First Realty, Ltd. v. Frontier Insurance Company, a Subsidiary of Frontier Insurance Group, Inc. Bankers Multiple Line Insurance Company

Citations: 378 F.3d 729; 2004 U.S. App. LEXIS 16189; 2004 WL 1752584Docket: 00-3930

Court: Court of Appeals for the First Circuit; August 6, 2004; Federal Appellate Court

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First Realty, Ltd. appeals a summary judgment from the Southern District of Iowa favoring Frontier Insurance Company. The court found that Frontier had no duty to defend First Realty in a lawsuit concerning the sale of property due to a pollution exclusion in their liability insurance policy. This policy covered claims related to professional services but excluded those arising from hazardous materials. The underlying lawsuit, brought by Greg and April Johnson against First Realty and the property sellers, alleged non-disclosure of a former waste disposal site, resulting in claims of fraud and negligent misrepresentation. Although the jury cleared First Realty of fraud, it found them liable for negligent misrepresentation but awarded no damages. First Realty argued Frontier breached the contract and acted in bad faith by refusing to defend against the claims, which Frontier justified by citing the pollution exclusion. The district court agreed with Frontier, leading to First Realty's appeal. The Appeals Court will review the summary judgment de novo, focusing on whether genuine issues of material fact exist and if Frontier is entitled to judgment as a matter of law under Iowa's standards for an insurer's duty to defend. The Appeals Court has reversed the district court's decision and remanded for further proceedings.

The determination of whether a claim falls within an insurance policy's coverage primarily relies on the petition's allegations, as established in *Norwalk Ready Mixed Concrete, Inc. v. Travelers Ins. Cos.* Under Iowa law, if any claim against the insured can be reasonably interpreted to fall within the policy’s coverage, the insurer must provide a defense for the entire action. This principle ensures that the insured receives a unified defense strategy. In instances of ambiguity regarding coverage, Iowa law favors the insured, resolving doubts in their favor.

Before assessing the pleadings, it is essential to clarify the scope of any pollution exclusion within the policy. Under Iowa law, insurers must articulate limitations or exclusions clearly, bearing the burden of proving any lack of coverage due to such exclusions. If an exclusion is ambiguous, courts will interpret it in favor of the insured. 

The court's ruling in *West Bend Mut. Ins. Co. v. Iowa Iron Works, Inc.* illustrates this point, where the Iowa Supreme Court found the definition of 'waste' in a pollution exclusion to be ambiguous, potentially including non-hazardous rubbish. Consequently, the court held that the insurer had a duty to defend the insured, as the underlying claim was broader than the pollution exclusion's limits. Additionally, the *Sargent Constr. Co. v. State Auto. Ins. Co.* case, involving a similar pollution exclusion under Missouri law, further supports the interpretation of ambiguous terms in favor of the insured, with the rationale that insurance should protect rather than undermine the insured's interests.

The terms 'other material,' 'irritant,' and 'contaminant' in the pollution exclusion are deemed ambiguous and must be interpreted in favor of the insured. The underlying complaint reveals that while allegations regarding hazardous materials fall under the pollution exclusion, claims related to the failure to disclose a former solid waste disposal site are covered under negligent misrepresentation. The Johnsons accused First Realty of misrepresenting the absence of such a site on disclosure statements, violating Iowa Code §§ 558.69 and 558A.6, which distinguishes between hazardous and non-hazardous waste sites.

The relevant statutes require sellers to disclose known solid waste disposal sites, and not all such sites are hazardous; some may contain 'innocuous rubbish.' Since at least one claim in the underlying lawsuit exceeds the pollution exclusion, Frontier had a duty to defend the entire action. This duty was further supported when First Realty provided evidence indicating no hazardous waste was present on the property. Citing case law, if an insurer learns facts that suggest coverage, the duty to defend is triggered.

Although a jury determined First Realty negligently misrepresented the property condition, no damages were awarded because the site lacked pollutants. Additionally, First Realty contended that the district court incorrectly granted summary judgment on its bad-faith claim, as it hinged on the duty to defend, which the court did not evaluate. The appellate court reverses the district court's judgment and remands for further proceedings, allowing the district court to address the bad-faith claim.