CERTAIN UNDERWRITERS AT LLOYD'S, LONDON VS. ABUNDANCE COAL, INC.
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RENDERED: JUNE 24, 2011; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-001283-MR
CERTAIN UNDERWRITERS
AT LLOYD'S, LONDON
v.
APPELLANTS
APPEAL FROM KNOTT CIRCUIT COURT
HONORABLE KIM C. CHILDERS, JUDGE
ACTION NO. 09-CI-00117
ABUNDANCE COAL, INC.
APPELLEE
OPINION
REVERSING IN PART
VACATING IN PART AND REMANDING
** ** ** ** **
BEFORE: ACREE, DIXON AND KELLER, JUDGES.
ACREE, JUDGE: Certain Underwriters at Lloyd’s, London (Lloyd’s) appeal an
order of the Knott Circuit Court granting the motion of Abundance Coal, Inc.
(Abundance) to dismiss Lloyd’s declaratory judgment action. Finding the circuit
court erroneously dismissed the case, we reverse in part, vacate in part, and
remand.
Three plaintiffs sued Abundance in 2007, alleging the coal company’s
operations had tortiously caused dust to enter their real property.1 They asserted
that this constituted negligent trespass and sought compensatory, consequential,
and punitive damages. In 2009 Lloyd’s, Abundance’s insurer, filed a complaint
pursuant to Kentucky Revised Statute(s) (KRS) 418.040, seeking a declaration that
the insurance contract did not provide coverage for the alleged injuries. The
insurer cited clauses exempting coverage for punitive damages and pollution.
Abundance filed a motion to dismiss for failure to state a claim upon
which relief could be granted. In the motion, Alliance argued the plain language of
the insurance agreement required that the circuit court determine the allegations of
the Sparkman Complaint were covered by the policy. The circuit court agreed,
granted Abundance’s motion to dismiss, and ruled Lloyd’s was responsible for
coverage, exemptions notwithstanding. The insurer appealed.
Lloyd’s argues on appeal that the circuit court applied the improper
standard to the motion to dismiss and erred in construing the exclusions regarding
pollution and punitive damages.
Standard of review
1
This underlying complaint will be referred to as the Sparkman Complaint. It was filed by Keith
Sparkman, Maria Sparkman, and Keith Hall in the Knott Circuit Court.
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Lloyd’s first argues the circuit court applied the improper standard to
Abundance’s motion to dismiss. A motion to dismiss is governed by Kentucky
Rules of Civil Procedure (CR) 12.02. “Under CR 12.02 a court should not dismiss
for failure to state a claim unless the pleading party appears not to be entitled to
relief under any state of facts which could be proved in support of his claim.”
Weller v. McCauley, 383 S.W.2d 356, 357 (Ky. 1964) (citation omitted). “In
making this decision, the circuit court is not required to make any factual
determination; rather, the question is purely a matter of law.” James v. Wilson, 95
S.W.3d 875, 884 (Ky. App. 2002). Accordingly, our review of orders of dismissal
is de novo. Hamilton-Smith v. Commonwealth, 285 S.W.3d 307 (Ky. App. 2009).
CR 56 governs motions for summary judgment, which are proper if
“there is no genuine issue as to any material fact and … the moving party is
entitled to a judgment as a matter of law.” CR 56.03.
In the order now at issue, the circuit court used language more suited
to a motion for summary judgment (“the exclusion sought to deny coverage
advanced by [Lloyd’s] is insufficient as a matter of law.”), but, in effect, the order
was a dismissal pursuant to CR 12.02. The circuit court relied upon nothing
beyond the pleadings to determine Lloyd’s was not entitled to relief.2 Our review
2
Because the insurance agreement was an exhibit of the complaint, it became part of the
pleadings. CR 10.03.
Lloyd’s has also raised concerns that Abundance submitted an affidavit of Ray Slone,
who procured insurance coverage on behalf of the coal company, after Abundance filed its
motion to dismiss and Lloyd’s had responded. Review of the circuit court’s order, however,
gives no indication – either explicit or implicit – that it relied upon the facts asserted in the
affidavit or any other evidence beyond the pleadings.
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is, therefore, unchanged, despite the circuit court’s mistaken use of language which
applies to motions for summary judgment. We review the order to determine
whether it was proper under the standards governing a motion to dismiss.
Punitive damages
The insurance agreement specifically excludes coverage for punitive
damages. Coverage A provides protection for damages for bodily injury or
property damage, and Coverage B protects against claims of personal injury or
advertising injury. These two provisions contain identical exclusions, which bar
coverage for “[c]laims of PUNITIVE or EXEMPLARY DAMAGES, fines, or
penalties.” (Emphasis in original). There is no ambiguity in this portion of the
insurance agreement and, therefore, no need for interpretation or construction of
the contract’s terms. Ex parte Walker’s Executor, 68 S.W.2d 745, 747 (Ky. App.
1933) (It is “a cardinal principle relating to the construction of a contract … that
where the instrument is so clear and free of ambiguity as to be self-interpretive, it
needs no construction and will be performed or enforced in accordance with its
express terms.”). The insurance agreement does not cover claims against
Abundance for punitive damages.
The order now on appeal granted Abundance’s motion to dismiss the
declaratory judgment action in its entirety. The circuit court did not address the
issue of punitive damages, but the effect of the dismissal was to deny Lloyd’s
assertion that the policy excused the insurer from covering punitive damages
assessed against Abundance. That was improper. To the extent the circuit court’s
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order renders Lloyd’s liable for punitive damages Abundance incurs in connection
with the Sparkman Complaint, it is reversed.
Pollution exclusions
Coverage A and Coverage B also contained identical “Absolute
Pollution” exclusions. These exclusions prohibited protection from claims that an
injury
in whole or in part, is caused by, results from, is
attributable to, contributes to[,] or is aggravated by, the
actual, alleged[,] or threatened discharge, dispersal,
seepage, migration, release, escape of[,] or exposure to
pollutants, regardless of the source of the pollutants.
This exclusion applies whether the bodily injury or
property damage is caused by, arises from, results from[,]
or is attributable to any other cause acting in conjunction
with said pollutants.
A separate exclusion provides, “such insurance as is afforded by this policy shall
not apply to liability for the assured for contamination or pollution of land, water,
air[,] or real or personal property for any injuries or damages resulting
therefrom[.]”
The insurance agreement further defines a pollutant as
any solid, liquid, gaseous[,] or thermal irritants or
contaminants, including smoke, vapor, soot, fumes,
acids, sulfates, sulfites, alkalis, chemicals, waste,
biological material, mold, mildew[,] and intangibles
which negatively affect the health and welfare of people,
disrupt ecological balance, or desecrate the environment
and negatively impact plants and non-human species. …
Pollutant as used herein means any form of pollution as
defined above which forms the basis for liability, whether
the pollution is said to cause physical injury or not, which
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by volume or timing or any other factor is said to give
rise to liability.
In granting Abundance’s motion, the circuit court applied a narrow
construction of the language of the exclusions and determined that they did not
provide an exemption for the contamination alleged in the Sparkman Complaint.
Lloyd’s cites United States Fidelity and Guaranty Co. v. Star Fire
Coals, Inc., 856 F.2d 31 (6th Cir. 1988), in support of its position that coal dust
necessarily constitutes pollution and is, therefore, excluded from coverage. In that
case the Sixth Circuit, applying Kentucky law, set forth the exclusion provision
which, in substance, describes the same polluting substance as is at issue before
this Court.
[T]he policy does not apply:
to bodily injury or property damage arising out of the
discharge, dispersal, release[,] or escape of smoke,
vapors, soot, fumes, acids, alkalis, toxic chemicals,
liquids or gases, waste materials[,] or other irritants,
contaminants[,] or pollutants into or upon land, the
atmosphere[,] or any watercourse or body of water . . . .
Star Fire, 856 F.2d at 33 (quoting insurance policy exclusion). Regarding this
provision, the Sixth Circuit, said,
It is clear that this . . . pollution exclusion clause calls off
any obligations to provide coverage in cases such as this
where the damages are caused by the discharge of coal
dust.
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We fully agree with the conclusion that this
“language is clear and plain, something only a lawyer’s
ingenuity could make ambiguous.” American Motorists
Insurance Co. v. General Host Corp., 667 F.Supp. 1423
(D.Kan.1987). “It’s strange logic to perceive ambiguity”
in this clause. Waste Management of Carolinas, Inc. v.
Peerless Insurance Co., 315 N.C. 688, 340 S.E.2d 374
(1986).
Id. at 33-34.
Lloyd’s urges us to apply Star Fire to conclude that the dust and debris, of
which the Sparkman plaintiffs complain, are not covered by the insurance policy.
We are not persuaded.
First, Kentucky courts are not bound by the holdings of federal court
opinions applying or interpreting state law. LKS Pizza, Inc. v. Com. ex rel.
Rudolph, 169 S.W.3d 46, 49 (Ky. App. 2005). Second, Motorists Mut. Ins. Co. v.
RSJ, Inc., 926 S.W.2d 679 (Ky. App. 1996), casts doubt on Star Fire’s broad
application, preferring to consider the issue on a case-by-case basis.
In RSJ, this Court determined that insurance policies, and their absolute
pollution exclusions, which do not appear ambiguous on their face can be
ambiguous in application given certain factual situations. RSJ, 926 S.W.2d at 68081. The case before us is such a case.
To determine whether an absolute pollution clause was ambiguous
when applied to the claim at issue, this Court in RSJ analyzed the claim applying
several factors.
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The first of those factors was whether “other judges have held
alternative interpretations of the same language to be reasonable[.]” Id. at 681.
The exclusion in RSJ utilized similar, albeit not identical, language as is before us
and determined that language to be ambiguous. Though not conclusive, this factor
is persuasive.
The second factor “is the basic premise that terms used in insurance
contracts should be given their ordinary meaning as persons with the ordinary and
usual understanding would construe them.” Id. (citation and quotation marks
omitted). In RJS, this Court found telling the use of environmental terms of art,
concluding that the use of such terms “reflect[ed] the exclusion’s historical
objective – avoidance of liability for environmental catastrophes related to
intentional industrial pollution.” RJS, 926 S.W.2d at 681.3 The terms referred to in
RJS are identical to those in the clause now at issue including “discharge,”
“dispersal,” “seepage,” “migration,” “release,” and “escape.” This factor, too,
weighs in favor of finding ambiguity in the exclusion.
Finally, RJS instructs courts to consider the practical consequences of
the way in which we apply a provision. This Court warned of
absurd consequences that would result from a blind
application of the literal terms of the pollution exclusion:
The terms “irritant” and “contaminant,” when
viewed in isolation, are virtually boundless, for “there is
3
RJS also noted that the Washington Court of Appeals determined “the [standard] provision was
meant solely to deprive coverage to active polluters and did not apply where the damage caused
was neither expected nor intended.” RJS, 926 S.W.2d at 682 (citing United Pacific Insurance v.
Van’s Westlake Union, 664 P.2d 1262 (Wash. App. 1983)).
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virtually no substance or chemical in existence that
would not irritate or damage some person or property.”
Without some limiting principle, the pollution exclusion
clause would extend far beyond its intended scope, and
lead to some absurd results.
RJS, 926 S.W.2d at 682 (quoting and adopting the reasoning of Sullins v. Allstate
Ins. Co., 667 A.2d 617, 621-22 (Md. 1995)). In so holding, this Court concluded
that substances which are ordinarily classified as pollutants (e.g., chemicals like
Drano and chlorine) may not be pollutants in a given factual situation (e.g., when
spilled on the floor causing a slip and fall). Id. Or, in this case, coal dust, debris,
and particulate matter may not ordinarily be classified as a pollutant, but such
matter may constitute pollution in some cases (such as when the substance that has
become airborne is particularly noxious).
Taken as a whole, these factors weigh strongly in favor of finding
ambiguity in the insurance agreement. The circuit court properly determined the
contract was ambiguous.4
The circuit court was not correct, however, in concluding that the
Sparkman plaintiffs’ claims should necessarily be covered by the policy.
Ambiguity in an insurance policy does not justify automatic construction of the
term in favor of the insured. RSJ, 926 S.W.2d at 680. The circuit court should
have ascertained whether the injury alleged in the Sparkman complaint was the
type contemplated for coverage in the insurance agreement. It was not possible to
4
Although the order now on appeal contains no explicit finding that the policy was ambiguous,
the circuit court did purport to construe the agreement, which may only be done after the finding
of ambiguity. Ex parte Walker’s Executor, 68 S.W.2d at 747. The circuit court, therefore,
implicitly ruled the contract contained ambiguities.
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do so based on the pleadings alone. It is not clear from the record what type of
injury the Sparkman plaintiffs alleged. Has the dust made plaintiffs’ water
undrinkable? Has it caused humans or animals respiratory problems? Allegations
such as this might indicate a pollution claim. On the other hand, if they are merely
complaining about physical damage to their property or the accumulation of dirt
without environmental consequences, that would indicate injuries that do not result
from pollution. In sum, the dust at issue here is not a pollutant if it does not cause
the irritation, contamination, negative health or environmental effects, or other
types of harm contemplated in the insurance agreement.
There is a state of facts under which Lloyd’s can prevail, at least in
part, based on the policy’s pollution exclusions. Dismissal of the complaint was
therefore improper. To the extent the circuit court held that all claims based on
entry of dust upon a landowner’s property are necessarily covered by the policy, it
is vacated.
Conclusions
Abundance is not entitled to coverage by Lloyd’s for punitive
damages recoverable by the Sparkman plaintiffs. That portion of the circuit court’s
order to the contrary is reversed.
Abundance is not entitled to coverage for injuries the Sparkmans suffered as
the result of pollution caused by Abundance.
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If, however, dust and debris which allegedly entered the Sparkmans’
property do not constitute pollution as defined in the insurance policy, Abundance
is entitled to coverage of any amounts for which it is liable on those claims.
Accordingly, we vacate that portion of the circuit court’s order which holds
Lloyd’s policy covers all liability Abundance incurs as the result of the Sparkman
Complaint, and remand the matter for additional proceedings consistent with this
opinion.
ALL CONCUR.
BRIEFS FOR APPELLANTS:
BRIEF FOR APPELLEE:
Gene F. Zipperle, Jr.
Louisville, Kentucky
Ned Pillersdorf
Prestonsburg, Kentucky
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