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 Defe ndant-Appellee, St. Paul Fire and Marine Insurance Company, seeking rehearin g of this court’s opinion filed April 11, 2000. The members of the hearing p anel 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 membe rs 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 inpart to clarify and substitute a portion of the opinion at Part III.D, and is DENI ED in all other respects. We withdraw the opinion filed on April 11, 2000, vacat e 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-App ellant. Richard B. Caschette, John R. Mann and Kevin P. Per ez, of Kennedy & Christopher, P.C., Denver, Colorado, for Defendant- Appellee. Laura A. Foggan, Daniel E. Troy and Raymond Shepher d, 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 Distri ct (District), brought a declaratory action and sought damages for breach of insurance contract against St. Paul Fire and Marine Insurance Company (St. Pau l) alleging St. Paul had a duty to defend and indemnify the District againstenvironmental damage claims. The action was originally filed in Colorado state c ourt 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 judgment1 The District also brought a declaratory judgment an d breach of insurance

contract claim against American Guarantee & Liabili ty Insurance Company (American). That action was consolidated with the St. Paul action. As of the date the District filed its notice of appeal, the c laims against American had not been finally disposed of in the district court; how ever, 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, th is panel has determined unanimously that oral argument would not materiallyassist the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). T he case is therefore ordered submitted without oral argument. -3- against St. Paul on the duty to defend claim, whichthe district court denied. The district court held that the pollution exclusio n 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. § 1 291,

we reverse. 2

I. BACKGROUND A. The Old Timer Complaint The District owns and operates a sewage treatment f acility on North Clear Creek in Blackhawk, Colorado. The facility treats sanitary sewer waste from communities of Blackhawk and Central City and, purs uant to a permit issued by the Colorado Department of Health, Water Control Division, discharges effluent into North Clear Creek. In 1993, owners o f 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-CentralCity 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 o f 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, feca l coliform bacteria, ammonia, and residual chlorine in excess of its permit limit s, constitute “pollutants” within the meaning of the Clean Water Act, 33 U.S.C. § 136 2(6). The complaint alleges that the District’s conduct in violating and disreg arding 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 l iability (CGL) insurance policies issued by St. Paul. The first policy, No. 583ZA3251 (Policy ZA) was effective from February 18, 1983 to February 18, 19 86. 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 bodil y 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 agains t 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 inju ry or damage caused by the discharge, dispersal, release or escape of pollutants such as . . . acids, alkalis, toxic chemicals, liquids or gases; or waste materia l 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 ide ntical to the one in Policy ZA, but also contains a Pollution Exclusi on Endorsement (the Endorsement) which states it “replaces the [p]ollut ion exclusion” clause in the policy to exclude coverage. Id . at 121. The Endorsement omits the language in the pollution exclusion clause that restores cov erage 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 Distric t’s motion for partial summary judgment, ruling that the pollution exclusi on 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 thatthe pollution exclusion in Policy CK, as replaced by the Endorsement, was abso lute 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 resp onse arguing that St. Paul had not filed a motion for summary judgment, St. Paul m oved 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 int erpretation and construction of an insurance policy is a matter of law, and ther efore 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 divers ity 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 th e 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 Colora do Supreme Court has not yet addressed an issue, we seek to predict how thatcourt 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 d etermination 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 h as 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 certa in 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 allege s 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 inst ances, insurers will be found to-9-

have a duty to defend even though ultimately it maybe 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 ne ed 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 i nsured 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 p leadings in the case against the insured, but the allegations do st ate 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 defen se 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 clai ms 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, a nd that the exclusions are not subject to any other reasonable interpretation. The insurer has a duty to defend unless the insurercan establish that the allegations in the complaint are solely and ent irely within the exclusions in the insurance policy. An insurer is not excused from its duty to defend unless there is no factual or le gal basis on which the insurer might eventually be held liable to inde mnify 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 clai m, a duty to defend against all claims asserted arises if any one of them is ar guably 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 e rred in finding that the District’s effluent constitutes a “pollutant” withi n the scope of the pollution exclusion provisions in the insurance policies. Th e policies define “pollutants” broadly to include “toxic chemicals, liquids or gas es; 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 fro m a sewage treatment facility should be considered a “pollutant.” The District r elies 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 betw een toxic industrial sludge, and non-toxic, non-hazardous “bi osolids” 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 . The3 St. Paul argues that the District did not raise thi s issue before the district

court. We are satisfied from our review of excerpt s from the District’s motion for summary judgment and its motion to alter or ame nd the district court’s June 24, 1994 order, that this issue was adequatelypresented 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 i s 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 Appea ls decision upon which the District’s argument is based was recentlyoverruled 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 w hether 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 extrins ic evidence, including evidence that sewage effluent may not be a pollutant, in ana lyzing pollution exclusion provisions. See id . at 615-16. Under Colorado law, the only relevantinquiry is how the complaint characterized the materials and w hether 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 che micals 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” with in 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 dis trict court to have looked beyond the face of the complaint, as urged by the D istrict, in order to have considered any extrinsic evidence offered by the Di strict 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 cons titute “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 damage s, 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 th e district court did not err in finding that the sewage and effluent the Distric t is alleged to have discharged-13-

constitute “pollutants” within the meaning of St. P aul’s insurance policies’ exclusions. C. The CK Policy Endorsement The District next contends the district court erredin holding that the absolute pollution exclusion contained in the Endor sement to Policy CK overrides that policy’s standard pollution exclusion clause. Whereas the body of Policy CK contains an exception to its general pollution excl usion for “sudden accidents involving pollutants,” the absolute pollution exclu sion 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 end orsement provisions prevail.” Simon v. Shelter Gen. Ins. Co. , 842 P.2d 236, 241 (Colo. 1992). Simon recognized an exception to that general rule, howev er, 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 pollut ion exclusion provision in the Endorsement conflicts with the pol lution 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 conflictwith 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 addit ion to this clear and unambiguous explanation that the Endorsement is a r eplacement of the pollution exclusion clause, the introduction page to Policy C K clearly states that the policy may “include one or more endorsements,” and explain s that “[e]ndorsements are documents that change [the District’s] policy.” Id. at 100. Because the Endorsement reconciled its absolute pollution exclu sion provision with the body of Policy CK by making clear it was a replacement t o the pollution exclusion provision in the policy, there is no inherent conflict, as there was in Simon

. Thus, the district court correctly concluded that S t. 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 Distric t that the district court erroneously applied Colorado law, and that the phra se “sudden accident”-15-

is ambiguous under Colorado law and should, therefo re, 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 languag e in an insurance contract “must be construed in favor of the insured and agai nst the insurer who drafted the policy.” Id. at 1090. Further, under Colorado law, when there are two or more reasonable interpretations of an insurance provisio n, 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 cont ention that a policy exclusion applies, must prove “that the exemption claimed app lies in the particular case, and that the exclusions are not subject to any other re asonable 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 poll utants . . . , [b]ut this exclusion won’t apply to sudden accidents involving pollutant s.” Appellant’s App. at 83. Policy ZA does not define “sudden accidents.” An a lmost identical exception to a pollution exclusion clause was held to be ambiguo us by the Colorado Supreme Court in Hecla . There, the relevant provision stated that covera ge was restored if-16-

the discharge of the pollutant was “sudden and acci dental.” 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 u nintended, thus triggering the insurer’s duty to defend. Id . at 1092. The District argues Policy ZA’s pollution exclusionclause 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 ev ents. 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 inde mnify the insured.”). St. Paul counters that Hecla is distinguishable, and therefore not applicable h ere. St. Paul argues that Hecla ’s conclusion that “sudden” is capable of more thanone reasonable interpretation was based on unique polic y language in that case. In Hecla , the court noted that there would be an inherent c ontradiction with specific policy language if “sudden” was given a temporal co nnotation, 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, “sudd en” only has a temporal connotation, meaning “abrupt and immediate,” in thi s case. The district court ignored both these arguments, ho lding 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 o f pollutants was no accident.” Blackhawk , 856 F. Supp. at 591. The district court ruled that the Old Timer complaint alleged that the discharges occurred rout inely 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 Distri ct’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 eve n in a policy in which there would be no internal contra diction with other policy provisions, as there was in Hecla , the term “sudden” in a pollution exclusion clause is nevertheless subject to more than one pos sible 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. P aul 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 co nstruction, 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. Color ado 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 arg ues “sudden” cannot mean “unexpected and unintended” because both “sudd en” and “accident” would mean “unexpected and unintended,” rendering the complete phrase redundant and meaningless.-19-

St. Paul’s argument erroneously presumes “sudden” i s only capable of two meanings, abrupt or unexpected. The Colorado S upreme Court rejected this argument in Public Service , and clarified that Hecladid not limit the term “sudden” to meaning only “unexpected and unintended .” See id. at 932 n.6. Heclanoted several reasonable interpretations of the te rm “sudden.”
See 811 P.2d at 1091 (listing several meanings for “sud den,” including “happening without previous notice” and “not forese en” (quotation omitted)).
In Public Service , the Colorado Supreme Court construed “sudden” to mean “not prepared for,” in order to eliminate a possibl e redundancy and to give meaning to the term “sudden” in a clause which rest ored coverage for “sudden, unexpected and unintended” polluting events. 986 P .2d at 933. “In our view,” the Colorado court explained, “in the context of th e [policy’s] pollution exclusion, ‘sudden’ must be read to mean something other than ‘unintended’ or ‘unexpected,’ because otherwise the term ‘sudden’ w ould be surplus language. However, we do not agree with [the insurer’s] concl usion 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 meanin gs. In addition to meaning “unintended” or “unexpected,” the term “sud den” can be used to mean “happening or coming without warning o r premonition” or “unpremeditated, done without forethought,” “unf oreseen,” and “not prepared for.” Of course, we recognize that these terms are similar to each other, but each has its own distinc t meaning. Therefore, we hold that the term “sudden” in [the p olicy’s] pollution-20-

exclusion is ambiguous. Because it is ambiguous, this term must be construed against the insurer who drafted the polic ies 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 concl ude that Colorado would find the two clauses legally indistinguishable. S ee St. Paul Fire & Marine Ins. Co. v. Lefton Iron & Metal Co. , 694 N.E.2d 1049, 1056-57 (Ill. Ct. App. 1998) (fi nding “sudden accident” ambiguous based on precedent find ing “sudden and accidental” ambiguous). The phrase could mean an abrupt accide nt, 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.” Thu s, St. Paul cannot show that its temporal interpretation of the term “sudden acc ident” 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 cov erage, 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 conclusi on that the discharges alleged in the Old Timer complaint could not have been an “accident” withinthe meaning of Policy ZA. Policy ZA doesn’t define “ac cident,” but it defines “accidental event” as loss that the insured “didn’texpect or intend to happen.”-21-

Appellant’s App. at 80. As noted, both parties agr ee that the term “accident” in the St. Paul policies means “unintended and unexpec ted.” Colorado courts have held that “the phrase ‘neither expected nor intende d’ 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 do es a calculated risk amount to an expectation of damage. To deny coverage, the n, 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 intentof the insured. It is not enough that an insured was warned that damages might ensue from its actions, or that, once warned, an in sured 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 direct ly 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 co nstitute an “accident” under Colorado law. Given this construction, the d istrict court’s ruling that the-22-

discharges could not be an “accident” under St. Paul’s policies is in error. T he Old Timercomplaint makes alternative allegations regarding the knowledge or intent of the District in releasing effluent in exc ess 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 Dis trict’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 Cree k and that it is irrelevant whether or not the District intended or expected th e damage caused by the discharge of those contaminants into the surroundin g environment. It argues that the “pollution of the Old Timerplaintiffs’ 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 contaminatio n,” id. at 31 (quotation and citations omitted).
In Broderick, we interpreted the phrase “discharge, dispersal, r elease or escape,” in light of Colorado law and held that suc h a pollution exclusion clause4 When we sit in diversity, we are obligated to applythe 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 deci sion 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, w e 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 TenthCircuit 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 m ust apply the state law as of the time of the appeal to give effect to the interv ening state court decision if substantive state law changes between the time of afederal 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 intentionall y discharges wastes in a containment area, even if that party neither expect s 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 init ial 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 excl usion clause was wrong. 984 P.2d at 617 (“We disagree with the Broderick analysis.”). 4 Compass holds that the relevant inquiry is whether the insu red “inten[ded] to discharge-24-

pollutants from the containment area into the surro unding environment as opposed to the company’s intent to place pollutants into th e containment area in the first instance.” Id. at 617. [T]he average purchaser of insurance would have und erstood that mere placement of wastes into a place which was tho ught would contain or filter the wastes would not have been anevent which would fall within the exclusion. . . . [W]here mat erial has been deposited in a place which was believed would conta in or safely filter the material, such as a waste disposal pit o r sanitary landfill, the polluting event is the discharge, dispersal, re lease, or escape from that place of containment into or upon the land, th e 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 inte nd the release of pollutants, the insurer is not excused from its duty to defend unde r 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 i s whether those in control of the contaminants expected or intended the actions whichresulted 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-

Timercomplaint, however, leaves open the possibility th at the District’s conduct was only negligent, that the District did not expec t or intend that its facility would not properly contain or filter the water it was tre ating, 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 P olicy ZA, in which the Old
Timercomplaint alleges only a single warning to the Dis trict 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 Timercomplaint alleges that the District was first notified that sampling discl osed effluent discharges in excess of permit levels in August 1985. It is poss ible, therefore, under the facts alleged in the complaint, that any discharges in ex cess 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 an d 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 lawbecause the complaint leaves open the possibility that the District did not inte nd to cause the damages which flowed from its intentional acts. We repeat the te st 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 ris k 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 accid entally over an extended period of time); Benedictine Sisters of St. Mary’s Hosp. v. St. PaulFire & Marine
Ins. Co. , 815 F.2d 1209, 1210-12 (8th Cir. 1987) (finding c overage 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 conditionand, 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 inde mnify 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 err ed 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 Distr ict’s permit constitutes a separate violation of the Clean WaterAct. Because at least some of5 The District also argues that is there is a duty to defend because St. Paul’s

construction of its pollution exclusion clauses wou ld eliminate virtually all coverage for the District’s operations--the treatme nt of sewage and discharge of treated wastewater--which would violate the Distric t’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 reason able expectation doctrine recognized by Colorado in insurance contract interp retation). Because we conclude that St. Paul does have a duty to defend u nder 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 h as 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 o f 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 RE MANDED for further proceedings consistent with this opinion.