Mart v. Zurich Am. Ins. Co., 2012 U.S. Dist. LEXIS 163205 (E.D.Mich. Nov, 15, 2012), the United States District Court for the Eastern District of Michigan had occasion to consider the scope of an insurer’s coverage obligations under a storage tank liability policy.

Zurich insured H&M Petro Mart under a Storage Tanks System Third Party Liability and Cleanup Policy, providing environmental cleanup coverage for releases of product from four insured underground storage tanks.  The policy defined “tank” to include “any connected piping, ancillary equipment and containment system that is on, within, or under a 'scheduled location.'”  Further, the policy defined “cleanup costs” as necessary costs related to the “investigation, removal, remediation, neutralization or immobilization of contaminated soil, surface water, groundwater, or other contamination.”  Notably, the policy contained an exclusion applicable to:

L.   any costs for the reconstruction, repair, removal, maintenance, replacement, upgrading, or rebuilding of any "scheduled storage tank system", personal property, fixtures, buildings, or any other improvements and any site enhancement or routine maintenance on, within, or under the "schedule location(s).

H&M reported a release to Zurich in 2009, and Zurich subsequently paid in excess of $190,000 in costs identified as “cleanup costs.”  Zurich, however, disclaimed coverage for certain costs submitted by H&M that related to reinstallation and/or reconstruction of gas pumps, such as installation of new product lines, electrical wire and conduits, reconstruction of a sewer system and canopy drain, installation of dispenser islands and bumper guards, and re-installation and calibration of dispensers.  H&M also sought coverage for costs associated with pouring of 5,800 square feet of concrete on the ground above where the new tanks had been installed.  Zurich determined that such costs were for site enhancement and not properly categorized as remediation costs.

H&M argued in a subsequent declaratory judgment action that the denied costs were integral to the remediation of its site and thus should qualify as “cleanup costs.”  Specifically, H&M argued that in order to effectuate the environmental cleanup required by the state, H&M was required to rip up the concrete at its gas station and remove its tanks, in order to gain access to the contaminated soils.  As such, argued H&M, these items were damaged by the release, and their replacement costs should come within the policy’s coverage.  H&M also argued that it was required to replace certain portions of its tanks and repour the concrete in order to comply with applicable regulations.

The court agreed that while it may have been necessary to remove portions of the tanks and concrete in order to effectuate the remediation, this did not mean that the costs of replacing such items came within the policy’s coverage.   On the contrary, the policy specifically excluded coverage for such items as indicated in exclusion L, which explicitly barred coverage for tank repairs or reconstruction.  The court drew a distinction between costs necessary to effectuate the remediation and costs covered under the policy:

Zurich assumed the costs for cleaning up the soil and groundwater to bring its quality up to standards required by governmental regulations. Zurich satisfied this obligation when MDEQ issued a "closed" designation  to the site. It appears as if the services invoiced may be "necessary" in remediating the contaminated area because excavation of the site was required to treat the surrounding affected area. Inevitably, items on the surface of the location required removal in order to remediate the contamination. Although they may be necessary in order to effectuate remediation, these costs are explicitly excluded in Section IV.L of the Policy.

The court held similarly with respect to repouring concrete at H&M’s station.  The court agreed that while such work was necessary to restore the site to its original condition, Zurich’s policy did not afford coverage for such work.  Rather, Zurich’s coverage obligations were limited to remediating any environmental contamination.   As the court explained, the policy “unambiguously excluded coverage for costs associated with restoring the entire premises back to its original condition.”

Utah Federal Court Holds Pain Pump Claims Not Related

In its recent decision in Columbia Casualty Company v. SMI Liquidating, Inc., 2012 U.S. Dist. LEXIS 162892 (D. Utah Nov. 14, 2012), the United States District Court for the District of Utah had occasion to consider the concept of “related claims” in the context of claims made products liability policies.

The insurance dispute in SMI Liquidating arose out of defective shoulder pain pumps manufactured by Sorenson Development, which was insured by Columbia Casualty under successive policies.  The first such policy, issued for the period July 1, 2007 through July 1, 2008, had limits of liability of $10 million per claim and in the aggregate, subject to a $25,000 deductible per claim and a $125,000 deductible aggregate.  Notably, the 07-08 policy contained a “related claims” provision that stated, in pertinent part:

If related claims are subsequently made against the Insured and reported to the Company, all such related claims, whenever made, shall be considered a single claim first made and reported to the Company within the policy period in which the earliest of the related claims was first made and reported to the Company.

The policy defined “related claims” as all claims arising out of the same occurrence or related occurrences.  Further, the policy defined related occurrences as those “that are logically or casually connected by any common fact, circumstance, condition, situation, transaction, event, advice or decision in the design, formulation, manufacturing, distribution, sale, testing, use, operation, maintenance, repair or replacement of your product or your work.”

While the 07-08 policy was in effect, Sorenson was named as a defendant in four lawsuits relating to its pain pumps.  Columbia initially treated these suits as separate claims, each triggering a separate deductible.  Columbia did, however, have internal deliberations between its claim and legal departments as to whether the four suits should be considered related claims triggering only a single deductible. 

Toward the end of the 07-08 policy period, Columbia began the underwriting process for a renewal.  During this process, the Columbia underwriter learned of the pending pain pump claims and became concerned about future claims.  She determined that the renewal would have different deductible terms than the 07-08 policy.  She offered a renewal on the terms that all claims other than shoulder pump claims would be subject to the original $25,000 deductible per claim, with a $125,000 deductible aggregate, but that shoulder pump claims would be subject to a $250,000 deductible per claim, unaggregated.  Sorenson’s risk manager understood  at the time why the renewal would be on different terms and reluctantly agreed to it.  The renewal became effective on July 1, 2008.

Claims continued to be made against Sorenson during the end of the 07-08 policy period and into the 08-09 policy period.  In August 2008, some seven weeks after the 08-09 policy became effective, Columbia’s claim department decided to treat all pending claims as being related and thus covered only under the 07-08 policy.  Notwithstanding its decision, Columbia continued charging Sorenson separate deductibles for each new claim made.  Over the next year, as new claims were made against Sorenson, Columbia issued supplemental correspondence amending the grounds on which Columbia determined that the underlying claims were related.  Thus, whereas Columbia initially took the position that various claims were related because they involved the same pain pump model, this later evolved into the position that any claims involving any pain pump model manufactured by Sorenson were related. 

During a mediation in November 2009, the issue of related claims was brought to a head. Columbia advised that it would be tendering the remaining limits of its 07-08 policy in connection with an upcoming mediation, and that at that point, its coverage obligations would be terminated.  Around the same time, Columbia learned of the fact that it had been charging multiple deductibles instead of a single deductible as it should have in light of its related claims position.  Columbia tried to refund the “erroneously” paid amounts to Sorenson, but Sorenson refused to accept the check.  Columbia subsequently filed a coverage action against Sorenson seeking a declaration that the pain pump claims were related claims covered only under the 07-08 policy, and not covered under the 08-09 policy.

In considering the issue, the court focused primarily on the deductible language contained in the 08-09 policy that specifically distinguished pump claims from non-pump claims.   This deductible scheme, concluded the court, indicated “a clear and unequivocal agreement that shoulder pump claims would be covered, subject to specialized deductibles.”  Columbia’s “related claims” position, observed the court, would negate this express and specific language.  The court further concluded the concept of related claims in the 07-08 policy could be harmonized with coverage for pump claims in the 08-09 policy, agreeing with Sorenson’s contention that “whatever was intended to fall within the scope of the related claims’ clause, the parties specifically agreed that it would not include the expressly dealt with shoulder pump claims.”

While the court reached its conclusion based on the plain terms of the 08-09 policy, it noted that extrinsic evidence would have compelled the same holding.  Specifically, the fact that Sorenson and Columbia negotiated the deductible scheme for the 08-09 policy indicated to the court that the parties considered and agreed on the manner in which the 08-09 policy would provide coverage for pain pump claims.  Absent from these negotiations was any discussion that the specialized deductible would apply only if Columbia decided that pump claims made in 08-09 were not related to those made in the 07-08 policy.  In this regard, the court found it “significant that Columbia’s decision to treat all shoulder pump claims as ‘related claims’ under the Year One policy post-dates the effective date of the Year Two policy by over a month.”  Thus, the court concluded that the parties’ contemporaneous communications, at least at the time the 08-09 policy was issued, reflected a mutual understanding that pump claims would be covered under the 08-09 policy.   Columbia’s subsequent decision that the claims would only be covered under the 07-08 policy “fundamentally altered the allocation of risk bargained for by the parties in the Year Two policy and was contrary to the parties’ express intentions at the time of contracting.”

Illinois Federal Court Allows Consideration of Extrinsic Evidence

In its recent decision in Nautilus Ins. Co. v. Ricciardi Dev., LLC, 2012 U.S. Dist. LEXIS 161244 (N.D. Ill. Nov. 9, 2012), the United States District Court for the Northern District of Illinois had occasion to consider when and under what circumstances an insurer can rely on facts extrinsic to a complaint in evaluating whether it has a duty to defend.

The insured, Ricciardi Development was named as a defendant an underlying suit alleging that it negligently owned and maintained an apartment building in Chicago, Illinois, where a roof porch guard rail collapsed, causing plaintiffs to fall to the ground.   Among other things, it was alleged that Ricciardi has work performed on the porch rails that allowed for the accident.  Notably, the complaint alleged that the accident happened on May 24, 2009, and that Ricciardi owned and renovated the building sometime prior to that date.   The complaint did not allege a specific date on which such work was performed.

At the time of the accident, Ricciardi was insured under a general liability policy issued by Nautilus Insurance Company.  By endorsement, the Nautilus policy excluded coverage for bodily injury resulting from Ricciardi’s work completed prior to September 11, 2008 and specifically stated that Nautilus would have no duty to defend any claim alleging bodily injury arising out of Ricciardi’s work, or work completed for Ricciardi, prior to September 11, 2008.  Having learned from its own investigation that Ricciardi only owned the building only from 2000 through 2005, and thus could not have performed work subsequent to 2008, Nautilus filed suit against Ricciardi, seeking a judicial declaration that it had no duty to defend or indemnify on the basis of this exclusion.

On motion for summary judgment, the court agreed that the exclusion was clear and unambiguous, and thus applied to claims against Ricciardi involving work performed by or for it prior to September 11, 2008.  The underlying suit, however, did not allege the date on which various porch repairs were performed.  The court reasoned, therefore, that if it could only consider allegations contained in the underlying complaint, then Nautilus would have a duty to defend, explaining “[b]ecause September 11, 2008, the policy's cut-off date, is prior to May 24, 2009, the complaint alleges a claim that potentially could fall within the policy's coverage.”  The court further reasoned, however, that if it could rely on facts extrinsic to the complaint, then there was no potential for coverage since any work Ricciardi performed with respect to the porch necessarily was completed prior to 2005 when Ricciardi sold the premises.

The court observed the general rule of Illinois law, which is that an insurer may consider only the facts alleged in the underlying complaint in determining a duty to defend.   It noted, however, an exception to this rule applicable when an insurer elects to file a declaratory judgment action regarding its duty to defend.   Under such circumstances, explained the court, Illinois case law generally supports the proposition that consideration of such extrinsic facts is required except when these facts are central to the determination of an issue in the underlying suit.  Looking to these cases, the court concluded that:

… this court can and must consider the undisputed extrinsic evidence set forth by Nautilus—that Ricciardi sold the property on February 22, 2005, and completed the work on the porch and guardrail before then—in determining whether Nautilus has a duty to defend  Ricciardi and Development. There is no basis for concern that considering this evidence would "tend[] to determine an issue crucial to the determination of the underlying [state court] lawsuit." … Indeed, the opposing sides in the underlying suit unanimously agree in this case that Ricciardi sold the property in February 2005 or, at a minimum, that he did not own the property as of September 11, 2008. … If that fact were contested in or significant to the underlying suit, the opposing sides in that suit would not have agreed on that fact here.

Thus, concluding that consideration of extrinsic facts was permissible and that these facts were dispositive of the policy’s exclusion, the court agreed that Nautilus had no duty to defend.

Mississippi Court Holds Insured Gave Untimely Notice of Potential Claim

In its recent decision in Sollek v. Westport Ins. Corp., 2012 U.S. Dist. LEXIS 157649 (S.D. Miss. Nov. 2, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider the conditions precedent to coverage under a claims made and reported policy.

The insured, Vann Leonard, was insured under a legal malpractice policy issued by Westport Insurance Company for the period April 8, 2010 to April 8, 2011.  In 2006, Leonard had been retained by Gilbert Sollek to negotiate a home equity loan and to make the subsequent monthly payments on the loan.  In May 2011, Leonard was arrested for embezzling client funds.  While incarcerated, he failed to make Sollek’s monthly payment.  Sollek learned of this on May 5, 2011 – nearly a month after the policy expired – and he later filed suit against Leonard on May 31, 2011.  Leonard was served with the complaint on June 2, 2011 while he was in jail, and he later faxed a copy of the suit to Westport on June 15, 2011.   At the time, Westport had been defending Leonard in connection with other suits arising out of his alleged embezzlement scheme.  Westport, however, later disclaimed coverage for all such suits, including Sollek’s, on the basis of a criminal acts exclusion in the policy.  Notably, the disclaimer did not address the issue of when Sollek’s claim was first made and reported.  Solleck later brought a declaratory judgment action against Westport challenging the validity of Westport’s disclaimer to Leonard.

Westport moved for summary judgment on the basis that Sollek’s claim was not first made or reported during the policy period as required by the policy’s insuring agreement.  The court began its decision by noting that Mississippi’s Supreme Court had not yet had occasion to interpret a claims made and reported policy.  It nevertheless observed that courts and commentators generally acknowledge that “both the making and reporting of the claim within the specified period” are considered essential elements of coverage under such policies.  The court agreed that Mississippi courts would follow this majority rule.

After concluding that the Westport policy was unambiguous and required the claim to be first made and reported during the policy period, or that notice of potential claim be given during the policy period, the court considered whether these conditions precedent to coverage were satisfied.   Sollek conceded that he had failed to assert a claim against Leonard prior to the expiration of the Westport policy, and as such the date on which the claim was reported to Westport was irrelevant.  He nevertheless argued that Westport received notice of a potential claim during the policy period such that it had a coverage obligation to Leonard for the subsequently made claim.   The Westport policy indeed contained a notice of potential claim provision stating:

[i]f, during the current POLICY PERIOD, any INSURED first becomes aware of a POTENTIAL CLAIM and gives written notice of such POTENTIAL CLAIM to the Company during the current POLICY PERIOD, any CLAIMS subsequently made against any INSURED arising from the POTENTIAL CLAIM shall be considered to have been first made during the POLICY PERIOD the INSURED first became aware of a POTENTIAL CLAIM.

The court found this provision to unambiguously require that the notice of potential claim be given to Westport prior to the policy’s expiration, and that this notice be given to Westport in writing.  The court also observed that the policy’s notice provision, applicable to claims or potential claims, required the insured to report specific information, including a description of the claim and alleged wrongful act, a summary of the relevant facts, potential damages, etc.  The court concluded that because Westport did not receive written notice of a potential claim during the policy period, or the specific information required by the notice provision, the policy was not triggered. 

In so concluding, the court rejected Sollek’s argument that there was “substantial compliance” with the policy’s reporting requirement concerning potential claims since Leonard’s defense counsel, appointed by Westport to defend different lawsuits, had become aware of Sollek’s potential claim during the policy period.  The court did not agree that defense counsel could be considered Westport’s agent for the purpose of giving notice under the policy, and it also observed that there was no evidence that defense counsel had, in fact, learned of Sollek’s potential claim prior to the policy’s expiration.  More significantly, the court rejected the insured’s entire theory of “substantial compliance,” noting that there was no authority to support the “finding that substantial compliance applies with a claims-made and reported policy when the insurer learns of a potential claim but receives no report from the insured” and that any such rule would be contrary to the contractual requirements set forth in the policy.

Sollek argued in the alternative that the doctrines of waiver or estoppel precluded Westport from denying coverage on the basis of when the claim or potential claim was first made and reported, since Westport had failed to identify this coverage defense in its initial disclaimer letter to Leonard.  Citing to various case law from the federal and state level, the court observed that waiver and estoppel cannot be used to expand a policy’s coverage, although an insurer can waive compliance with policy conditions.  While noting it to be a matter of first impression under Mississippi law, the court agreed that the reporting requirements in a claims made and reported policy are inherent to the policy’s scope of coverage and thus cannot be subject to waiver or estoppel, explaining that:

… allowing waiver or estoppel to nullify these requirements would fundamentally change the nature of the insurer's risk. It would likewise expand coverage beyond the scope of the bargain. Neither waiver nor estoppel create coverage in this context.

First Circuit Addresses Scope of Antitrust Exclusion in E&O Policy

In its recent decision in The Saint Consulting Group, Inc. v. Endurance Am. Specialty Ins. Co., 2012 U.S. App. LEXIS 22631 (1^st Cir. Nov. 2, 2012), the United States Court of Appeals for the First Circuit, applying Massachusetts law, had occasion to consider the application of a restraint of trade exclusion in a professional liability policy.

The insured, The Saint Consulting Group (“Saint”), was a real estate consulting firm specializing in land use disputes.  In particular, Saint had developed a specialty in representing grocery stores in their attempts to prohibit or delay Wal-Mart from opening stores in their client’s territories by spurring litigation and regulatory proceedings.  At issue in the insurance coverage dispute were Saint’s efforts to block two Wal-Mart stores from being developed in Illinois.   Underlying plaintiff, Rubloff Development, had purchased two parcels of land it intended sell to Wal-Mart to be used for construction of Wal-Mart and other retail stores.  Saint, acting on behalf of a competing grocery store, undertook efforts to rally local businesses against the Wal-Mart stores.  Saint’s efforts in these regards were led by a single employee, Leigh Mayo, who used a pseudonym while pursuing these efforts, allegedly concocted false stories about the negative the effects of Wal-Mart stores, and concealed the fact that he was a Saint employee working on behalf of a Wal-Mart competitor.

While these anti-Wal-Mart efforts were still proceeding, Leigh Mayo left Saint’s employ, and shortly thereafter sold to Rubloff thousands of internal documents concerning Saint’s efforts to block the Wal-Mart stores.  Upon learning of this, Saint demanded the documents back.  Rubloff shortly thereafter filed suit action against Saint seeking only a judicial declaration that the documents were not privileged and that Rubloff could keep them for future use in a lawsuit.  Rubloff shortly thereafter amended its complaint to seek various forms of injunctive relief concerning other documents in Saint’s possession.   While the court dismissed Rubloff’s claim for injunctive relief, it ultimately declared that Rubloff was entitled to keep the documents.  Just prior to ruling on Rubloff’s claim for declaratory relief, Rubloff filed a second amended complaint that included substantive causes of actions relating to Saint’s efforts to block or delay the Wal-Mart stores.  Specifically, the second amended complaint included causes action of for RICO violations based Saint’s efforts to conceal Mayo’s true identity and employer, conspiracy to restrain trade under the Sherman Act and Illinois Antitrust Act, tortious interference with prospective economic advantage, common law fraud, and conspiracy.  

Saint ultimately was successful in having each of these causes of action dismissed.  It did so, however, without the assistance of its professional liability insurer, Endurance, which had denied coverage to Saint for the original and amended complaints on the basis of a restraint of trade exclusion stating that coverage did not apply:

… to any Claim based upon or arising out of any actual or alleged price fixing, restraint of trade, monopolization or unfair trade practices including actual or alleged violations of the Sherman Anti-Trust Act, the Clayton Act, or any similar provision [of] any state, federal or local statutory law or common law anywhere in the world.

In the subsequent insurance coverage action, the United States District Court for the District of Massachusetts granted Endurance’s motion to dismiss, concluding that the exclusion barred coverage for the causes of action specifically brought under the Sherman Act and the Illinois Antitrust Act, and that it also applied to the other causes of action since each such cause of action arose out of the same alleged restraint of trade.

In considering the matter on appeal, the First Circuit noted that under Massachusetts law, if even one cause of action escaped the restraint of trade exclusion, then Endurance would have an obligation to defend the suit in its entirety.  Beginning first with the amended complaint filed in the underlying action, the court agreed that the causes of action for antitrust violation under federal and state statute were excluded.  “Far more interesting” to the court was whether the RICO causes of action and common law causes of action were excluded, notwithstanding the fact that they were not titled as “restraint of trade” counts.  In considering this issue, the court observed that the exclusion applied to causes of action “based upon or arising out of any actual or alleged . . . restraint of trade.”  The phrase “arising out of,” it noted, is typically afforded a broad construction under Massachusetts law.  With this in mind, the court observed that:

It can hardly be disputed that the factual allegations of the Second Amended Complaint allege a conspiracy to forestall competition through misuse of legal proceedings and through deception. And every count in the Rubloff Action that is not itself described as an antitrust claim depends centrally on the alleged existence of such a scheme.

The court therefore concluded that because the statutory and common law causes of action in the second amended complaint were premised on Saint’s efforts to restrain trade, the exclusion applied to each such cause of action.  In so holding, the court rejected Saint’s argument that its success in the underlying action evidenced the fact that Saint had not engaged in the prohibited conduct.  The court found this argument to be a “non-sequitur,” explaining:

Exclusion N depends not on whether conduct occurred or, if so, whether it was unlawful, but on what the complaint alleged. What was factually alleged in the Second Amended Complaint in no uncertain terms was an anti-competitive scheme and, where the pertinent counts arise out of that alleged scheme, Exclusion N negates coverage.  The exclusion does not depend on whether a successful defense can be advanced: it excludes meritless claims quite as much as ones that may prove successful.

After concluding that Saint was not entitled to coverage for the second amended complaint, the court then sought coverage for the initial complaint concerning only Rubloff’s declaratory judgment action to keep the internal documents sold by Mayo as well as certain injunctive relief.  The court concluded that coverage was unavailable for that complaint, since the dispute over possession of documents did not involve a wrongful act arising out of Saint’s professional services, and thus did not fall within the policy’s insuring agreement.