Opinion ID: 2634716
Heading Depth: 2
Heading Rank: 4

Heading: Application of the Qualified Pollution Exclusion Clauses

Text: Having concluded that the court of appeals incorrectly interpreted the qualified pollution exclusion clauses and having outlined the correct analysis, we now apply this analysis to determine whether the court of appeals properly affirmed the trial court's grants of summary judgment in favor of the insurers. We ask whether, under the interpretation of qualified pollution exclusion clauses set forth above, the primary insurers have a duty to defend, and all of the insurers have a duty to indemnify, Cotter. Before we begin to apply this analysis, however, we note that the trial court and court of appeals appeared to collapse the determination of whether the primary insurers had a duty to defend with the determination of whether all of the insurers owed a duty to indemnify Cotter. We instead separately address the determination of these duties, because to address them together would suggest that the insurers can rely on facts developed over the course of litigation to argue that no duty to defend exists. To determine whether the court of appeals correctly concluded that the primary insurers had a duty to defend Cotter, we look to the complaints from the Boughton and Dodge litigation. Because the facts alleged in the Boughton and Dodge complaints may be within the exceptions to the pollution exclusions, we hold that the court of appeals erred by affirming the trial court's grants of summary judgment in favor of the primary insurers with respect to their duty to defend Cotter. Next, we examine whether the court of appeals properly affirmed the trial court's grants of summary judgment in favor of the insurers with respect to their duty to indemnify Cotter. We determine that because issues of material fact exist as to whether Cotter actually expected to fully contain contaminants through filtration, the court of appeals erred by affirming the trial court's grants of summary judgment in favor of the insurers with respect to their duty to indemnify Cotter.
First, we explain that because the primary insurers refused to defend Cotter, they must rely solely on the allegations contained in the complaint, and not on the ultimate determination of coverage, to establish that no duty to defend existed. Next, we apply this analysis and examine the complaints in the Boughton and Dodge litigation to determine whether the primary insurers had a duty to defend Cotter. We conclude that the facts alleged in the underlying complaints may be within the exceptions to the pollution exclusions. Therefore, we hold that the court of appeals erred by affirming the trial court's grant of summary judgment in favor of the primary insurers.
In this case, the trial court and court of appeals collapsed the determination of the primary insurers' duty to defend with the determination of the insurers' duty to indemnify. As a result, these courts based the determination of the primary insurers' duty to defend on facts revealed over the course of the Boughton and Dodge litigation. The trial court and court of appeals appear to have relied on language in Hecla Mining Co. v. New Hampshire Insurance Co. that suggests that once underlying litigation is resolved, the analysis to determine the duty to defend is the same as to determine the duty to indemnify. 811 P.2d 1083 (Colo.1991). As we explain, however, when an insurer refuses to defend its insured, the determination of the insurer's duty to defend is separate from the determination of the duty to indemnify, and is based solely on factual allegations contained in the underlying complaint. We have consistently held that an insurer's duty to defend arises solely from the complaint in the underlying action. Thompson v. Md. Cas. Co., 84 P.3d 496, 502 (Colo.2004); Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo.2003); Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 613 (Colo.1999); Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556, 563 (Colo.1997); Hecla, 811 P.2d at 1089. Therefore, we have described the duty to defend as broader than the duty to indemnify, which depends on the ultimate determination of coverage as decided by the trier of fact. Hecla, 811 P.2d at 1089. We have held that a duty to defend exists when a complaint includes any allegations that, if sustained, would impose a liability covered by the policy. Id. In Hecla, however, we noted a circumstance in which courts may rely on facts outside of the complaint to determine an insurer's obligation to defend. There, we outlined the procedure that an insurer should follow when it believes it has no obligation to defend its insured. We explained that such an insurer should defend but reserve its rights either to seek reimbursement should the facts at trial prove that the incident resulting in liability was not covered by the policy, or to file a declaratory judgment action after the underlying case has been adjudicated. Id. (emphasis added). Therefore, we allowed insurers that provide a defense to rely on facts outside of the complaint to determine whether they could recover costs of defense from the insured. Here, the trial court and the court of appeals appear to have interpreted the language in Hecla as permitting them to collapse the determinations of the duty to defend and the duty to indemnify because the underlying litigation had concluded. The trial court and court of appeals relied on various statements by Cotter made over the course of the Boughton and Dodge litigation to conclude that Cotter expected seepage from the tailings ponds. See Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 64 P.3d 886, 891-92 (Colo.App. 2002). These courts reasoned that because Cotter expected such seepage, the qualified pollution exclusion clauses excluded coverage and the insurers had no duty to either defend or indemnify Cotter. The insurers urge that Hecla sanctions the trial court's result and point to a decision in which the court of appeals interpreted Hecla as allowing an insurer that refuses to defend to rely on the ultimate determination of coverage to defeat such a duty. The court of appeals explained that an insurer which contracts to defend the insured and fails to do so runs a calculated risk. If there is an ultimate finding . . . of no coverage, the insurer will not be liable for the litigation expenses of its insured since it would have been entitled to reimbursement. Wheeler v. Reese, 835 P.2d 572, 577 (Colo.App.1992) (citing Hecla, 811 P.2d at 1089). In Hecla, however, we did not attempt to shift the basis for determining the duty to defend upon conclusion of the underlying litigation from the complaint alone to facts outside of the complaint. Rather, in Hecla, we addressed a specific situation in which an insurer believes it is under no obligation to defend. See Hecla, 811 P.2d at 1089. We allowed insurers in such a situation to seek reimbursement for defense costs if coverage ultimately did not exist under their policies. See id. We attempted to balance the interests of both the insurers and the insureds by ensuring that the broad rule basing the duty to defend on the complaint will not require insurers to pay defense costs if coverage ultimately does not exist under the policies. Additionally, we created an incentive for insurers to defend by allowing them to subsequently seek reimbursement. See Stewart McNab, The Duty to Defend in Colorado After Hecla Mining, 20 Colo. Law.2095, 2097 (1991). Thus, we did not modify the general determination of the duty to defend, but instead merely attempted to create a remedy for insurers that provided defenses to insureds when coverage ultimately did not exist. In contrast, when an insurer refuses to defend and the insured brings an action for defense costs after the underlying litigation has been resolved, we apply the general rule that the duty to defend is determined from the factual allegations contained in the complaint. Determining the duty to defend from the face of the complaint in this circumstance serves two purposes: first, it ensures that insurers that refuse to defend do not gain an advantage over insurers that determine their obligations before the underlying litigation concludes and, second, it protects an insured's reasonable expectation of a defense. We determine the duty to defend on the same basis both before and after the completion of the underlying litigation to ensure that insurers that refuse to defend do not gain an advantage over insurers that establish their obligations before the litigation has completed. When resolving an insurer's obligations in an anticipatory declaratory action brought before the conclusion of the underlying dispute, an insurer's duty to defend is determined from the face of the complaint. Constitution, 930 P.2d at 563; see also Hartford Ins. Group v. Dist. Court, 625 P.2d 1013, 1016 (Colo.1981) (acknowledging that the trial court found a duty to defend on the basis of the complaint before the underlying litigation was completed but postponing a determination of coverage until the completion of the litigation). Therefore, for insurers that refuse to defend, we similarly base their duty to defend on the face of the complaint. To allow them to use the ultimate determination of coverage to establish that no duty existed would create an advantage over insurers seeking anticipatory declaratory judgments. We do not intend to create an incentive for insurers to refuse to defend in the hope that litigation will reveal that no duty to defend exists. [8] Therefore, to ensure that insurers that refuse to defend face the same duty to defend standard as those that resolve the issue through anticipatory declaratory judgments, we base such insurers' duty to defend on the face of the complaint. Additionally, basing the determination of the duty to defend on the complaint when an insurer refuses to defend protects the insured's legitimate expectation of a defense. Hecla, 811 P.2d at 1090. By purchasing insurance, the insured reasonably expects that he will not be required to furnish the cost of defending actions that facially fall within the terms of his policy. Hartford, 625 P.2d at 1017; see also Hecla, 811 P.2d at 1090. Therefore, allowing insurers to refuse to defend, and requiring insureds to seek reimbursement of defense costs after coverage has been determined, would defeat the basic reason for the purchase of the insurance. See Hartford, 625 P.2d at 1017 (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, 178 (1966)). Thus, we base the determination of an insurer's duty to defend on the allegations contained in the underlying complaint when such insurer refuses to defend his insured. [9] In this case, because Cotter's primary insurers refused to defend, the issue of their duty to defend does not hinge on the ultimate determination of coverage. Therefore, the trial court and court of appeals improperly collapsed the duty to defend and duty to indemnify analysis. Instead, to determine whether the primary insurers had a duty to defend Cotter, we look to the allegations contained in the complaints from the Boughton and Dodge actions.
We now consider whether the court of appeals correctly affirmed the trial court's grant of summary judgment in favor of the primary insurers on the issue of their duty to defend Cotter. Specifically, we ask whether, based on the allegations in the Boughton and Dodge complaints, no factual or legal basis exists on which the insurers might be required to indemnify Cotter. We hold that because some allegations in the complaints are within the exception contained in the qualified pollution exclusion clause, the insurers have a duty to defend. As we have explained, when insurers refuse to defend their insured and the insured files an action seeking reimbursement, we apply traditional duty to defend analysis to the underlying complaint to determine the insurer's duty to defend. See, e.g., Thompson v. Md. Cas. Co., 84 P.3d 496, 502 (Colo.2004). A duty to defend arises from allegations in the complaint, which if sustained, would impose a liability covered by the policy. Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, 1089 (Colo.1991). To defeat a duty to defend, an insurer must establish that there is no factual or legal basis on which the insurer might eventually be held liable to indemnify the insured. See id. at 1090. Thus, the insurer bears the burden of establishing that the allegations in the complaint are solely and entirely within the exclusions in the insurance policy and that any exceptions to the exclusions do not restore coverage. Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 618 (Colo.1999) (quoting Hecla, 811 P.2d at 1090). In this case, the allegations in the Boughton and Dodge complaints are within the pollution exclusion because they allege that contaminants migrated from the tailings ponds off Cotter's property and into the groundwater. However, the complaints also allege facts that are within the exception to the exclusion. The exception to the exclusion restores coverage if Cotter did not expect and intend the migration of contaminants off its property or into the groundwater. Although the complaints contain allegations that Cotter knew or intended that contaminants would migrate off its property or into the groundwater, the complaints also include allegations for which Cotter could be held liable even if it did not expect and intend contamination. For example, the complaints allege negligence by Cotter that resulted in contamination. [10] Similarly, the complaints include absolute and strict liability actions that do not require a showing of Cotter's intent. See United States v. Corrow, 119 F.3d 796, 805 (10th Cir.1997) (noting that for strict liability crimes, proof of intent is not required). Therefore, some of the allegations in the complaints may be within the exception that Cotter did not expect and intend migration of contaminants off its property or into the groundwater. Because some of the allegations in the Boughton and Dodge complaints may be within the exception to the exclusion, we cannot conclude that no factual legal basis exists on which the insurers could be required to indemnify Cotter. Therefore, we conclude that the insurers have a duty to defend Cotter. For this reason, we hold that the court of appeals erred by affirming summary judgment in favor of the primary insurers with respect to their duty to defend Cotter. Thus, we reverse the court of appeals' judgment affirming the trial court's grants of summary judgment to the primary insurers with respect to the issue of their duty to defend.
We now address whether the insurers were entitled to grants of summary judgment on the issue of their duty to indemnify Cotter. Specifically, in light of our interpretation of qualified pollution exclusion clauses, we consider evidence of whether Cotter expected or intended the migration of contaminants off its property or into the groundwater. We find that the record contains conflicting evidence regarding Cotter's expectation and intention that contaminants would migrate off its property or into the groundwater. Therefore, we conclude that issues of material fact exist with respect to Cotter's expectation of containment that do not warrant summary judgment in favor of the insurers. An insurer's duty to indemnify arises when the policy actually covers the harm. Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 301 (Colo.2003). The determination of whether a duty to indemnify exists is largely a question of fact. Id. at 301-02. Initially, in reviewing the trial court and court of appeals' respective reasons for granting and affirming summary judgment in favor of the insurers, we note the inconclusive nature of much of the evidence cited by these courts. Several statements appear to be out of context and seem less determinative when the evidence is viewed as a whole. For example, an expert witness's statement, the ponds were designed to seep, and that's what happened, by itself ignores her testimony that at the time of their use, tailings ponds were expected to contain contaminants through seepage. See Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 64 P.3d 886, 891 (Colo.App.2002). Similarly, Cotter's statement, the very nature of the uranium milling process contemplates migration of certain contaminants off-site from the mill, appears in a response to a request to admit as an objection to the insurers' failure to define contamination. See id. Additionally, this statement may only acknowledge that the milling process creates a risk of off-site migration and does not distinguish uranium tailings from other contaminants generated in the milling process. Moreover, these statements appear inconclusive when viewed against the amount of overall evidence. The exhibits supporting the motions for summary judgment consist of hundreds of pages of documents and make up only a fraction of the entire record. Thus, we do not view a handful of phrases out of the volumes of record as demonstrating that no issues of material fact exist. More importantly, the trial court and court of appeals only considered whether Cotter expected seepage from the ponds. As we have explained today, to prevail on their motion for summary judgment, the insurers must establish that the undisputed facts show that contaminants migrated off Cotter's property or into the groundwater, and that Cotter expected or intended such migration. Thus, we now apply the standard articulated above to the facts of this case and evaluate whether the grants of summary judgment in favor of the insurers were warranted. Although the parties do not dispute that contaminants migrated into the groundwater and off Cotter's property, conflicting evidence exists as to whether Cotter expected or intended this migration. For example, the insurers point to a statement by Cotter that the very nature of the uranium milling process contemplates migration of certain contaminants off-site from the mill which is the basis for regulatory monitoring requirements imposed by government agencies. . . . Cotter, 64 P.3d at 891 (alteration in original). Similarly, Cotter has also stated that it may have expected migration of contaminants off its property or into the groundwater in safe or de minimis levels. This evidence suggests that Cotter expected and intended the migration of contaminants off its property. Yet evidence also indicates that Cotter did not expect and intend for contaminants to migrate off its property or into the groundwater. Mainly, Cotter points to evidence that it intended to contain contaminants when it placed them in the ponds. Cotter cites evidence that, at the time of their installment, the ponds were viewed as state-of-the art technology to control pollution. For example, passages from the federal publication Waste Guide for the Uranium Milling Industry state that general practice in the uranium industry to dispose of tailings was to place them in tailings ponds. A former employee of the state health department similarly testified in the Dodge litigation that disposal in tailings ponds was a standard industry practice. Furthermore, Cotter presents evidence of how the ponds were understood to safely remove contaminants. During the Boughton and Dodge litigation, experts testified that when wastes were placed in the ponds, liquid waste was expected to evaporate or seep into the ground. Dissolved solids and particles were then expected to be either absorbed by the dirt or precipitate out. Similarly, the federal uranium waste guide boasts that the ponds can successfully remove substantially all settleable solids, and describes them as a means of preventing water damage. Thus, Cotter proffered evidence that creates an inference that it intended to contain contaminants when it placed them in the ponds, and that any migration off its property and into the groundwater was unexpected and unintended. We find from this evidence that issues of material fact are disputed. For these reasons, we conclude that the evidence Cotter presents contradicts the insurers' assertion that Cotter expected or intended the migration of contaminants off its property and into the groundwater. Therefore, we hold that issues of material fact exist that preclude summary judgment and that the insurers were not entitled to summary judgment on the issue of their duty to indemnify Cotter.