Legal Watch: Volume 24

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

COURT RULES INSURANCE CARRIER MUST PAY LEGAL COSTS DEFENDING MTBE LAW SUITS

Case Summary: Eight lawsuits were filed against Sabic Americas, Inc., and fifty other oil companies by multiple municipal corporations alleging that their water supply systems and groundwater were contaminated by methyl tertiary butyl ether (MTBE) that they distributed, supplied, and/or marketed.  In their lawsuits, the municipal plaintiffs raised numerous claims including negligence, product liability, and trespass.  The plaintiffs asked the court for recovery of their costs for testing and monitoring of groundwater;  the removal of contaminants from groundwater; and damage to water wells, pumping stations, filters, and property.  In general, the plaintiffs allege that Sabic and the other defendants knew or should have known the unique dangers that the addition of MTBE to gasoline posed to groundwater as early as the 1970s.  They allege that the contamination is continuous and ongoing.  Sabic forwarded the eight complaints to its insurance carrier, Dallas National, expecting legal defense coverage under four commercial general liability insurance policies covering July 2003 to July 2007.  The policies contain pollution exclusions and state they do not apply to bodily injury to or property loss “expected or intended from the standpoint of the insured.”  Dallas National, however, denied coverage and filed suit asking for a declaratory judgment that it owed no duty to defend or indemnify under the policies.  The trial court ruled that Dallas National had a duty to defend Sabic in the lawsuits and to reimburse Sabic for its attorney fees and defense costs.  Dallas National appealed, and raised two main issues:  (a) whether the “fortuity doctrine” barred coverage for the lawsuits; and (b) whether coverage was excluded under the pollution exclusion clause.  With regard to the first issue, the appeal court explained that the “fortuity doctrine”, or “known-loss doctrine,” bars coverage for a loss that the insured already knows to have occurred, or is in progress, at the inception of the policy term.  National Dallas argued that since the plaintiffs allege in the lawsuit that the wrongful conduct occurred before the purchase of the insurance policies, the known-loss doctrine bars coverage, and no duty to defend arises.  The appeals court rejected this contention finding that “Sabic has demonstrated that the underlying lawsuits allege some facts which may support a duty to defend, and Dallas National has failed to refute all possible bases for Sabic’s liability in negligence necessary to defeat the contractual duty to defend.” With regard to the second issue, the court stated that the pollution exclusion clause bars coverage for “any loss, cost or expense … arising out of any…[c]laim 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.’”  The court then addressed Sabic’s argument that the term “governmental  authority” is ambiguous, and that the court must adopt its construction, if reasonable, even if Dallas National’s construction is more reasonable.   Specifically, Sabic contended that the plaintiffs are quasi-municipal water sellers, not “governmental authorities” that have some authority to issue or enforce environmental cleanups.  In contrast, Dallas National urged the court to adopt a broader definition of the term “governmental authority.”  The court ruled that the term “governmental authority” is ambiguous and that, accordingly, “we must adopt Sabic’s interpretation of this policy provision so long as Sabic’s interpretation is not unreasonable.”  The court further explained that with regard to exclusionary provisions such as the pollution exclusion clause, the insured interpretation need not be the only reasonable interpretation to prevail  -- it need only  to be a reasonable one.  Accordingly, the court ruled that Dallas National must defend the case and pay Sabic’s attorney fees.  Dallas National Insurance Company v. Sabic Americas, Inc.

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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