Opinion ID: 1877444
Heading Depth: 1
Heading Rank: 3

Heading: Coverage Defenses

Text: Although the MPCA has not yet decided the particular remedies appropriate for clean-up at the Site, the defendants contend that at least some remediation will take place on and solely to benefit the property where Domtar operated its tar refining plant. The CGL policies introduced at trial exclude claims for damage to property owned by the insured, and the defendants assert that it was error not to present this coverage defense to the jury. Drafting special verdict forms is a matter within a trial court's sound discretion. However, a party is entitled to have the jury consider important questions of material fact raised by the pleadings and the evidence. Minn. R. Civ. P. 49.01(a); Hill v. Okay Constr. Co., 312 Minn. 324, 340, 252 N.W.2d 107, 118 (1977); see also Thielbar v. Juenke, 291 Minn. 129, 136, 189 N.W.2d 493, 498 (1971). We have indicated that the owned-property exclusion can limit recovery for MPCA-prompted remediation expenses. NSP, 523 N.W.2d at 662 n. 6. Domtar is correct, however, that groundwater contamination is damage to public property and therefore not excluded. 3M, 457 N.W.2d at 182. Moreover, we agree that if there is actual injury and an existing threat to third-party property (whether private or public), then clean-up on the insured's own property that is designed to protect third-party property is not excluded. Cf. State v. Signo Trading Int'l, Inc., 130 N.J. 51, 61-64, 612 A.2d 932, 937-39 (1992) (adopting this standard, but requiring an imminent threat). Nevertheless, the owned-property exclusion does bar coverage for expenses incurred to clean-up contamination that is confined to the insured's property and unrelated to preventing off-site contamination. We agree with the lower courts, however, that the owned-property exclusion does not apply in this case. Domtar simply did not own the property at the time that the defendants' insurance policies were in effect. See Hatco Corp. v. W.R. Grace & Co.-Conn., 801 F.Supp. 1334, 1359 (D.N.J.1992). Domtar sold the property in 1955 and the first policy issued by the defendants commenced in 1956. The defendants stress that the New Jersey Supreme Court has held that property sold before damage occurs may fall within an owned-premises exclusion. Wickner v. American Reliance Ins. Co., 141 N.J. 392, 398-99, 661 A.2d 1256, 1259 (1995) (rejecting the reasoning in Hatco ). But Wickner interpreted policies that excluded coverage for property damage arising out of an owned premises. Id. at 396, 661 A.2d at 1258. The policies in this case exclude damage to or destruction of property owned by the insured; the language of these exclusions is not so easily extended to include sold-and-then-damaged property. This result is entirely consistent with NSP. The policies at issue in that case were in effect when the insured owned at least some of the contaminated property. NSP, 523 N.W.2d at 659. Our approval of the potential applicability of the owned-property exclusion was therefore no indication that coverage is barred no matter when the property damage takes place. Consistent with the best reading of the policy language before us, we hold that the owned-property exclusions and limitations in the 1956-1970 policies do not apply.
Lloyd's offers four additional arguments against coverage for Domtar. First, Lloyd's argues that it conclusively established at trial that no appreciable damage took place during its policy periods. The jury rejected Lloyd's argument, and a jury's answer to a special verdict form can be set aside only if no reasonable mind could find as did the jury. Hauenstein v. Loctite Corp., 347 N.W.2d 272, 275 (Minn.1984). Here, the evidence clearly supported the jury's answer. Domtar's expert testified that the contamination has been migrating through the soil and into the groundwater since 1956. Continental's expert believed that certain components of the contamination had moved little since discharge, but he acknowledged that movement had occurred. Granted, Lloyd's expert testified that contaminants could not have migrated over the years to the groundwater, but instead moved rapidly through cracks in the subsurface clay at the time of the spills. However, the defendants' experts both acknowledged that there was some migration, especially with respect to the pollution that reached the groundwater. At trial, Lloyd's response was that biodegradation actually ameliorated the contamination after it was discharged. The jury apparently disagreed. There was competent evidence in the record to support the reasonableness of the jury's conclusion. Second, Lloyd's points out that its 1966-1969 excess coverage requires that property damage must be unexpected for there to be an occurrence. Based on an objective standard, Lloyd's contends that the contamination was expected because Domtar knew or had reason to know that property damage was likely to occur. The trial court denied Lloyd's request to include the issue of Domtar's expectations in the special verdict form. For CGL policies, this court has interpreted the meaning of expected damage to require a certainty of harm on the part of the insured greater than general standards of foreseeability used to impose liability on the insured. Continental Western Ins. Co. v. Toal, 309 Minn. 169, 176 & n. 3, 244 N.W.2d 121, 125 & n. 3 (1976); Bituminous Cas. Corp. v. Bartlett, 307 Minn. 72, 77-79, 240 N.W.2d 310, 313-14 (1976). In explaining the high degree of certainty demanded, we have also equated expected damage with reckless conduct. Ohio Cas. Ins. Co. v. Terrace Enters., Inc., 260 N.W.2d 450, 452-53 (Minn.1977). Of course, this standard does not preclude the use of circumstantial evidence or proof of willful blindness, but it is the insured's actual expectation of damage that allows a defense to coverage. [6] Based on the record, it was not reversible error to refuse to submit the expected-damage defense to the jury. Lloyd's is unable to identify evidence of Domtar's subjective expectations. The only evidence on point was the testimony of Eli Skorich, a retired plant worker who testified that he neither expected nor intended environmental harm from anything he did at the plant, nor was he aware of such expectations or intentions on the part of anyone else at the plant. Although we cannot say that it would have been an abuse of discretion for the trial court to submit the issue to the jury based on circumstantial evidence of Domtar's subjective expectations, the refusal to do so does not merit reversal and a new trial. In the absence of any evidence that Domtar expected, to a high degree of certainty, the same general type of damage for which the MPCA now seeks remedial action, the trial court properly refused to submit the issue of expected damages to the jury. Cf. Pittston Co. v. Allianz Ins. Co., 905 F.Supp. 1279, 1301 (D.N.J. 1995); Morton Int'l, Inc. v. General Accident Ins. Co. of Am., 134 N.J. 1, 85-87, 90-95, 629 A.2d 831, 879-80, 882-84 (1993) (allowing proof by objective indicia in exceptional circumstances). Third, Lloyd's argues that, despite NSP, its 1956-1965 coverage is accident-based and therefore not triggered by property damage; rather, an accidental discharge must take place during the policy period. We disagree. It is of course true that NSP reviewed occurrence-based policies, NSP, 523 N.W.2d at 659, and that there is a distinction between the concepts of accident and occurrence, at least in the absence of any policy language to the contrary, Singsaas, 307 Minn. at 155-56, 238 N.W.2d at 880 (noting the 1966 revision in standard-form CGL policies); Golden v. Lerch Bros., Inc., 211 Minn. 30, 34-36, 300 N.W. 207, 210-11 (1941); Kenneth S. Abraham, Environmental Liability Insurance Law 92 (1991). But our definition of accident is not as restrictive as Lloyd's claims. See Hauenstein v. St. Paul-Mercury Indem. Co., 242 Minn. 354, 358-59, 65 N.W.2d 122, 126 (1954) (accident includes an unexpected happening or consequence from either a known or unknown cause; allowing recovery for damages occurring during the policy period caused by the insured's defectively manufactured plaster). More importantly, Lloyd's policies apply to events occurring anywhere, and define accident to include a series of accidents arising out of an event or occurrence. Considering the practical nature of NSP and Lloyd's policy language, the actual-injury trigger applies to all of the policies at issue in this case. Fourth and finally, Lloyd's contends that the jury should have been asked to determine whether Domtar had adequately established the terms and conditions of its 1956-1965 primary coverage with Canadian General. The found Lloyd's excess policy for 1962-1965 covers liabilities which are also covered by and defined in the policy/ies    issued by Canadian General, and the standard-form Lloyd's excess policy introduced as circumstantial evidence of 1956-1962 insurance covers property damage arising out of the hazards covered by and as defined in the underlying Canadian General policies. Lloyd's therefore claims that the terms and conditions of this primary coverage must be proved and satisfied as a condition precedent to invoking Lloyd's excess coverage. The initial burden of demonstrating coverage rests with the insured; the burden of establishing the applicability of exclusions rests with the insurer. SCSC, 536 N.W.2d at 311-14. We agree with Lloyd's and the prevailing rule that, as part of the insured's initial burden, the essential terms and conditions of coverage must be proved. [7] When the actual policies have been inadvertently lost or destroyed, the insured may satisfy this burden with circumstantial evidence, such as proof that a particular standard-form policy was issued to the insured. By the same token, the insurer may then establish the existence, terms, and conditions of any exclusions using circumstantial evidence. However, we see no sense in declaring that the trial court erred because Domtar's dispute with Canadian General has not yet been resolved. Although the record is not entirely clear, our reading is that the existence of primary coverage for 1956-1965 was simply not litigated by the parties nor decided by the trial court during the proceedings below. Instead, the trial court decided to proceed while Canadian General pressed its jurisdictional arguments through the appellate courts, holding Domtar responsible for the uncontested policy limits of the 1956-1965 primary coverage. In this court, Lloyd's does not object to the absence of Canadian General at trial nor to the trial court's decision to consider Domtar self-insured while its case against Canadian General awaits trial. The sufficiency of the evidence regarding Domtar's 1956-1965 primary coverage should be judged by the standard we articulated above, but the trial court in this case had no occasion to rule on the evidence of primary coverage. In effect, there is no ruling for us to reverse and no argument against the trial court's order to consider. Lloyd's is therefore liable as an excess insurer for the 1956-1965 policy periods and, until Domtar's dispute with Canadian General is resolved, Domtar will be considered self-insured for this period. In subsequent proceedings, if the evidence of primary coverage for this period is found to be insufficient or if the primary policies somehow bar coverage, then, consistent with the language of Lloyd's policies, Lloyd's is not liable on its 1956-1965 policies.
Continental raises three additional arguments against coverage for Domtar. Continental's first concern is that the jury should have been asked to consider the defense of lack of fortuity. Continental's policies do not refer to fortuity as a requirement for coverage. They do, however, contain an exclusion for any act or omission committed with intent to cause injury to persons or property. The trial court did include this exclusion in the special verdict form, but the jury concluded that Continental failed to demonstrate that Domtar intended to injure property. See SCSC, 536 N.W.2d at 313-14 (the insurer bears the burden of establishing the applicability of an exclusion as an affirmative defense). Continental is, in essence, attempting to insert an exclusion for expected damage into its policies; in fact, Continental's requested special verdict question was, [S]hould Domtar have expected property damage prior to 1965. (Emphasis added). We see no good reason to rewrite Continental's policies. Second, Continental argues that the known-loss doctrine bars coverage. This argument has clearer support in our case law, but it fails for lack of evidence in the record. In Waseca Mut. Ins. Co. v. Noska, we explained, Insurance cannot be issued for a known loss. Oster v. Riley, 276 Minn. 274, 287, 150 N.W.2d 43, 52 (1967) (Otis, J., dissenting). Once the loss has occurred, there is no longer any risk. Hence, where the loss has occurred prior to the application for insurance, the relevant question is    whether the parties, particularly the insured, knew of the loss at the time of application, since that knowledge would be nearly conclusive evidence as to bad faith. 331 N.W.2d 917, 924-25 n. 6 (Minn.1983). In this state, known loss is a fraud-based defense. See Franklin v. Carpenter, 309 Minn. 419, 424-25, 244 N.W.2d 492, 496 (1976); Oster, 276 Minn. at 280-81, 150 N.W.2d at 48-49; id. at 287, 150 N.W.2d at 53 (Otis, J., dissenting). As such, the doctrine requires proof that the insured withheld material information concerning the existence of property damage, including the initiation or continuation of soil or groundwater contamination, for which the insured subsequently obtained insurance. The insured need not know of the exact nature or extent of the contamination, but there must be evidence that the insured knew of the property damage when it purchased insurance that would otherwise cover the loss. There is no such evidence in the record before us. Third, Continental claims its retrospective premium rating adjustment plan required Domtar to notify Continental of the property damage at issue in this case within 5 years. Continental argues that an unadjusted premium constitutes lack of consideration. This argument lacks merit. The language of the endorsement does not indicate that it excludes unknown losses. Even if it did, we would be hard pressed to conclude that the policy is void and lacks consideration simply because the premium was not adjusted. It is uncontested that Domtar paid the standard premium. Continental offers no convincing argument for disturbing the lower courts' rulings that it breached its duty to defend and that it has a duty to indemnify Domtar. See SCSC, 536 N.W.2d at 311-14, 315 (explaining that the duty to defend is broader than the duty to indemnify). Domtar met its burden of establishing coverage and no defenses to coverage apply.