Court Opinion

ID: 9640143
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:58:50.054413+00
Date Added: 2024-06-11T08:16:51.705039
License: Public Domain

CASTILLE, Justice,
dissenting.
I respectfully dissent.
The excess comprehensive general liability insurers here sought to avoid their obligation to indemnify appellants for environmental cleanup costs which resulted from the retroactive application of a new federal statute, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq. The insurers raised three affirmative defenses that are the subject of this appeal. One defense, late notice, derives from the actual insurance agreement between the parties. The other two defenses, *481“known loss” (which has not been previously recognized by this Court) and fraud (which has been recognized), do not; they are extra-contractual doctrines. Known loss and fraud both focus on alleged misrepresentations or failures to disclose by the insured. This appeal presents important questions concerning not only the proper resolution of the three affirmative defenses in this case, but also broader questions concerning the proper contours of the defenses under Pennsylvania law.
Notwithstanding its overall factual complexity, the resolution of this case turns on the perceived legal consequences of a single fact crucial both to the insurers’ argument and the majority’s affirmance,1 and to a single federal statute crucial to appellants’ argument. That fact consists of appellants’ failure to volunteer information in the 1960s to their excess insurers concerning arsenic pollution at the Whitmoyer facility, which they purchased in 1964. It is undisputed that appellants made no misrepresentations in this regard: The insurers never asked about environmental pollution in approving and issuing the excess comprehensive liability policies, and appellants did not tell. The insurers’ legal theory, accepted by the Superior Court, was that, notwithstanding the insurers’ failure to condition their excess comprehensive liability coverage upon the disclosure of this particular kind of information, appellants should be charged with an extra-contractual, de jure obligation to volunteer it.
The federal statute crucial to appellants’ claim that they are entitled to judgment as a matter of law on the three affirmative defenses is CERCLA, which was enacted in 1980. Appellants note that their liability for the environmental clean-up costs at issue here did not arise at any time even remotely near to the period when they failed to volunteer that there was arsenic contamination at the Whitmoyer facility. Instead, *482the environmental clean-up liability arose only after the passage and retroactive application of CERCLA. It was this fortuity which made appellants, as former owners of Whitmoyer, retroactively and strictly liable to remediate the contamination at the Whitmoyer facility, the majority of which had occurred before their purchase of the facility. Appellants no longer even owned the Whitmoyer site when CERCLA was enacted in 1980, much less by the time the Environmental Protection Agency (EPA) notified them in 1986 that they were a potentially responsible party under CERCLA.
In my view, as a matter of law, appellants’ mere failure to volunteer unrequested information concerning the contamination at Whitmoyer when they secured excess comprehensive coverage against a risk of liability, such as the massive environmental cleanup costs that were retroactively mandated by the subsequent passage and interpretation of CERCLA, provides no basis for finding an extra-contractual forfeiture of coverage. The majority overlooks the insurers’ failure to make the mere fact of contamination relevant to issuing the coverage and also fails to factor in the controlling importance of CERCLA. Because I disagree with the majority’s approach here, and because I believe that a deeper inquiry commands a different result, I respectfully dissent.
I. Known Loss
The majority summarily concludes that the extra-contractual “known loss” doctrine is now a viable defense to an otherwise valid insurance claim in Pennsylvania separate from the “closely related” and well-defined defense of fraud. The majority also approves of a formulation of known loss adopted by Superior Court that permits the new defense to swallow and even expand the well-settled fraud doctrine. Simply quoting from the Superior Court opinion without elaboration, the majority articulates a broad known loss standard as follows: “whether the evidence shows that the insured was charged with knowledge which reasonably shows that it was, or should [have been], aware of a likely exposure to losses which would reach the level of coverage.” Majority Op. at *4831177, quoting Rohm and Haas Co. v. Continental Casualty Co., 732 A.2d 1236, 1258 (Pa.Super.1999). The majority rejects, without explanation, the prevailing standard among those courts recognizing known loss. This formulation permits a forfeiture of coverage under third-party liability insurance policies “only where, at the time of contracting, the legal liability for which coverage is sought (rather than the property damage or occurrence that may later give rise to liability) is a certainty, i.e., a ‘legal obligation to pay’ third-party claims for damages has been established before the inception of the policy.” Brief of Appellant, 25-26 & n. 15 (emphasis in original), citing, inter alia, Montrose Chem. Corp. of California v. Admiral Ins. Co., 10 Cal.4th 645, 42 Cal.Rptr.2d 324, 913 P.2d 878 (1995); Pittston Co. Ultramar Am. Ltd. v. Allianz Ins. Co., 124 F.3d 508, 518 (3d Cir.1997) (predicting New Jersey law); CPC Int’l, Inc. v. Hartford Acc. & Indem. Co., 316 N.J.Super. 351, 720 A.2d 408 (App.Div.1998), appeal denied, 158 N.J. 73, 74, 726 A.2d 937 (1999). See also Amicus Brief of United Policyholders, 19-25 (discussing cases).
The questions of whether Pennsylvania should recognize the known loss doctrine at all as an additional, extra-contractual, affirmative defense and, if so, what “construction of the doctrine” should be adopted, are more difficult than the majority’s treatment reveals. The fraud defense is subject to a settled, exacting standard befitting a doctrine that would undo the actual agreement between the parties because of wrongdoing by one of the parties. The insurer must prove by clear and convincing evidence: (1) a fraudulent misrepresentation, (2) made with a “deliberate intent to deceive,” and (3) which is material to the risk contractually assumed by the insurer. See Majority Op. at 1179. Although the only principled basis for a known loss defense is a similar concern with fraud, the Superior Court construction of it, approved by the majority here, is far less exacting. This novel formulation apparently would not be subject to the clear and convincing evidence standard of fraud, nor would it require a misrepresentation made with a deliberate intent to deceive. Instead, the standard, such as it is, is one of multiple laxity: The insurer need *484merely “show” (assumedly by a preponderance of the evidence) that the insured “was charged with knowledge” that “reasonably shows” that the insured “was or should have been aware” of a mere “likely exposure” to losses that would reach the level of coverage. There is no requirement under this formulation that the insured have knowledge of an existing legal liability to a third party, which is the actual risk being insured against in this sort of coverage. Instead, the majority focuses on mere “losses,” and then requires only a “likelihood” of exposure to the level of coverage. The majority does not explain why it embraces these multiple vacillations to undo the parties’ agreement, rather than reasoning from our actual experience with fraud cases in the insurance area.
Appellants accurately argue that the formulation of the known loss doctrine embraced by the majority simply “bypasses” the fraud standard, permitting a forfeiture of coverage pursuant to a lesser standard of proof, and “without proof of a false statement or statement made in bad faith, an intent to deceive, or detrimental reliance.” Brief of Appellants, 29. Appellants further accurately note that the majority’s new rule is contrary to the well-established law and policy in this Commonwealth, which disfavors rules of general application that result in the forfeiture of insurance coverage. See, e.g., Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193, 196-97 (1977). Appellants also argue that this formulation is “unprecedented” in Pennsylvania (as it certainly is), and is far out of step with decisions of other courts nationwide (as it most certainly is). When such an unprecedented new doctrine resulting in a forfeiture of coverage is applied retroactively, as the majority does here, appellants rightly note that it “strike[s] at the heart of the settled expectations under many existing third-party liability insurance contracts in the Commonwealth.”, Brief of Appellants, 29-30. The majority does not address these legitimate concerns. The Court should come to terms with these ably argued realities and, at a minimum, make some attempt to justify the néw course, before approving such a radical change in the law and applying it retroactively to the insurance agreements in this case.
*485For my part, I would recognize the known loss doctrine, if at all, only in conjunction with our settled fraud standard. Since the defense sounds in the same sort of misconduct/misrepresentation as fraud, and also involves a forfeiture of a contractual right by judicial intervention, I believe it should be evaluated similarly, including its being subject to a clear and convincing evidence standard of proof. With respect to the elements of the defense, I would require that the undisclosed knowledge that triggers the defense should consist of actual (not imputed) knowledge of the existing legal liability, which is the subject of the later claim for indemnification — here, the liability retroactively arising after CERCLA’s enactment. It is this legal liability which is the risk of loss being insured against; thus, it is only a nondisclosure as to this existing loss that could be said to amount to a material misrepresentation.
The very purpose of insurance is to protect against identifiable, known risks of varying degrees of predictability. Indeed, perception of a risk is an ineluctable element of the desire for insurance. Recognizing the risk of a specific peril, both the insurer and insured wager against an occurrence or nonoccurrence; the carrier is thus insuring against the risk of an occurrence, not the certainty thereof. See SCA Services, Inc. v. Transportation Ins. Co., 419 Mass. 528, 646 N.E.2d 394, 397 (1995). This insurable risk is eliminated only where the insured knows and fails to disclose, when it purchases the policy, that it already “has suffered the threat of an immediate economic loss, as a result of some event, and that the reality of that loss occurring is a certainty.” Insurance Co. of North America v. Kayser-Roth Corp., et al., 770 A.2d 403, 415 (R.I.2001), citing 3 Eric Mills Holmes, Holmes’s Appleman on Insurance 2d, § 16.4, at 290 (1998) (known loss doctrine “applies only where the insured is aware of a threat of loss so immediate that it might be stated that the loss was already in progress and such was known at the time of application or issuance of the policy since this doctrine is designed to prevent fraud when coverage is sought to be misused to insure a certainty rather than a fortuity”).
*486The risk of economic loss at issue in the context of third party insurance should remain insurable, under any intelligible version of the known loss doctrine, whenever “there is uncertainty about the imposition of liability and no ‘legal obligation to pay yet established.” Kayser-Roth, quoting Montrose, 42 Cal.Rptr.2d 324, 913 P.2d at 905-06 (emphasis in original). See also Pittston, 124 F.3d at 518 (certainty of legal liability for damage, rather than certainty of damage, is required to trigger application of known loss doctrine). Knowledge of a mere risk cannot and should not be enough to negate a policy of insurance. See Aluminum Co. of America v. Aetna Cas. & Sur. Co., 140 Wash.2d 517, 998 P.2d 856 (2000) (although insured failed to advise insurers about known pollution damage to its property, policies were not void where pollution damage was not material factor in insurers’ decision to insure); Montrose (“known loss” will not defeat coverage as long as there remains uncertainty about damage that may occur during policy period).
By permitting an insurer to avoid its explicit contractual obligation where there is a mere awareness of a “likely exposure to losses” of a certain magnitude, the majority misapprehends the very nature of third party liability insurance. It is that very risk of loss, of varying degrees of likelihood, which creates the market for this insurance in the first place. And the insurer, a powerful and sophisticated party, well knows that. The peril being insured against by the policies here was not the certain arsenic damage at the Whitmoyer site, but rather the attenuated risk of third party legal liability — here for government-ordered remediation of the contamination — later arising ex-post facto from that pollution. That loss, and its catastrophic extent, was not at all “known” or knowable at the time these policies were issued. I believe that appellants were entitled to prevail against the known loss defense as a matter of law.
It is undisputed that, as early as 1965, appellants voluntarily disclosed to Commonwealth authorities the arsenic contamination at Whitmoyer and conducted an extensive cleanup program at their own expense. Appellants also disclosed the *487contamination in 1965 to their primary insurance carrier and their insurance broker. Although it is unclear whether the environmental contamination, which was of public record, was specifically relayed to the excess carriers, it was indisputably not hidden by appellants. At the times appellants secured their excess coverage — with appellants failing to volunteer the fact of contamination and their insurers failing to ask about or condition the issuance of the policies upon the absence of contamination — appellants were not faced with any actual lawsuits or other existing bases of liability that threatened to trigger the various excess insurance policies. Nor was there any evidence to suggest that appellants had actual knowledge or “could be charged with knowledge” that the pollution they discovered was at that time remotely likely to result in third party liability that would exhaust their primary insurance coverage and trigger their various and escalating excess comprehensive liability policies. In point of fact, throughout appellants’ ownership of the facility, no claim arose from the arsenic contamination to trigger the excess coverage. The notion that the mere fact of pollution at Whitmoyer would inevitably lead to a legal liability reaching the excess carriers is so attenuated that it cannot be said that appellants “knew” of that “loss.”
To borrow an apt phrase from Justice Holmes’ view of the First Amendment, the mere fact of pollution in the instant situation presented no “clear and present danger” that the actual harm being insured against was already in existence such as to render that harm uninsurable. Nor does it lead to the conclusion that there was no insurable risk. The costly environmental remediation loss here was not something that existed all along, known to and undisclosed by appellants, and then sprung upon their sophisticated, but understandably unsuspecting, insurers. Instead, the controlling fact is one that the majority inexplicably deems to be irrelevant: the unforeseeable passage, years later, of CERCLA. It was CERCLA’s strict liability provisions and its retroactive application alone that created the liability for which appellants sought coverage. The passage and effect of CERCLA was *488not known or knowable to appellants any more than it was to their insurers. The majority simply fails to grasp that, under the law and state of affairs existing at the times of purchase, appellants had suffered no known relevant loss that would implicate their excess coverage. Passage of CERCLA was the controlling event.
The majority in essence “charges” appellants with knowledge of a revolutionary environmental statute that was not passed until many years later, and with knowledge that CERCLA not only would affect its potential liability for cleanup, but that it would also result in a liability of sufficient magnitude as to reach the substantial thresholds of the excess policies. Unlike the majority, I would not casually adopt, and retroactively apply, an extra-contractual judicial doctrine that would fault appellants in retrospect for failing to foresee the passage and unprecedented implications of CERCLA. This was, in my view, precisely the sort of uncertain risk that appellants rightly insured themselves against. The courts should not interfere with that contract.2
It should be noted that ours is not the only court to confront the known loss doctrine in connection with CERCLA liability. For instance, in Kayser-Roth, swpra, the Rhode Island Supreme Court addressed the unforeseeable pecuniary impact of CERCLA. The insured there purchased insurance coverage before it received any indication that the federal government would seek to hold it liable for the costs of CERCLA remediation. The court noted that nothing that occurred before the receipt by the insured of possible responsible party notification from the EPA alerted the insured that it would be liable for environmental cleanup on such a grand scale, or, for that *489matter, on any scale. 770 A.2d at 415. If not for the strict liability imposed under CERCLA, the insured may never have been involved in an EPA cleanup action. The Rhode Island Supreme Court concluded, as I would here, that although the insured was aware that it potentially could be subjected to suits for property damage, it had no reason to know that it could be subjected to a suit from the government for massive cleanup costs and, therefore, the insurer’s “known loss defense” was properly denied as a matter of law. Id. at 416.
For these reasons, I would affirm the trial court’s grant of JNOY on the known loss issue.
II. Fraud
The majority, again following the lead of the Superior Court, finds sufficient evidence to sustain the fraud verdict in favor of the insurers on the basis that appellants failed to volunteer to the excess insurers the contamination at Whitmoyer. The majority apparently deems this failure to disclose clear and convincing evidence of a “fraudulent misrepresentation” that was deliberately intended to deceive the insurers on issues material to the decision to issue the insurance in the first place. I disagree with the majority’s judgment in this regard.
Appellants accurately argue that the Superior Court imposed upon it an “unprecedented duty to volunteer unrequested information.” They claim that is has long been the law in Pennsylvania that “mere silence is not fraud absent a duty to speak.” Brief of Appellants, 14, citing, Morrow v. Wilson, 266 Pa. 394, 109 A. 632, 633 (1920). Appellants further cite cases from other jurisdictions recognizing, as a general proposition, that information not requested by the insurer is presumptively not material and, thus, need not be volunteered. See, e.g., Southard v. Occidental Life Ins. Co., 31 Wis.2d 351, 142 N.W.2d 844 (1966) (no duty to volunteer information beyond scope of questions asked); Greensboro Nat’l Life Ins. Co. v. Southside Bank, 206 Va. 263, 142 S.E.2d 551 (1965) (if no inquiry made by insurer as to status of property, insured *490cannot, after loss has occurred, defeat recovery because insured did not volunteer certain information).
Although the majority adopts the Superior Court approach criticized by appellants, the majority does not squarely address appellants’ arguments. Furthermore, the cases the majority cites in outlining fraud merely recognize the general proposition that “concealment” or “suppression” of a material fact, no less than, an affirmative misrepresentation of material fact, can amount to fraud. But the question of the duty a prospective insured has to identify on its own material facts in areas the insurer has not inquired into, and then to volunteer those facts to an insurer, has not been addressed in these cases. I would address the properly preserved point directly.
It is undisputed that the insurers here never asked about environmental contamination, much less did they condition issuance of the excess comprehensive general liability policies upon the presence or absence of environmental contamination — merely one of countless possible bases of liability under the policies at issue.3 It is inequitable to retroactively impose a duty upon appellants to disclose information concerning the contamination at Whitmoyer when such information of pollution or contamination was never requested by the insurer. Although appellants may be “sophisticated” purchasers of insurance, the insurers here certainly were no less sophisticated or powerful. More importantly, an insurer is the only party in a position to fully know, and in fact dictate, what is material to its decision to issue coverage.
On the other hand, the prospective insured is, as a general matter, in no position to know with any kind of certainty what unidentified information an insurer might later deem relevant to its decision to insure. Hence, the insured should be under no extra-contractual, judicial obligation to speculate as to what *491its insurer might later deem relevant and to volunteer that information. As this Court stated over 100 years ago in Niagara Fire Ins. Co. of New York v. Miller, 120 Pa. 504, 516, 14 A. 385, 386 (1888): “unless the [insured] has knowledge that a particular fact will increase the risk, [the insured] is not bound to report such fact to the [insurer].” “It is a very simple matter for the [insurer] to inform the [insured], by the terms of its policy or otherwise, what it regards as an increase of risk.” Id.
I cannot join in the majority’s unprecedented loosening of the fraud standard by creating an extra-contractual requirement that the insured speculate as to what its insurer might later deem relevant and material. The insurer is fully equipped to protect its own interests in the application process. I would not use the imprimatur of the judiciary to absolve an insurer for its failure to adequately protect its interests.
In any event, even if I could agree with the majority’s new requirement that insureds in this Commonwealth are now required to speculate as to what their insurers might someday claim is material, and then volunteer information relevant to those speculations, I would still hold that appellants were entitled to judgment as a matter of law on the fraud defense. In my view, the proof here does not support a finding, by clear and convincing evidence, that the failure to volunteer here concerned “material” information or was motivated by a “deliberate, fraudulent intent to deceive.”
As the trial court noted, there was no direct evidence that appellants planned to deceive their insurers. “Notably, in the vast amount of documents produced throughout the over nine weeks of trial, there was not one exhibit introduced into evidence which demonstrated that any Rohm and Haas supervisory or executive employee was involved in a plan to deceive the ... insurers.” Trial Court Opinion, 36. Furthermore, the circumstantial evidence belied any claim of intent to deceive. Without external prompting, Rohm and Haas immediately disclosed the existence of the Whitmoyer contamination to Commonwealth authorities (who promptly made it public), to *492its neighbors, to its primary insurer and to its insurance broker who arranged the excess coverage with appellees. The fact that their primary insurer did not reject coverage after the disclosure is objective proof that appellants had no reason to believe that the fact of pollution was material to issuance of the excess coverage. Nor did appellants ever fail to answer accurately any question actually posed by their insurers respecting the facility; the insurers simply failed to ask. This objective evidence hardly constitutes conduct warranting a jury finding of clear and convincing evidence of an intent to deceive.
Furthermore, in my view, any accurate assessment of appellants’ alleged intent to deceive must account for the change that CERCLA wrought in the liability scheme for environmental contamination. If CERCLA had existed in 1965, the failure to volunteer information of the contamination would be exponentially more suspicious — but still less suspicious than would be a failure of the insurers even to inquire into the existence of such pollution. But CERCLA did not then exist. It is also a fact that, throughout the period when appellants were purchasing and increasing their excess general liability policies, they were never faced with any non- or pre-CERCLA claim that remotely implicated their excess coverage. It is also a fact that, at the time the insurers issued these policies, they were not concerned enough with environmental contamination as a possible basis for third-party liability as to make specific inquiries into the existence of environmental pollution. The indisputable landscape existing at the times the policies were issued, as contrasted with the abrupt change in the risk of liability occasioned by passage and application of CERCLA, are further objective facts, unaccounted for in the majority opinion, that preclude any finding of an intent to deceive the insurers as to any material fact.
All that is left is the post hoc ergo propter hoc (fallacy of false cause) inference arising from the equivocal fact that appellants increased their coverage as time went by. As the majority itself recognizes, Majority op. at 1179 n. 6, that alone is insufficient to uphold the jury’s verdict on this issue. *493Accordingly, I would affirm the trial court’s grant of JNOY on the fraud issue.
III. Late Notice
Finally, the majority finds that the trial court erred in directing a verdict on the insurers’ late notice defense. The majority states that twenty-four years elapsed between the acquisition of Whitmoyer and appellants’ claim for coverage and that there was sufficient evidence of prejudice resulting from this delay (in that certain potential witnesses had died, memories had likely dimmed, and relevant documents allegedly had been lost or destroyed) as to warrant its presentation to the jury.
In my view, the majority’s analysis in this regard is flawed because, once again, it fails to account for the importance of CERCLA. The specific contractual notice clause at issue reads as follows:
Notification of Claims — The Assured upon knowledge of any occurrence likely to give rise to a claim hereunder shall give immediate written advice thereof to the person(s) or firm named for the purpose in the Schedule. (Emphasis supplied.)
The majority’s focus upon the contamination, as opposed to the prospect of third party liability, which was the actual risk being insured against, betrays the same misapprehension of the policies that renders its known loss analysis flawed. The mere fact of contamination did not ineluctably suggest that there would be a third party liability claim at all, much less a claim that was likely to reach the excess policies. In point of fact, there was no prospect of a claim under the policy until after 1986 at the very earliest, which is when the EPA notified appellants that they were potentially responsible parties for the costs associated with a cleanup at the site, under the retroactive application of the strict liability provisions of CERCLA. Before that time, there was no basis to conclude that there was likely to be a claim that would reach the excess policies.
*494The speculative prejudice identified by the majority accrued in the time period before Rohm and Haas had any basis or duty to notify the insurers that there was likely to be a claim implicating the excess coverage. Accordingly, the trial court properly directed a verdict on this claim.
In summary, the majority not only has erroneously decided the three issues on this appeal, but, what is more troubling, in the process has summarily approved unwise expansions of extra-contractual defenses that will result in the unforeseeable forfeiture of otherwise legitimately bargained-for coverage in countless other cases. Accordingly, I respectfully dissent.
Justices CAPPY and SAYLOR join this dissenting opinion.

. I use the term "majority” for ease of reference only. Justice Nigro’s concurring opinion does not join in the lead opinion; rather, it agrees that the Superior Court should be affirmed on the fraud theory alone and would not address the additional two theories of late notice and known loss. Consequently, there is, strictly speaking, no true majority opinion.

. This conclusion is particularly compelling where, as here, the insurer has raised several defenses to the enforcement of the insurance contract rather than seeking equitable relief in the form of reformation. Cf. Travelers Indemnity Co. v. Reynolds Metals Co., 1995 WL 606317, *2 (Del. Ct. Chancery Oct. 2, 1995) (Chancery Court does not have jurisdiction where insurer failed to state cognizable claim for equitable relief predicated on notion that, "the contracting parties did not intend, and could not have intended, to insure against future liabilities arising under an entirely new, unprecedented statutory scheme (CERCLA)....”).

. The insurers argue that they did require, as a condition of coverage, that appellants affirm in writing that there were "no known losses" and that appellants’ subsequent affirmation to that effect was false since they knew of the contamination at Whitmoyer. Brief of Appellees, 39. The inquiry into "known losses," for purposes of excess third party liability coverage, hardly encompassed an inquiry into whether there was then mere environmental pollution at any of appellants’ facilities.