Dolsen Companies v. Bedivere Insurance Co.

Citation: 264 F. Supp. 3d 1083Docket: NO. 1:16-CV-3141-TOR

Court: District Court, E.D. Washington; September 11, 2017; Federal District Court

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Defendants QBE Insurance Corporation, Unigard Insurance Company, Bedivere Insurance Company, and Armour Risk Management, Inc. successfully filed motions for partial summary judgment, while Plaintiffs The Dolsen Companies, Cow Palace, LLC, and Three D Properties, LLC’s motion for partial summary judgment was denied. The case centers around environmental pollution linked to the Plaintiffs' concentrated animal farming operations, specifically the leakage of over 1.6 million gallons of untreated manure into groundwater and the excessive application of manure on frozen fields. 

This led to a lawsuit filed by the Community Association for Restoration of the Environment, Inc. and Center for Food Safety, Inc., alleging violations of multiple environmental statutes, including the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). After settling the underlying litigation in May 2015, Plaintiffs incurred significant expenses and sought a declaratory judgment that the Defendants were obligated to defend and indemnify them, asserting claims for breach of contract, bad faith, and violations of Washington state laws. The Defendants argued that their policies included absolute pollution exclusions that negated any duty to defend or indemnify. The Court, after reviewing the record and hearing oral arguments, ruled in favor of the Defendants regarding their duty to defend and indemnify.

Summary Judgment is granted to a movant when there are no genuine disputes regarding material facts and the movant is entitled to judgment as a matter of law, as per Fed. R. Civ. P. 56(a). A fact is considered material if it could impact the lawsuit's outcome under applicable law, while a genuine issue exists if reasonable evidence could support a verdict for the non-moving party. The moving party must demonstrate the absence of a genuine issue, which involves an initial burden of production that shifts to the non-moving party upon satisfaction, and an ultimate burden of persuasion that remains with the moving party.

In cases involving federal courts sitting in diversity, the forum state's choice of law rules dictate the substantive law, with Washington law governing the interpretation of insurance policies in this instance since all events occurred in Washington and the insured parties are also located there. Interpretation of insurance contracts is a legal question, wherein policies are treated as contracts. Courts evaluate the entire policy, applying a fair and sensible construction reflective of an average purchaser's understanding, and rely on the plain meanings of undefined terms.

The interpretation aims for practical and reasonable outcomes that fulfill the contract's purpose without creating absurdities or ineffectiveness. Clear, unambiguous policy language is enforced as written, and the expectations of the insured do not alter the contract's plain language. Ambiguities are interpreted in favor of the insured, but a clause is only deemed ambiguous if it can reasonably support two interpretations. Exclusions of coverage are not extended beyond their clear meanings, and once an insured demonstrates a prima facie case for coverage, the insurer must prove that an exclusion applies. However, the clear language of exclusions remains paramount, even when strictly applied against the drafter.

The key issue in the Motions for Summary Judgment is whether the Defendants are obligated to indemnify and defend the Plaintiffs in the underlying case. A duty to indemnify arises when the insurance policy provides coverage for the loss. The parties agree that the losses would generally be covered by the insurance policies, except for the absolute pollution exclusion. The disputes center on (1) the applicability of this exclusion and (2) whether coverage exists if another covered occurrence was the efficient cause of the pollution.

Absolute pollution exclusions are designed to exclude coverage for pollution-related losses and are enforceable in Washington. These exclusions apply to losses arising from substances acting as pollutants. They were established in response to increased environmental liability under laws like CERCLA and aim to protect insurers from substantial cleanup costs. Previous cases have affirmed the clarity of absolute pollution exclusions regarding various pollutants, including hazardous fumes and carbon monoxide. 

In this context, the absolute pollution exclusions clearly exclude coverage for liabilities arising from the discharge or release of pollutants from specific premises or waste handling sites. The remaining questions are whether manure qualifies as a pollutant and if it was acting as such. The definitions within the policies categorize pollutants broadly, encompassing a variety of contaminants, which indicates that nearly any undesirable substance, including manure when introduced to water, can be considered a pollutant.

The terms 'irritant' and 'contaminant' are interpreted broadly, as nearly any substance can potentially cause irritation or damage. Manure qualifies as a pollutant since it is classified as waste. Although the plaintiffs argue against this classification, they acknowledge that the insurance policy could have explicitly excluded coverage for property damage arising from manure if that had been the insurers' intent. The plaintiffs contend that 'waste' should only refer to materials that cannot be repurposed, but a broader interpretation is supported by the policy language, which includes materials intended for recycling or reuse, such as manure. The plaintiffs reference the case of Littleton v. Whatcom County to argue that manure should not be classified as waste; however, this case dealt with specific statutory definitions under Washington legislation, which is not directly applicable to insurance contract interpretation. Regardless of its classification as waste, manure is recognized as a potential contaminant, particularly when it enters drinking water, rendering it unfit for use. The court rejects the plaintiffs' assertion that including manure as a contaminant leads to absurd conclusions, affirming that manure can indeed contaminate water supplies.

Plaintiffs contend that the insured would not expect significant portions of their operations to be excluded from coverage. However, the court in Cook rejected this perspective, emphasizing that the exclusion does not differentiate between various aspects of the insured’s business. The court noted the implausibility of an insured bringing pollutants to a work site without business necessity and asserted that Washington has not adopted a reasonable expectation policy, focusing instead on how a reasonable person interprets policy language without allowing subjective expectations to take precedence. 

Plaintiffs argue that an average insured would not classify manure in storage or applied to land as a contaminant, but the crux of the matter is whether a reasonable insurance purchaser would recognize manure as a pollutant, particularly regarding environmental harm. The case cites significant contamination of soil and groundwater attributed to manure storage and usage. While plaintiffs acknowledge a broad definition of pollutant, they mistakenly argue this leads to ambiguity; the court clarifies that a term can be broad yet still unambiguous if it encompasses a clear, reasonable interpretation.

Plaintiffs also claim that manure is not a pollutant when used as intended, but the court indicates that even if that were necessary, the intended use here—storing and applying manure as fertilizer—resulted in pollution. Thus, the requirement is satisfied. Furthermore, the assertion concerning the chemical drift liability provision misinterprets the breadth of the pollutant definition, as claw-back provisions illustrate the expansive nature of what constitutes a pollutant. Washington limits the exclusion to losses arising from the pollutant’s function as a pollutant, reinforcing that the definition, while broad, is effectively constrained.

The absolute pollution exclusion in insurance policies is examined through various cases. In Bremerton, Cook, Quadrant, and Xia, courts applied the exclusion based on the inherent polluting nature of substances involved. In Bremerton, sewage-related odors were deemed pollutants due to the sewage itself (92 Wash. App. 17, 19-23, 963 P.2d 194). Cook and Quadrant similarly found that harmful fumes from sealants were caused by their toxic properties (Cook, 83 Wash.App. at 153-4, 920 P.2d 1223; Quadrant, 154 Wash.2d at 180, 110 P.3d 733). Conversely, in Kent Farms, the exclusion did not apply because the gasoline causing injury was not acting as a pollutant (Kent Farms, 140 Wash.2d at 401, 998 P.2d 292). The Washington Supreme Court later clarified this distinction, noting that the harm in Kent Farms would have occurred irrespective of the gasoline being water (Xia, 188 Wash.2d at 180-81, 400 P.3d 1234, 2017 WL 3711907, at *4). Here, manure contaminating water clearly acted as a pollutant, unlike the situation in Kent Farms.

Additionally, Washington's 'efficient cause' rule states that insurance coverage exists when a covered peril initiates a causal chain leading to loss, even if subsequent events are excluded (Xia, 188 Wash.2d at 182-83, 400 P.3d 1234, 2017 WL 3711907, at *5). For instance, in Xia, coverage was upheld for damages from a carbon monoxide leak resulting from a negligent water heater installation, a covered peril (Id. at 188-91, 400 P.3d 1234, 2017 WL 3711907, at *8-9). However, in Quadrant, the exclusion applied because the initial cause was the polluting event of sealant application (154 Wash.2d at 167-68, 110 P.3d 733). Similarly, Bremerton upheld the exclusion when plaintiffs experienced damage from toxic fumes due to negligent operations of a treatment plant (92 Wash.App. at 19, 963 P.2d 194).

The key distinction between the two lines of cases lies in the relationship between the initial act and the resulting pollutant. The court determines that the initial act was directly related to the pollutant, categorizing it as the polluting act itself. The Defendants argue against the applicability of the 'efficient cause' rule, highlighting a difference in policy language—specifically, that their policies use "arising from" rather than "proximately caused by." However, previous rulings, particularly in Xia, establish that broad policy language does not negate the efficient cause rule, particularly when specific exclusions are present. Washington courts permit insurers to create specific exclusions that deny coverage when an excluded event initiates the causal chain and is either the sole or efficient proximate cause of the loss.

In this case, the initial act, which caused harm, was an excluded event: the over-application of manure directly onto the land and the seepage from holding ponds. The over-application is identified as a single relevant event, falling under a specified exclusion for pollution caused by the release of manure. Similarly, the seepage from the holding ponds, linked to negligent construction, is also excluded under the policy terms, which specifically address the seepage of pollutants stored as waste. The plaintiffs' attempt to separate the negligent construction from the resulting pollution fails, as the inadequate storage of manure is the root cause of the seepage, further solidifying the exclusion from coverage.

There is no coverage under the insurance policy for the claims related to the polluting events associated with the use and storage of manure, which fall under an explicit exclusion in the policy. The polluting event is identified as the application and storage of manure, with no negligent acts occurring prior to these actions. Attempts by the Plaintiffs to separate the seepage event from the manure storage are ineffective, as the nature of the storage is included in the exclusion. The insurer's duty to defend is broader than its duty to indemnify and arises when there is a potential for liability. The insurer can apply the 'eight corners' rule to assess coverage based on the complaint and policy terms. If claims are clearly outside policy coverage, there is no duty to defend. In this case, non-coverage is evident, negating the insurer's duty to defend the Plaintiffs. The Plaintiffs' reference to Silver Creek Pig does not create ambiguity regarding the duty to defend, as its legal reasoning diverges significantly from Washington law on pollution exclusions, which focuses on definitions of pollutants and harm. Washington case law, including Bremerton, Cook, Quadrant, and Xia, consistently applies exclusions to circumstances similar to the current case, underscoring that the insurance policy's exclusions are not restricted to traditional environmental harms.

The court in Quadrant rejected the necessity of a 'classic environmental pollution' standard, noting that the contract in question does not differentiate between pollution types. The case involved traditional environmental pollution, as similarly concluded by the Silver Creek Pig court regarding manure's impact on surrounding areas. Under Washington law, the critical factor is whether the substance causing harm acted as a pollutant, which is applicable here. The court emphasized that differing approaches in other states do not create ambiguity in Washington's legal framework. It determined that the pollution-related occurrences were excluded under the policy, specifically the handling and storage of pollutants.

The court ordered the granting of partial summary judgments for Defendants QBE Insurance Corporation and Unigard Insurance Company, as well as Bedivere Insurance Company and Armour Risk Management, while denying the Plaintiffs’ motion for partial summary judgment. The case involved allegations that manure containing nitrates contaminated the water supply, with the insurance policies in question containing similar provisions. The court referenced the importance of standard dictionary definitions for interpreting undefined terms, and noted regulatory exclusions for agricultural wastes, including manure. However, it highlighted that legislative definitions may not align with common understandings, particularly in light of contrasting case precedents. The discussion included the ambiguity surrounding the intended use of naturally occurring substances like manure and sewage, which do not fit neatly into the 'intended use' analysis applicable to manufactured products. Additionally, the court cited examples of attempts to bypass pollution exclusions in insurance coverage, reinforcing the notion that manure was considered a pollutant, although its classification under certain exclusions remained contested.