Opinion ID: 1136740
Heading Depth: 1
Heading Rank: 1

Heading: The USF & G CGL Policy and Breach of Contract

Text: Because the existence of a contractual duty on the part of USF & G to provide insurance coverage is the foundation of Alabama Plating's claims, we address that question first. The broad insuring clause of the standard-form CGL policy states: The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . . COVERAGE B-PROPERTY DAMAGE to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such ... property damage, even if any of the allegations of the suit are groundless, false or fraudulent. (Emphasis added.) The policy defines an occurrence as an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. Accordingly, the focus of the definition of occurrence is whether the insured, in this case Alabama Plating, expected or intended that its manufacturing operations would cause the property damage alleged in the ADEM orders, the soil and groundwater contamination. Under Alabama law, this inquiry is a subjective test, Haisten v. Audubon Indem. Co, 642 So.2d 404 (Ala.1994), and Alabama Plating has presented substantial evidence that it did not expect or intend that its manufacturing process would cause the property damage at issue. [1]
One of the bases for USF & G's denial of insurance coverage to Alabama Plating is the so-called pollution exclusion clause that the insurance industry uniformly added to CGL policies beginning in the early 1970's. USF & G argues that the clause eliminates insurance coverage for Alabama Plating as a matter of law. The qualified exclusion clause states: THIS POLICY SHALL NOT APPLY: . . . . (f) to ... 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; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.  (Emphasis added.) Although this Court has previously considered appeals involving the above-quoted exclusion, we have not addressed the meaning of the sudden and accidental exception to the exclusion, which reinvokes coverage that the prior language of the clause excludes. USF & G argues that the sudden and accidental exception provides coverage only where the pollution contamination was caused by an abrupt, short-lived event. Alabama Plating argues that the phrase sudden and accidental in the exception is ambiguous in meaning, and it makes several arguments supporting the proposition that sudden and accidental should be interpreted in favor of the policyholder to mean unexpected and unintended. First, we note that Hicks v. American Resources Ins. Co., 544 So.2d 952 (Ala.1989), cited by USF & G, is of no assistance. The meaning of the sudden and accidental exception to the pollution exclusion was not raised in that appeal. We also find no guidance from Koch v. State Farm Fire & Cas. Co., 565 So.2d 226, 231 (Ala.1990), where we interpreted the phrase sudden and accidental appearing in an exception to an exclusion in a homeowner's policy to mean immediate and accidental. Our interpretation was driven by the fact that the homeowner's policy at issue was written with an overall structure intended to exclude coverage for gradually occurring damage. In contrast, the overall structure of a CGL policy provides coverage for gradual, repeated conditions. Thus, a CGL policy provides a context in which to interpret the phrase sudden and accidental that is very different from the context in which the homeowner's policy in Koch was interpreted. A narrow majority of state supreme courts that have considered the meaning of the pollution exclusion, including the Supreme Courts of Indiana and Oregon this year, have held that the sudden and accidental exception is ambiguous and must be construed in favor of the policyholder to provide coverage where migration of contaminants into the soil or groundwater was unexpected and unintended. [2] We agree and, thus, adopt the majority position, which we consider to be the better reasoned approach. At a minimum, the word sudden is ambiguous. It may refer to an event that is unexpected, or to one that happens quickly or abruptly. Dictionaries, particularly those published around 1970, when the pollution exclusion clause was first added to CGL policies, reveal two differing definitions for sudden, with the primary meaning being unexpected. [3] Given this ambiguity in the pollution exclusion, we look to extrinsic evidence of the drafter's intent. Before the addition of the so-called pollution exclusion to occurrence-based CGL policies in the early 1970's, it was clear that the policies provided coverage for gradually occurring environmental contamination. [4] The evidence of the intent of the drafter of the pollution exclusion clause, an insurance industry group that represented USF & G and many other insurers, reveals that when the clause was added to the occurrence-based CGL policies, it was added with an expressed intent that there would be no reduction in coverage, but that the addition of the exclusion was merely a clarification that the policies did not provide coverage for intentional polluters. This evidence includes both contemporaneous statements by insurance industry representatives [5] and standard form letters sent to state insurance departments, including the Alabama Department of Insurance, in 1970 asking for approval of the pollution exclusion as an addition to CGL policies. [6] Moreover, when insurers sought to add the pollution exclusion to their CGL policies, the phrase sudden and accidental had already undergone judicial construction as language in boiler and machinery insurance policies where the occurrence of damage had to be sudden and accidental for coverage to be invoked. Courts had uniformly interpreted the phrase to mean that the damage had to be unexpected and unintended for the insurance to apply, so that the phrase provided coverage for gradual events. [7] In the face of this established interpretation, insurance companies chose to use the phrase sudden and accidental in the exception to the pollution exclusion. [8] Because the judicial construction placed upon particular words or phrases made prior to the issuance of a policy employing them will be presumed to have been the construction intended to be adopted by the parties, Couch on Insurance 2d § 15:20 (1984), we hold that the sudden and accidental exception to the pollution exclusion clause provides coverage when the discharge, dispersal, release or escape of contaminants into the environment was unexpected and unintended. [9]
USF & G also argues that it does not have to provide insurance coverage to Alabama Plating under its CGL policies, based on the following reasons: (1) the costs of performing the environmental remediation ordered by ADEM are not damages under a CGL policy, and (2) the CGL policy's owned property exclusion precludes coverage for cleanup of water or soil within the boundaries of an insured's property. This Court has not previously addressed these specific issues, and the relevant terms are not defined in the CGL policies at issue. However, as noted previously, the policies in question are standard-form policies, issued nationwide, so the rulings of courts in other states are of some guidance. We find that as to each issue above, the clear majority of courts that have answered the questions have ruled against the arguments made by USF & G. Thus, we adopt the majority position on each issue: environmental remediation costs are damages covered by CGL policies, [10] and the owned property exclusion does not exclude coverage for the costs of remediating groundwater contamination. [11] These rulings are consistent with prior decisions of this Court. We have previously refused to narrowly limit the type of costs covered as damages under a liability policy. National Union Fire Ins. Co. v. City of Leeds, 530 So.2d 205 (Ala.1988). We have also held that a landowner's interest in the groundwater beneath his property is a limited right, see Martin v. City of Linden, 667 So.2d 732 (Ala.1995), not one of ownership.
As a last defense, USF & G claims that, as a matter of law, Alabama Plating failed to give timely notice of the occurrences relating to the 1986, 1990, and 1991 ADEM administrative orders. USF & G's CGL policies require that notice be given of an occurrence as soon as practicable and that notice of a claim or lawsuit be given immediately. Alabama Plating contends that in 1985 it notified HRH of possible environmental liability; it says HRH was an agent of USF & G for receiving notice of a claim, but that HRH failed to pass the notice on to USF & G. Alabama Plating also argues that its June 1991 written notice to USF & G was reasonable notice under the circumstances. This court has held that notice requirements in insurance policies such as as soon as practicable mean that the insured must give notice to the insurer within a reasonable time under the circumstances of the case. CIE Service Corp. v. Smith, 460 So.2d 1244 (Ala.1984). To determine whether any delay in giving the notice was reasonable, a court must consider the length of the delay and any reasons for the delay. CIE Service Corp., supra. Moreover, mitigating evidence offered by the insured can create a question of fact as to whether the notice was reasonable. Watson v. Alabama Farm Bureau Mut. Cas. Ins. Co., 465 So.2d 394 (Ala. 1985). Alabama Plating presented substantial evidence indicating that HRH was the agent of its insurers for the receipt of notice relating to the potential for environmental liability. Alabama Plating says that when it first gave notice to HRH in 1985, HRH informed it that it had no insurance coverage for such liability and then failed to give notice of potential liability to its insurers. This alleged action is the basis of Alabama Plating's claims against HRH, discussed in section II, below. Alabama Plating contends that HRH's misrepresentation led it to believe that an attempt on its own part to notify its insurers would be futile. We conclude that there are questions of fact for a jury to resolve before it can be determined whether Alabama Plating's notice to its insurers in June 1991 of the 1991, 1990, and 1986 ADEM orders was reasonable under the circumstances. A finding that notice to USF & G was late as to one of those orders would not preclude a finding that it was timely as to other orders. In sum, Alabama Plating's notice to USF & G was not untimely as a matter of law.
We conclude that Alabama Plating has presented substantial evidence that USF & G owed a duty under its CGL policies to provide insurance coverage to Alabama Plating in relation to the ADEM orders. Thus, the trial court erred in entering the summary judgment for USF & G on Alabama Plating's breach of contract claims.