UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

BLACKHAWK–CENTRAL

CITY SANITATION DISTRICT,

a quasi-municipal Colorado

corporation,

Plaintiff-Appellant,

v.

AMERICAN GUARANTEE

AND LIABILITY INSURANCE

COMPANY, a New York corporation,

Defendant,

and

ST. PAUL FIRE AND MARINE

INSURANCE COMPANY,

a Minnesota corporation,

Defendant-Appellee.

THE INSURANCE

ENVIRONMENTAL

LITIGATION ASSOCIATION,

Amicus Curiae.

No. 98-1075
-2-

ORDER

Filed May 31, 2000

Before BALDOCK , EBEL , and MURPHY , Circuit Judges.

This matter is before the court on petition of Defendant-Appellee, St. Paul

Fire and Marine Insurance Company, seeking rehearing of this court’s opinion

filed April 11, 2000. The members of the hearing panel have determined that it is

appropriate to clarify and substitute the opinion’s discussion in Part III.D of an

aspect of Appellee’s argument on appeal. The members of the hearing panel have

also considered Appellee’s arguments on the merits of this court’s disposition of

this appeal, and conclude that the court’s original disposition was correct. 

Therefore, the petition for rehearing is GRANTED in part to clarify and substitute

a portion of the opinion at Part III.D, and is DENIED in all other respects. We

withdraw the opinion filed on April 11, 2000, vacate the judgment, and substitute

the modified opinion attached to this order.

 Entered for the Court,

 PATRICK FISHER, Clerk of Court

 By:

 Keith Nelson

 Deputy Clerk
F I L E D

United States Court of Appeals

Tenth Circuit

MAY 31 2000

PATRICK FISHER

Clerk

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

BLACKHAWK–CENTRAL

CITY SANITATION DISTRICT,

a quasi-municipal Colorado

corporation,

Plaintiff-Appellant,

v.

AMERICAN GUARANTEE

AND LIABILITY INSURANCE

COMPANY, a New York corporation,

Defendant,

and

ST. PAUL FIRE AND MARINE

INSURANCE COMPANY,

a Minnesota corporation,

Defendant-Appellee.

THE INSURANCE

ENVIRONMENTAL

LITIGATION ASSOCIATION,

Amicus Curiae.

No. 98-1075
-2-

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

(D.C. No. 93-B-1252)

Submitted on the briefs:

Timothy J. Flanagan and Katherine Taylor Eubank, of Fowler, Schimberg &

Flanagan, P.C., Denver, Colorado, for Plaintiff-Appellant.

Richard B. Caschette, John R. Mann and Kevin P. Perez, of Kennedy &

Christopher, P.C., Denver, Colorado, for Defendant-Appellee.

Laura A. Foggan, Daniel E. Troy and Raymond Shepherd, III, of Wiley, Rein &

Fielding, Washington, D.C., filed an amicus curiae brief for the Insurance

Environmental Litigation Association.

Before BALDOCK , EBEL , and MURPHY , Circuit Judges.

MURPHY , Circuit Judge.

Plaintiff, Blackhawk-Central City Sanitation District (District), brought

a declaratory action and sought damages for breach of insurance contract against

St. Paul Fire and Marine Insurance Company (St. Paul) alleging St. Paul had

a duty to defend and indemnify the District against environmental damage claims. 

The action was originally filed in Colorado state court but, on St. Paul’s motion,

was removed to federal court pursuant to diversity of citizenship jurisdiction

under 28 U.S.C. § 1332. The District moved for partial summary judgment
1 The District also brought a declaratory judgment and breach of insurance

contract claim against American Guarantee & Liability Insurance Company

(American). That action was consolidated with the St. Paul action. As of the

date the District filed its notice of appeal, the claims against American had not

been finally disposed of in the district court; however, the district court granted

certification on the claims against St. Paul pursuant to Fed. R. Civ. P. 54(b).

2 After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination

of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is

therefore ordered submitted without oral argument.

-3-

against St. Paul on the duty to defend claim, which the district court denied. 

The district court held that the pollution exclusion provisions in the St. Paul

insurance policies excluded coverage for the claims made against the District in

the Old Timer complaint. 1 Exercising jurisdiction pursuant to 28 U.S.C. § 1291,

we reverse. 2

I. BACKGROUND

A. The Old Timer Complaint

The District owns and operates a sewage treatment facility on North Clear

Creek in Blackhawk, Colorado. The facility treats sanitary sewer waste from

communities of Blackhawk and Central City and, pursuant to a permit issued

by the Colorado Department of Health, Water Control Division, discharges

effluent into North Clear Creek. In 1993, owners of property downstream from

the treatment facility sued the District, alleging that the District repeatedly

discharged improperly treated sewage effluent into North Clear Creek in violation
-4-

of its permit. See The Old Timer, Inc. et al. v. Blackhawk-Central City Sanitation

District , D. Colo. No. 93-B-249 complaint, Appellant’s App. at 61-73 (the

Old Timer litigation). The Old Timer complaint lists a series of specific dates,

beginning in 1985 and continuing through the date of the complaint, on which it

alleges testing revealed effluent containing waste matter in excess of permitted

levels. The complaint alleges that the substances contained in the District’s

effluent, alleged to include suspended solids, fecal coliform bacteria, ammonia,

and residual chlorine in excess of its permit limits, constitute “pollutants” within

the meaning of the Clean Water Act, 33 U.S.C. § 1362(6). The complaint alleges

that the District’s conduct in violating and disregarding the permit limitations

was knowing, willful and negligent.

B. The Insurance Policies

During a portion of the time frame at issue in the Old Timer litigation, the

District was insured by two comprehensive general liability (CGL) insurance

policies issued by St. Paul. The first policy, No. 583ZA3251 (Policy ZA) was

effective from February 18, 1983 to February 18, 1986. The second policy,

No. CK08300195 (Policy CK), was effective from February 18, 1986 to

February 18, 1987. Both policies cover claims for property damage resulting

from an “accidental event.” Appellant’s App. at 80, 108. An “accidental event”

is defined to mean “any event that results in bodily injury or property damage
-5-

that the protected person didn’t expect or intend to happen.” Id. Both policies

obligate St. Paul to defend any suit brought against the District for covered

claims, even if the suit is groundless or frivolous.

Both policies contain a standard clause known as a “pollution exclusion

clause,” which states St. Paul will not “cover injury or damage caused by the

discharge, dispersal, release or escape of pollutants such as . . . acids, alkalis,

toxic chemicals, liquids or gases; or waste material or other irritants or

contaminants.” Id. at 83, 111. However, Policy ZA states that “this exclusion

won’t apply to sudden accidents involving pollutants.” Id. at 83. In other words,

Policy ZA generally excludes any coverage for pollution discharges, but restores

coverage for “sudden accidents involving pollutants.” Id.

Policy CK contains a pollution exclusion clause identical to the one

in Policy ZA, but also contains a Pollution Exclusion Endorsement (the

Endorsement) which states it “replaces the [p]ollution exclusion” clause in the

policy to exclude coverage. Id. at 121. The Endorsement omits the language

in the pollution exclusion clause that restores coverage for “sudden accidents

involving pollutants.” Compare id. at 111 with id. at 121. The Endorsement

is known as an “absolute pollution exclusion.”
-6-

C. The Proceedings Below

In July 1994, the district court denied the District’s motion for partial

summary judgment, ruling that the pollution exclusion provisions in Policy ZA

and CK barred coverage for the Old Timer litigation. See Blackhawk-Central

City Sanitation Dist. v. American Guar. & Liab. Ins. Co. , 856 F. Supp. 584, 591

(D. Colo. 1994). The district court concluded that the pollution exclusion in

Policy CK, as replaced by the Endorsement, was absolute and precluded coverage

for all of the claims in the Old Timer litigation. The district court concluded that

the pollution exclusion provision in Policy ZA also barred coverage because the

release of effluent as alleged in the Old Timer litigation was not an “accident.” 

Thus, the district court held that St. Paul had no duty to defend the District in

the Old Timer litigation. Id.

St. Paul then filed a motion for costs and entry of judgment pursuant to

Fed. R. Civ. P. 58. When the District filed a response arguing that St. Paul had

not filed a motion for summary judgment, St. Paul moved for summary judgment

in its reply. The district court granted St. Paul’s motions for summary judgment

and for entry of judgment on January 29, 1998, and certified that judgment as

final under Rule 54(b) on April 14, 1998.
-7-

II. STANDARD OF REVIEW

The District appeals the district court’s grant of summary judgment in favor

of St. Paul. We review the district court’s grant of summary judgment de novo ,

applying the same legal standards used by that court. See Charter Canyon

Treatment Ctr. v. Pool Co. , 153 F.3d 1132, 1135 (10th Cir. 1998). Summary

judgment should not be granted unless the evidence, viewed in the light most

favorable to the party opposing the motion, shows there are no genuine issues

of material fact and the moving party is due judgment as a matter of law. See id .;

Fed. R. Civ. P. 56(c). Furthermore, the proper interpretation and construction

of an insurance policy is a matter of law, and therefore we review the policies

at issue de novo in order to determine whether they gave rise to a duty to defend. 

See I.D.G., Inc. v. St. Paul Fire & Marine Ins. Co. , No. 99-5067, 2000 WL

135171, at **3 (10th Cir. Feb. 7, 2000).

When, as here, a federal court is exercising diversity jurisdiction, it must

apply the substantive law of the forum state. See Blanke v. Alexander , 152 F.3d

1224, 1228 (10th Cir. 1998). The parties agree that Colorado law governs our

interpretation of these policies; thus, we apply the most recent statement of

Colorado law by the Colorado Supreme Court. See Wood v. Eli Lilly & Co. ,

38 F.3d 510, 513 (10th Cir. 1994). When the Colorado Supreme Court has not

yet addressed an issue, we seek to predict how that court would decide the
-8-

question. See Farmers Alliance Mut. Ins. Co. v. Bakke , 619 F.2d 885, 888

(10th Cir. 1980). We review the district court’s determination of Colorado law

de novo . See Salve Regina College v. Russell , 499 U.S. 225, 231 (1991).

We ordered this appeal abated pending decisions by the Colorado Supreme

Court in City of Englewood v. Commercial Union Assurance Cos. , 940 P.2d 948

(Colo. Ct. App. 1996), cert. granted sub nom. Compass Ins. Co. v. City of

Littleton , No. 96SC852 (Colo. July 28, 1997) and Public Service Co. v. Wallis

& Cos., 955 P.2d 564 (Colo. Ct. App. 1997), cert. granted , No. 97SC792

(Colo. May 26, 1998). The Colorado Supreme Court has now handed down

decisions in both of these cases. See Compass Ins. Co. v. City of Littleton ,

984 P.2d 606 (Colo. 1999) and Public Service Co. v. Wallis & Cos. , 986 P.2d 924

(Colo. 1999). Because both decisions address certain of the issues raised here,

we analyze the District’s claims in light of these recent cases.

III. DISCUSSION

A. The Duty to Defend

Under Colorado law, an insurance carrier’s duty to defend under a liability

insurance policy arises whenever a complaint alleges any facts that arguably fall

under the coverage of the policy. See Hecla Mining Co. v. New Hampshire Ins.

Co., 811 P.2d 1083, 1089 (Colo. 1991). An insurer’s “duty to defend is broader

than the duty to indemnify . . . [and] in some instances, insurers will be found to
-9-

have a duty to defend even though ultimately it may be determined that they have

no duty to indemnify.” Compass , 984 P.2d at 613 (quotation omitted).

Colorado “has set a high standard for an insurance company seeking to

avoid its duty to defend,” by which “the insured need only show that the

underlying claim may fall within policy coverage; the insurer must prove that it

cannot.” Id. at 614 (quotation omitted).

An insurer seeking to avoid its duty to defend an insured bears

a heavy burden. An insurer’s duty to defend arises when the

underlying complaint against the insurer alleges any facts that might

fall within the coverage of the policy. The actual liability of the

insured to the claimant is not the criterion which places upon the

insurance company the obligation to defend. Rather, the obligation

to defend arises from allegations in the complaint, which if

sustained, would impose a liability covered by the policy. Where the

insurer’s duty to defend is not apparent from the pleadings in the

case against the insured, but the allegations do state a claim which is

potentially or arguably within the policy coverage, or there is some

doubt as to whether a theory of recovery within the policy coverage

has been pleaded, the insurer must accept the defense of the claim.

Id. at 613-14 (quoting Hecla , 811 P.2d at 1089) (further quotations omitted).

This same heavy burden applies when an insurer claims its duty to defend

does not exist because of the policy’s exclusions:

In order to avoid policy coverage, an insurer must establish that the

exemption claimed applies in the particular case, and that the

exclusions are not subject to any other reasonable interpretation. 

The insurer has a duty to defend unless the insurer can establish that

the allegations in the complaint are solely and entirely within the

exclusions in the insurance policy. An insurer is not excused from

its duty to defend unless there is no factual or legal basis on which

the insurer might eventually be held liable to indemnify the insured.
-10-

Id. at 614 (quoting Hecla , 811 P.2d at 1090). Further, under Colorado law, if

the underlying complaint asserts more than one claim, a duty to defend against

all claims asserted arises if any one of them is arguably a risk covered by the

pertinent policy. See Fire Ins. Exch. v. Bentley , 953 P.2d 1297, 1300 (Colo. Ct.

App. 1998).

B. Whether the Effluent is a Pollutant

The District first argues that the district court erred in finding that the

District’s effluent constitutes a “pollutant” within the scope of the pollution

exclusion provisions in the insurance policies. The policies define “pollutants”

broadly to include “toxic chemicals, liquids or gases; or waste material or other

irritants or contaminants.” Appellant’s App. at 83, 111. The District argues that

an ambiguity exists about whether sewage sludge from a sewage treatment facility

should be considered a “pollutant.” The District relies on two federal district

court decisions from Colorado and a Colorado Court of Appeals decision, City

of Englewood v. Commercial Union Assurance Cos. , 940 P.2d 948, rev’d in part

by Compass , 984 P.2d 606, which recognized a distinction between toxic

industrial sludge, and non-toxic, non-hazardous “biosolids” or domestic sewage

sludge, because of the beneficial reuse of sewage sludge in agriculture. See id.

at 955. City of Englewood held that genuine issues existed as to the legal and

factual characterization of domestic municipal sewage sludge. See id . The
3 St. Paul argues that the District did not raise this issue before the district

court. We are satisfied from our review of excerpts from the District’s motion

for summary judgment and its motion to alter or amend the district court’s

June 24, 1994 order, that this issue was adequately presented below, particularly

because the district court addressed this issue in its ruling, see Blackhawk ,

856 F. Supp. at 589.

-11-

District argues that in cases where sewage sludge is the alleged pollutant, there

is a mixed question of law and fact as to whether the sewage sludge constitutes

a “pollutant.” 3

However, the portion of the Colorado Court of Appeals decision upon

which the District’s argument is based was recently overruled by the Colorado

Supreme Court. In Compass Ins. Co. v. City of Littleton , the Colorado Supreme

Court held that the Colorado Court of Appeals erred in City of Englewood

in considering whether genuine issues existed as to the legal and factual

characterization of sewage sludge with respect to whether it constituted a

“pollutant.” See 984 P.2d at 615. Compass held that, in resolving duty-to-defend

claims, courts may only look at the allegations of the underlying complaint

against the insured, and cannot look to any extrinsic evidence, including evidence

that sewage effluent may not be a pollutant, in analyzing pollution exclusion

provisions. See id . at 615-16. Under Colorado law, the only relevant inquiry is

how the complaint characterized the materials and whether that characterization

fits within the terms of the policy. See id .
-12-

Thus, the relevant inquiry in this case is how the Old Timer complaint

characterized the alleged discharges. The Old Timer complaint makes the factual

allegation that the District discharged “Suspended Solids, Fecal Coliform

Bacteria, Ammonia, Residual Chlorine, and other chemicals and substances in

amounts in excess of levels permitted by law,” and that it discharged “raw sewage

and other pollutants.” Appellant’s App. at 64, 69. Clearly, these materials

constitute “waste material” and “contaminants” within the policies’ broad

definition of “pollutants.” See Compass , 984 P.2d at 615-16 and 615 n.7. 

It would, therefore, have been improper for the district court to have looked

beyond the face of the complaint, as urged by the District, in order to have

considered any extrinsic evidence offered by the District in its attempt to change

the characterization of the discharge. See id. at 615-16. The complaint also

makes the legal allegation that the discharges constitute “pollutants,” and that the

plaintiffs suffered damage from “pollutants” discharged by the District that

entered and remained on their land. See Appellant’s App. at 64, 69, 70. Finally,

the environmental statutes that the Old Timer complaint alleges the District

violated and under which the complaint seeks damages, define “pollutants” to

include sewage and sewage sludge. See 33 U.S.C. § 1362(6); Colo. Rev. Stat.

§ 25-8-103(15) (1990). Accordingly, we conclude the district court did not err

in finding that the sewage and effluent the District is alleged to have discharged
-13-

constitute “pollutants” within the meaning of St. Paul’s insurance policies’

exclusions.

C. The CK Policy Endorsement

The District next contends the district court erred in holding that the

absolute pollution exclusion contained in the Endorsement to Policy CK overrides

that policy’s standard pollution exclusion clause. Whereas the body of Policy CK

contains an exception to its general pollution exclusion for “sudden accidents

involving pollutants,” the absolute pollution exclusion clause in the Endorsement

contains no such exception restoring coverage. See Appellant’s App. at 111, 121.

“The general rule provides that when a conflict in an insurance contract

arises between provisions contained in the body of the policy and provisions

contained in an endorsement to that policy, the endorsement provisions prevail.” 

Simon v. Shelter Gen. Ins. Co. , 842 P.2d 236, 241 (Colo. 1992). Simon

recognized an exception to that general rule, however, holding that conflicting

provisions should be construed against the insurer in cases where the endorsement

contains no separate signatures, and there is no other evidence or allegation that

the endorsement had been separately negotiated. See id . at 241-47. The District

contends the Simon conditions exist here and that the absolute pollution exclusion

provision in the Endorsement conflicts with the pollution exclusion clause in the

body of the policy.
-14-

We agree with the district court’s conclusion that Simon does not apply to

this case because the Endorsement does not conflict with the policy. Unlike the

endorsement at issue in Simon , the Endorsement to Policy CK expressly states

that it “ replaces the [p]ollution exclusion” within the body of the policy. 

Appellant’s App. at 121 (emphasis added). In addition to this clear and

unambiguous explanation that the Endorsement is a replacement of the pollution

exclusion clause, the introduction page to Policy CK clearly states that the policy

may “include one or more endorsements,” and explains that “[e]ndorsements

are documents that change [the District’s] policy.” Id. at 100. Because the

Endorsement reconciled its absolute pollution exclusion provision with the body

of Policy CK by making clear it was a replacement to the pollution exclusion

provision in the policy, there is no inherent conflict, as there was in Simon . 

Thus, the district court correctly concluded that St. Paul does not have a duty

to defend the District under Policy CK.

D. The Pollution Exclusion Clause in Policy ZA

The District next contends that the district court failed to find, pursuant

to Hecla , that the phrase “sudden accident” in Policy ZA’s pollution exclusion

provisions is ambiguous. We agree with the District that the district court

erroneously applied Colorado law, and that the phrase “sudden accident”
-15-

is ambiguous under Colorado law and should, therefore, be construed in favor

of the District.

Under Colorado law, “[t]erms used in a contract are ambiguous when they

are susceptible to more than one reasonable interpretation.” Hecla , 811 P.2d

at 1091. Colorado law holds that ambiguous language in an insurance contract

“must be construed in favor of the insured and against the insurer who drafted the

policy.” Id. at 1090. Further, under Colorado law, when there are two or more

reasonable interpretations of an insurance provision, courts must adopt an

interpretation that provides coverage. See Chacon v. American Family Mut. Ins.

Co., 788 P.2d 748, 750 (Colo. 1990). It follows from these principles that an

insurer seeking to avoid coverage based on the contention that a policy exclusion

applies, must prove “that the exemption claimed applies in the particular case, and

that the exclusions are not subject to any other reasonable interpretation.” 

Compass , 984 P.2d at 614 (quoting Hecla , 811 P.2d at 1090).

Policy ZA states that St. Paul “won’t cover injury or damage caused by

the discharge, dispersal, release or escape of pollutants . . . , [b]ut this exclusion

won’t apply to sudden accidents involving pollutants.” Appellant’s App. at 83. 

Policy ZA does not define “sudden accidents.” An almost identical exception to

a pollution exclusion clause was held to be ambiguous by the Colorado Supreme

Court in Hecla . There, the relevant provision stated that coverage was restored if
-16-

the discharge of the pollutant was “sudden and accidental.” 811 P.2d at 1087.

The court in Hecla concluded the phrase “sudden and accidental” could

reasonably be defined to mean abrupt or immediate, or it could reasonably be

defined to mean unexpected and unintended. Id. at 1092. Hecla construed the

phrase against the insurer to mean unexpected and unintended, thus triggering

the insurer’s duty to defend. Id. at 1092.

The District argues Policy ZA’s pollution exclusion clause suffers from the

same ambiguity as the one in Hecla and should be construed against St. Paul to

apply to all unexpected and unintended pollution events. It contends that St. Paul

has a duty to defend because the discharges alleged in the Old Timer complaint

were arguably unexpected and unintended. See id . at 1090 (“An insurer is not

excused from its duty to defend unless there is no factual or legal basis on which

the insurer might eventually be held liable to indemnify the insured.”). St. Paul

counters that Hecla is distinguishable, and therefore not applicable here. St. Paul

argues that Hecla ’s conclusion that “sudden” is capable of more than one

reasonable interpretation was based on unique policy language in that case. In

Hecla , the court noted that there would be an inherent contradiction with specific

policy language if “sudden” was given a temporal connotation, that is, only meant

“abrupt.” See id. at 1092. St. Paul contends that there would be no such inherent
-17-

contradiction within its policies; therefore, “sudden” only has a temporal

connotation, meaning “abrupt and immediate,” in this case.

The district court ignored both these arguments, holding that, “[r]egardless

of which party’s definition of ‘sudden’ is applied in this case, the Old Timer

complaint makes clear that the District’s release of pollutants was no accident.” 

Blackhawk , 856 F. Supp. at 591. The district court ruled that the Old Timer

complaint alleged that the discharges occurred routinely in the regular course

of business and thus, were neither unintentional nor unexpected. See id . We

conclude, however, that Colorado courts would find the phrase “sudden accident”

in St. Paul’s exclusion clause to be ambiguous. We also conclude that Colorado

courts would hold that the discharges alleged in the Old Timer complaint could

have been unexpected and unintended from the District’s point of view and,

therefore, that St. Paul is not excused from its duty to defend because the claims

in the Old Timer complaint arguably fall within policy coverage.

In Public Service , the Colorado Supreme Court recently held that even in

a policy in which there would be no internal contradiction with other policy

provisions, as there was in Hecla , the term “sudden” in a pollution exclusion

clause is nevertheless subject to more than one possible meaning and is therefore

inherently ambiguous. See 986 P.2d at 931-33. At issue in Public Service was

a pollution exclusion clause restoring coverage if the polluting event was
-18-

“sudden, unintended and unexpected.” Id. at 928-29. The Colorado Supreme

Court rejected the same argument made here by St. Paul that “sudden” was only

held to be ambiguous in Hecla in order to avoid an internal policy inconsistency. 

The Colorado Supreme Court in Public Service concluded that even though there

was no inherent contradiction within the context of the policy at issue in that

case, the phrase was nevertheless subject to more than one reasonable

interpretation and must, therefore, be construed against the insurer. See id.

at 931-33.

The Public Service decision also eliminates another argument advanced

by St. Paul: that “sudden” must have a temporal construction, meaning abrupt,

within the context of its policy in order to avoid redundancy. Both the District

and St. Paul agree that the term “accident” in the St. Paul policy means damage

that the insured “didn’t expect or intend to happen,” in other words, “unintended

and unexpected.” See Appellant’s Br. at 9; Appellee’s Br. at 30. Colorado

follows the “general rule of contract construction that a court should seek to give

effect to all provisions so that none will be rendered meaningless.” Public

Service, 986 P.2d at 933 (quotation omitted). St. Paul argues “sudden” cannot

mean “unexpected and unintended” because both “sudden” and “accident” would

mean “unexpected and unintended,” rendering the complete phrase redundant

and meaningless.
-19-

St. Paul’s argument erroneously presumes “sudden” is only capable of

two meanings, abrupt or unexpected. The Colorado Supreme Court rejected

this argument in Public Service, and clarified that Hecla did not limit the term

“sudden” to meaning only “unexpected and unintended.” See id. at 932 n.6. 

Hecla noted several reasonable interpretations of the term “sudden.” 

See 811 P.2d at 1091 (listing several meanings for “sudden,” including

“happening without previous notice” and “not foreseen” (quotation omitted)). 

In Public Service, the Colorado Supreme Court construed “sudden” to mean

“not prepared for,” in order to eliminate a possible redundancy and to give

meaning to the term “sudden” in a clause which restored coverage for “sudden,

unexpected and unintended” polluting events. 986 P.2d at 933. “In our view,”

the Colorado court explained, “in the context of the [policy’s] pollution

exclusion, ‘sudden’ must be read to mean something other than ‘unintended’ or

‘unexpected,’ because otherwise the term ‘sudden’ would be surplus language. 

However, we do not agree with [the insurer’s] conclusion that the term ‘sudden’

is therefore unambiguous and means ‘abrupt.’” Id. The court explained:

We return to the principle that ambiguous contract terms are those

that are reasonably susceptible to different meanings. In addition to

meaning “unintended” or “unexpected,” the term “sudden” can be

used to mean “happening or coming without warning or premonition”

or “unpremeditated, done without forethought,” “unforeseen,” and

“not prepared for.” Of course, we recognize that these terms are

similar to each other, but each has its own distinct meaning. 

Therefore, we hold that the term “sudden” in [the policy’s] pollution
-20-

exclusion is ambiguous. Because it is ambiguous, this term must be

construed against the insurer who drafted the policies and in favor of

the insured. 

Public Service , 986 P.2d at 933 (citations omitted).

Here, although the “sudden accident” phrase in St. Paul’s policy is not

identical to the “sudden and accidental” exclusionary clause in Hecla ’s policy

because of the deletion of the word “and,” we conclude that Colorado would find

the two clauses legally indistinguishable. See St. Paul Fire & Marine Ins. Co. v.

Lefton Iron & Metal Co., 694 N.E.2d 1049, 1056-57 (Ill. Ct. App. 1998) (finding

“sudden accident” ambiguous based on precedent finding “sudden and accidental”

ambiguous). The phrase could mean an abrupt accident, as St. Paul wishes us to

construe it, or, just as in Public Service , it can reasonably be construed to mean

“not prepared for, unintended and unexpected.” Thus, St. Paul cannot show that

its temporal interpretation of the term “sudden accident” is the only reasonable

interpretation of its exclusion clause. Hence, it has a duty to defend. See Hecla ,

811 P.2d at 1090 (holding that, to avoid policy coverage, the insurer must be able

to show that the exclusions are not subject to any other reasonable interpretation).

We also disagree with the district court’s conclusion that the discharges

alleged in the Old Timer complaint could not have been an “accident” within the

meaning of Policy ZA. Policy ZA doesn’t define “accident,” but it defines

“accidental event” as loss that the insured “didn’t expect or intend to happen.” 
-21-

Appellant’s App. at 80. As noted, both parties agree that the term “accident” in

the St. Paul policies means “unintended and unexpected.” Colorado courts have

held that “the phrase ‘neither expected nor intended’ should be read only to

exclude those damages that the insured knew would flow directly and immediately

from its intentional act.” Hecla , 811 P.2d at 1088 (emphasis added). Hecla

explicitly adopted the Second Circuit’s reasoning in City of Johnstown v. Bankers

Standard Insurance Co. , which held that “[o]rdinary negligence does not

constitute an intention to cause damage; neither does a calculated risk amount

to an expectation of damage. To deny coverage, then, the fact finder must find

that the insured intended to cause damage.” 877 F.2d 1146, 1150 (2d Cir. 1989)

(quoting Brooklyn Law School v. Aetna Cas. & Sur. Co. , 849 F.2d 788, 789

(2d Cir. 1988). Quoting from Johnstown , Hecla stated:

In general, what make injuries or damages expected or intended

rather than accidental are the knowledge and intent of the insured. 

It is not enough that an insured was warned that damages might

ensue from its actions, or that, once warned, an insured decided to

take a calculated risk and proceed as before. Recovery will be barred

only if the insured intended the damages , or if it can be said that the

damages were, in a broader sense, “intended” by the insured because

the insured knew that the damages would flow directly and

immediately from its intentional act.

811 P.2d at 1088 (quoting City of Johnstown , 877 F.2d at 1150) (emphasis added).

Accordingly, damages arising from negligence may constitute an “accident”

under Colorado law. Given this construction, the district court’s ruling that the
-22-

discharges could not be an “accident” under St. Paul’s policies is in error. T he

Old Timer complaint makes alternative allegations regarding the knowledge or

intent of the District in releasing effluent in excess of permit levels, alleging both

intentional conduct and negligence. See Appellant’s App. at 61, 65, 69. Thus,

the Old Timer complaint leaves open the possibility that the District’s conduct

was merely negligent.

Relying heavily on this circuit’s decision in Broderick Investment Co. v.

Hartford Accident & Indemnity Co., 954 F.2d 601, 606-07 (10th Cir. 1992),

St. Paul argues that its pollution exclusion clause precludes coverage because the

District intended to discharge effluent containing waste and contaminants from its

sewage treatment facility into the North Clear Creek and that it is irrelevant

whether or not the District intended or expected the damage caused by the

discharge of those contaminants into the surrounding environment. It argues that

the “pollution of the Old Timer plaintiffs’ land ‘could not have occurred but for’

the discharge of sewage effluent into the creek,” Appellee’s Br. at 32, and that the

“the proper inquiry is whether those in control of the contaminants expected or

intended the actions which resulted in contamination,” id. at 31 (quotation and

citations omitted).

In Broderick, we interpreted the phrase “discharge, dispersal, release or

escape,” in light of Colorado law and held that such a pollution exclusion clause
4 When we sit in diversity, we are obligated to apply the most recent

statement of state law by the state’s highest court. See Wood v. Eli Lilly & Co.,

38 F.3d at 513. When, as here, an intervening decision of a state’s highest court

has resolved an issue of state law directly contrary to this circuit’s prediction of

how the state court would resolve the same issue, we are bound by the later state

ruling, not by our prior panel’s interpretation of state law. Cf. Koch v. Koch

Indus., Inc., 203 F.3d 1202, 1231 (10th Cir. 2000) (holding that one panel of this

court must follow a prior panel’s interpretation of state law “absent a supervening

declaration to the contrary by that state’s courts or an intervening change in the

state’s law.”); Kinnison v. Houghton, 432 F.2d 1274, 1277 (10th Cir. 1970)

(concluding that the panel need not look to a Tenth Circuit opinion addressing

state law which supported the appellant’s position, because an intervening state

court decision held to the contrary); see also Huddleston v. Dwyer, 322 U.S. 232,

236 (1944) (holding that federal appellate courts must apply the state law as of

the time of the appeal to give effect to the intervening state court decision if

substantive state law changes between the time of a federal trial and appeal). 

Accordingly, we must follow the Colorado court’s interpretation of the pollution

exclusion clause in Compass, not our prediction in Broderick of how Colorado

would interpret such a clause.

-23-

will exclude coverage whenever a party intentionally discharges wastes in a

containment area, even if that party neither expects nor intends for pollutants to

escape from the containment area. See 954 F.2d at 606-07. We held that whether

the insured intended to cause damage after the initial discharge was irrelevant. 

Id. at 607.

The Colorado Supreme Court in Compass decided that our determination

in Broderick of how Colorado would interpret the pollution exclusion clause was

wrong. 984 P.2d at 617 (“We disagree with the Broderick analysis.”).4

 Compass

holds that the relevant inquiry is whether the insured “inten[ded] to discharge
-24-

pollutants from the containment area into the surrounding environment as opposed

to the company’s intent to place pollutants into the containment area in the first

instance.” Id. at 617.

[T]he average purchaser of insurance would have understood that

mere placement of wastes into a place which was thought would

contain or filter the wastes would not have been an event which

would fall within the exclusion. . . . [W]here material has been

deposited in a place which was believed would contain or safely

filter the material, such as a waste disposal pit or sanitary landfill,

the polluting event is the discharge, dispersal, release, or escape from

that place of containment into or upon the land, the air or water,

including groundwater.

Id. at 617-18 (quotation omitted). 

Compass holds that, where the underlying complaint leaves open the

possibility that the insured did not expect or intend the release of pollutants, the

insurer is not excused from its duty to defend under Colorado law. See id. at 618. 

Because Compass , consistent with Hecla , focused on whether the insured

intended the actual release of pollutants into the environment, it implicitly

rejected St. Paul’s argument that “whether the District expected or intended the

contamination is not relevant; the proper inquiry is whether those in control of the

contaminants expected or intended the actions which resulted in contamination.” 

Appellee’s Br. at 31 (quotation omitted).

St. Paul argues that the Old Timer complaint alleges that the District

intentionally discharged pollutants directly into North Clear Creek. The Old
-25-

Timer complaint, however, leaves open the possibility that the District’s conduct

was only negligent, that the District did not expect or intend that its facility would

not properly contain or filter the water it was treating, and that the District did not

expect or intend to release pollutants into the surrounding environment. This is

particularly so during the time period covered by Policy ZA, in which the Old

Timer complaint alleges only a single warning to the District that its discharges

exceeded permitted levels.

Policy ZA covers claims for damages resulting from events between

February 18, 1983 and February 18, 1986. The Old Timer complaint alleges that

the District was first notified that sampling disclosed effluent discharges in

excess of permit levels in August 1985. It is possible, therefore, under the facts

alleged in the complaint, that any discharges in excess of permitted levels prior to

August 1985, were not known to the District. Even after the District was warned

that its effluent was in excess of permit levels and even if it intentionally took

calculated risks with respect to the management of its sanitation facility, it is still

possible under the allegations of the Old Timer complaint that its conduct would

still be considered “accidental” under Colorado law because the complaint leaves

open the possibility that the District did not intend to cause the damages which

flowed from its intentional acts. We repeat the test used in Colorado: “It is not

enough that an insured was warned that damages might ensue . . . or that, once
-26-

warned, an insured decided to take a calculated risk and proceed as before. 

Recovery will be barred only if the insured intended the damages.” Hecla ,

811 P.2d at 1088; see also Johnstown , 877 F.2d at 1150 (noting that a discharge

of toxic waste could theoretically take place accidentally over an extended

period of time); Benedictine Sisters of St. Mary’s Hosp. v. St. Paul Fire & Marine

Ins. Co., 815 F.2d 1209, 1210-12 (8th Cir. 1987) (finding coverage under a

“sudden accident” pollution exclusion clause for a long-term discharge of soot

from hospital’s boiler stack because of malfunction, because of the possibility

that insured was unaware of the dangerous condition and, thus, did not expect or

intend the harm at the time it occurred).

St. Paul must demonstrate that “there is no factual or legal basis on which

the insurer might eventually be held liable to indemnify the insured.” Hecla,

811 P.2d at 1090. On the face of the complaint, we conclude that there is

a factual and legal possibility under Colorado law that the discharges were

a “sudden accident,” that is, that the District was not prepared for, and did not

expect or intend to discharge pollutants during the time frame covered by Policy

ZA. Hence, we conclude that the district court erred in finding that St. Paul did

not have a duty to defend under Policy ZA.

The Old Timer complaint alleges that each violation of the District’s permit

constitutes a separate violation of the Clean Water Act. Because at least some of
5 The District also argues that is there is a duty to defend because St. Paul’s

construction of its pollution exclusion clauses would eliminate virtually all

coverage for the District’s operations--the treatment of sewage and discharge of

treated wastewater--which would violate the District’s reasonable expectation that

the payment of its premiums would result in a comparable amount of coverage. 

See Regional Bank of Colo., N.A. v. St. Paul Fire & Marine Ins. Co. , 35 F.3d 494,

496, 497-98 (10th Cir. 1994) (describing the reasonable expectation doctrine

recognized by Colorado in insurance contract interpretation). Because we

conclude that St. Paul does have a duty to defend under Policy ZA, we need not

address this issue.

-27-

the claims in the underlying complaint allege facts that might fall within the

coverage of the policy’s phrase “sudden accident,” as these terms have been

interpreted by the Colorado courts, St. Paul has a duty to defend the District

on the whole suit under Policy ZA. See Fire Ins. Exch. , 953 P.2d at 1300

(holding that under Colorado law, once an insurer has a duty to defend an

insured under one claim brought against the insured, the insurer must defend

all claims brought at the same time, even if some of the claims are not covered

by the policy). 5

Accordingly, the judgment of the United States District Court for the

District of Colorado is REVERSED and the case is REMANDED for further

proceedings consistent with this opinion.