Opinion ID: 1169781
Heading Depth: 2
Heading Rank: 2

Heading: AMICO's Defense Obligations Under its Insurance Policies

Text: Before we reach the merits of Aetna's subrogation claim, we must first address AMICO's cross-appeal and determine whether AMICO had a duty to defend arising under its insurance policies with UV Industries. We have previously held that an insurer's duty to defend is broader than its duty to indemnify. Its defense duty arises when the insurer ascertains facts giving rise to potential liability under the insurance policy. Deseret Fed. Sav. & Loan Assoc. v. United States Fidelity & Guar. Co., 714 P.2d 1143, 1146 (Utah 1986). This potential liability is determined by referring to the allegations in the underlying complaint. When those allegations, if proved, could result in liability under the policy, then the insurer has a duty to defend. Id. at 1147. AMICO claims that the allegations of the EPA's complaint, even if proved, could not give rise to liability under its policies with its insured. As set forth above, from April 1, 1975, to April 1, 1980, AMICO contracted with UV to provide comprehensive general liability insurance (known in the industry as CGL policies). The insurance policies provided that AMICO would pay the insured all sums which the insured shall become legally obligated to pay as damages ... because of: (a) bodily injury or property damage, ... caused by an occurrence.... Moreover, the policies provided that AMICO would defend its insured in any suit against the insured alleging such injury or property damage and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false, or fraudulent. Similar to most standard CGL policies, however, AMICO's policies generally excluded coverage for pollution: This policy does not apply ... to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water. The pollution exclusion, however, also contained an exception where the discharge or dispersal, release or escape is sudden and accidental.  (Emphasis added.) In July 1988 the trial court initially ruled that the damage alleged in the underlying CERCLA action fell under the pollution exclusion clause contained in AMICO's policies and was not sudden and accidental as required by the exception's language. Therefore, it held that AMICO did not have a duty to defend. After finding that the language of the exception to the exclusion was clear and unambiguous, the court reasoned that although the term sudden encompassed whether the discharge was expected, it also had a temporal element requiring it to be instantaneous and abrupt. The court then held that since the buildup of tailings piles was alleged to have occurred over a 70-year period, [t]here can be no doubt that the United States is alleging gradual contamination and is not alleging a sudden release. However, in March 1989, the court considered additional evidence, specifically a 1988 EPA report entitled Final Draft Remedial Investigation Report. That report indicated that pollution may have occurred from sudden high-wind events or slope failures from the stored tailings, after the gradual dumping had taken place. Thus, based on the pleadings, the court held that because genuine issues of material fact existed as to whether some of the pollution damage was sudden and accidental, there was a possibility that AMICO's policies covered the discharges, and thus AMICO had a duty to defend. AMICO, however, never paid any defense costs because a disputed issue still remained as to which entities were covered by the AMICO policies. [8] After AMICO submitted its brief arguing why the Liquidating Trust was not covered, but before the issue was decided, AMICO settled with both the Liquidating Trust and Sharon Steel. AMICO now argues that if its settlement with the insured did not cut off Aetna's subrogation right, the trial court erred in determining that AMICO had a duty to defend. AMICO agrees with the trial court's interpretation of the exception to its pollution exclusion clause to the extent that the term sudden denotes a time-specific event and that long-term discharges of pollutants are not sudden. However, AMICO contends that the court erred in reversing its first decision and finding that the EPA had later alleged sudden discharges from the tailings piles. AMICO argues that a gradual and long-term course of conduct in discharging pollutants does not qualify as `sudden,' even if some of the individual discharges would be `sudden' if viewed in isolation. It cites federal case law from the Tenth Circuit which holds that if the discharges were part of a series of routine events which occurred as a concomitant of regular business operations, then the fact that individual discharges may have occurred both suddenly and accidentally, when viewed in isolation, does not make the overall pattern of discharges sudden and accidental. Quaker State Minit-Lube, Inc. v. Fireman's Fund Ins. Co., 52 F.3d 1522, 1529-30 (10th Cir.1995); accord Hartford Accident & Indem. Co. v. United States Fidelity & Guar. Co., 962 F.2d 1484, 1490 (10th Cir.1992). Before determining the merits of AMICO's contention, we examine the trial court's initial interpretation of the sudden and accidental exception to the pollution exclusion clause and determine whether it correctly concluded that the language is unambiguous and that the term sudden includes a temporal element. Whether a contract term is ambiguous is a question of law, which we review for correctness. Interwest Constr. v. Palmer, 923 P.2d 1350, 1358 (Utah 1996) (citing Willard Pease Oil & Gas Co. v. Pioneer Oil & Gas Co., 899 P.2d 766, 770 (Utah 1995)). If a contract is unambiguous, a trial court may interpret the contract as a matter of law, and we review the court's interpretation for correctness. Id. at 1358-59. Although this court has never had the opportunity to interpret these terms, the sudden and accidental exception to pollution exclusion clauses in CGL policies has been the subject of considerable debate in the federal courts and other jurisdictions. One line of authority rejects the holding adopted by the trial court and reasons that because CGL policies do not define sudden and accidental, and because dictionary definitions vary [9] and the drafting history of the policy is confused, the language is ambiguous. See, e.g., Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1091-92 (Colo.1991); Claussen v. Aetna Cas. & Sur. Co., 259 Ga. 333, 380 S.E.2d 686, 688 (1989); Just v. Land Reclamation, Ltd., 155 Wis.2d 737, 456 N.W.2d 570, 573 (1990). As a result, these jurisdictions, resorting to maxims of contract interpretation such as contra preferentum, interpret the terms of the contract against the contract's drafter and thus in favor of the insured and ultimately find that the terms sudden and accidental mean only unexpected or unintended and do not contain a temporal element. Under this interpretation, a policy may cover the pollution even where it occurs gradually over time, as long as it was not expected or intended. See, e.g., Outboard Marine Corp. v. Liberty Mut. Ins. Corp., 154 Ill.2d 90, 180 Ill.Dec. 691, 705, 607 N.E.2d 1204, 1218 (1992); Morton Int'l Inc. v. General Accident Ins. Co., 134 N.J. 1, 629 A.2d 831, 847-49 (1993), cert. denied, 512 U.S. 1245, 114 S.Ct. 2764, 129 L.Ed.2d 878 (1994); Queen City Farms, Inc. v. Central Nat'l Ins. Co., 126 Wash.2d 50, 882 P.2d 703, 720-21 (1994); Joy Techs., Inc. v. Liberty Mut. Ins. Co., 187 W.Va. 742, 421 S.E.2d 493, 498-99 (1992). However, we believe the better reasoning, adopted by a majority of the courts, including the U.S. Court of Appeals for the Tenth Circuit, and followed by the trial court here, is that the language is unambiguous and that the term sudden contains a temporal element, such as being abrupt or quick, and the term accidental means something akin to unintended or unexpected. [10] United States Fidelity & Guar. Co. v. Morrison Grain Co., 999 F.2d 489, 493 (10th Cir.1993). The courts adopting this view have reasoned that the term sudden includes an element of immediacy, quickness, or abruptness, because the contrary reading would render the word accidental (which clearly means unexpected) redundant. Id. (citing United States Fidelity & Guar. Co. v. Morrison Grain Co., 734 F.Supp. 437, 446 (D.Kan. 1990)). This interpretation has also been followed by the Utah Court of Appeals in Gridley Associates v. Transamerica Insurance Co., 828 P.2d 524 (Utah.Ct.App.1992). After reviewing the interpretation of numerous other courts, the court of appeals found that the decisions holding that the terms were unambiguous were better reasoned, and thus opined that [w]hile the word connotes a sense of unexpectedness, `sudden' within the `sudden and accidental' clause cannot be defined without reference to a temporal element, specifically immediacy, abruptness, and quickness. Id. at 527. We agree. Having determined that the terms are unambiguous, we now turn to whether the trial court correctly held that, according to the facts of this case, some of the pollution could be deemed sudden to include it within the coverage of the CGL policy. Generally, courts have agreed that [i]t is the release of pollutants itself that must have occurred suddenly, if the exception is to apply. Lumbermens Mut. Cas. Co. v. Belleville Indus., Inc., 407 Mass. 675, 555 N.E.2d 568, 571 (1990). In cases where the release of pollution occurred abruptly over a relatively short period of time, courts are more likely to find that the discharge was sudden. For example, in Gridley, the Utah Court of Appeals held that the release of gasoline from an underground gas line over a three-month period was sudden, because it was caused by an unexpected break in the line resulting in an immediate and abrupt flow of gasoline from the severed line every time the pump was activated. 828 P.2d at 527. The court rejected the argument that because the spill lasted for an extended period of time it was gradual, and held that the policy only requires that the discharge itself be sudden to be covered under the policy. Id. at 527-28. However, the question becomes more problematic when the discharge of pollutants has occurred over a long period of time. The trial court here, focusing on the alleged sudden release of toxic substances from the tailings themselves, held that this would potentially put the pollution within the exception to the exclusion. However, most courts (including the Tenth Circuit in three cases applying Utah law) have focused on whether the pollution was a concomitant of regular business activity rather than a series of unrelated accidents. They reason that if the releases were part of the overall business operations, then even if some of the releases viewed individually may have been sudden, this does not alter the conclusion that the overall pattern of discharges was not `sudden and accidental.' Quaker State, 52 F.3d at 1529; accord Anaconda Minerals Co. v. Stoller Chem. Co., 990 F.2d 1175, 1178-79 (10th Cir.1993); Hartford Accident & Indem. Co., 962 F.2d at 1487-90 (10th Cir.1992). In Quaker State, oil and other wastes from a company which recycled or re-refined used automobile and industrial oils were released in part from unlined pits and overflows from storage tanks. Although the insured alleged that all these releases were sudden and accidental, the court ultimately held that [s]imply put, courts should not engage in a microanalysis of discrete discharges which are claimed to be `sudden and accidental' when the discharges otherwise arise as commonplace events which occur in the course of daily business. Quaker State, 52 F.3d at 1529; see also Ray Indus. Inc. v. Liberty Mut. Ins. Co., 974 F.2d 754, 768 (6th Cir. 1992) (rejecting the insured's argument that each release in an ongoing pattern of releases was sudden, when viewed in isolation because under this theory, all releases would be sudden; one can always isolate a specific moment at which pollution actually enters the environment); A. Johnson & Co. v. Aetna Cas. & Sur. Co., 933 F.2d 66, 75 (1st Cir.1991) (Mere speculation under these circumstances that any individual instance of disposal, including leaks, occurred `suddenly' cannot contradict a reasonable reading of the allegations that the entire pattern of conduct was not a `sudden and accidental' occurrence.); United States Fidelity & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d 31, 34-35 (6th Cir.1988) (finding that pollution occurring over a period of more than seven or eight years is not sudden); accord Cincinnati Ins. Co. v. Flanders Elec. Motor Serv. Inc., 40 F.3d 146, 153-54 (7th Cir.1994); Great Lakes Container Corp. v. National Union Fire Ins. Co., 727 F.2d 30, 33-34 (1st Cir.1984); Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Corp., 636 So.2d 700, 704-05 (Fla.1993). We find this line of reasoning to be the better approach. One commentator notes that this approach is consistent with the purpose behind insurance contracts of protecting the insured from fortuitous incidents, not to cover injuries resulting from industrial practices whose harmfulness was highly likely. Sharon M. Murphy, Note, The Sudden and Accidental Exception to the Pollution Exclusion Clause in Comprehensive General Liability Insurance Policies: The Gordian Knot of Environmental Liability, 45 Vand. L.Rev. 161, 167-78 (1992). Hence, where incidents of pollution appear to be more like normal business activities, the costs of cleanup should be included in the normal cost of business by the insured. Furthermore, holding the industrial community liable for its pollution may be more likely to motivate industry to improve its practices and become safer and cleaner. See id. In the instant case, we find that the release of the toxic materials from the tailings which were dumped as part of the insured's normal course of operation over a 60-to 70-year period was not sudden and accidental, even if some of the pollution, viewed in isolation, could be deemed to have occurred suddenly. We thus reverse the trial court's decision and hold that the pollution alleged in the EPA action fell within the pollution exclusion of AMICO's policies with UV Industries. As a result, AMICO did not have an obligation to defend in the underlying action. Aetna's action for equitable subrogation is therefore limited to recovery from Hartford. [11]