Judgment rendered January 15, 2020. Application for rehearing may be filed within the delay allowed by Art. 2166, La. C.C.P.
No. 53,096-CW No. 53,099-CW (Consolidated Cases)
COURT OF APPEAL SECOND CIRCUIT STATE OF LOUISIANA
*****
THE KANSAS CITY SOUTHERN Plaintiff-Respondant RAILWAY COMPANY AND UNION PACIFIC RAILROAD COMPANY
versus
THE WOOD ENERGY GROUP, Defendant-Applicant INC. AND CHARTIS SPECIALTY INSURANCE COMPANY
On Application for Writs from the Second Judicial District Court for the Parish of Bienville, Louisiana Trial Court No. 44216
Honorable Charles Glenn Fallin, Judge
DURRETT LAW OFFICES, LLC Counsel for Appellant, By: John Andrew Durrett AIG Specialty Insurance Michael R. Smith Company, (formerly Known as Chartis AKERMAN, LLP Specialty Insurance By: Brent Connley Wyatt Company) Matthew Schroeder Elliot Strader PHELPS DUNBAR, LLC Counsel for Appellee, By: Patrick A. Talley, Jr. The Kansas City Jeremy Thomas Grabill Southern Railway Company and Union NEWELL & NEWELL Pacific Railroad By: Daniel W. Newell Company
Before MOORE, STEPHENS, and McCALLUM, JJ. McCALLUM, J.
In this environmental contamination case, Chartis Specialty Insurance
Company, now known as AIG Specialty Insurance Company (“AIG”), and
Kansas City Southern Railway Company and Union Pacific Railroad
Company (collectively “the Railroads”) have sought supervisory review
with this Court following the trial court’s denial of AIG’s motion for
summary judgment and the Railroads’ motion for partial summary
judgment. At issue in these motions was whether a primary insurance policy
and an excess insurance policy issued by AIG to the Wood Energy Group,
Inc. (“Wood”), provided coverage for losses allegedly exceeding $1 million
that were incurred by the Railroads when remediating a site where Wood
had processed railroad crossties under a contract with the Railroads.
Concluding that the subject policies did not provide coverage for the
Railroads’ losses, we affirm the trial court’s denial of the Railroads’ motion
for partial summary judgment, but reverse the denial of AIG’s motion for
summary judgment.
FACTS
In 2009, Wood entered into an agreement with Union Pacific Railroad
Company (“Union Pacific”) for the recycling of creosote-treated wooden rail
crossties. Kansas City Southern Railway Company (“KCS”) entered into a
similar agreement with Wood the following year. Wood agreed to provide
supervision, labor, equipment, materials, transportation, and permits to
remove and dispose of the Railroads’ used crossties. The resulting materials
would be processed as fuel. Wood’s operations were to take place on
property (“site”) owned by Louisiana & North West Railroad Company
(“LNW”) in Gibsland, Louisiana, that was leased by Wood. Under the terms of the agreements with the Railroads, Wood agreed to
procure and maintain commercial general liability insurance and pollution
liability insurance during the life of the agreement.
AIG issued a primary policy with Wood as the named insured that
afforded commercial general liability and pollution legal liability coverage.
The policy period was from June 30, 2012, to June 30, 2013. AIG also
issued a commercial excess policy with Wood as the named insured. The
excess policy period was the same as for the primary policy. Coverage
under the excess policy would be triggered by coverage under the underlying
policy, which was the primary policy.
On February 6, 2012, the Environmental Protection Agency gave
notice to LNW of an administrative order for violation of the Clean Water
Act at the site. The alleged violations included the failure to obtain the
necessary permit, the failure to install adequate storm water controls, and the
discharge of a pollutant into the waters of the United States.
On July 10, 2012, the Louisiana Department of Environmental
Quality (“LDEQ”) gave Wood notice of a potential penalty regarding
violations at the site. Wood was accused of: (1) processing regulated solid
waste without a permit or authorization; (2) transporting regulated solid
waste to an unauthorized, nonpermitted facility; (3) failing to obtain an air
permit; and (4) failing to obtain a permit for water discharges.
In January of 2013, Wood filed for Chapter 11 bankruptcy. The next
month, Wood converted its bankruptcy to a Chapter 7 bankruptcy. Wood
left a literal mess for others to rectify.
On April 1, 2013, the LDEQ sent Wood a consolidated compliance
order and notice of potential penalty. The LDEQ asserted that Wood had 2 lacked a permit or other authority to dispose of and/or process solid waste at
the site. The LDEQ had conducted a site inspection there on February 19,
2013, and had found large volumes of accumulated creosote-treated
crossties, which were considered solid waste, as well as several areas of
stained soils and areas of pooled water with an oily sheen. The LDEQ noted
that processing of solid waste at the site had stopped.
The LDEQ stated in the April 1 order and notice that it had found that
Wood had violated regulations by depositing and processing regulated solid
waste at the site without permit or authorization. Wood was ordered to
remove all deposited regulated solid waste to an authorized facility, excavate
areas of visibly contaminated soil, take any and all measures necessary to
meet and maintain compliance with the solid waste regulations, and submit a
written report detailing the actions to be taken to comply with the order.
On August 28, 2013, Commercial Insurance Associates wrote to AIG
that it had been instructed by Maggie Smith, the trustee of Wood’s
bankruptcy estate, to forward notice of a claim to AIG. The letter further
stated that it had received a “direct action” from LNW regarding pollution at
the site as well as notice from the LDEQ regarding Wood’s noncompliance
with Louisiana’s waste disposal regulations.
By letter to AIG dated August 28, 2013, LNW gave notice of a claim
against Wood under the primary and excess policies. The letter further
stated that LNW was providing notice to AIG for itself as an additional
insured under the policies as well.
On May 28, 2014, the LDEQ sent demand letters to KCS and Union
Pacific regarding site remediation. The LDEQ demanded the removal and
proper disposal of solid wastes at the site, the design and implementation of 3 a remedial site investigation, and the design and implementation of any
corrective actions necessary to address potential contamination of soil and/or
groundwater at the facility. The letters informed the Railroads that soil and
groundwater samples collected and tested by LNW revealed concentration of
known hazardous substances in several soil samples that exceeded the
LDEQ’s standards for arsenic and various semivolatile organic compounds
including benzo(a)anthracene, benzo(a)fluoranthene, and benzo(a)pyrene.
The Railroads, along with LNW, cooperated with the LDEQ’s
demands to clean up the site. On March 31, 2016, KCS, in its capacity as an
additional insured and/or insured under the policies, made demand on AIG
to defend and indemnify it in connection with the site remediation. KCS
also stated it was making demand on AIG as Wood’s insurer. KCS’s letter
listed Wood as the insured, KCS as an additional insured, and the LDEQ as
a claimant.
On December 29, 2016, the Railroads filed this lawsuit against
Wood and AIG. The Railroads alleged that Wood was liable to them for
the costs of remediating the site, and they were entitled to recover from AIG
for any liability of Wood. They also alleged that Wood and AIG were
required to defend and indemnify them in connection with the LDEQ’s
demands because the Railroads were insureds and/or additional insureds
under the primary and excess policies issued by AIG. Finally, the Railroads
alleged that AIG had acted in bad faith by denying coverage.
KCS and Union Pacific prayed for a judgment: (i) finding Wood
liable for environmental cost recovery, tort indemnity/contribution, and/or
contractual liability/indemnity; (ii) finding AIG liable for Wood’s damages;
(iii) declaring and finding that KCS and Union Pacific are insureds and/or 4 additional insureds under the AIG policies; and (iv) awarding damages for
AIG’s bad faith failure to fulfill its defense and indemnity obligations.
In December of 2018, the LDEQ provided notice that it had reviewed
a site investigation report and determined that no further action was
necessary at the site.
In March of 2019, the Railroads filed a motion for partial summary
judgment in which they argued they are entitled to summary judgment on
the issue of coverage under the AIG policies for their losses in connection
with responding to the LDEQ’s demands. AIG filed its own motion for
summary judgment asserting there was no coverage under its policies for the
Railroads’ losses.
Finding that genuine issues of material fact remained, the trial court
denied the motions for summary judgment and partial summary judgment.
AIG and the Railroads then applied for writs with this Court seeking
supervisory review of the judgment. AIG and the Railroads agreed that
there were no material facts in dispute, with the only issue being how the
insurance policies applied to those undisputed facts. This Court
consolidated the writs and granted them to docket.
DISCUSSION
When determining whether or not a policy affords coverage for an
incident, it is the burden of the insured to prove the incident falls within the
policy’s terms. Doerr v. Mobil Oil Corp., 00-0947 (La. 12/19/00), 774 So.
2d 119. The insurer bears the burden of proving the applicability of an
exclusionary clause within a policy. Id.
Regarding the interpretation of insurance contracts, the Louisiana
Supreme Court has stated: 5 An insurance policy is a contract between the parties and should be construed employing the general rules of interpretation of contracts set forth in the Louisiana Civil Code. The parties’ intent, as reflected by the words of the policy, determine the extent of coverage. La.Civ.Code art. 2045[.] Words and phrases used in a policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning. La.Civ.Code art. 2047.2. An insurance policy should not be interpreted in an unreasonable or a strained manner so as to enlarge or to restrict its provisions beyond what is reasonably contemplated by its terms or so as to achieve an absurd conclusion. Where the language in the policy is clear, unambiguous, and expressive of the intent of the parties, the agreement must be enforced as written. However, if after applying the other rules of construction an ambiguity remains, the ambiguous provision is to be construed against the drafter and in favor of the insured.
The purpose of liability insurance is to afford the insured protection from damage claims. Policies therefore should be construed to effect, and not to deny, coverage. Thus, a provision which seeks to narrow the insurer’s obligation is strictly construed against the insurer, and, if the language of the exclusion is subject to two or more reasonable interpretations, the interpretation which favors coverage must be applied.
It is equally well settled, however, that subject to the above rules of interpretation, insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy.
Reynolds v. Select Properties, Ltd., 93-1480 (La. 4/11/94), 634 So. 2d 1180,
1183 (case citations omitted). See also Elliott v. Continental Cas. Co., 06-
1505 (La. 02/22/07), 949 So. 2d 1247.
The fact that a policy provides general coverage, but then subjects it
to certain exclusions, does not make the policy ambiguous. McGee v.
Allstate Ins. Co., 52,299 (La. App. 2 Cir. 11/14/18), 259 So. 3d 1161, writ
denied, 18-2057 (La. 2/18/19), 265 So. 3d 773.
The interpretation of an insurance policy ordinarily involves a legal
question that can be properly resolved on motion for summary judgment. Id.
Summary judgment declaring a lack of coverage under an insurance policy 6 may not be rendered unless there is no reasonable interpretation of the
policy, when applied to the undisputed material facts shown by the evidence
supporting the motion, under which coverage could be afforded. Reynolds,
supra; Elliott, supra.
Review of a grant or denial of a motion for summary judgment is de
novo. Lawrence v. Sanders, 49,966 (La. App. 2 Cir. 6/24/15) 169 So. 3d
790, writ denied, 15-1450 (La. 10/23/15), 179 So. 3d 601.
Our review shows that the primary policy does not afford coverage for
the losses sustained by the Railroads either as insureds for the demands
made by the LDEQ or as claimants against Wood.
Coverage D
Coverage D is the pollution legal liability section of the primary
policy. The Railroads argued in their motion for partial summary judgment
that they are insureds under the policies and entitled to coverage for their
losses under Coverage D as it provides coverage for “loss that the insured
becomes legally obligated to pay as a result of claims for bodily injury or
property damage resulting from pollution conditions on or under the insured
property.” Although the Railroads do not directly reference D-1.a. as the
source of their coverage, the cited language is from that particular provision.
D-1.a. states in its entirety:
COVERAGE D – POLLUTION LEGAL LIABILITY
1. Insuring Agreements
COVERAGE D-1
a. THIRD-PARTY CLAIMS FOR ON-SITE BODILY INJURY OR PROPERTY DAMAGE We will pay loss that the insured becomes legally obligated to pay as a result of claims for bodily injury or property damage resulting from pollution conditions on or under the insured 7 property while the person injured or property damaged is on the insured property and such pollution conditions did not first commence before the Retroactive Date, if any, shown in the Schedule of Insured Property(ies) Endorsement, provided the claim for bodily injury or property damage is first made against the insured and reported to us in writing during the policy period or any extended reporting period if applicable.
The Railroads maintain that coverage is afforded under Coverage D
because: (1) they are insureds under the policies; (2) the processing site is an
insured property under the policies; (3) they incurred losses that they were
legally obligated to pay as a result of the LDEQ’s claims for property
damage resulting from pollution conditions on or under the insured property;
and (4) AIG received timely notice of the LDEQ’s demands. The parties
stipulated that the site is an insured property. AIG assumes for purposes of
summary judgment that the Railroads are additional insureds under the
policies.
Coverage D-1.a. states that the claim for property damage is to be
made against the insured and reported to AIG in writing during the policy
period or any extended reporting period. Thus, the AIG policy is a claims-
made-and-reported policy insofar as coverage under D-1.a. is concerned.
Regarding the differences between claims-made insurance policies
and occurrence insurance policies, our Supreme Court has cited what it
considered a “seminal statement” on the subject:
With the development of a more complex society, it became more reasonable, particularly with respect to the activities of professionals, to insure against the making of claims, rather than the happening of occurrences, and “claims made” insurance developed to meet a need for professionals to insure against the making of a claim as the insured event, rather than having to struggle with traditional concepts and difficulties inherent in determining whether the “event” insured against was the commission of an act, error or omission or the date of discovery thereof or the date of injury caused thereby.
8 The major distinction between the “occurrence” policy and the “claims made” policy constitutes the difference between the peril insured. In the “occurrence” policy, the peril insured is the “occurrence” itself. Once the “occurrence” takes place, coverage attaches even though the claim may not be made for some time thereafter. While in the “claims made” policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place.
Anderson v. Ichinose, 98-2157, pp. 5-6 (La. 9/8/99), 760 So. 2d 302,
305 (quoting Sol Kroll, The Professional Liability Policy “Claims
Made”, 13 Forum 842, 843 (1978)).
There are even differences between claims-made policies and
claims-made-and-reported policies. Pure claims-made policies shift to
the insured only the risk of claims incurred but not made. Anderson v.
Ichinose, supra (citing Bob Works, Excusing Nonoccurrence of
Insurance Policy Conditions in Order to Avoid Disproportionate
Forfeiture: Claims-Made Formats as a Test Case, 5 Conn. L.J. 505,
546 (1999)). Under a claims-made-and-reported policy, the risk of a
claim incurred but not made, as well as a claim made but not reported,
is shifted to the insured. Gorman v. City of Opelousas, 13-1734 (La.
7/1/14), 148 So. 3d 888. See Anderson v. Ichinose, supra. The event
and peril insured against is based on making and reporting of the
claim within the period specified by the policy. Gorman, supra.
As discussed in Gorman:
“The purpose of the reporting requirement [in a claims-made policy] is to define the scope of coverage [purchased by the insured] by providing a certain date after which an insurer knows it is no longer liable under the policy.” Once the policy period and reporting period expire, the insurer can “close its books” on that policy.
Id., 13-1734 at pp. 6-7, 148 So. 3d at 893 (citations omitted).
9 In Gorman, supra, the Supreme Court concluded that provisions on
the making and reporting of claims in a claims-made-and-reported policy
were a permissible limitation on the insurer’s liability as to third parties.1
The Court reasoned that not enforcing the provisions would effectively
convert the claims-made-and-reported policy into an occurrence policy,
resulting in the judicial modification of the bargained-for exchange between
the insurer and insured. Id. See Hood v. Cotter, 08-0215 (La. 12/2/08),
5 So. 3d 819.
AIG correctly argues in opposition to the Railroads’ motion for partial
summary judgment that the Railroads did not comply with the claims-made-
and-reported provisions. The policy period ended on June 20, 2013. There
was an extended reporting period of 60 days following the end of the policy
period. The LDEQ did not make claims against the Railroads until May 28,
2014. KCS did not report the claim to AIG or make a claim against Wood
until March 31, 2016, at the earliest. The Railroads sued AIG in December
of 2016. Thus, the LDEQ’s claims against the Railroads and the Railroads’
claims against Wood were made well outside the policy period and extended
reporting period.
Nevertheless, the Railroads maintain that the claims-made-and-
reported provisions were complied with during the policy period and
extended reporting period. The Railroads note that the LDEQ made claims
against Wood on July 10, 2012 (notice of potential penalty) and on April 1,
2013 (consolidated compliance order and notice of potential penalty). The
1 As noted in Gorman, in Livingston Parish Sch. Bd. v. Fireman’s Fund Am. Ins. Co., 282 So. 2d 478 (La. 1973), the Louisiana Supreme Court rejected a public policy attack made on a claims-made-and-reported policy in connection with an insured’s claim. 10 Railroads further note that these claims were reported to AIG during the
extended reporting period because on August 28, 2013, AIG received notice
of the LDEQ’s demands from the bankruptcy trustee and from LNW.
However, those events do not constitute compliance by the Railroads with
the claims-made-and-reported provisions. Allowing those events to do so
would broaden the bargained-for coverage and convert the policy to an
occurrence policy.
Moreover, in Section IV-CONDITIONS of the policy, there is a
provision regarding the separation of insureds:
6. Separation of Insureds Except with respect to the Limits of Insurance, and any rights or duties specifically assigned to the first Named Insured, this insurance applies: a.) As if each Named Insured were the only Named Insured; and b.) Separately to each insured against whom claim is made or suit is brought. Solely with respect to Coverage D, this condition shall not apply to an insured that is a parent, subsidiary or affiliate of you.
Under this provision, the Railroads as additional insureds are treated
separately from the other insureds under the policy. The Railroads were
independently required to satisfy the claims-made-and-reported requirement.
Thus, claims made timely against Wood and/or LNW and timely reported to
AIG do not inure to the benefit of the Railroads.
The Railroads point out that during discovery, AIG produced an
internal email in which an AIG claims handler admitted there was D-1
coverage in reference to an insurance claim made by LNW. Even if the
email is taken literally, this April 16, 2014, email cannot be construed as
meaning that coverage for LNW’s claims equates to coverage for the
Railroads’ claims, especially in light of the separation of insureds provision. 11 In summary, the primary policy does not provide coverage under
Coverage D to either the LDEQ’s claims against the Railroads as the insured
or the Railroads’ claims against Wood as the insured.
Coverage A
In their motion for partial summary judgment, the Railroads
maintained that while they are entitled to coverage under Coverage A, they
did not seek summary judgment on that basis because they believed they are
entitled to coverage under Coverage D. Thus, their motion focused
exclusively on Coverage D. AIG argued in its motion for summary
judgment that the primary policy did not afford coverage for the Railroads’
losses under either Coverage A or Coverage D. The Railroads counter that
AIG did not meet its burden under its motion of proving the lack of coverage
under Coverage A.
Coverage A, which provides coverage for bodily injury and property
damage liability, states, in relevant part:
COVERAGE A – BODILY INJURY AND PROPERTY DAMAGE LIABILITY
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages. However we will have no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which the insurance does not apply. . . .
AIG argues that there is no coverage afforded under Coverage A
because of a pair of relevant exclusions. The first is the property damage
exclusion:
2. Exclusions 12 This insurance does not apply to:
.....
j. Damage to Property
Property damage to:
(1) Property you own, rent, or occupy including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;
This exclusion expressly excludes coverage under Coverage A for
property damage to property rented or occupied by Wood. Coverage A
states that AIG will pay sums that the “insured becomes legally obligated to
pay as damages because of the . . . property damage.” However, excluded is
property damage to property “you . . . rent, or occupy[.]” The policy defines
“you” as the named insured, meaning Wood, which leased the site from
LNW.
Additionally, the exclusion states that the excluded property damage
includes “any costs or expenses incurred by you, or any other person,
organization or entity, for repair, replacement, enhancement, restoration or
maintenance of such property for any reason[.]” Again, “you” is the named
insured, Wood. Thus, the cleanup costs incurred by the Railroads in
restoring the property were “costs incurred . . . by any other . . . entity[.]”
AIG next contends that coverage is not afforded under Coverage A
because of the pollution exclusion. This exclusion states:
2. Exclusions
This insurance does not apply to:
13 .....
f. Pollution
(1) Bodily injury or property damage which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time.
(2) Any loss, cost, or expense arising out of any: (a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or (b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants.
Regarding pollution, the primary policy contains some relevant
definitions:
31. Pollutants mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. Pollutants shall include Microbial Matter and legionella pneumophilia.
32. Pollution conditions means the discharge, dispersal, release or escape of pollutants into or upon land, or any structure on land, the atmosphere or any watercourse or body of water, including groundwater, provided such conditions are not naturally present in the environment in the amounts or concentrations discovered.
Under the pollution exclusion, the primary policy does not apply to
property damage which would not have occurred but for the “discharge,
dispersal, seepage, migration, release, or escape of pollutants at any time.”
The LDEQ found accumulated crossties on the site. Those crossties were
characterized as regulated waste. Waste is included within the definition of
“pollutants.” Samples taken of the soil there also revealed the presence of
arsenic and various semivolatile organic compounds. Undoubtedly the 14 property damage originated from the “discharge, dispersal, seepage,
migration, release, or escape of pollutants[.]”
These two exclusions under Coverage A are entirely unambiguous
and apply to the claims brought by the LDEQ against the Railroads as
insureds and to the claims brought by the Railroads against Wood as an
insured.
The Railroads argue that the damage to property exclusion does not
apply because contamination to groundwater would not have been damage
to property rented or occupied by Wood. They additionally argue that AIG
has not cited evidence of what property was actually remediated. In regards
to the pollution exclusion, the Railroads argue that the exclusion would not
apply to the mere presence of pollutants. They maintain that AIG has not
established there was a “discharge, dispersal, seepage, migration, release or
escape of pollutants” requiring site remediation within the scope of the
pollution exclusion. The Railroads’ arguments are inconsistent.
If the property damage exclusion is inapplicable because of
groundwater contamination, then that contamination would have necessarily
come from the discharge, dispersal, seepage, migration, release, or escape of
pollutants from Wood’s activities at the site. Moreover, in order to have
coverage under Coverage D-1.a. as alleged by the Railroads, there would
need to be “property damage resulting from pollution conditions[.]” As
defined in the policy, “pollution conditions” means “the discharge, dispersal,
release or escape of pollutants[.]” Furthermore, the Railroads also argue that
AIG has not cited evidence of what property was actually remediated, yet
the Railroads are seeking coverage for losses they incurred in remediating
the site. 15 Finally, the pollution exclusion states the policy does not apply to any
loss, cost, or expense arising from any “[r]equest, demand, order or statutory
or regulatory requirement that any insured or others test for, monitor, clean
up, remove, contain, treat, detoxify or neutralize, or in any way respond to,
or assess the effects of pollutants[.]” That is the essence of what the LDEQ
demanded the Railroads do and how they incurred their losses in this matter.
CONCLUSION
In summary, regardless of whether Wood or the Railroads are
considered the insured, the primary policy did not afford coverage for the
costs incurred by the Railroads in connection with remediating the site as
demanded by the LDEQ. Since there is no coverage under the primary
policy, there is no coverage under the excess policy and the Railroads’ bad
faith claim fails as well. Accordingly, the trial court erred in denying AIG’s
motion for summary judgment.
At the Railroads’ cost, we AFFIRM that part of the judgment denying
the Railroads’ motion for partial summary judgment, but REVERSE that
part of the judgment denying AIG’s motion for summary judgment.