Catlin Specialty Ins. Co. v. J.J. White, Inc.

Citation: 309 F. Supp. 3d 345Docket: CIVIL ACTION No. 14–1255

Court: District Court, E.D. Pennsylvania; February 25, 2018; Federal District Court

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The case involves Catlin Specialty Insurance Company seeking a judicial declaration that its insurance policy issued to J.J. White, Inc. does not cover losses related to a wrongful death lawsuit resulting from alleged harmful chemical exposure at Sunoco refineries. The plaintiff, Catlin, contends that it is not liable for the claims brought by the estate of a J.J. White employee, while J.J. White and Sunoco have counterclaimed, alleging a breach of duty to defend and seeking reimbursement for settlement amounts paid.

Currently before the court are two cross-motions for summary judgment. Catlin's motion is denied, while J.J. White and Sunoco's motion is granted in part and denied in part. J.J. White, serving as a maintenance contractor for Sunoco, was required under their contracts to maintain insurance policies naming Sunoco as an additional insured. The insurance policy in question, termed the "Pollution Policy," was issued by Catlin and has been renewed twice since its inception in 2009. 

Only Coverage C, which pertains to "Pollution Legal Liability," is relevant here. This coverage obligates the insurer to pay for Pollution Losses that the insured is legally obligated to pay due to a Pollution Claim made and reported during the policy period, contingent upon the Pollution Conditions occurring after a specified Retroactive Date of April 30, 2002. The Pollution Policy is a "claims-made" policy, meaning coverage is based on when the claim is made rather than when the event occurred, although it includes an occurrence-based proviso regarding the timing of Pollution Conditions.

The Pollution Policy names J.J. White as the "Named Insured" and extends Coverage C to clients designated as additional insureds through written contracts, specifically for Pollution Losses related to J.J. White's Contractor Activity. George Gans, a former employee of J.J. White, was diagnosed with Acute Myelogenous Leukemia in 2010, which his estate claims resulted from exposure to BTEX at Sunoco's refineries. Gans' estate filed the "Gans Suit" against Sunoco in 2011, alleging negligence in protecting Gans from hazardous exposures, although the exact dates of exposure were not specified. In March 2012, Sunoco requested J.J. White to defend and indemnify it based on their contractual agreements, prompting J.J. White to notify Catlin about the claim. Sunoco later filed a third-party complaint against J.J. White for indemnification.

Catlin agreed to defend J.J. White but reserved the right to deny coverage if exposures occurred before the Pollution Policy's retroactive date of April 30, 2002. Catlin did not defend Sunoco, which hired its own legal counsel. By October 2013, expert reports revealed conflicting views on the cause of Gans' leukemia, with the estate's experts attributing it to BTEX exposure and defense experts suggesting it was idiopathic or due to Gans’ smoking history. Depositions of Gans’ coworkers indicated he was exposed to BTEX during his employment with J.J. White. On February 27, 2014, Catlin initiated a declaratory judgment action to assert that the Pollution Policy excluded coverage for the Gans Suit, citing deposition testimony indicating exposure occurred before the retroactive date. Shortly after Catlin disclaimed coverage, J.J. White and Sunoco settled with Gans’ estate for $3.5 million.

Following this, cross-motions for summary judgment were filed, with Catlin seeking a declaration of no coverage for the Gans Suit, while J.J. White counterclaimed for breach of the duty to defend, and Sunoco intervened as an additional insured seeking defense from Catlin.

J.J. White and Sunoco assert that Catlin breached its duty to defend by withdrawing its defense in the Gans Suit while the cause of Gans' leukemia was still contested. They argue that this breach necessitates Catlin's indemnification for the $3.5 million settlement they paid to resolve the lawsuit. Additionally, they request partial summary judgment, claiming the Retroactive Date Provision constitutes an exclusion to coverage, which Catlin must prove does not apply. Sunoco also claims it is an additional insured under the Pollution Policy, entitled to defense and indemnity from Catlin based on a contract with J.J. White.

The court finds that Catlin is not entitled to summary judgment on its claim that the Pollution Policy excludes coverage for the Gans Suit and determines that Catlin breached its duty to defend by withdrawing its defense. However, this breach alone does not obligate Catlin to indemnify J.J. White and Sunoco for the settlement. The court rules that the Retroactive Date Provision is not an exclusion but part of the coverage grant, and thus J.J. White and Sunoco bear the burden of proof. Finally, the court confirms that Sunoco qualifies as an additional insured under the Pollution Policy.

Summary judgment is appropriate when there are no genuine disputes over material facts. The burden initially lies with the moving party to show no material issues exist, after which the burden shifts to the non-moving party to demonstrate otherwise. A genuine issue exists if a reasonable jury could potentially favor the non-moving party, and materiality refers to facts that could influence the suit's outcome. Speculation or conclusory statements cannot prevent summary judgment; specific facts must be cited. The court views evidence favorably for the non-moving party, and cross-motions for summary judgment are treated independently without implying agreement on material facts.

The legal dispute centers on the applicable state law for interpreting the Pollution Policy, with Catlin advocating for New York law based on a choice of law clause in the policy. In contrast, J.J. White and Sunoco argue for Pennsylvania law, claiming that the clause only applies to the interpretation of the policy, while other issues, such as breach consequences and Retroactive Date Provision exclusions, fall outside its scope. They further contend that the clause should be deemed invalid.

A federal court in Pennsylvania must apply the state's choice of law rules, which favor enforcing choice of law clauses. The initial step is to ascertain if the parties have explicitly or implicitly chosen governing law, eliminating the need to identify any conflict between New York and Pennsylvania law if the clause is valid and relevant to the issues at hand.

J.J. White and Sunoco assert the clause's invalidity based on two points: first, that such clauses are unenforceable in insurance contracts if they provide less protection than applicable law; second, that there is insufficient connection to New York. However, the court disagrees, affirming the clause's validity. It notes that Pennsylvania courts have historically upheld choice of law clauses in insurance policies regardless of the protection level provided, and J.J. White and Sunoco fail to cite relevant Pennsylvania cases supporting their argument against enforcement, despite referencing a comment from the Restatement (Second) of Conflict of Laws. The court highlights that Pennsylvania courts consistently apply Section 187 of the Restatement to validate choice of law clauses in insurance contexts.

Under Pennsylvania choice of law rules, a choice of law provision in an insurance contract is enforceable if the issue at hand could have been explicitly addressed in the contract. The current disputes regarding the interpretation of the Retroactive Date Provision, the implications of breaching the duty to defend, and whether the Retroactive Date is an exclusion that shifts the burden of proof to the insurer, Catlin, could have been covered in the Pollution Policy. The policy itself includes relevant provisions on contract interpretation, the duty to defend, and exclusions.

Even if these issues could not have been directly addressed, the choice of law clause remains valid under Restatement Section 187(2), which permits a choice of law unless the chosen state lacks a substantial relationship to the parties or the transaction, and there is no reasonable basis for the choice. Although J.J. White and Catlin are incorporated in different states and have limited ties to New York, there exists a reasonable basis for choosing New York law, as J.J. White conducted a portion of its business there and Catlin had significant operations in New York.

The validity of the choice of law clause leads to the need to ascertain whether the issues in the summary judgment motions fall within its scope. J.J. White and Sunoco contend that the clause only pertains to the "interpretation" of the Pollution Policy, not other substantive matters such as breach consequences or the classification of the retroactive date. They argue that if the intention was for other aspects of New York law to apply, the clause would have been phrased differently. Courts typically recognize two forms of choice-of-law clauses: those that specify a contract shall be "interpreted" under a certain state's law and those that state the contract shall be "governed" by that law.

Linguistic variation in interpreting contracts can be significant, especially if a court distinguishes between interpreting a contract and determining parties' rights and obligations. However, most courts view these terms as interchangeable, a principle known as the canon of linguistic equivalence. This principle suggests that parties would not intend to use different states' laws for interpreting a contract and determining rights under it. Consequently, terms like "interpreted," "construed," and "governed" are functionally equivalent in choice-of-law clauses. Applying this canon, New York's substantive contract and insurance law govern the Pollution Policy at issue.

The central dispute in the parties' cross-motions for summary judgment relates to the interpretation of the Pollution Policy's Retroactive Date Provision. The relevant provision states that the insurer will cover Pollution Loss resulting from Pollution Claims if the Pollution Conditions occurred on or after the Retroactive Date, defined as April 30, 2002. Catlin argues that the provision excludes coverage for the Gans Suit because Gans was exposed to BTEX before this date. In contrast, J.J. White and Sunoco contend that the provision only excludes coverage if Gans' pre-retroactive-date exposures caused his leukemia, asserting that the term "the Pollution Conditions" refers to those exposures described in Coverage C. They argue that the language indicates coverage is contingent on whether the exposures caused the Pollution Loss.

The court concludes that J.J. White and Sunoco’s interpretation is correct, asserting that the initial interpretation of a contract is a legal matter for the court. Under New York law, the court must interpret insurance policies to reflect the parties' intent as expressed in clear language. Ambiguity arises when terms suggest multiple meanings to a reasonably intelligent person familiar with the relevant trade practices and terminology.

When ambiguity arises in contract interpretation, courts may consider extrinsic evidence to determine the parties' intended meaning. If this evidence is inconclusive, courts apply principles of contract construction, including resolving ambiguities in favor of the insured in insurance policies. In this case, the Retroactive Date Provision is clear: it limits coverage for Pollution Losses to those caused by Pollution Conditions occurring after the specified retroactive date. 

The provision uses the definite article "the" to specify that only Pollution Conditions mentioned earlier in Coverage C are relevant, meaning coverage is not triggered by any Pollution Conditions but rather those that caused the loss. The terms "as a result of" and "from" indicate causation, emphasizing that the relevant Pollution Conditions are those leading to the loss.

Furthermore, J.J. White's choice of April 30, 2002, as the retroactive date was intended to prevent gaps in coverage between its previous occurrence-based policy and its new claims-made policy. This expectation aligns with the interpretation that losses from Pollution Conditions would be covered by one of these policies, while losses from pre-retroactive-date Pollution Conditions would fall under the occurrence-based policy. 

In contrast, Catlin’s interpretation of the Pollution Policy would unreasonably deny coverage even for losses caused by post-retroactive-date exposure if there was any prior exposure, creating a scenario where no coverage would exist under either policy. This outcome contradicts J.J. White's reasonable expectations regarding coverage.

Catlin contends that its interpretation of the Retroactive Date Provision aligns with two court cases where similar provisions barred coverage for pollution-related losses. Catlin asserts that for a retroactive date provision to apply, it is not necessary for the pollution conditions before the retroactive date to have caused the loss. In the case of Kagor Realty, an insurer sought a declaration of non-coverage for an insured property owner, where the policy included a retroactive date provision requiring pollution conditions to start on or after that date. The court granted summary judgment to the insurer, noting that evidence showed pollution conditions commenced before the retroactive date. This precedent does not support Catlin's position regarding Gans' leukemia, as it remains contested whether prior or subsequent exposures caused the illness.

In Pritchard, another case involved an insurer denying coverage for a gas station's underground tank leak based on a similar retroactive date provision. The court ruled against coverage, highlighting a lack of evidence for pollution occurring on or after the retroactive date. Like Kagor Realty, this case does not bolster Catlin's argument, as all pollution conditions were determined to have occurred before the retroactive date.

The text of Coverage C clearly indicates that the Retroactive Date Provision only excludes coverage if the loss is caused by pollution conditions prior to the retroactive date. Even if there were ambiguity, J.J. White's reasonable expectations as the insured support this interpretation. The analysis will proceed based on this understanding of the Pollution Policy.

Regarding the breach of the duty to defend, it is established under New York law that an insurer must defend its insured if allegations in the underlying complaint could potentially lead to a covered claim. If any claims could arise from covered events, the insurer is obligated to defend the entire action. However, an insurer may be relieved of this duty if it can demonstrate, as a matter of law, that there is no factual or legal basis to eventually indemnify the insured.

Catlin had a duty to defend the Gans Suit as the complaint did not rule out coverage, merely indicating Gans was exposed to BTEX before May 1, 2010. This duty persisted until Catlin could conclusively demonstrate that there was no factual or legal basis for potential indemnification. The Retroactive Date Provision limited coverage to losses caused by post-retroactive-date Pollution Conditions, meaning Catlin had to show that Gans' leukemia was solely due to pre-retroactive exposures to BTEX, specifically before April 30, 2002. 

Catlin breached its duty to defend because it failed to establish this fact before withdrawing its defense on February 27, 2014, while discovery was still active and genuine disputes regarding causation existed. Experts supporting the defense indicated that Gans' leukemia was likely idiopathic or linked to other factors like family history or smoking, rather than his occupational BTEX exposure. For instance, expert David Pyatt argued that significant benzene exposure must occur within 10-15 years prior to diagnosis to influence leukemia risk, suggesting that Gans' pre-retroactive exposures, occurring eight years before his 2010 diagnosis, could not be causative.

Additionally, defense experts criticized the estate's reliance on coworker testimonies regarding BTEX exposure, asserting that such statements lacked reliability in establishing actual exposure levels. They further noted that there is no validated method to measure dermal exposure harm compared to inhalation. Overall, the defense maintained that the evidence supported the conclusion that Gans' leukemia was not caused by exposure to BTEX as alleged.

Sunoco intended to challenge coworker testimony in the Gans Suit by highlighting the absence of incident reports from Gans regarding spills or BTEX exposure and noting that air samples collected from 1987 to 2007 did not indicate Gans was present in those areas. If the case went to trial, a factfinder might determine that Gans was significantly exposed to BTEX before the retroactive date, potentially negating coverage under the Pollution Policy, or that exposure occurred afterward, which would allow for coverage. Catlin, however, could not demonstrate as a matter of law that there was no factual or legal basis for covering the loss at the time it withdrew its defense, thus maintaining its duty to defend.

Catlin argued it was not obligated to defend the Gans Suit because J.J. White and Sunoco had not paid the required $250,000 Self-Insurance Retention (SIR) under the Pollution Policy. The SIR provision specifies that this amount must be paid by the Named Insured for each claim before coverage applies. Nevertheless, Catlin could not invoke this defense now, as it had previously assumed the defense of the Gans Suit with a reservation of rights concerning coverage, regardless of the SIR payment status. Catlin is thus equitably estopped from raising the SIR defense, as its delay in asserting this argument caused prejudice to J.J. White and Sunoco. Had Catlin raised the SIR issue earlier, they could have arranged for payment, which is now only permissible as a deduction from any recovery they might seek from Catlin.

The unexhausted portion of the Self-Insured Retention (SIR) should be deducted from any recovery allocated to JJ White. Catlin breached its duty to defend by withdrawing from the Gans Suit before establishing causation regarding Gans' leukemia and past exposures to BTEX. Consequently, J.J. White and Sunoco’s Motion for Summary Judgment on this issue is granted. 

However, regarding whether Catlin can dispute its duty to indemnify J.J. White and Sunoco for the subsequent settlement with Gans' estate, J.J. White and Sunoco assert that Catlin cannot dispute coverage due to its breach of the duty to defend, provided the settlement was reasonable. Catlin counters that the breach does not inherently create a duty to indemnify, as coverage must still be established. Under New York law, as affirmed in *Servidone Construction Corp. v. Sec. Ins. Co. of Hartford* and *K2 Inv. Grp. v. Am. Guar. Liab. Ins. Co.*, a breach of the duty to defend does not automatically lead to a duty to indemnify if coverage is contested. 

The court clarified that while the duty to defend is based on the allegations in the pleadings, the duty to indemnify hinges on the actual liability basis. Finding an insurer liable for indemnification solely on the possibility of coverage from the complaint would unfairly expand the insurer's obligations as a penalty for breach of the duty to defend. Although J.J. White and Sunoco reference a proposed Restatement of the Law of Liability Insurance advocating for coverage despite a breach, the New York Court of Appeals opted to uphold the *Servidone* rule, emphasizing that a breach does not automatically entitle indemnification for a reasonable settlement. Therefore, the Motion for Summary Judgment by J.J. White and Sunoco is denied due to ongoing disputes regarding coverage under the Pollution Policy. 

Lastly, the document raises a question regarding whether the Retroactive Date Provision constitutes an exclusion for which Catlin must bear the burden of proof.

J.J. White and Sunoco's request for summary judgment against Catlin for indemnification related to their settlement with Gans' estate has been declined, prompting examination of their alternative claim for partial summary judgment. This claim revolves around whether Catlin must demonstrate the applicability of the Retroactive Date Provision, specifically if Gans' leukemia resulted from exposures to BTEX occurring before this retroactive date. J.J. White and Sunoco contend that the Retroactive Date Provision should be classified as an exclusion, placing the burden of proof on Catlin as the insurer. Conversely, Catlin argues that this provision is integral to the initial coverage grant, thus shifting the burden to J.J. White and Sunoco to prove its inapplicability.

Under New York law, the insured generally must establish coverage while the insurer must demonstrate the applicability of exclusions. The parties disagree on whether the Retroactive Date Provision is an exclusion or part of the initial coverage. J.J. White and Sunoco view it as an exclusion since it effectively removes coverage for certain losses, while Catlin views it as defining coverage initiation, akin to an effective period in occurrence-based policies. Federal courts have noted the complexities in distinguishing between exclusions and lack of coverage, emphasizing the need to determine if a loss was initially covered and later excluded or never covered at all.

Although no New York cases directly address the status of retroactive date provisions, a recent appellate decision appears to support Catlin's position. In Kagor Realty, the court affirmed that a retroactive date provision was not an exclusionary clause but part of the initial grant of coverage, establishing that its applicability resulted in a lack of coverage rather than an exclusion.

A court outside New York has determined that a retroactive date provision is integral to the initial grant of coverage, rather than an exclusion. Under Tennessee law, the insured must demonstrate that a pollution incident occurred after the retroactive date to establish coverage. This aligns with the principle that in occurrence-based insurance policies, the timing of a claimed event falls within the initial coverage scope. Consequently, J.J. White and Sunoco carry the burden of proof regarding the applicability of the Retroactive Date Provision, specifically that Gans' leukemia was caused by BTEX exposures post-retroactive date.

Sunoco seeks summary judgment to confirm its status as an additional insured under the Pollution Policy, based on a clause that covers clients named as additional insureds in written contracts with J.J. White. The Field Services Contracts stipulate that J.J. White must maintain various insurances, but pollution coverage is not explicitly mentioned. However, both parties assert that mutual understanding implies the inclusion of pollution coverage. The court will interpret these contracts to ascertain if J.J. White agreed to name Sunoco as an additional insured under the Pollution Policy.

Parties to a contract are bound by the meanings they mutually attach to promises or terms, as established in Finkle Distributors, Inc. v. Herzog. The interpretation of a contract based on the parties' prior understanding is significant, especially when agreed upon before any disputes arise. In this case, J.J. White and Sunoco demonstrated an undisputed understanding that the Field Services Contracts required J.J. White to obtain pollution coverage and name Sunoco as an additional insured. This understanding is supported by two key facts: first, J.J. White initially secured pollution coverage through its general commercial liability policy, which aligns with the contract's requirements; second, J.J. White communicated to Sunoco that the labor rates charged included costs for obtaining this pollution coverage. Notably, in a July 5, 2002, fax, J.J. White's risk manager detailed the insurance coverages included in the labor rates, explicitly mentioning pollution coverage. Given this evidence, the court concluded that J.J. White and Sunoco mutually recognized the necessity of pollution coverage under the Field Services Contracts, affirming Sunoco's status as an additional insured on the Pollution Policy. Consequently, J.J. White and Sunoco's Motion for Summary Judgment is granted, while Catlin's Motion for Summary Judgment regarding its declaratory judgment claim is denied.

J.J. White and Sunoco assert that Catlin breached its duty to defend them, and Sunoco claims it is an additional insured under the Pollution Policy. However, their motion is denied in other respects. The parties are in disagreement regarding the specific insurance coverage J.J. White was obligated to acquire under the Field Services Contracts. The Pollution Policy was effective from June 1, 2011, to June 1, 2012. Key definitions from the policy include "Pollution Loss," which pertains to amounts the Named Insured is legally obligated to pay due to Pollution Conditions resulting from Contractor Activities, and "Pollution Claim," which refers to legal assertions of liability related to Pollution Conditions, including lawsuits against the Insured. The case acknowledges that direct exposure to BTEX constitutes a "Pollution Condition," but mere presence of a toxic chemical without its escape does not qualify. Catlin's denial of allegations without providing evidence does not suffice to create a genuine dispute of material fact. The Pollution Policy explicitly states that the insurer has a duty to defend against any Pollution Claim, regardless of whether the allegations are groundless. An expert for Sunoco, David Garabrant, noted that benzene exposures occurring more than 15 years before the diagnosis of leukemia have minimal impact on the disease's causation, irrespective of cumulative exposure.

The court in Kagor Realty addressed the applicability of a New York insurance statute related to notice requirements for policy exclusions, ultimately concluding that a retroactive date provision is part of the initial coverage grant rather than an exclusion. This holding is relevant in the current case. Catlin argues that the term "written contract" in the Pollution Policy necessitates an explicit requirement for J.J. White to name an entity as an additional insured, thus precluding the use of extrinsic evidence to interpret the Field Services Contracts. However, the court disagrees, stating that the Pollution Policy requires a written contract for coverage but allows for extrinsic evidence to interpret such contracts when appropriate. Both the 2003 and 2009 Field Services Contracts specify Pennsylvania law for interpretation, which the court will apply. Catlin's response to the Statement of Facts, merely denying knowledge, is insufficient to challenge this interpretation or create a genuine dispute.