Opinion ID: 2743762
Heading Depth: 2
Heading Rank: 1

Heading: Application of the Pollution Exclusions

Text: Headwaters first contends the pollution exclusions are ambiguous and it is entitled to a trial to determine the scope of ACE’s duty to defend and provide indemnification of any losses associated with the Chesapeake litigation.
In this diversity action, we apply Utah law. Houston Gen. Ins. Co. v. Am. Fence Co., 115 F.3d 805, 806 (10th Cir. 1997) (“The interpretation of an -7- insurance contract is governed by state law and, sitting in diversity, we look to the law of the forum state.”). Under Utah law, the insurer has a duty to defend claims that arguably fall within the scope of the coverage provided. Equine Assisted Growth and Learning Ass’n v. Carolina Cas. Ins. Co., 266 P.3d 733, 736 (Utah 2011); see also Fire Ins. Exch. v. Therkelsen, 27 P.3d 555, 560 (Utah 2001) (“The test is whether the complaint alleges a risk within the coverage of the policy.” (internal citation omitted)). In duty-to-defend cases, Utah applies the so-called “eight corners rule.” See, e.g., Basic Research, LLC v. Admiral Ins. Co., 297 P.3d 578, 580 (Utah 2013). Under the eight corners rule, an insurer’s coverage liability is determined by comparing the allegations within the four corners of the complaint to the language contained in the four corners of the insurance policy. Id. 2 On this basis, the duty to defend “is triggered when the allegations in the underlying complaint[,] if proved, could result in liability under the policy.” Cincinnati Ins. Co. v. AMSCO Windows, 921 F. Supp. 2d 1226, 1236 (D. Utah 2013) (internal quotation marks omitted). But “[i]f the language found within the collective ‘eight corners’ of these documents clearly and unambiguously indicates that a duty to defend does or does not exist, the analysis is complete.” Equine Assisted 2 By contrast, under some insurance policies, it is necessary to consult the objective facts underlying the complaint to determine whether coverage is warranted. Equine Assisted Growth, 266 P.3d at 736. But where, as here, the policy defines the scope of coverage with specific reference to the allegations in the complaint, the eight corners rule controls. See id. -8- Growth, 266 P.3d at 737. It is the insurance company’s burden to “demonstrate that none of the allegations of the underlying claim is potentially covered (or that a policy exclusion conclusively applies to exclude all potential for such coverage).” Cincinnati Ins. Co., 921 F. Supp. 2d at 1236–37. Examining the four corners of the insurance policy is a matter of contract interpretation because an insurance policy is “merely a contract between the insured and the insurer.” Alf v. State Farm Fire and Cas. Co., 850 P.2d 1272, 1274 (Utah 1993). Like other contracts, an insurance policy is interpreted to give effect to the intent of the parties as expressed by the plain language of the instrument itself. Id. The insurer is permitted to limit or modify its obligations to provide coverage through explicit exclusions and exclusionary language. See Pollard v. Truck Ins. Exch., 26 P.3d 868, 871 (Utah 2001). But to limit coverage in this way the insurer must set forth exclusions “using language which clearly and unmistakably communicates to the insured the specific circumstances under which the expected coverage will not be provided.” Alf, 850 P.2d at 1275 (internal quotation marks omitted). The policies do not require a per se duty to defend. Rather, they provide for reimbursement of various expenses that Headwaters incurs in connection with the defense of lawsuits in which bodily injury or property damage within the scope of coverage “are alleged.” See, e.g., App. Vol. II at 371–77. Under this socalled “allocated loss adjustment expenses” provision, ACE could, but was not -9- obligated to, assume from Headwaters the defense or control of any covered suit filed against Headwaters. If ACE chose not to defend, then it would reimburse Headwaters for all reasonable and necessary expenses in excess of a minimum retention amount. Irrespective of its classification, this duty is one to which the eight corners rule applies. Cf. Equine Assisted Growth, 266 P.3d at 735–36 (describing the circumstances under which the eight corners rule operates). When an insurance policy, including its exclusions and limitations, is unambiguous, a court is restricted from considering extrinsic evidence to determine the parties’ intent. 3 Faulkner v. Farnsworth, 665 P.2d 1292, 1293 (Utah 1983) (“Whether an ambiguity exists is a question of law to be decided before parol evidence may be admitted.”); see also Emp’rs Mut. Cas. Co. v. Bartile Roofs, Inc., 618 F.3d 1153, 1171–72 (10th Cir. 2010) (collecting cases under Utah law that show the prohibition on extrinsic evidence in duty-to-defend cases that are based on the allegations in the complaint). On the other hand, when a policy provision is ambiguous, extrinsic evidence is admissible to help “resolve the ambiguity.” Fire Ins. Exch. v. Oltmanns, 285 P.3d 802, 805 (Utah 2012); Village Inn Apartments v. State Farm Fire & Cas. Co., 790 P.2d 581, 583 (Utah 3 In its reply brief, Headwaters also contends that Utah law allows extrinsic evidence to determine whether a latent ambiguity exists in the first instance. See Aplt. Reply at 21–22 (citing Watkins v. Ford, 304 P.3d 841 (Utah 2013)). But Headwaters argued in its opening brief that extrinsic evidence was only admissible to resolve the policies’ allegedly patent ambiguities, thus waiving the argument concerning a latent ambiguity that it makes on reply. -10- Ct. App. 1990) (defining ambiguity as an instance where “the terms used to express the intention of the parties may be understood to have two or more plausible meanings”). Similarly, when an insurance policy is less than clear to the reasonable purchaser of insurance, Utah courts consistently interpret “ambiguous or uncertain language in an insurance contract that is fairly susceptible to different interpretations [ ] in favor of coverage.” U.S. Fid. & Guar. Co. v. Sandt, 854 P.2d 519, 522 (Utah 1993). But the identification of an ambiguity is a matter first for the court. Cf. Farmers Ins. Exch. v. Versaw, 99 P.3d 796, 800–01 (Utah 2004) (finding ambiguities first, before construing the lack of clarity in favor of the insured). In other words, unless the language is unclear, the general rule applies, and the court interprets the contract in accordance with the parties’ intent as expressed by the plain language of the relevant instruments. See Holmes Dev., LLC v. Cook, 48 P.3d 895, 902 (Utah 2002); State Farm Mut. Auto. Ins. Co. v. DeHerrera, 145 P.3d 1172, 1174 (Utah Ct. App. 2006). And it is important to remember, a policy provision is not ambiguous simply because the parties ascribe different meanings to it according to their own interests. See Camp v. Deseret Mut. Benefit Ass’n, 589 P.2d 780, 782 (Utah 1979). With this legal background in mind, we turn next to the language of the pollution exclusions. -11-
The various policies that insured Headwaters contain similar but not identical exclusionary language. Broadly stated, the pollution exclusions are forms of the “total pollution exclusion” that “[t]he majority of courts have held [to be] ‘clear and unambiguous.’” See 9 Steven Plitt et al., Couch on Ins. § 127:13 (3d ed. 1995, database updated 2014). 4 Headwaters, however, maintains that the comprehensiveness of the pollution exclusions reveals ambiguity within the policies because literal application of the exclusions abolishes coverage. But a plain reading of the exclusion provisions contradicts Headwaters’ appeal for ambiguity. Simply stated, the pollution exclusions, while far-reaching, are not ambiguous and do not abolish all coverage under the policies. We reach this conclusion by first reviewing the various iterations of the pollution exclusions incorporated into the relevant policies.
The 2003 and 2006 policies, which contain an identical pollution 4 As a historical note, the “total pollution exclusion” within CGL policies has evolved over the past forty years as an effort by the insurance industry to limit its liability for the potentially large costs associated with environmental litigation. See Kenneth S. Abraham, The Rise and Fall of Commercial Liability Insurance, 87 Va. L. Rev. 85, 104 (2001). Accordingly, there is no question that the standard-form pollution exclusions have aimed for the broad applicability that Headwaters challenges here. Id. -12- exclusion, 5 excise coverage for “bodily injury” and “property damage” that stems from “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’” when combined with at least one of five circumstances enumerated in lettered subparts. App. Vol. II at 283–84; App. Vol. III at 530. 6 The district court held that the allegations in the complaint fell within subpart c of the pollution exclusion. That provision excludes coverage for bodily 5 Before the district court, Headwaters argued that certain “endorsements” contained in the 2006 policy effectively deleted the pollution exclusion in its entirety. The district court disagreed, and Headwaters does not make the argument on appeal. See Aplt. Br. at 18–19. Accordingly, for our purposes the pollution exclusions for the 2003 and 2006 policies are the same. 6 In relevant part, the exclusions take away coverage for: “Bodily injury” or “property damage” arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants”: