Opinion ID: 2614519
Heading Depth: 1
Heading Rank: 3

Heading: the pollution exclusion clause

Text: We agree with the conclusion of the court of appeals that the trial court erred in granting summary judgment to Insurers based on the pollution exclusion clause. However, we disagree with the reasoning that the court of appeals used to reach this result. Under Hecla, an insurer's duty to defend is determined by an examination of the allegations in the underlying complaint against the insured. See Hecla, 811 P.2d at 1089. Applying this rule here, we conclude that the court of appeals erred in focussing on whether genuine issues of fact exist as to the factual and legal characterization of municipal sewage sludge, because the EPA did not allege that the Cities disposed of sewage sludge at the Lowry Landfill. Rather, the EPA alleged that the cities disposed of waste and hazardous substances. However, because the trial court applied the analysis of Broderick, 954 F.2d 601, which we do not follow, we agree with the court of appeal's conclusion that the trial court erred in granting summary judgment based on the pollution exclusion clauses. Therefore, with respect to the trial court's pollution exclusion summary judgment rulings, we affirm the judgment of the court of appeals, albeit for different reasons.
We begin our analysis with a brief discussion of the facts and the central holding of Hecla. Hecla was a consolidated appeal of two cases involving a suit under CERCLA by the state against certain mining companies and a third-party complaint by those mining companies seeking contribution from the Hecla Mining Company. See Hecla, 811 P.2d at 1085-86. The relevant factual allegations were that the mining companies caused heavy metals and other contaminants to be discharged from the Yak Tunnel into the California Gulch. See Hecla, 811 P.2d at 1085. The tunnel was designed as a portal for the transportation of ore out of adjacent mines and to allow for drainage of the mine shafts into the California Gulch. Id. at 1085 n. 2. The mining companies' mine shafts connected with and drained into the tunnel. See id. at 1086. A surge of yellow sedimentary sludge and contaminated water was emitted from the tunnel, causing a twenty-mile stretch of the Arkansas River to turn orange. See id. at 1085. In interpreting the exception to the pollution exclusion, we held that the phrase sudden and accidental was ambiguous, and we construed this phrase to mean unexpected and unintended. Id. at 1092. Finding that neither of the complaints against the mining companies in that case asserted that the companies expected or intended to discharge pollutants from the tunnel, we held that the trial court did not err in granting summary judgment for the insureds by ruling as a matter of law that the insurance company had the duty to defend the mining companies. See id. We reiterate the standard set forth in Hecla delineating the narrow circumstances under which an insurer may avoid the duty to defend: The insurer has a duty to defend unless the insurer can establish that the allegations in the complaint are solely and entirely within the exclusions in the insurance policy. 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. Id. at 1090. Applying this standard to the facts of this case, the court of appeals stated, [W]e need not look beyond the four corners of the complaint to conclude there is a factual and legal basis upon which the insurers might be held liable to indemnify the cities... because there is a pending legal issue regarding the characterization of domestic sewage sludge. Englewood, 940 P.2d at 955. The court of appeals noted that [s]everal courts have recognized a significant distinction between: (1) toxic industrial sludge; and (2) non-toxic, non-hazardous biosolids or domestic sewage sludge, which is suitable for beneficial reuse on agricultural lands or as a soil supplement. Id. Finally, the court of appeals relied in part on the fact that two federal district courts in Colorado have rejected the defendants' argument that, as a matter of law, sewage sludge is an irritant, contaminant, or pollutant. Id. (citing Metro Wastewater Reclamation Dist. v. Continental Cas. Co., 834 F.Supp. 1254, 1260 (D.Colo. 1993) and City of Lakewood v. United States Fire Ins. Co., No. 90-Z-880 (D.Colo. Mar.30, 1993) (reprinted in Mealey's Litigation Reports-Insurance Vol. 7, # 30)). [5] In our view, the court of appeals erred in its application of the standards set forth in Hecla for determining an insurer's duty to defend. As explained in Hecla, Colorado follows the rule that the duty to defend is determined by looking at the allegations of the underlying complaint against the insured. See Hecla, 811 P.2d at 1089. This rule is sometimes referred to as the complaint rule. [6] We recognize that the well-reasoned dissent in Hecla raised some valid concerns about the application of the complaint rule to complex cases involving liability for environmental pollution under CERCLA. See id. at 1092-95 (Mullarkey, J., dissenting). However, the majority in that case also addressed this issue in detail, see id. at 1089-90 n. 10, and its conclusion that the duty to defend arises from the allegations in the complaint is precedent that we must follow in this case. Here, the PRP letters are the functional equivalent of the complaint in the underlying action against the insured Cities, see section VI.A., infra, and we must examine the allegations contained in the PRP letters in order to decide whether Insurers may avoid their duty to defend. Neither the PRP letter sent to Englewood nor the PRP letter sent to the Bi-City Plant refer to municipal sewage sludge. Rather, the letters refer to the disposal of waste and hazardous substances at the Lowry Landfill and to a release of hazardous substances from the landfill into the alluvial and bedrock systems at and around the site. Therefore, the court of appeals erred in focussing its analysis on whether there existed a mixed question of law and fact whether domestic sewage sludge is an `irritant, contaminant, or pollutant' within the meaning of the pollution exclusion clause. Englewood, 940 P.2d at 955. [7] Under the complaint rule, as applied to the facts of this case, courts are not allowed to consider extrinsic facts such as the evidence presented by the cities that the waste they disposed of at Lowry was non-hazardous sewage sludge that was suitable for beneficial use on croplands. Based on the PRP letters, the relevant allegations that we must consider are that the Cities are responsible for disposing of waste and hazardous substances at the Lowry Landfill. The policy language excluding coverage for pollution refers to waste material or other irritants, contaminants, or pollutants. There can be no serious question that waste and hazardous substances are wholly subsumed within the categories waste material or other irritants, contaminants, or pollutants. Hence, we hold that the court of appeals erred in basing its judgment on the characterization of the materials disposed of by the Cities. Even so, we ultimately agree with the judgment by the court of appeals that the trial court erred in granting summary judgment to Insurers on the basis of the pollution exclusion clause, and therefore we affirm that judgment based on our disagreement with the Tenth Circuit's interpretation of the sudden and accidental exception to the pollution exclusion in the Broderick decision. [8]
The trial court relied on Broderick for the proposition that the phrase discharge, dispersal, release, or escape in the standard pollution exclusion clause refers to the Cities' disposal of wastes into the Lowry Landfill rather than the subsequent release of hazardous substances from the landfill into surrounding areas and groundwater. See Broderick, 954 F.2d at 606-07. As the court of appeals recognized, there is a split of authority in the nation on this issue. See Englewood, 940 P.2d at 956. [9] The distinction is a meaningful one in many CERCLA cases involving the duty to defend. According to the exception to the standard pollution exclusion clause, the exclusion does not apply if the discharge, dispersal, release or escape of the listed contaminants is sudden or accidental. Thus, while the pollution exclusion generally operates to remove insurance coverage, the sudden and accidental exception to the pollution exclusion, where applicable, restores coverage. [10] In Hecla, this court found that the phrase sudden or accidental was ambiguous and interpreted it to mean unexpected and unintended. See Hecla, 811 P.2d at 1092. Thus, under the Broderick court's interpretation of the pollution exclusion clause, the clause will exclude coverage whenever a party intentionally disposes of wastes in a containment area, even if that party neither expects nor intends for pollutants to escape from that containment area. Under Broderick, there is no duty to defend in such circumstances because coverage is excluded since the waste was intentionally placed into the containment area. In other words, following the Tenth Circuit's analysis, the exception to the pollution exclusion clause for unexpected and unintended discharges would not apply to restore coverage under these factual circumstances. In Broderick, the Tenth Circuit was applying Colorado law. See Broderick, 954 F.2d at 604. The Tenth Circuit explained that it had waited to decide Broderick until this court issued its opinion in Hecla. See id. Although it acknowledged that Hecla addressed the sudden and accidental exception to the pollution exclusion clause, the Broderick court found that this court had left unresolved the critical issue of whether the placement of waste materials into containment ponds constituted a `discharge, dispersal, release or escape.' See id. at 605. The Broderick court answered this question affirmatively. See id. at 607. We disagree with the Broderick analysis. [11] In our view, Hecla implicitly held that the phrase discharge, dispersal, release or escape in the pollution exclusion does not apply to an initial placement of waste in a containment area such as a licensed landfill. In Hecla, applying the complaint rule, this court noted that [n]either the state's CERCLA complaint, nor the third-party complaint contains claims asserting that Hecla expected or intended the discharge of pollutants into the California Gulch as a result of its mining operations. Hecla, 811 P.2d at 1092. Thus, in Hecla, this court inquired into the mining company's intent 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. Since our opinion in Hecla only implicitly decided that the relevant polluting event for purposes of the pollution exclusion clause is the release of pollutants from a containment area and not the initial placement of waste in that containment area, we now make this holding explicit. We are persuaded by the analysis and conclusion of the Supreme Court of Washington in Queen City Farms, Inc. v. Central Nat'l Ins. Co. of Omaha, 124 Wash.2d 536, 882 P.2d 703 (1994) as follows. When faced with terms in an insurance policy that are not defined, Washington law, like that of Colorado, dictates that such terms be given their plain, ordinary meaning and interpreted according to the understanding of the average purchaser of insurance. See id. at 718; Simon v. Shelter Gen. Ins. Co., 842 P.2d 236, 239-40 (Colo.1992). In both Queen City and this case, the key terms discharge, dispersal, release or escape in the pollution exclusion are not defined in the insurance policies at issue. See Queen City, 882 P.2d at 718. The Supreme Court of Washington found that all of these terms carry the connotation of the issuance of a substance from a state of containment; none of the terms is normally used to describe the placement of a substance into an area of confinement. See id. at 719. In deciding what the average purchaser of comprehensive liability insurance in the 1960s and 1970s would have interpreted the pollution exclusion to mean, the Supreme Court of Washington noted that society's understanding of environmental pollution has evolved over time and recognized that [w]hen landfills began to be licensed in the late 1960s and early 1970s, landfill operators and even many environmental officials expected the design of a landfill would function to contain pollutants. Id. We agree with the Supreme Court of Washington's conclusion that the 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. Id. Thus, we agree with the holding of the Supreme Court of Washington that where 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. Id. We return briefly to our opinion in Hecla. Our ultimate holding in that case was that the trial court did not err in granting summary judgment for Hecla, the insured, on the duty to defend. See Hecla, 811 P.2d at 1092. Once again, the rationale for that holding was that neither of the complaints at issue asserted that Hecla expected or intended the discharge of pollutants from the tunnel. See id. Applying these standards to the facts of this case, we begin with the proposition that the PRP letters are the functional equivalent of the complaints at issue in Hecla. See section VI.A., infra. Neither of the PRP letters alleges that the Cities expected or intended the release of hazardous substances from the Lowry Landfill. The insurer has a duty to defend unless the insurer can establish that the allegations in the complaint are solely and entirely within the exclusions in the insurance policy. Id. Under this exacting standard, the insurer bears the burden of establishing that the exception to the pollution exclusion cannot apply to restore coverage. [12] Here, there is no allegation in the PRP letters that the Cities expected or intended the release of hazardous substances from Lowry. Thus, Insurers have not (and cannot, on the undisputed record before us concerning the allegations of the PRP letters) establish the inapplicability of the exception to the pollution exclusion. [13] Therefore, as a matter of law, we hold that Insurers are not excused from their duty to defend the Cities by operation of the pollution exclusion because the exception to the pollution exclusion applies to restore liability coverage to the Cities. [14] Accordingly, we hold that the trial court erred in granting summary judgment for Insurers based on the pollution exclusion clauses in their policies.