Opinion ID: 769015
Heading Depth: 3
Heading Rank: 4

Heading: The Pollution Exclusion Clause in Policy ZA

Text: 26 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 is ambiguous under Colorado law and should, therefore, be construed in favor of the District. 27 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). 28 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 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. 29 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 contradiction within its policies; therefore, sudden only has a temporal connotation, meaning abrupt and immediate, in this case. 30 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. 31 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 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. 32 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. 33 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: 34 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 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. 35 Public Service, 986 P.2d at 933 (citations omitted). 36 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). 37 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. 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: 38 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. 39 811 P.2d at 1088 (quoting City of Johnstown, 877 F.2d at 1150) (emphasis added). 40 Accordingly, damages arising from negligence may constitute an accident under Colorado law. Given this construction, the district court's ruling that the discharges could not be an accident under St. Paul's policies is in error. The 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. 41 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). 42 In Broderick, we interpreted the phrase discharge, dispersal, release or escape, in light of Colorado law and held that such a pollution exclusion clause 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. 43 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 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. 44 [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. 45 Id. at 617-18 (quotation omitted). 46 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). 47 St. Paul argues that the Old Timer complaint alleges that the District intentionally discharged pollutants directly into North Clear Creek. The Old 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. 48 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 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). 49 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. 50 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 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 51 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.