Oklahoma Court Enforces Terms of Pollution Buy-Back

In its recent decision in Star Ins. Co. v. Bear Prods., Inc., 2013 U.S. Dist. LEXIS 148559 (E.D. Okl. Oct. 16, 2013), the United States District Court for the Eastern District of Oklahoma had occasion to consider the coverage afforded under a pollution buy-back endorsement.

Star Insurance Company insured Bear Products under a primary general liability policy as well as an umbrella liability policy.  Bear was named as a defendant in a class action lawsuit alleging personal injury and property damage resulting from exposure to “produced fluid waste,” described as waste fluids and solids generated as a result of oil and gas drilling operations.  Specifically, produced fluid waste is described to include “saltwater, sand, acid, oil-based drilling fluids, water-based drilling fluids, completion flowback fluid, frack flowback fluid, workover flowback fluid, rainwater gathered on drilling and productions sites, drilling cuttings, pit water, including frack, mud, circulation and reserve pits, and numerous other fluids and solid wastes generated during the exploration and completion of oil and gas wells.”  Bear Products was identified as having transported produced fluid waste to a disposal pit located in the vicinity of the plaintiff class.

Both the primary policy and umbrella policies issued by Star Insurance contained a total pollution exclusion.  The primary policy also contained an endorsement giving back limited pollution liability at designated well sites for bodily injury, property damage or environmental damage caused by a “pollution incident.” The endorsement set forth the following limitations on coverage:

This insurance applies to "bodily injury", "property damage", and "environmental damage" only if:

(1)       The "bodily injury", "property damage", or "environmental damage" are caused by a "pollution incident"

(a) on or from a "designated well site" in the "coverage territory", and

(b) that begins and ends within 72 hours of the incident; and

(c) that is accidental; and

(d) that is reported within 90 days of the incident

(2)       The "bodily injury", "property damage", or "environmental damage" first occurs during the policy period[.]

The court agreed that produced fluid waste was a pollutant for the purpose of the policies’ respective pollution exclusions.  Bear Products nevertheless contended that at the very least, coverage was available under the primary policy’s pollution buy-back endorsement.  The court disagreed.  Looking to the allegations of the complaint, the court observed that the conditions necessary to trigger the pollution coverage under the buy-back were not satisfied.  Notably, the waste was alleged to have been generated and disposed of prior to the policy period, the pollution condition lasted more than 72 hours, and the pollution condition was not accidentally generated.  Bear Products argued that if strictly enforced, the buy-back would be rendered illusory, since the majority of pollution incidents for which it could be liable would not satisfy these conditions precedent to coverage.  The court rejected this argument, explaining:

…  Bear is a corporate business. It bargained for an exception to the pollution exclusion. Bear is entitled only to the coverage for which it negotiated and paid. Bear argues that read literally, the policies provide virtually no coverage for risks inherent to its business. In fact, the policies do provide coverage for some risks inherent to Bear's business. For example, the policies cover liability as a result of an accidental spill of waste (a "pollution incident") or an accidental collision of one of Bear's trucks with another vehicle, object or person. Though it is unfortunate that the policies do not cover liability for pollution as alleged in the Underlying Complaint, the court may not rewrite the policies.

California Court Holds § 998 Offer Exceeding Policy Limits Made In Good Faith

In its recent decision in Aguilar v. Gostischef, 2013 Cal.App. LEXIS 816 (Cal. App. 2d Dist. Oct. 11, 2013), a California appellate court had occasion to consider whether a claimant’s statutory settlement offer under California Code of Civil Procedure, §998, knowingly made in excess of an insurer’s policy limits, could be considered a “good faith” offer.

Section 998 of the California Code of Civil Procedure permits a party to make an offer to settle and compromise a litigation. and establishes consequences if the other side rejects the offer.  Under such circumstances, if the party rejecting the offer is unsuccessful in the litigation, or less successful than the dollar amount of the offer, then the losing party may be obligated to pay a certain portion of the other party’s costs.  In order to be a valid §998 offer, it must be made in “good faith,” meaning that settlement offer must be realistically reasonable under the circumstances of the particular case.  The Aguilardecision addresses the issue of whether a claimant’s § 998 offer knowingly made in excess of the defendant’s insurance policy limits could be made in good faith.

Aguilar and Gostischef were individuals involved in a motor vehicle accident.  Gostischef was insured by Farmers Insurance Exchange (“Farmers”) under an auto liability policy with a $100,000 combined single limit.  Subsequent to the accident, Aguilar's counsel wrote to Farmers three separate occasions to obtain information on the policy limits for the express purpose of making a settlement demand. The last letter to Farmers stated: “My client has asked to know the policy limits so that he can make a policy limits demand and resolve this case and move on with his life. Unfortunately, until and unless we are advised of the limits in coverage, we are not able to make a policy limits demand. He is, however, prepared to do so upon being advised of the limits.  Once again, we entreat you to get permission from your insured to disclose the policy limits, provide them to us in the form of a certified policy and declaration, so that we can then immediately demand policy limits. Please favor us with a reply within the next two weeks.”  Farmers, however, did not respond to any of these requests.

Given Farmers’ silence, Aguilar eventually brought suit against Gostischef.  Farmers then advised Aguilar of the $100,000 policy limit and offered to pay its full policy limit to settle the case.  Gostischef later made a § 998 offer to Aguilar in the same amount.  Aguilar rejected both offers.  Instead, his counsel wrote to Farmers and advised that in light of Farmers’ failure to have previously disclosed the limits, and to settle the claim on behalf of its insured, Farmers would be liable for any judgment in excess of its policy’s limits.  A month later, Aguilar made a section §998 offer to settle in the amount of $700,000.  Farmers again offer to pay $100,000 and this was rejected.

The case was tried, and Aguilar was ultimately awarded $2,339,657.  Aguilar then sought $1,639,451.14 in costs from Farmers pursuant to §998.  Farmers argued the §998 offer in the amount of $700,000 was not made in good faith since Aguilar knew that the policy limits were $100,000.  The trial court disagreed and awarded costs, on the basis that the offer was “realistically reasonable under the circumstances.”  Farmers appealed, arguing that the offer could not have been made in good faith as there was no reasonable expectation that it would be accepted, based on plaintiff’s knowledge of the policy limits and defendant’s financial hardship.

The appellate court held that it was reasonable for Aguilar to believe Farmers could have been liable for a judgment in excess of policy limits, as case law supports the proposition that an insurer that refuses to disclose its limits may be subject to excess judgment liability in certain circumstances.  Farmers further failed to show any bad faith on plaintiff’s part; plaintiff had made its intention to seek policy limits known to Farmers, and had made three requests to Farmers for the information.  As such, the court agreed that Aguilar’s $700,000 demand was made in good faith and that Farmers was liable for the costs awarded pursuant to §998.

Is the Insurer Always Justified in Denying Coverage On the Basis of a Breach of a Statutory Clause?

Every automobile insurance policy issued in Ontario contains statutory clause 4.1:

 

                The insured shall not drive or operate or permit any other person to drive or operate the automobile unless the insured or other person is authorized by law to drive or operate it.

 

Section 32 of Highway Traffic Act requires an operator of a motor vehicle to hold a valid driver’s licence. In Kozel v.Personal Insurance Co. [2013] ONSC 2670 (S.C.J), the applicant was a 77 woman year old woman who was involved in a motor vehicle accident in Florida. Her insurer denied coverage on the basis that she was in breach of the policy at the time of the accident because her driver’s license had expired. The applicant brought this application for a declaration that the insurer owed a duty to indemnify and defend her in a third party action against her.

 

Approximately five months prior to the accident, the applicant received documentation from the Ministry concerning the renewal of her driver’s licence and vehicle plate sticker. Two weeks prior to the renewal date, the applicant gave the package of documentation to her dealership where she took delivery of a new vehicle. She was unaware that this package contained her licence renewal. Until the accident occurred, she was unaware that her licence had not been renewed. She reported the accident in a timely manner and renewed her license immediately upon discovering it was expired.

 

Justice Wood cited the 2011 Court of Appeal decision Tut v. R.B.C. General Insurance Company [2011] ONCA 644 where it was held that if an offence for breaching the regulation was one of strict liability rather than absolute liability, it was open to the insured to argue that he took all reasonable care in the circumstances to see that he was not in breach of the regulation. Were he able to argue this defence successfully it would follow that he remained authorized to drive within the meaning of statutory condition 4(1).

 

Justice Wood held that since an offence of driving with an expired licence is one of strict liability, an argument that the applicant exercised due diligence was available. Justice Wood found that the applicant took active steps to ensure that she met her duty, although mistakenly, she provided a believable explanation for her lack of perfect diligence and her actions were those of a reasonable person acting upon a genuinely mistaken belief.  As such, the court found that the applicant was entitled to a defence under the policy.

 

This case shows that breaches of the insurance policy are not always clear cut and can involve the consideration by the court of many subjective factors.    

Mississippi Court Holds Pollution Exclusion Applicable to Chinese Drywall Claim

In its recent decision in Prestige Properties, Inc. v. National Builders and Contractors Ins. Co., 2013 U.S. Dist. LEXIS 146738 (S.D. Miss. Oct. 10, 2013), the United States District Court for the Southern District of Mississippi had occasion to consider the application of a total pollution exclusion in a general liability policy to underlying claims involving Chinese-manufactured drywall.

The insured, Prestige Properties, was a Mississippi contractor hired to perform repairs on a client’s home that had been damaged as a result of Hurricane Katrina.  Part of these repairs involved replacing damaged drywall. Prestige later was named as a defendant in the Chinese drywall multidistrict litigation pending in the Eastern District of Louisiana.  Prestige’s client alleged that Prestige had used defective Chinese manufactured drywall in their home and that the drywall resulted in bodily injury (eye irritation, nausea, respiratory ailments, etc.) and property damage (corrosion and damage to appliances, wiring and object with metal surfaces).

Prestige was insured for the relevant time period under a commercial general liability policy issued by National Builders.  National Builders disclaimed coverage to Prestige on the basis of its policy’s total pollution exclusion barring coverage for:

f. Pollution.

(1)  "Bodily injury" or "property damage" which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" at any time.

(2)  Any loss, cost or expense arising out of any:

(a)   Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants"; or

(b)  Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of, "pollutants."

On motion for summary judgment, National Builders pointed out that the underlying suit alleged that the drywall was defective in that it emitted various sulfide and other noxious gases through off-gassing.  These allegations, argued National Builders, fell squarely within the terms of the exclusion.  While no Mississippi court considered the application of the exclusion on similar facts (i.e., to releases of gas indoors), National Builders cited to case law from other jurisdictions holding the exclusion applicable to indoor air quality claims.  National Builders also cited to case law from other jurisdictions holding the exclusion applicable to Chinese drywall claims.  See, e.g., Evanston Ins. Co. v. Germano, 514 F. App'x 362 (4th Cir. 2013), TravCo Ins. Co. v. Ward, 284 Va. 547, 736 S.E.2d 321 (Va. 2012); Granite State Ins. Co. v. American Bldg. Materials, Inc., 504 F. App'x 815 (11th Cir. 2013).  Prestige, on the other hand, cited to the decision in In re Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822 (E.D. La. 2010), in which the Eastern District of Louisiana, applying Louisiana law on the pollution exclusion, including the seminal decision in Doerr v. Mobil Oil Corp., 774 So. 2d 119 (La. 2000), held the exclusion inapplicable to Chinese drywall claims. 

The Prestigecourt distinguished the holding in In re Chinese Manufactured Drywall Prods. Liab. Litig. on the basis that the Louisiana court was considering coverage under homeowners policies rather than commercial general liability policies.  The Prestige court further reasoned that Mississippi’s Supreme Court would not follow the restrictive application of the pollution exclusion as set forth by Louisiana’s highest court in Doerr, but instead would apply the exclusion pursuant to its “plain terms.”  In other words, no distinction would be drawn between traditional and non-traditional environmental pollution.  As such, the court granted summary judgment in National Builder’s favor.

First Circuit Addresses “Insured Location” Exclusion in Homeowner’s Policy

In its recent decision in Vermont Mut. Ins. Co. v. Zamsky, 2013 U.S. App. LEXIS 20569 (1^st Cir. Oct. 9, 2013), the United States Court of Appeals for the First Circuit, applying Massachusetts law, had occasion to consider the applicability of exclusions in homeowners policies limiting coverage to insured locations.

The underlying loss arose out of a fire at what appears to have been a summer home which was owned by the insured but not identified in the insured’s homeowner’s policy as an “insured location.”  The insured’s daughter and several of her friends went to the house and while there tried to light a fire in a portable fire pit.  Gasoline was introduced to the fire, resulting in a large flash of flames that caused severe burns to three of the individuals present.  Suit was later brought against the insured, and the matter was tendered to the insured’s homeowner’s insurers: two primary insurers and an umbrella insurer.  The carriers agreed to provide the insured with a defense, subject to a reservation of rights to deny coverage based on what the court described as a “UL” exclusion (presumable uninsured location), precluding coverage for bodily injury:

            e. Arising out of a premises:

        (1) Owned by an "insured";

        (2) Rented to an "insured"; or

        (3) Rented to others by an "insured";

that is not an "insured location" . . .

The coverage dispute eventually resulted in litigation, and on motion for summary judgment, the United States District Court for the District of Massachusetts held that the exclusion was inapplicable because the fire did not result from a condition inherent to summer home. 

On appeal, the First Circuit observed the lack of any decisions by Massachusetts’ highest court – the Supreme Judicial Court – construing the UL exclusion.  The court nevertheless found instructive two decisions from the Massachusetts Appeals Court in Callahan v. Quincy Mutual Fire Insurance Co., 736 N.E.2d 857 (Mass. App. Ct. 2000) and Commerce Insurance Co. v. Theodore, 841 N.E.2d 281 (Mass. App. Ct. 2006).   In the Callahandecision, the Appeals Court held the exclusion inapplicable to a dog bite that happened at location owned by the insured, but not otherwise an “insured location,” because the dog was not a condition of the premises.  In Theodore, the Appeals Court held the exclusion applicable where a third party was on a premises owned by the insured, but not an “insured location,” to perform repair work on the premises.  Under such circumstances, the injury happened because of a condition inherent to the premises, and as such, the injury could be considered to have arisen out of the non-insured location.

The First Circuit reasoned that the Callahanand Theodore cases stand for the general principal that the phrase “arising out of a premises” as used in the UL exclusion means arising out of a conditionof the premises.  As the court explained:

... the cases establish a dichotomy: if the covered occurrence arises out of a condition of the premises and the exclusion's other requirements are satisfied, the exclusion applies; otherwise, it does not.

The court further noted that this reading of the exclusion comported with case law from other jurisdictions, such as Louisiana and Ohio.

With this rule in mind, the court agreed that the exclusion was inapplicable to the underlying burn case because the fire was not caused by a condition of the premises.  Rather, the fire arose out of the use of the fire pit.  Because the fire pit was a portable device that was not inherently a part of the premises, and could not be considered a defect in the premises, there simply was not a sufficient connection between the home and the fire as required for the exclusion to apply.

Can a Plaintiff Avoid Discovery Due to Medical Reasons?

Can a plaintiff avoid attending discovery or an independent medical examination due to anxiety or an inability to respond to questions appropriately?

In Lalousis v. Roberts, 2013 ONSC 5897 (S.C.J), the plaintiff sought $4 million in two actions relating to two motor vehicle accidents.  She alleged that she could not participate in oral discovery or an IME  due to medical reasons, including that she was not able to respond to questions, had poor communication and attention, and discovery would increase her anxiety and depression.  She sought to avoid the discovery process or have her husband act as a substitute.

Master Muir dismissed the motion.  A party has a prima facie right to a full and complete discovery of an adverse party, which includes oral examination and may include a medical examination.  The threshold to limit a party's right to discovery is a high one and should be ordered only in the rarest of cases.  In the circumstances, an examination for discovery might be unproductive as she may not provide responsive answer, and it could cause anxiety for the plaintiff; however, there was no evidence that it would cause her permanent damage.

In order to permit the defence to fully respond to the claim against it, it makes sense that the threshold for taking away those rights is very high.

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