WESTINGHOUSE HITTMAN NUCLEAR, INC., ET AL V. AETNA CASUALTY & SURETY COMPANY, ET AL
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RENDERED: SEPTEMBER 22, 2005
MODIFIED : JANUARY 19, 2006
TO BE PUBLISHED
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2002-SC-307-DG
AETNA CASUALTY & SURETY
COMPANY, et al.
v.
D
D
~
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-214
JEFFERSON CIRCUIT COURT NO . 87-CI-3359
COMMONWEALTH OF KENTUCKY, NATURAL RESOURCES
AND ENVIRONMENTAL PROTECTION CABINET, et al .
APPELLANTS
E / -i9-o
.G'a~
APPELLEES
AND
2003-SC-407-DG
WESTINGHOUSE HITTMAN
NUCLEAR, INC ., et al .
v.
CROSS-APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-213 & 214
JEFFERSON CIRCUIT COURT NO. 87-CI-3359
AETNA CASUALTY & SURETY
COMPANY, et al .
CROSS-APPELLEES
AND
2003-SC-408-DG
ATCOR, INC ., et al.
v.
CROSS-APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-213 & 214 & 215
JEFFERSON CIRCUIT COURT NO. 87-CI-3359
AETNA CASUALTY & SURETY
COMPANY, et al .
CROSS-APPELLEES
o'c
OPINION OF THE COURT BY JUSTICE SCOTT
AFFIRMING IN PART AND REVERSING IN PART
This appeal is from the judgment of the Court of Appeals, affirming the
decision of the Jefferson Circuit Court, except on the jury instruction issue of
fortuity. The Court of Appeals reversed on the issue of fortuity and remanded the
matter for a new trial consistent with their opinion .
Six separate issues were raised on appeal and cross-appeal by the
various parties . These include : (1) whether the Court of Appeals erred in setting
aside the jury verdict; (2) whether ANI should be required to reimburse the
insureds for the costs of participating in the CERCLA action; (3) whether the
costs of site measures are paid "as damages because of property damages"
within the meaning of the ANI policies ; (4) whether exclusion (f) applies and
therefore precludes coverage; (5) whether ANI's policies cover the defense costs
incurred in this action ; and (6) whether the AN[ policies were triggered for the full
amount of the limits in effect at any time the property damage at issue was
caused without pro-rating the liability .
We shall address all six issues argued, but first set forth the following
summary of facts, taken largely from the list of sixty-eight stipulations compiled
by the parties and the Court of Appeals Opinion :
Maxey Flats is a chemical and nuclear waste disposal facility located in
eastern Fleming County which accepted waste from 1963 to 1977 . Over this
time period, approximately 4 .75 million cubic feet of low-level radioactive waste
was received and buried at the Maxey Flats facility . The waste originated from
power plants, hospitals, universities, various industries, and government
installations . Most of the waste transported to the Maxey Flats facility consisted
of solid materials that were deposited in containers constructed of various
materials including cardboard, wood and steel . Liquid wastes, including tritium,
were also accepted at Maxey Flats from 1963 to 1972. Both solid and liquid
radioactive waste was buried in trenches at Maxey Flats .
The use of trenches to bury waste was a permissible practice for
disposing of low-level radioactive waste during the time period the Maxey Flats
facility was open for the receipt of commercial waste.
Unfortunately, rain water penetrated the large, unlined trenches, mixed
with the radioactive waste, and leached out underneath the trenches and beyond
the facility .
In December, 1977, the Commonwealth of Kentucky ("Commonwealth"),
as the primary regulatory authority with respect to the use and disposal of
radioactive material in Kentucky, became alarmed at the level of radioactive
contaminants migrating off-site . Accordingly, it issued an order suspending the
facility's license to accept additional waste . Thus, no commercial waste was
received at the Maxey Flats facility after December 1977 .
Atcor, Inc ., Chem-Nuclear Systems, Inc. ("Chem-Nuclear") and Hittman
Nuclear & Development Corporation ("Hittman") were in the business of
transporting and/or arranging for the transportation of low level radioactive waste
to licensed waste disposal sites throughout the United States . Hittman was
acquired by Westinghouse Electric Corporation in 1982. In 1984, the name of
the corporation was changed to Westinghouse Hittman Nuclear Incorporated .
Atcor and Chem-Nuclear never owned or operated the Maxey Flats
facility. Neither Hittman, Westinghouse Electric Corporation nor Westinghouse
Hittman Nuclear Incorporated (collectively "Hittman") owned or operated the
Maxey Flats facility while it was open and accepting commercial waste .
Aetna Casualty and Surety Company, and the other involved insurance
companies (36 companies altogether) are members of the American Nuclear
Insurers, or "ANI ." ANI is an unincorporated underwriting association, formed by
conventional insurance carriers, which issues nuclear liability insurance policies .
ANI issued Policy NF-48 (FACILITY FORM) to U .S. Ecology (successor to
NECO, original licensee of the Maxey Flats facility), the Commonwealth and
Hittman corporation . These insureds purchased the ANI Facility Form to insure
against nuclear energy hazard liability arising out of the ownership or
operation of the Maxey Flats facility . The policy defines "Insured" broadly to
include not only the named insured, but "any other person with respect to his
legal liability for damages because of . . . property damage caused by the nuclear
energy hazard ."
ANI also issued separate "Supplier & Transporters Form" insurance
policies ("S & T' Forms) to Chem-Nuclear, Atcor and Hittman Nuclear and
Development Corporation . These policies provide coverage for nuclear energy
hazard liability arising out of their waste transportation activities .
In 1986, the Environmental Protection Agency ("EPA") placed the Maxey
Flats facility on the National Priorities List. Pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S .C
§ 9601 et seq., the EPA instituted administrative proceedings against the
insureds for the cleanup of the contaminated site and the abatement of the
effects of the contamination . The initial step in such proceedings took place
November 26, 1986 when the EPA sent notices by certified mail to approximately
832 Potentially Responsible Parties ("PRPs") who had owned or operated the
Maxey Flats facility, or who had transported or arranged for the transportation of
waste to the facility. These entities included Atcor, Chem-Nuclear, US Ecology,
the Kentucky Natural Resources and Environmental Protection Cabinet and
Westinghouse Electric Corporation on behalf of Hittman .
When the insureds notified ANI of the EPA's PRP notices, ANI refused to
defend or indemnify them in the CERCLA action . Therefore, the insureds were
forced to deal with the EPA on their own. Subsequently, in 1987 the PRPs
agreed to a consent order with the EPA obligating them to perform a "Remedial
Investigation and Feasibility Study" ("Feasibility Study") to determine the nature
and extent of the property damage, and to evaluate alternative remediation
programs for its correction or containment. The study was completed at a cost of
over $5,000,000. Following submission of the Feasibility Study, the EPA issued
a Record of Decision which incorporated parts of this Feasibility Study in a cleanup remedy for the insureds to implement at Maxey Flats . The remedial plan had
an estimated cost of implementation in excess of $57,000,000 . The insureds
ultimately settled the EPA's claims and the settlement is contained in a consent
decree filed with the United States District Court for the Eastern District of
Kentucky in July 1995 .
Meanwhile, in April 1987, ANI, having refused to defend, filed a
declaratory judgment action in the Jefferson Circuit Court seeking to establish no
coverage liability . Counterclaims were made by the insureds for coverage under
the policies and money damages for ANI's breach of contractual duties to defend
and indemnify them .
Following discovery, all parties filed cross-motions for summary judgment .
On January 4, 1995, the Jefferson Circuit Court entered a partial summary
judgment in favor of the insureds, holding (1) the response costs required to
remediate the site were "damages" within the meaning of the policy and (2) the
contamination of off-site property constituted "property damage" as defined by
the policies . Thereafter, the Court summarily ruled that ANI's duty to defend the
appellees had been triggered by the EPA's notice of CERCLA proceedings (the
PRP notice letters) .
ANI's defense to coverage, applicable to the Commonwealth and U .S .
Ecology, the "fortuity defense," proceeded to trial in June 1997. "Fortuity" is the
principle that an insured cannot have coverage for those things that are
"expected or intended" from the covered conduct . See, e .g., James Graham
Brown Foundation v. St. Paul Fire & Marine Ins . Co ., 814 S .W.2d 273 (Ky. 1991) .
The jury found these appellees were precluded from recovery under the "Facility
Form" since their share of the remediation costs were "expected, intended,
anticipated or foreseen" in the ordinary course of operating the facility under
regulatory compliance .
The Court of Appeals affirmed the circuit court's summary judgment ruling,
but held the Commonwealth was entitled to a new trial on the issue of "fortuity"
due to erroneous jury instructions . This Court granted discretionary review.
a . Whether the Court of Appeals erred in setting aside the iury verdict
By order dated March 3, 1997, the Jefferson Circuit Court allowed the
"fortuity" defense to proceed to jury trial . Originally, this defense potentially
applied to the comprehensive general liability policies held by several of the
insureds . However, prior to trial ANI had reached a settlement with all but the
Commonwealth and US Ecology.
Appellants, ANI, argue the Court of Appeals erred in setting aside the jury
verdict on the issue of fortuity. They cite what they contend are multiple errors by
the Court, including (1) the Court of Appeals ignoring the fact that the trial court
correctly instructed the jury at the close of trial on the issue that had been tried to
the jury by agreement of the parties, (2) the Court of Appeal's finding that the
Commonwealth had preserved the objection to the instructions as required by
CR 51(3), and (3) the Court of Appeal's holding that the trial court's instructions
were erroneous in light of this Court's decision in Brown Foundation , supra.
To address these arguments, we state first that we agree with ANI and the
Court of Appeals that the requirement that loss be fortuitous, i.e. not intended, is
a concept inherent in all liability policies . Fortuity "must be judged using a
subjective standard, because requiring this knowledge element best serves the
overall principle of insurance law." Aetna Cas . & Sur. Co. v. Dow Chemical Co.,
10 F .Supp .2d 771, 789 (E.D. Mich. 1998) (internal quotes and citations omitted) .
"The crucial issue is whether [the insured] was aware. . . of an immediate threat of
the [injury] for which it was ultimately held responsible and for which it now seeks
coverage, not the [insured's] awareness of its legal liability for that [injury] ." Id. at
790 .
Second, we dispel ANI's argument that the Commonwealth waived any
error with respect to the jury instructions by its submission of a proposed
instruction substantially similar in form to that actually tendered to the jury. The
Commonwealth offered two alternate instructions regarding fortuity before the
close of the trial. And as the process for developing jury instructions continued
throughout the trial, the Commonwealth's late offering of its preferred fortuity
instruction does not hinder its ability to argue on appeal that such an instruction
was proper.
We find the. Commonwealth properly preserved its objection to the given
jury instruction, which improperly focused on the "fortuity of the response costs
(damages), instead of the fortuity of the harm (property damage)," by its offer of
an alternative instruction incorporating its position, which was substantively
opposite from that the court chose to give. CR 51(3) allows an offered instruction
as one method to preserve a party's objection to an offering or failure to offer an
instruction .
We also find the Commonwealth's proffered instruction to more accurately
state the law as spoken to in Brown Foundation , supra . In Brown Foundation ,
this Court addressed the issue of fortuity regarding a claim for insurance
coverage. The case mirrors the case at hand in that it involved insureds seeking
coverage to pay for an environmental cleanup ordered by the EPA pursuant to
CERCLA. We held the Foundation was entitled to coverage under its policies
unless it had specific and subjective intent to cause the pollution giving rise to the
CERCLA claims . Equating the reasoning of Brown to the case at hand, the
Commonwealth is entitled to insurance coverage unless it specifically and
subjectively intended to cause the migration of radioactive contamination .
Therefore, we affirm the Court of Appeal's finding of reversible error due to
the giving of an erroneous jury instruction, which we believe misled the jury on
the issue of fortuity.
b. Whether ANI should be required to reimburse the insureds for the
costs of participating in the EPA Administrative Process
Appellants, ANI, argue they should not be required to reimburse appellees
for the costs of participating in the CERCLA proceedings because (1) the policy
language provides that ANI will defend a "suit," not an administrative notice, and
(2) neither public policy considerations, nor the insureds' reasonable
expectations, require ANI to provide a defense to the CERCLA proceedings .
Appellees, Westinghouse Hittman Nuclear Incorporated and Hittman
Nuclear & Development Corporation (collectively referred to as "Hittman") and
Atcor, Inc. and Chem-Nuclear Systems, Inc . (collectively referred to as "ChemNuclear"), (position also adopted by Commonwealth) argue the CERCLA
proceedings constitute a "suit" requiring ANI to defend .
Both the "Facility" and "S & T" policies issued by ANI provide the insurers
will "defend any suit against the insured alleging . . . bodily injury or property
damage and seeking damages which are payable under the terms of the policy;
but the companies may make such investigation, negotiation or settlement of any
claim or suit as they deem expedient." The policies do not define the term "suit"
or "claim ."
ANI relies on Foster-Gardner, Inc . v. National Union Fire Ins. Co ., 959
P.2d 265 (Cal . 1998), and various other cases from other jurisdictions, for the
proposition that an administrative order directing an insured to take remedial
action to clean up pollution is not a "suit" triggering a duty to defend. The Court
of Appeals expressly rejected this "bright line" approach, distinguishing suits from
claims, because it believed this approach disregards the doctrine of reasonable
expectations .
The rule of interpretation known as the "reasonable expectations doctrine"
resolves an insurance policy ambiguity in favor of the insured's reasonable
expectations. True v. Raines, 99 S.W.3d 439, 443 (Ky. 2003) . As we agree with
the Court of Appeals that the term "suit" is susceptible of more than one
interpretation, an ambiguity exists as to what actions or processes the term "suit"
describes . And thus, such ambiguity must be resolved in favor of the insured's
reasonable expectations.
We believe "an insurance company should not be allowed to collect
premiums by stimulating a reasonable expectation of risk protection in the mind
of the consumer, and then hide behind a technical definition to snatch away the
protection which induced the premium payment ." Moore v. Commonwealth Life
Ins . Co . , 759 S.W.2d 598, 599 (Ky . App. 1988)(internal citations omitted) .
Therefore, we would not allow ANI to avoid their duty to defend the
insureds in this instance by clinging to an archaic definition of "suit." In this, we
are persuaded by the reasoning in Johnson Controls, Inc . v. Employers
Insurance of Wausau, 665 N .W .2d 257 (Wisc . 2003), wherein the Wisconsin
Supreme Court held:
[an] [i]nsured's receipt of a potentially responsible party (PRP)
letter from the Environmental Protection Agency (EPA) or an
equivalent state agency seeking remediation or remediation
costs is a "suit" which a comprehensive general liability (CGL)
insurer has a duty to defend. . . ; it is the functional equivalent
of a suit and marks the beginning of adversarial administrative
legal proceedings that seek to impose liability upon an insured,
and a reasonable person in the position of the insured would
expect the insurer to provide a defense .
Id. at 285.
The existence of a statutory system designed to forgo litigation, while
achieving the same relief, minimizes the distinction between administrative
claims and formal legal proceedings . See Aetna Cas. & Sur. Co. v. Pintlar Corg.,
948 F.2d 1507, 1517 (9th Cir. 1991) . "Coverage should not depend on whether
the EPA may choose to proceed with its administrative remedies or go directly to
litigation ." Id. at 1517 .
For the reasons outlined above, we affirm the Court of Appeal's finding
that ANI is required to reimburse the insureds for their costs in participating in the
EPA administrative process .
c. Whether the costs of site measures are paid "as damages because of
propert)tdamaaes" within the_meaning of the ANI policies .
Appellants, ANI, argue the costs of site measures are not paid "as damages
because of property damage ." They contend : (1) none of the insureds' Maxey
Flats response cost liability was spent to compensate third parties for a
91compensable loss;" (2) no third party has "sued" any of the insureds alleging
bodily injury or property damage to its property because of the nuclear energy
hazard at Maxey Flats; and (3) the CERCLA liability was imposed for purely
"prophylactic" measures for which ANI's policies do not provide coverage .
Appellees, Hittman and Chem-Nuclear (position also adopted by
Commonwealth) argue the response costs at issue are damages for three
reasons : (1) the plain and ordinary meaning of the term "damages" encompasses
any monetary liability for property damage, without regard to the form of action in
which the liability is imposed, (2) 15 of 17 state supreme courts that have
addressed this issue have held that legally mandated environmental remediation
costs are "damages," and (3) the term "damages" is at least ambiguous and must
be construed in favor of coverage .
In its policies, ANI promises "to pay on behalf of the insured . . . all sums
which the insured shall become legally obligated to pay as damages because of
. . . property damage caused by the nuclear energy hazard ."
CERCLA expressly permits responsible parties to insure against the costs
of relief under this legislation . See 42 U .S.C. §9607(e) . Therefore, our task is to
decide whether ANI's policies do provide coverage according to their terms
despite "damages" being undefined within the policy language.
As such, our reasons for affirming the Court of Appeal's decision that the
cost of site measures are "damages because of property damage" mimic our
considerations and reasoning regarding the prior issue of EPA proceedings being
the functional equivalent of a suit.
As damages are not defined within ANI's policies, and various authorities
from dictionaries to court opinions define the term to encompass diverse aspects
of monetary awards, we find the term ambiguous and subject to the reasonable
expectations of the insureds .
We believe the policy language, "all sums which the insured shall become
legally obligated to pay as damages because of property damage," can
reasonably be interpreted to cover any claim asserted against the insured arising
out of property damage, which requires the expenditure of money, regardless of
whether the claim can be characterized as legal or equitable in nature . This
interpretation is supported by the dictionary definition of "damages" which makes
no distinction between damages at law and actions in equity. See Webster's
Third New International Dictionary 571 (P. Gove ed . 1961) .
We agree with the majority of state appellate courts that hold the ordinary
meaning of "damages" is broad enough to, and does include, government
mandated response or cleanup costs under CERCLA and similar state
environmental protection statutes : as long as the purpose is to rectify, correct,
control, lessen or stop ongoing injury of the premises . This purpose is met in this
action .
We are further persuaded by the reasoning of the Wisconsin Supreme
Court in Johnson Controls, Inc. v. Employers Insurance of Wausau , 665 N.W.2d
257 (Wis . 2003), wherein the Court explained :
the nature of relief in CERCLA response cost actions is
not confined to future injuries; it includes legal recompense
for injuries sustained. . . . Thus, there is both a prospective
and remedial element to an insured's response cost liability.
Because CERCLA proceedings seek the costs of repairing
damaged property, rather than the cost of conforming one's
future conduct, the nature of the relief is, at least in part
compensatory.
Id. at 274 .
The Sixth Circuit Court of Appeals has also explained its interpretation of
the term "damages" in the case of Anderson Development Co . v. Travelers
Indem . Co . , 49 F .3d 1128 (6
th Cir. 1995), wherein the Court wrote :
The fact that the insured cooperates and assumes the
obligation to conduct the clean-up, rather than forcing the
EPA to incur the expenses of a clean-up and then bring a
coercive suit, does not change the bottom line that a legal
obligation exists . Accordingly, we . . . hold . . . government
imposed environmental clean-up costs constitute "damages ."
Id. at 1133 .
We would add, also, that if ANI intended a narrow technical definition of
"damages," it was their duty to define the term clearly within their policies . See
Minnesota Min . & Mfg . Co . v. Travelers Indem. Co., 457 N .W.2d 175,181 (Minn.
1990) .
The second question we must answer before concluding ANI's policies
provide coverage for the cost of site measures incurred by the insureds, is
whether these costs are "damages because of property damage" within the
meaning of the policies.
Unlike standard form general liability policies, ANI's policies expressly
define "property damage" to include "radioactive contamination" and also
contemplate within the definition, the "imminent danger of such contamination ."
Because radioactive contamination of property has unquestionably occurred at,
in, and around Maxey Flats, we find "property damage" has occurred as the term
is defined within the policies .
We think the trial court explained its reasoning well when it wrote :
The EPA response costs were triggered by, and can be seen
by the ordinary insured to have been imposed "because of" the
radionuclide levels which were discovered on the adjacent
property . Since the radionuclide levels on the adjacent property
triggered the liability, they were "property damage" from the
standpoint of the insureds . The ambiguity of the provision allows
nontechnical construction, and application in the insureds' favor.
Thus, we affirm the Court of Appeal's decision that the insureds' costs of
site measures are "damages because of property damage" as defined within
ANI's policies.
d. Whether exclusion (f) applies and therefore precludes coverage
The ANI "Facility" and "S & T" policies contain what are referred to as
"Facility Exclusions" that preclude coverage for property damage to Maxey Flats.
ANI's Facility Form Exclusion (f) provides that coverage does not apply "to
property damage to any property at the location designated in [Maxey Flats],
other than aircraft, watercraft or vehicles licensed for highway use, provided such
aircraft, watercraft or vehicles are not used in connection with operation of the
facility ."
The ANI S & T Forms NS-230 and NS-266, at Exclusion f, state that those
policies do not apply "to property damage to any property at any nuclear facility
or any property threat arising out of the possession, handling, use, storage or
disposal of nuclear material at such nuclear facility . . . ."
Kentucky law mandates that exclusions in insurance policies should be
narrowly construed as to effectuate insurance coverage . See E ly er v.
Nationwide Mut. Fire Ins. Co., 824 S.W .2d 855, 859 (Ky. 1992) . We find in
accordance with the Court of Appeal's opinion that the weight of authority favors
coverage under liability policies for remediation expenses when the primary
intent is to prevent additional harm to the property of others or to public waters .
See, e .g., Intel Corporation v. Hartford Acc. & Indem. Co., 952 F .2d 1551 (9th Cir.
1991); Gerrish Corp . v. Universal Underwriters Ins . Co ., 947 F.2d 1023 (2d Cir.
1991). We recognize also that common sense would mandate in this scenario .
the most effective method of preventing additional harm to the property of others
or to public waters would be to target the site of the harm, though it may be onsite, to prevent further contamination via run off to off-site locations.
Plus, we find the parties stipulation that only 2 .6% of the total response
costs were designed to clean up damage confined to the insured facility
determinative of our decision whether exclusion (f) applies to exclude ANI's
liability for the insureds' response costs. Accordingly, we affirm the lower court's
finding that only 2.6% of the response costs are subject to exclusion (f), a ruling
undisturbed by the Court of Appeal's opinion .
e . Whether ANI's policies cover the defense costs incurred in this
action .
Cross-appellants, Hittman and Chem-Nuclear, (position also adopted by
Commonwealth) argue the Court of Appeals erred in enforcing the provision
contained in both the "Facility" and "S & T" policies which includes (or offsets)
defense costs within the policies limits. The insureds also argue they are entitled
to recover their attorney's fees incurred in the declaration action brought by
cross-appellees, ANI .
The "Facility" and "S & T" Forms of the Nuclear Energy Liability Policy
both contain the following expense offset provision, titled : Limit of Liability:
Termination of Policy Upon Exhaustion of Limit, which states, in part:
the limit of the companies' liability stated in the declarations is
the total liability of the companies for their obligations under this
policy and the expenses incurred by the companies in
connection with such obligations, including . . . payments for
expenses incurred in . . .defense of any claim or suit, including . . .
attorneys' fees and disbursements . . . . Each payment made by
the companies in discharge of their obligations under this policy
or for expenses incurred in connection with such obligations shall
reduce by the amount of such payment the limit of the companies'
liability under this policy.
Regarding offset of the defense costs, the Court of Appeals reasoned
absent a finding of bad faith on the part of an insurer, a breach of its obligation to
defend the insureds does not provide for a rewriting of the policy contract to
award the insured more coverage than it purchased . We disagree with the Court
of Appeal's reading of the contract .
It is the Opinion of this Court that all of the cross-appellants' Maxey Flats
defense costs are now "damages" to be paid by cross-appeI lees, ANI; Not
payments made directly by ANI "in discharge of their obligations under this policy
or for expenses incurred in connection with such obligations. . . ." We are not
disposed to expand the meaning of "payments made in discharge of their
obligations under the policy," or "expenses incurred in connection with such
obligations" to include payment of damages under compulsion. Anyway one
reads the contested policy language, it requires voluntary payments by the
companies in furtherance of the contractual obligations under the policy ; not
"litigated" damages for failure to honor the policy terms .
If ANI had paid attorneys' fees and expenses in defense of the insureds in
the EPA CERCLA action, they would be entitled to offset such "payments for
expenses incurred in defense of any claim or suit" as their policies directly
provide . However, this policy language does not encompass "damages paid, or
to be paid" for a breach of the contract .
As argued by cross-appellants and supported by Kentucky law, an insurer
has a duty to defend if there is any allegation which potentially, possibly or might
come within the coverage terms of the insurance policy . Brown Foundation v. St.
Paul Fire and Marine Insurance Co ., 814 S .W.2d 273, 279 (Ky. 1991)(internal
citations omitted) . If the insurer believes there is no coverage, it has several
options . One is to defend the claim anyway, while preserving by a reservation of
rights letter its right to challenge the coverage at a later date. Another is to elect
not to defend. However, should coverage be found, the insurer will be liable for
"all damages naturally flowing from" the failure to provide a defense. See
Eskrdae v. Educator and Executive Insurers . Inc., 677 S.W.2d 887 (Ky. 1984).
This includes "damages" for reimbursement of defense costs and expenses if the
insured hires his own lawyer, and in some instances, the amount of a default
judgment, if he does not. cf., Grimes v. Nationwide Mutual Insurance Company,
705 S.W.2d 926 (Ky . App. 1985).
In line with the reasoning of Eskridge and Grimes, we find the defense
costs expended by cross-appellants in the CERCLA action, for which ANI owed a
duty to defend, are damages to be paid them, and even though measured by the
cost of such defense as owed, are not deductible, or to be offset, from ANI's
liability policy limits . We note also that should this Court have determined a lack
of coverage existed regarding the EPA proceeding, ANI would still have owed a
duty to defend the insureds in the EPA action, because we believe the EPA's
Potentially Responsible Parties notice letter contained allegations which
"potentially, possibly or might" be considered to indicate "property damage" within
ANI policies' scope of coverage . Therefore, ANI owed a duty to defend,
regardless of whether they were later adjudicated to owe a duty to pay.
We also agree with cross-appellants' argument that if ANI were allowed to
invoke the above quoted provision from their liability policy, they would not suffer
any adverse consequences as a result of their breach of duty to defend . There
would be no incentive to review the contractual language carefully, as there
would be no consequences . Therefore, public policy is another incentive to find
in favor of the Cross-Appellants on this issue . An insurer should not stand to
gain from its denial to defend its insured .
The second sub-issue regarding attorneys' fees involves the insureds'
claim that the Court of Appeals erred in refusing to allow them recovery of their
attorneys' fees incurred in the declaratory judgment action initiated by ANI . With
this contention, we cannot agree.
The Court of Appeals correctly stated the general rule in Kentucky that,
"with the exception of a specific contractual provision allowing for recovery of
attorneys' fees or a fee-shifting statute, . . .each party assumes responsibility for
his or her own attorneys' fees," citing Nucor Corp . v. General Electric Co., 812
S.W .2d 136 (Ky. 1991) .
We are still in agreement with the holding in Nucor, and therefore, affirm
the Court of Appeal's decision not to allow cross-appellants recovery of their
attorneys' fees in the declaratory judgment action .
f. Whether the ANI policies were triggered for the full amount of the
limits in effect at any time the property damage at issue was caused
without pro-rating the liability
In its cross-appeal, Westinghouse Hittman Nuclear Incorporated and
Hittman Nuclear & Development Corporation (collectively referred to as
"Hittman"), argue the Court of Appeals erred in affirming the trial court's decision
to pro-rate the amount of insurance available to cover its losses . Crossappellees, ANI, argue the ANI policies were not triggered for the full amount of
the limits. They believe the circuit court correctly allocated the damage over time
periods and then correctly applied the policy limits in effect during that time
period to the amounts so allocated .
The trial court held that the cause of the property damage on and off
Maxey Flats was ongoing and continuous during the various policy periods .
Therefore, the Trial Court pro-rated coverage since the damage was not divisible
or allocable during and between the policy periods .
We adopt the reasoning of the Court of Appeal's opinion regarding this
issue of pro-ration as we agree that Hittman's cited authorities do not carry their
proclaimed weight when dealing with the instant case involving one insurer, a
single liability policy (the "Facility" Form) and a single excess policy (the "S & T"
policy) . As such, we affirm the Court of Appeal's decision on this issue .
Lambert, C.J ., Graves, Johnstone and Wintersheminer, JJ ., concur.
Cooper, J., dissents by separate opinion with Roach, J ., joining that opinion
except for its reliance on Section 2 of the Constitution of Kentucky.
COUNSEL FOR APPELLANTS :
Roger E. Warin
Kenneth I. Jonson
Samuel T. Perkins
STEPTOE & JOHNSON LLP
1330 Connecticut Avenue, N.W .
Washington, D .C . 20036-1795
O. Grant Bruton
C. Kent Hatfield
John W. Bilby
MIDDLETON & REUTILNGER
2500 Brown & Williamson Tower
Louisville, KY 40202
COUNSEL FOR APPELANTS :
C. Michael Haines
Deputy General Counsel
Office of Legal Counsel
Kentucky Natural Reources &
Enviromental Protection Cabinet
Capital Plaza Tower - 5th Floor
Frankfort, KY 40601
Eugene L. Mosley
Ackerson, Mosley & Yann
1200 One Riverfront Plaza
Louisville, KY 40202
Neal R. Brendel
James R. Segerdahl
Christopher C . French
Kirkpatrick & Lockhart LLP
1500 Oliver Building
Pittsburgh, PA 15222-2312
Anne Courtney Coorssen
Westinghouse Electric Corporation
Law Department
11 Stanwix Street
Pittsburgh, PA 15222
Richard M. Sullivan
Edward F. Busch
Kenneth A. Bohnert
Conliffe, Sandmann & Sullivan
2000 Waterfront Plaza
325 West Main Street
Louisville, KY 40202
I rvin D. Foley
Foley, Bryant & Holloway
718 West Main Street, Suite 201
Louisville, KY 40202
Kevin M. Murphy
Kenneth G. Schuler
Latham & Watkins
5800 Sear Tower
233 South Wacker Drive
Chicago, IL 60606
RENDERED : SEPTEMBER 22, 2005
TO BE PUBLISHED
,*ixyxrmm Courf of ~rnfurhV
2002-SC-307-DG
AETNA CASUALTY & SURETY
COMPANY, ET AL.
V
APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-214
JEFFERSON CIRCUIT COURT NO. 87-CI-3359
COMMONWEALTH OF KENTUCKY,
NATURAL RESOURCES AND ENVIRONMENTAL
PROTECTION CABINET, ET AL.
AND
2003-SC-407-DG
WESTINGHOUSE HITTMAN
NUCLEAR, INC ., ET AL.
V
CROSS-APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-213 & 214
JEFFERSON CIRCUIT COURT NO. 87-CI-3359
AETNA CASUALTY & SURETY
COMPANY, ET AL.
AND
CROSS-APPELLEES
2003-SC-408-DG
ATCOR, INC ., ET AL.
V
APPELLEES
CROSS-APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-213 & 214 & 215
JEFFERSON CIRCUIT COURT NO. 87-CI-3359
AETNA CASUALTY & SURETY
COMPANY, ET AL.
CROSS-APPELLEES
OPINION BY JUSTICE COOPER
DISSENTING IN PART
I dissent from the majority opinion because (1) the insurance policies issued by
American Nuclear Insurers (ANI) are third-party liability policies that do not provide
coverage either for property damage to the insured site or for capital improvements to
the site itself (referred to as "site measures") ; (2) the trial court properly instructed the
jury on the issue of fortuity and the jury's verdict on that issue would preclude ANI's
liability with respect to the Commonwealth of Kentucky and US Ecology even if
coverage otherwise existed; and (3) ANI was not required to provide a defense to the
administrative agency proceedings initiated by the Environmental Protection Agency
(EPA) pursuant to CERCLA; but even if that were not so, the majority opinion violates
Section 2 of our Constitution by rewriting the parties' contract with respect to the costs
and fees incurred in that defense, thereby impairing obligations of contract and, sua
sponte, imposing the equivalent of potentially massive punitive damages.
I. THE INSURANCE POLICIES .
ANI issued two policies of liability insurance with respect to the Maxey Flats
nuclear waste disposal site, each titled "Nuclear Energy Liability Policy," with one
subtitled "Facility Form" and the other subtitled "Supplier's and Transporter's Form"
("S&T Form"). The Facility Form provides underlying coverage for liability arising out of
the ownership or operation of the Maxey Flats site . The named insureds of the Facility
Form are the Commonwealth, Natural Resources and Environmental Protection Cabinet
(NREPC), US Ecology, and Westinghouse, all of whom either owned, operated, or
monitored Maxey Flats at one time or another . (Westinghouse also transported waste
to Maxey Flats.) The S&T Form provides excess coverage for waste haulers in the
event the lessee/operator of a particular waste disposal facility is underinsured . There
are actually two S&T Form policies applicable to this case, one issued to Chem-Nuclear
and Atcor and the other issued to Westinghouse .
The Facility Form contains the following relevant provisions with respect to
coverage:
BODILY INJURY AND PROPERTY DAMAGE LIABILITY. To pay on
behalf of the insured :
(1)
all sums which the insured shall become legally obligated to pay as
damages because of bodily injury or property damage caused by
the nuclear energy hazard, and the companies shall defend any
suit against the insured alleging such bodily injury or property
damage and seeking damages which are payable under the terms
of this policy; but the companies may make such investigation,
negotiation and settlement of any claim or suit as they deem
expedient;
DEFINITION OF INSURED . The unqualified word "insured" includes (a)
the named insured and (b) any other person or organization with respect
to his legal responsibility for damages because of bodily injury or property
damage caused by the nuclear energy hazard .
Subject to Condition 3 ["Limit of Liability"] and the other provisions
of this policy, the insurance applies separately to each insured against
whom claim is made or suit _is brou ght.
DEFINITIONS . Wherever used in this policy:
"property damage" means physical injury to or destruction or radioactive
contamination of property, and loss of use of property so injured,
destroyed or contaminated, and loss of use of property while evacuated or
withdrawn from use because possibly so contaminated or because of
imminent danger of such contamination . . . .
EXCLUSIONS .
This policy does not apply:
(f)
to property damage to any property at the location designated in
Item 3 of the declarations [Maxey Flats site] . . .
CONDITIONS .
3.
LIMIT OF LIABILITY; TERMINATION OF POLICY UPON
EXHAUSTION OF LIMIT . Regardless of the number of persons
and organizations who are insureds under this policy, and
d
regardless of the number of claims made and suits brought against
any or all insureds because of one or more occurrences resulting in
bodily injury or property damage caused during the policy period by
the nuclear energy hazard, the limit of the companies' liability stated
in the declarations is the total liability of the companies for their
obligations under this policy and the expenses incurred by the
companies in connection with such obligations, including
(a)
payments in settlement of claims and in satisfaction of
judgments against the insureds for damages because of
bodily injury or property damage . . . .
(b)
payments for expenses incurred in the investigation,
negotiation, settlement and defense of any claim or suit,
including, but not limited to, the cost of such services by
salaried employees of the companies, fees and expenses of
independent adjusters, attorneys' fees and disbursements,
expenses for expert testimony, inspection and appraisal of
property, examination, X-ray or autopsy or medical expenses
of any kind . . . .
Each payment made by the companies in discharge of their
obligations under this policy or for expenses incurred in connection
with such obligations shall reduce by the amount of such payment
the limit of the companies' liability under this policy.
If, during the policy period or subsequent thereto, the total of
such payments made by the companies shall exhaust the limit of
the companies' liability under this policy, all liability and obligations
of the companies under this policy shall thereupon terminate . . . .
Regardless of the number of years this policy shall continue
in force and the number of premiums which shall be payable or
paid, the limit of the companies' liability stated in the declarations
shall not be cumulative from year to year .
(Emphasis added .)
The S&T Form contains the same language as the Facility Form with respect to
bodily injury and property damage liability, .the definition of "property damage," and the
limit of liability (Condition 3). However, it confines its coverage only to the named
insureds and its "Exclusion (f)" reads as follows :
EXCLUSIONS.
This policy does not apply:
(f)
to property damage to any nuclear facility or any property threat
arising out of the possession, handling, use, storage or disposal of
nuclear material at such nuclear facility . . . .
(Emphasis added.)
All of these policies are third-party liability policies that pay on behalf of the
insureds damages arising out of damage to property owned by others caused by
activities on the insured site, ea., migration of radionuclides from the insured site to
other properties. Because they specifically exclude coverage for property damage to
the insured site, itself, and do not purport to pay for capital improvements to the insured
site, they are not first-party policies. Allstate Ins. Co. v. Dana Corp. , 759 N .E .2d 1049,
1054 (Ind. 2001) ("Because there is no liability coverage for damage to Dana's own
property, reference to the 'owned property' exclusion in these policies is unnecessary .").
First-party policies, sometimes referred to as "Differences in Conditions" (DIC), All
Risks,"' or Casualty Insurance policies, are conceptually similar to collision coverage in
a standard automobile policy or fire coverage in a standard homeowner's policy.
Third party insurance involves protection for the policyholder for liability it
incurs to someone else, while first party insurance involves protection for
losses to the policyholder's own property . Generally, a CGL
[Comprehensive General Liability] policy insures against injury or damage
to a third party ; the insurer agrees to defend and indemnify the insured
against liability for risks identified in the policy. A DIC [Differences in
Conditions] policy, by contrast, is generally a first-party insurance policy
that indemnifies the insured for damage to its own property .
Aluminum Co . of Am. f"ALCOA"1 v. Aetna Cas. & Sur. Co . , 998 P.2d 856, 863 (Wash.
2000) (applying Pennsylvania law and holding that ALCOA's DIC policies, but not its
' For an example of an "All Risks" policy, see California Union Ins. Co . v. Spade, 642
S.W.2d 582 (Ky. 1982) .
5
CGL policies, provided coverage for CERCLA clean-up costs incurred with respect to
ALCOA's own property) . See also Bausch & Lomb Inc. v. Utica Mut. Ins. Co . , 625 A.2d
1021, 1033 (Md . 1993) ("A hallmark of the comprehensive general liability policy is that
it insures against injury done to a third party's property, in contradistinction to an 'allrisks' policy also covering losses sustained by the policy-holder .") .
11. MAXEY FLATS.
When it enacted the 1962 legislation that created the Kentucky Atomic Energy
Authority and authorized the operation of nuclear and radioactive waste disposal sites,
the General Assembly recognized that there would be a continuing and perpetual need
to maintain, repair, and improve the containment features of such sites . It assigned that
responsibility to the Commonwealth .
It is recognized by the General Assembly that any site used as a
radioactive waste material site will represent a continuing and perpetual
responsibility in the interests of the public health, safety and general
welfare, and that the same must ultimately be reposed in a sovereign
government without regard for the existence or non-existence of any
particular agency, instrumentality, department, division or officer thereof. .
In the event the Authority shall acquire and dedicate one or more
radioactive waste material sites, the Authority may convey such sites to
the Commonwealth for no other consideration than an undertaking of the
Commonwealth to maintain, safeguard and operate the same in the
interests of the public health, safety and welfare . Any such conveyance
may contain an express provision that the Commonwealth thereby
assumes such continuing and perpetual responsibility, and the
Commissioner of Health (or other officer succeeding to his functions) is
hereby authorized to sign the same and bind the Commonwealth in that
regard ; and any such conveyance may be made subject to any existing
contractual rights of licensees using source, by-product and special
nuclear materials to make use of the site or sites in the disposition of
radioactive waste materials .
2 1962 Ky. Acts, ch . 100, codified at KRS 152.510, et seg. , repealed, except with
respect to KRS 152.590, by 1964 Ky. Acts, ch. 7, § 12, 1976 Ky. Acts, ch . 299, § 91 .
-6-
1962 Ky. Acts, ch . 100, § 19, codified at KRS 152.690, repealed 1978 Ky . Acts, ch . 279,
§ 9 (emphasis added) . The Maxey Flats nuclear waste disposal site opened in 1963
under lease to Nuclear Engineering Co. (NECO) . The lease was subsequently
transferred to US Ecology, Inc. Instead of purchasing, e .g_, a DIC policy to defray the
cost of its "continuing and perpetual responsibility," the Commonwealth sought to build
a fund for that purpose by charging "burial fees" to its lessees, who presumably passed
those fees along to the waste haulers . See Lease between Kentucky Atomic Energy
Authority and NECO, Jan. 21, 1963, at 4-6 (PI. Ex . 49) and testimony of J . Scoville
(deposition read at trial).
The Commonwealth closed the Maxey Flats site in 1977. A study completed
shortly thereafter determined that the site did not pose a public health hazard but that
there existed a "potential" for migration of radionuclides to adjacent properties . In 1980,
the General Assembly enacted KRS 211 .898, viz:
The Natural Resources and Environmental Protection Cabinet shall
proceed toward the stabilization and decommissioning of any nuclear
waste facility owned by the Commonwealth on July 15, 1980 as
expeditiously as is reasonably possible in order to place the facility in such
a condition that active ongoing maintenance is eliminated and only
surveillance and monitoring are required .
1980 Ky. Acts, ch . 17, § 4. However, when the NREPC undertook to perform this
mandate, it discovered that the estimated cost of complying with it far exceeded the
"burial fees" set aside for that purpose.
III. THE CERCLA PROCEEDINGS .
The Commonwealth first sought additional funds from various federal agencies .
It then vigorously and successfully sought to have Maxey Flats placed on the National
Priority List (NPL) of the nation's most dangerous nuclear waste sites so as to qualify for
"Superfunds" and possibly spread its liability to other "potentially responsible parties"
("PRPs") .
See Letter from Governor Martha Layne Collins to Charles Jeter, Regional
Administrator of the Environmental Protection Agency (EPA) (September 7, 1984) (Pl.
Ex. 28) ("The purpose of this letter is to make you aware that the Maxey Flats site is the
highest priority in Kentucky for Superfund planning and budgeting for FY 1985 ."); Letter
from T. Michael Taimi, Commissioner, Kentucky Department for Environmental
Protection, to Thomas W. Devine, Director of EPA's Air and Waste Management
Division (August 23, 1984) (Pl. Ex. 26) ("This is to advise that the Commonwealth of
Kentucky has expended serious effort to include the Maxey Flats site near Morehead,
Kentucky on the next edition of the National Priority List (NPL). . . .
[A]ssuming this site
is placed on the NPL, Kentucky would like for this site to be considered as the number
one priority for further investigation and feasibility."); Memorandum from Rose Marie
Carr, Manager, Maxey Flats Branch, to T. Michael Taimi (January 14, 1985) (PI. Ex. 27)
("The Department has been successful in having the Maxey Flats Nuclear Waste
Disposal Site placed on the Superfund list .") .
Placement of Maxey Flats on the NPL automatically triggered the administrative
procedures required by the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA), 42 U.S .C. § 9601, et seg., as supplemented by the
Superfund Amendments and Reauthorization Act of 1986 (SARA), Pub . L. No. 99-499,
100 Stat . 1613 . On November 26, 1986, the EPA issued PRP letters to 832 entities,
ultimately trimmed to approximately 600, that had owned, operated, or sent waste to
Maxey Flats . H. Doyle Mills and Caroline Patrick Haight, Kentucky Department for
Environmental Protection, Superfund Clean Up of a Commercial Radioactive Waste
Disposal Facility in Kentucky 2. Pursuant to CERCLA, the EPA offered the PRPs the
opportunity to conduct their own Remedial Investigation/Feasibility Study (RI/FS) of the
site . Eighty-two (82) PRPs, including Appellees, accepted the offer, formed a steering
committee, and conducted and partially funded the RI/FS . (Most of the funding was
provided by the Department of Energy and the Department of Defense, which were
PRPs but not members of the steering committee .) On March 27, 1987, those who had
accepted the EPA's offer executed an "Administrative Order By Consent," reflecting
EPA's findings of fact and conclusions of law and setting forth the steering committee's
RI/FS plan of action.
Upon receipt of their respective PRP letters, Appellees all demanded that ANI
provide them with a "defense" to the CERCLA proceedings . The Commonwealth's
demand was particularly ironic in view of the fact that the initiation of the proceedings
was a direct result of the Commonwealth's own urgent requests that Maxey Flats be
placed on the NPL so as to qualify for Superfund and PRP contributions to mitigate its
preexisting liability under KRS 211 .898. It succeeded . Now it claims that the CERCLA
administrative proceeding was a "suit" against which ANI was required to defend it. In
effect, the Commonwealth was more a plaintiff than a defendant in the CERCLA
proceedings, since its position was that of a party attempting to lay off a portion of its
existing liability onto other parties. ANI denied coverage for any potential on-site cleanup or site improvement costs and declined to provide a defense to the CERCLA
proceedings . (Under the "any other person or organization" clause of the Facility Form
policy, each of the 832 original PRPs was a potential insured who, under the majority
opinion's reasoning, was entitled to a "defense" to the administrative proceedings and
indemnification for its pro rata share of the costs.)
In 1991, the EPA issued a Record of Decision (ROD) that confirmed the previous
study's finding that "the site does not currently pose a threat to human health or the
environment," but concluded that certain site measures should be undertaken because
of a potential " threat to human health and the environment posed by the site in the
future should these activities not be undertaken ." ROD Responsiveness Summary 25
(emphasis added) . The estimated cost of these measures was $33,500,000, ROD
Declaration Statement 2, of which it is stipulated that 97.4% was attributable to siteimprovement measures and 2.6% to clean-up measures . None of the measures
included any off-site remediation or improvements . The NREPC, the other PRPs, and
the federal agencies agreed on an apportionment of the cost of these measures . The
NREPC and the other parties to this appeal now claim coverage under ANI's third-party
liability insurance policies for the amounts they agreed to pay, claiming that the ROD
was an award of "damages" for "property damage."
The majority opinion correctly notes that 42 U .S .C. § 9607(e)(1) expressly
authorizes PRPs to insure against the costs of relief imposed under CERCLA .
Presumably, that refers to the purchase of a policy providing first-party coverage, etc ., a
"Differences in Conditions" (DIC), "All Risks," or Casualty policy, and not a liability policy
that provides only third-party coverage for damage to the property of another. As a
condition of licensure as either a nuclear waste disposal facility or a nuclear waste
hauler, the licensee must maintain a policy of "public liability" insurance. 42 U.S .C . §
2210(a) . In that respect, the United States Code defines "public liability" as "any legal
liability arising out of or resulting from a nuclear incident . . . except . . . claims for loss
of, or damage to, or loss of use of property which is located at the site of and used in
connection with the licensed activity where the nuclear incident occurs." 42 U.S .C .A . §
_ 1 0-
2014(w) (emphasis added) . In other words, a licensee is required to carry a policy of
third-party liability insurance under 42 U .S .C . § 2210(a) and has the option of carrying a
policy of first-party insurance under 42 U .S .C. § 9607(e) . Since the policies at issue in
this case are "public liability" policies, they do not provide coverage for damage to the
insured site per 42 U .S.C. § 2014(w) .
IV. COVERAGE.
A. Clean-up Costs.
Exclusion (f) in the Facility Form excludes coverage for "property damage to any
property at the location designated in Item 3," i.e. , Maxey Flats. Exclusion (f) in the S&T
Form excludes coverage for "property damage to any nuclear facility" and for "any
property threat." The "any nuclear facility" language obviously anticipates that some
insured waste haulers will haul waste to more than one nuclear facility . The language
includes the Maxey Flats facility and, in that respect, is identical to Exclusion (f) in the
Facility Form . Both of these exclusions are akin to the "owned property" exclusion
found in virtually all comprehensive general liability (CGL) policies and apply to the
clean-up costs required by the EPA pursuant to CERCLA.
The majority opinion concedes that these exclusions preclude recovery of the
clean-up costs . Ante , at
(slip op. at 16-17) . Accord Yale Univ . v. Cigna Ins . Co . ,
224 F. Supp. 2d 402, 407 (D . Conn . 2002) ("[E]ven assuming arguendo that the cleanup costs incurred by Yale were sums it was 'legally obligated to pay"as damages'
pursuant to the directives, the plain language of the policies [referring to the "owned
property" exclusion] additionally require that such damages have been incurred
because of third-party property damage .") ; Cedar Lane Invs. v. St . Paul Fire & Marine
Ins . Co . , 883 P.2d 600, 603 (Colo . Ct. App. 1994) ("owned property" exclusion
-11 -
"unambiguously" barred coverage for an EPA-ordered clean-up of the insured's
property) ; Boardman Petroleum, Inc . v. Federated Mut. Ins. Co. , 498 S.E .2d 492, 495
(Ga . 1998) ("Boardman cannot obtain coverage for the costs of remediation to its own
property on grounds that the clean-up was state-ordered or because of a possible future
threat to surrounding property .") ; Hakim v. Mass . Insurers' Insolvency Fund , 675 N .E .2d
1161, 1166 (Mass . 1997) ("Costs incurred for the sole purpose of remediating the
Hakims' property are barred by the owned property exclusion of the policy.") ; Martin v.
State Farm Fire & Cas . Co . , 932 P .2d 1207,1212-13 (Or. Ct. App. 1997) ("Whether the
reason for cleaning up the pollution was to restore the property to its full value for the
benefit of its owners or to comply with governmental regulations for the benefit of the
public, the remediation occurred on Martin's 'own property"' and, thus, the cost thereof
was "unambiguously exclude[d] .") .
B. Site Measures.
(1 ~ Threat of damaae .
The site measures, i .e . , improvement of the site's containment features, were
performed to alleviate the "threat to human health and the environment posed by the
site in the future." ROD Responsiveness Summary 25 . Obviously, the exclusion in the
S&T Form policy of "any property threat" excludes coverage for the cost of
implementing the recommended site measures . Furthermore, "threatened harm" is not
within the coverage of either policy. State v. Signo Trading Int'I, Inc . , 612 A.2d 932, 938
(N .J . 1992) ("The policy's definition of property damage does not encompass
'threatened harm' even if that threat is 'imminent' and 'immediate ."') . In W.M. Schlosser
Co., Inc. v. Insurance Co . of North America , 600 A.2d 836 (Md. 1992), the insured made
- 1 2-
a claim for the cost of work done on his own property to prevent possible future damage
to adjoining property .
The insurance contract involved in this case is a Contractor's General
Liability Policy . By its clear and unambiguous language, it is intended to
protect the insured against claims made by others for damages the
insured has a legal responsibility to pay. It is not an all risks or builder's
risk policy . No claims were made by others as a result of any personal
injury or property damage. Moreover, there was no occurrence within the
meaning of the policy that caused damage to the persons or property of
others. The action taken by Schlosser was intended to prevent the type of
harm the policy would have covered, and no such harm in fact resulted .
Id . at 838-39. See also E .I . du Pont de Nemours & Co. v. Allstate Ins. Co., 686 A .2d
152, 157 (Del . 1996) ("Costs for remedial measures taken on the insured's property to
prevent third party property damage are precluded from coverage under the operation
of the owned property clause."); Weyerhaeuser Co. v. Aetna Cas. & Sur. Co . , 874 P.2d
142, 150 (Wash . 1994) (en banc) ("[P]reventive measures taken before pollution has
occurred are not costs incurred because of property damage.") (internal citation and
quotation omitted) .
The majority opinion's reliance on Intel Corp . v. Hartford Accident & Indemnity
Co. , 952 F .2d 1551 (9th Cir. 1991), and Gerrish Corp . v. Universal Underwriters
Insurance Co . , 947 F.2d 1023 (2nd Cir. 1991), is misplaced. Those cases only
exemplify a narrow exception to the general rule that is applied by some jurisdictions
when pollutants from the insured property have already damaged adjacent properties,
thus triggering the third-party liability coverage of the insured's policy . In that
circumstance, the liability insurer may be required to pay damages not only for the
damage to the adjacent owner's property but also for measures required to mitigate
additional damage from the same cause. Intel, 952 F.2d at 1566 ("[I]t would seem
strangely incongruous to the insured that his policy would cover him for damages to
- 1 3-
tangible property destroyed through his negligence in allowing a fire to escape but not
for sums incurred in mitigating such damages by suppressing the fire ." (quoting Globe
Indem. Co. v. People, 118 Cal . Rptr. 75, 79 (Cal . Ct. App. 1974) (internal citations and
quotations omitted)); Gerrish , 947 F.2d at 1030-31 . See also W . World Ins. Co . v.
Dana, 765 F. Supp. 1011, 1015 (E.D. Cal. 1991) ("Mitigation damages are only
available to mitigate against the further occurrence of an insured loss . Costs incurred to
remedy the soil contamination are not recoverable mitigation costs because the damage
was confined to property owned by the insured and therefore did not constitute an
insured loss.") (internal citation and quotation omitted) ; City of Laguna Beach v. Mead
Reinsurance Corp. , 276 Cal . Rptr. 438 (Cal . Ct . App. 1990) ("Necessary to a recovery
. . . is the existence of an insured loss.") ; E.I . du Pont, 686 A.2d at 157 ("[T]he plain
meaning of the language contained in the owned property exception and the purpose of
liability policies in general, both require the result that coverage not be provided for
measures taken on an insured's property unless it is in response to damage to third
party property .") ; Signo Trading , 612 A.2d at 939 ("[T]his case does not fall within the
narrow exception allowing recovery for the cost of measures intended to prevent
imminent or immediate future damage when a present injury has already been
demonstrated .") . "The policies require proof of actual harm to third-party property in
order to 'eliminate[] any risk that insurance companies will be called upon to pay the
ordinary costs of compliance with agency regulations ."' Yale Univ . , 224 F. Supp . 2d at
408 (quoting Metex Corp. v. Fed. Ins . Co. , 675 A.2d 220, 228 (N .J . Super. Ct. App. Div.
1996)) .
(2) Prope
damage.
It was asserted in the PRP letters and found by the trial court that some
radionuclides had, in fact, migrated from the Maxey Flats site to adjacent property . The
majority opinion characterizes that assertion as proof that "'property damage' has
occurred as the term is defined within the policies." Ante , at
(slip op. at 15) .
However, the Department of Health regulations governing Maxey Flats authorized the
migration of minimal amounts of radioactivity from the site so long as such releases did
not exceed prescribed limits,3 which, consistent with Kentucky's "Agreement State"
status with the EPA, were identical to permissible discharge limits established under
federal regulations . The mere presence of radioactive particles on property does not
ipso facto constitute "property damage ." Wilhite v. Rockwell Int'I Corp. , 83 S.W.3d 516,
520-21 (Ky. 2002) .
1 would note in passing that, while the PRP letters recited that elevated levels of
radionuclides have been detected off-site and that studies have shown higher-thannormal tritium levels in trees adjacent to the site, the findings of fact in the
Administrative Order By Consent prepared four months later recited only that elevated
levels of radionuclides have been detected "on the site outside the restricted area." In
re Maxey Flats Nuclear Disposal Site , U .S. EPA Docket No. 87-08-C, Finding of Fact D,
at 3 (Envtl . Prot. Agency, Region IV, Mar. 24, 1987) . None of the remediation or site
measures involved any off-site clean-up or construction . As of this writing, the Maxey
Flats nuclear disposal site has been closed for twenty-eight years and no adjacent
property owner has yet made a claim for damages for property damage alleged to have
been caused by migration of radionuclides from the site.
3 Ky. Dep't Health Reg . RH-4 §§ 7(b), 16 (1961) ; RH-4-1 §§ 7(b), 16 (1964) .
4 10 C .F.R. § 20.106 & App. B (1960) .
- 1 5-
The majority opinion's citation to Intel Corp . v. Hartford , for the proposition that
harm to public waters would constitute damage to a third-party, ante , at
(slip op. at
16), is also misplaced. Intel did, indeed, hold that "[d]amage to -groundwater is not
damage to property 'owned or occupied by or rented to' Intel," 952 F.2d at 1565
(emphasis added) ; but, in doing so, it was construing California law providing that "[a]II
water within the State is the property of the people of the State." Cal. Water Code §
102. In Kentucky, underground percolating waters are owned by the surface owner,
Nourse v. Andrews , 200 Ky. 467, 255 S .W. 84, 86 (1923), thus, any damage to
percolating waters falls within the "owned property" exclusion . Am. States Ins. Co. v.
Hanson Indus. , 873 F. Supp. 17, 24 (S.D . Tex. 1995) (where groundwater is owned by
the property owner, the owned property exclusion applies); Boardman Petroleum, 498
S.E .2d at 495 (same) . There is no evidence that any seepage from the Maxey Flats site
damaged or even threatened any surface waters.
C3) "Dama-ges ."
The majority opinion attempts to satisfy the "damages" requirement of ANI's
coverage provisions by likening the cost of the site improvement measures to
"damages," because they were supposedly "ordered" by the EPA pursuant to CERCLA .
Ante, at
(slip op . at 13-14) . However:
"Damages," as distinguished from claims for injunctive or restitutionary
relief, includes only payments to third persons when those persons have a
legal claim for damages . . . . The general comprehensive liability policy
between the parties covers "damages," but not the expenditures which
result from complying with the directives of regulatory agencies.
Md . Cas. Co. v. Armco, Inc . , 822 F.2d 1348, 1352 (4th Cir. 1987) .
[T]he insurer's duty to indemnify the insured for "all sums that the insured
becomes legally obligated to pay as damages" under the standard
comprehensive general liability insurance policy is limited to money
- 1 6-
ordered by a court. . . . For it is in a "suit" that "damages" are sought in
some amount through the court's order .
Certain Underwriters at Lloyd's of London v. Superior Court , 16 P.3d 94, 103-04 (Cal .
2001). Improvements to one's own property, even at the behest of an administrative
agency, are not "damages ." The majority opinion resorts to Webster's dictionary to
ascertain the ordinary meaning of damages . Ante, at
(slip op. at 1 3) . However,
while "[v]iewed outside the insurance context, the term 'damages' is ambiguous . . . the
term 'damages' is not ambiguous in the insurance context and . . . the plain meaning of
the term 'damages' used in the CGL policies refers to legal damages and does not
cover cleanup costs." Cont'l Ins . v. Northeastern Pharm . & Chem . Co ., 842 F.2d 977,
985 (8th Cir. 1988) (en banc) (construing Missouri law). See also Grisham v.
Commercial Union Ins . Co . , 951 F.2d 872, 875 (8th Cir. 1991) (same) (construing
Arkansas law) ; Mraz v . Canadian Universal Ins . Co ., Ltd . , 804 F.2d 1325, 1329 (4th Cir.
1986) (as evidenced by CERCLA provisions, response costs are an economic loss, not
damages) ; Patrons Oxford Mut. Ins . Co . v. Marois, 573 A.2d 16, 18-19 (Me. 1990)
("There may be a substantial difference between these remedial costs and the amount
of damages the Maroises would have to pay to property owners for damages to their
property . It is the latter expenditure upon which the parties have contracted and upon
which the insurance premium is based.") ; Coakley v. Me. Bonding and Cas . Co . , 618
A.2d 777, 784-85 (N .H . 1992) (containment costs, including related investigatory costs,
of insured's landfill were preventive in nature and not "damages," thus not covered by
insured's CGL policy) ; Weyerhaeuser , 874 P .2d at 150 ("[T]he term 'damages' does not
cover safety measures or other preventive costs taken in advance of any damage to
property .") .
- 1 7-
The narrow construction of the term "damages" is consistent with
the statutory scheme of CERCLA, which differentiates between clean-up
costs and damages . Clean-up or response costs are recoverable by the
government or by private parties . 42 U .S .C . § 9607(a)(4)(A), (B) .
Additionally, the government may sue for "damages for injury to,
destruction of, or loss of natural resources . . . . . 42 U .S.C. §
9607(a)(4)(C) . To date, most government actions have sought recovery of
response costs, rather than damages.
Verlan, Ltd . v. John L. Armitage & Co. , 695 F. Supp . 950, 954-55 (N .D. III. 1988)
(emphasis added) .
The majority opinion's reliance on Anderson Development Co. v. Travelers
Indemnity Co . , 49 F.3d 1128 (6th Cir. 1995), and Johnson Controls, Inc. v. Employers
Insurance
of
Wausau , 665 N .W .2d 257 (Wis . 2003), is misplaced . Both cases involved
only clean-up costs, not site-improvement measures. Anderson, 49 F .3d at 1132;
Johnson Controls , 665 N .W .2d at 274-75 . In fact, Johnson Controls opines that
CERCLA gives the EPA no authority to order site-improvement measures to prevent
future damage, but that such falls within the jurisdiction of the Resource Conservation
and Recovery Act (RCRA), 42 U.S .C . §§ 6901-6992 .
CERCLA does not regulate prospective conduct in the traditional sense
that governments regulate commercial behavior . Rather, it seeks to
impose strict liability on corporations and other entities for damages to
property done in the past . None of the costs at issue in this case appear
to have been incurred by Johnson Controls to improve the cleanliness of
ongoing processing or to comply with government regulations requiring
business practices conforming to some standard .
25 In
fact, another federal statute, the Resource Conservation and
Recovery Act (RCRA), 42 U .S.C . §§ 6901-6992, which preceded
CERCLA by a few years, regulates the present-day handling of
hazardous wastes and carries its own enforcement mechanisms.
Johnson Controls , 665 N .W .2d at 274-75 (internal citations and quotations omitted) .
There is support for this proposition in Meghria v. KFC Western, Inc., 516 U.S . 479, 116
S .Ct. 1251, 134 L.Ed.2d 121 (1996) :
- 1 8-
RCRA is a comprehensive environmental statute that governs the
treatment, storage, and disposal of solid and hazardous waste. Unlike
[CERCLA], RCRA is not principally designed to effectuate the cleanup of
toxic waste sites or to compensate those who have attended to the
remediation of environmental hazards . RCRA's primary purpose, rather,
is to reduce the generation of hazardous waste and to ensure the proper
treatment, storage, and disposal of that waste which is nonetheless
generated, so as to minimize the present and future threat to human
health and the environment.
Id . at 483, 116 S .Ct . at 1254 (emphasis added) (internal citations and quotations
omitted) . Cf. Gen . Elec . Co. v. Litton Indus. Automation Sys., Inc . , 920 F.2d 1415, 1422
(8th Cir. 1990) (the "two . . . main purposes of CERCLA" are "prompt cleanup of
hazardous waste sites and imposition of all cleanup costs on the responsible party"),
abrogated on other grounds by Key Tronic Corp . v. United States , 511 U.S. 809, 114
S.Ct. 1960, 128 L.Ed.2d 797; New York v. Shore Realty Corp. , 759 F.2d 1032, 1041 (2d
Cir. 1985) ("CERCLA is not a regulatory standard-setting statute such as the Clean Air
Act. ") .
In summary, the cost of the site-improvement measures is not within the
coverage of the ANI policies because they were not sums that the insureds were
"legally obligated to pay as damages because of . . . property damage" and because
they fall within Exclusion (f) of the policy.
[I]nsurance policies are construed strictly against the insurer and liberally
in favor of the insured so as not to defeat the intended purpose of the
policy. But this does not mean that courts in giving a liberal construction
to a policy can ascribe to it a meaning not coming within the limits of the
language of the contract of insurance . Nor can courts read into it
conditions and terms not incorporated therein .
Cal. Union Ins. Co. v . Spade , 642 S .W.2d 582, 583-84 (Ky. 1982) (internal citations and
quotations omitted) .
As a last resort to justify finding coverage, the majority opinion relies on that old
standby, the "doctrine of reasonable expectations," (though it cites a case in which
_19_
resort to the doctrine was rejected) . Ante , at
(slip op. at 10) . "The doctrine of
reasonable expectations is used in conjunction with the principle that ambiguities should
be resolved against the drafter in order to circumvent the technical, legalistic and
complex contract terms which limit benefits to the insured ." Simon v. Cont'I Ins. Co.,
724 S.W.2d 210, 212-13 (Ky. 1986) (quoting R.H. Long, The Law of Liability Insurance
§ 5 .10(B)) . However :
[C]ourts should resort to the doctrine of reasonable expectations only
when the phrasing of the policy is so confusing that the average
policyholder cannot make out the boundaries of coverage . When the
terms of an insurance contract are clear, [as in this case,] it is the function
of a court to enforce it as written and not to make a better contract for
either of the parties.
Signo Trading , 612 A.2d at 938. Appellees are not unsophisticated, uneducated, "runof-the-mill" policyholders . They are specialists in the field of nuclear waste disposal who
purchased policies of public liability insurance specially tailored to the nuclear energy
industry for the purpose of providing coverage for potential third-party liability damages
as required by 42 U .S .C . § 2210(a) . Their efforts to convert them into first-party policies
are both unconvincing and disingenuous.
V. FORTUITY - JURY INSTRUCTIONS.
The majority opinion reverses and remands for a new trial the issue of fortuity
because of an allegedly improper jury instruction . In doing so, it has seriously
misconstrued the holding in James Graham Brown Foundation, Inc . v. St. Paul Fire &
Marine Insurance Co . , 814 S .W.2d 273 (Ky. 1991) . ANC raised the fortuity defense
only against the claims of the Commonwealth (NREPC) and US Ecology.
"Implicit in the concept of insurance is that the loss occur as a result of a
fortuitous event, not one planned, intended, or anticipated ." Lee R . Russ & Thomas F.
- 20-
Segalla, 7 Couch on Insurance 3d § 101 :2, at 101-8 (1997) (emphasis added) . "The
fortuity principle is central to the notion of what constitutes insurance . The insurer will
not and should not be asked to provide coverage for a loss that is reasonably certain or
expected to occur within the policy period ." Eric Mills Holmes & Mark S . Rhodes, 1
Appleman on Insurance 2d § 1 .4, at 26 (1996) (emphasis added) . Because the fortuity
principle never appears in insurance contracts, it is sometimes referred to as the
"unnamed exclusion ." Stephen A . Cozen & Richard C. Bennett, Fortuity: The Unnamed
Exclusion , 20 Forum 222, 222 (1985) . The principle is rooted in common law and in the
statutes of some states. M . Elizabeth Medaglia, et al., The Status of Certain Nonfortuity
Defenses in Casualty Insurance Coverage , 30 Tort & Ins. L.J . 943, 945 (1995) .
Contrary to the assertion in the majority opinion, Brown Foundation did not hold
that the fortuity principle entitled the insured to coverage "unless it had specific and
subjective intent to cause the pollution giving rise to the CERCLA claims ." Ante , at
(slip op . at 9) (emphasis added). What Brown Foundation held was that "if in'u
was
not actually and subjectively intended or expected by the insured, coverage is provided
even though the action giving rise to the injury itself was intentional and the injury
foreseeable ." 814 S.W.2d at 278 (emphasis added) . At trial, the issue was submitted to
the jury by an interrogatory that asked the jury if it believed that "the Commonwealth's
share of the site costs now required by the EPA were expected, intended, anticipated or
foreseen by the Commonwealth when the insurance policy was issued."
I agree that the interrogatory varied slightly from Brown Foundation 's holding by
including the word "anticipated" (though such conformed to the definition recited in
Couch , supra, and "anticipated" is indistinguishable from "expected to occur," which is
recited in Appleman , supra ) . Requiring a specific and subjective intent to "cause the
- 2 1-
pollution" is a far greater standard than Brown Foundation 's "intended or expected the
injury" requirement and would equate the fortuity defense with the "intentional act"
exclusion found in most liability insurance policies. The fortuity defense was properly
adopted and defined in Brown Foundation and we should either follow Brown
Foundation or overrule it.
I would further note that since the majority holds that clean-up costs are not
covered by the ANI policies, the fortuity issue pertains only to the site improvement
measures . Those measures were not ordered because the Commonwealth "cause[d]
the pollution," ante , at
(slip op . at 9), but to repair and improve the site's
containment features so as to alleviate the threat that pollution might migrate to the
property of others in the future. Whether the Commonwealth intentionally caused
pollution would only be relevant to whether it was liable for clean-up costs . If the Facility
Form did cover the site improvement measures (which it does not), a proper
interrogatory with respect to the fortuity defense under Brown Foundation would be,
e___g_. : "Did the Commonwealth intend or expect, when the Facility Form policy was
issued, that future repairs and improvements to the facility, such as those subsequently
recommended by the EPA, would be necessary?"
VI. DEFENSE COSTS.
A. Dutv to defend.
The coverage clause of the ANI policies provides as follows with respect to the
duty to defend :
[T]he companies shall defend any suit against the insured alleging such
bodily injury or property damage and seeking damages which are payable
under the terms of this policy; but the companies may make such
investigation, negotiation and settlement of any claim or suit as they deem
expedient.
- 22-
(Emphasis added .) We recently explained the scope of an insurer's "duty to defend" as
follows :
In Kentucky, an insurer has a duty to defend if there is an allegation which
might come within the coverage terms of the insurance policy, but this
duty ends once the insurer establishes that the liability is in fact not
covered by the policy . 33 As previously discussed, coverage under the
Agreement did not extend to the Magistrates' actions . We believe this is
readily evident from a comparison of the complaint in the underlying action
and the Agreement. The claims were clearly and expressly excluded and
thus KALF appropriately declined to defend the allegations.
33J
ames Graham Brown Found., Inc . v. St. Paul Fire & Marine Ins.
Co . , 814 S .W .2d 273, 279 (Ky. 1991) ; see also Thompson v. West
Am . Ins . Co . , 839 S .W .2d 579,581 (Ky. App. 1992) (citing
Cincinnati Ins . Co. v. Vance , 730 S.W.2d 521 (Ky. 1987)) ("The
allegations of the complaint cannot compel a defense if coverage
does not exist. The obligation to defend arises out of the insurance
contract, not from the allegations of the complaint against the
insured ."); Ky. Farm Bureau Ins. Co. v. Cann , 590 S.W.2d 881, 883
(Ky . App . 1979) (explaining that there is no duty to defend claims
expressly excluded).
Ky. Ass'n of Counties All Lines Fund Trust v. McClendon, 157 S .W .3d 626, 635 (Ky.
2005) . "The determination of whether a defense is required must be made at the outset
of the litigation ." Brown Found., 814 S.W .2d at 279.
In the first place, there was no duty to defend the Commonwealth in the CERCLA
administrative proceedings because the NREPC was in the posture of plaintiff, not
defendant. Since it caused the proceedings to be initiated for the purpose of spreading
its own preexisting liability to others, it should not now be permitted to claim that it was
entitled to a "defense" to those proceedings. Regardless, ANI owed no duty to defend
any of the appellees in this case because (1) the CERCLA proceedings were not a
"suit;" and (2) the PRP letters did not "seek[] damages which are payable under the
terms of this policy ."
- 2 3-
1 . "Suit."
There is nothing ambiguous or all-inclusive about the word "suit." It has always
referred to an action brought in a court of justice seeking a legal remedy.
The term is certainly a very comprehensive one, and is understood to
apply to any proceeding in a court of justice, by which an individual
pursues that remedy in a court of justice, which the law affords him . The
modes of proceeding may be various, but if a right is litigated between
parties in a court of justice, the proceeding by which the decision of the
court is sought, is a suit .
Weston v. City Council of Charleston , 27 U.S . (2 Pet.) 449, 464, 7 L.Ed. 481 (1829)
(op. by Marshall, C .J., construing section 25 of the Judiciary Act of 1789) .
To characterize an administrative agency proceeding as a "suit" is akin to saying
that a bulldozer is a "building ." See Commonwealth v. Plowman , 86 S.W .3d 47, 50-54
(Ky. 2002) (Keller, J ., dissenting) . "Ambiguity (as opposed to outright lack of
understanding) is created only by converting an insured's hope or assumption that every
out-of-pocket payment is covered into a part of the contract language ." Patrons Oxford,
573 A.2d at 19.
Under [CERCLA], the federal government may seek an injunction
requiring the responsible party to clean up an environmentally
contaminated site . See 42 U .S .C . section 9606(a) (2000) . In the
alternative, the government may: (1) clean up the site and demand
reimbursement for its incurred costs (42 U .S .C . sections 9604(a)(1),
9607(a) (2000)) ; or (2) issue an administrative order requiring the
responsible party to perform the cleanup, subject to civil fines for a failure
to comply. 42 U.S .C . section 9606(a), (b) (2000).
C. III. Light Co. v. Home Ins. Co. , 795 N .E .2d 412, 425 (III. App. Ct. 2003) (note the
absence of any reference to "site measures") . In the alternative, the government can
bring a suit in federal court.
In addition to any other action taken by a State or local government, when
the President determines that there may be an imminent and substantial
endangerment to the public health or welfare or the environment because
of an actual or threatened release of a hazardous substance from a
- 24-
facility, he may require the Attorney General of the United States to secure
such relief as may be necessary to abate such danger or threat, and the
district court of the United States in the district in which the threat occurs
shall have jurisdiction to grant such relief as the public interest and the
equities of the case may require .
42 U.S .C. § 9606(a) . Thus, CERCLA authorizes both "suits" and administrative
proceedings . Under ANI's policies, the duty to defend is triggered only by a "suit ."
[T]he policies do not treat the terms "suit" and "claim" as interchangeable,
but consistently treat them separately . This careful separation indicates
that the insurers' differing rights and obligations with respect to "suit[s]"
and "claim[s]" were deliberately and intentionally articulated in the policies.
The effect of such policy language is that an insurer owes a duty to defend
"suits" but no duty to defend "claims" which have not yet become "suits ."
Instead, the insurer has the discretionary right to investigate and settle "as
it deems expedient ."
Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 959 P.2d 265, 280-281 (Cal . 1998)
(holding that order issued by state EPA, pursuant to state "Superfund" law, directing
insured to remediate pollution allegedly caused by its fertilizer and pesticide business,
did not constitute "suit" within meaning of comprehensive general liability (CGL)
insurance policies, so as to give rise to insurer's duty to defend) .
Thus, the duty to defend extends only to suits and not to allegations,
accusations or claims which have not been embodied within the context of
a complaint . In the instant case, a complaint alleging liability for property
damage has never been filed against Lapham-Hickey . Without a
complaint, there is no "suit ." And without a "suit," Protection's duty to
defend Lapham-Hickey is not triggered .
That the word "suit" refers to a proceeding in a court of law is also
apparent by looking at the Protection policy itself . If all of the policy's
language is to be given effect, then the words "suit" and "claim" as used
within provision 5 must have different meanings . While Protection has the
power to investigate any claim, it has the duty to defend only suits . If the
word "suit" was broadened to include claims, in the face of policy
language which distinguishes between the two, any distinction between
these two words would become superfluous . The distinction the policy
draws between suits and claims must be respected .
Neither the initial letter from the EPA, the draft consent order nor
the "no-action" letter initiated a suit. None was filed in a court of law and
none accomplished service of process upon Lapham-Hickey. Rather, the
draft consent order and ultimately the "no-action" letter were mechanisms
- 2 5-
used to encourage Lapham-Hickey to voluntarily investigate the
contamination at the facility . Though the tone of these documents may
have been confrontational, these documents by themselves are not
complaints and do not impose liability .
Lapham-Hickey Steel Corp. v. Prot. Mut. Ins. Co . , 655 N.E.2d 842, 847-48 (III. 1995)
(internal citations omitted) .
See also Aetna Cas. and Sur. Co. v. Gen . Dynamics Corp. , 968 F.2d 707, 71314 (8th Cir. 1992) (holding that letters sent by EPA to insured requiring insured to clean
up hazardous waste were not "suits" that triggered CGL insurer's duty to defend under
Missouri law ; demand letters did not seek damages, but, rather, sought to have insured
participate in, and negotiate, clean up of various sites), reaffirmed by Liberty Mut. Ins .
Co. v. FAG Bearings Corp. , 335 F.3d 752, 765 (8th Cir. 2003) ; Joslyn Mfg. Co. v.
Liberty Mut. Ins . Co. , 836 F. Supp . 1273, 1279 (W.D. La. 1993) ("[T]he August 2 and the
amended December 17 compliance orders issued by the DEQ [state environmental
agency] do not rise to the level of a suit which would invoke Liberty Mutual's duty to
defend. The court bases this conclusion on several factors: (1) the compliance order
itself specifically provides that if respondent refuses to comply with the order, the
respondent could be subject to possible enforcement procedures . . . . i .e., a civil action
or civil penalties ; (2) the general and traditional definition of a suit refers to a formal
proceeding in a court of law; and most importantly, (3) the insurance policies specifically
differentiate between the words claim and suit for purposes of the duty to defend . An
insurance policy is a contract, and this court finds that Liberty Mutual only contracted to
defend Joslyn against suits, not against complia nce orders of this nature .") ; Metro
Wastewater Reclamation Dist. v . Cont'I Cas. Co., 834 F . Supp. 1254, 1258 (D. Colo .
1993) ("'[S]uit' does not encompass the EPA proceeding alleged here . Thus. . . . the
defendants had no obligation to defend the plaintiffs under either the property damage
-26-
liability coverage provisions or the personal injury liability coverage provisions .") ;
Harleysville Mut. Ins . Co., Inc. v. Sussex County, Del ., 831 F. Supp . 1111, 1132 (D . Del.
1993) ("[T]he PRP letters sent to the County by the EPA do not constitute a "suit" and,
therefore, the insurers do not have a duty to defend the County against the CERCLA
proceeding brought by the EPA to investigate and control the release or threatened
release of hazardous substances, pollutants, or contaminants at Landfill No. 5 . . . . The
EPA letter at issue merely informed [the insured] of its potential liability under CERCLA
and that the EPA was interested in discussing [the insured's] voluntary participation in
remedial measures. The letter was an invitation to voluntary action on [the insured's]
part and is not the equivalent of the commencement of a formal proceeding within the
meaning of the subject comprehensive general liability policies.") ; Cedar Lane , 883 P .2d
at 603 ("[I]nasmuch as we have determined that the damages here were within the
policy exclusions, St . Paul had no duty to defend."); Patrons Oxford 573 A.2d at 20
(holding that state DEP's administrative proceeding to compel clean-up of pollution was
not "suit against the insured seeking damages" within meaning of multiperil policy
requiring insurer to defend insured in any suit seeking damages); Technicon Elecs .
Corp. v. Am . Home Assur. Co . , 533 N .Y .S.2d 91, 104-05 (N .Y. App. Div. 1988) ("[T]he
'potentially responsible person' letter sent by the EPA to Technicon on March 1, 1985,
does not constitute the institution of a "suit" . . . as that term is used in the subject
policies so as to require a defense . . . . The EPA letter at issue merely informed
Technicon of its potential liability under CERCLA and that the EPA was interested in
discussing Technicon's voluntary participation in remedial measures. The letter was an
invitation to voluntary action on Technicon's part and is not the equivalent of the
commencement of a formal proceeding within the meaning of the subject
comprehensive general liability policies .").
The facts of this case exemplify why nuclear facility and waste-hauler insurers do
not provide coverage or defense costs for CERCLA proceedings . The EPA sent 832
PRP letters to "potentially responsible parties" in this case. Ultimately, over 200 of
these PRPs were found to have no responsibility at all and only 82 had sufficient
responsibility to participate in the steering committee . Yet, based on today's majority
opinion and the definition of "insured" in the ANI policies, ANI had a duty to defend each
of the 832 PRPs, including not only the NREPC but also the United States Departments
of Defense and Energy. Because of obvious conflicts of interest (each PRP would be
attempting to reduce its own liability and thereby increase the liability of the others), ANI
would be required to provide separate counsel for each insured. See Acushnet Co . v.
Coaters, Inc. , 972 F. Supp . 41, 70 (D . Mass . 1997) (in civil action by PRPs who had
entered into consent decree with EPA and sued by common representation other PRPs
for contribution, held: "In view of their choice for common representation . . . . the
attorneys they have chosen are disabled from arguing to the court for any judicial
allocation of shares among settling parties themselves; the attorneys would inevitably
be preferring one client's interest over another client's interest in attempting to do so.") .
The potential for such conflicts of interest among PRPs was recognized during the
Congressional debate over the 1986 SARA amendments to CERCLA . See Ohio v.
United States Dep't of Interior , 880 F.2d 432, 466 (D.C. Cir. 1989). If required to
provide a separate defense for each of 832 "insureds" who received PRP letters from
the EPA, the cost of defense of the CERCLA proceedings would no doubt exceed the
costs incurred to clean up and improve the containment features of the site, itself .
(Appellees claim that their defense costs and expenses presently exceed $7,000,000.)
2. "Seeking damages which are payable under the terms of this policy ."
As discussed earlier, the ANI polices were third-party liability policies not
designed to reimburse the insureds for clean-up and capital improvements to the
insured property . Although the PRP letters alleged increased levels of radionuclides on
adjacent properties, they did not allege any damage to adjacent properties from that fact
- and the EPA eliminated that finding from its Administrative Order by Consent issued
four months later. Therefore, the CERCLA proceedings did not seek any damages
payable under the terms of ANI's policies . "The qualifying phrase, 'to which this
insurance applies' underscores the basic notion that the premium paid by the insured
does not buy coverage for all property damage but only for that type of damage
provided for in the policy." Weedo v. Stone-E-Brick, Inc. , 405 A .2d 788, 790 (N .J . 1979)
(CGL insurer had no duty to defend suit against insured mason which only claimed
faulty masonry work, not bodily injury or property damage) . See also Lenning v.
Commercial Union Ins . Co. , 260 F .3d 574, 581 (6th Cir. 2001) (denying claim for cost of
defense because "Tapp's complaint did not allege the type of claims that would be
covered by the policy . In addition, the language of the complaint reveals that any
potential coverage was abrogated by two explicit coverage exclusions .") (construing
Kentucky law) . Since the CERCLA proceedings did not seek any damages covered by
ANI's policies, ANI had no duty to provide a defense to those proceedings . To hold
otherwise would be akin to holding that an automobile insurer had a duty to defend a
suit brought against its insured alleging that the plaintiff sustained damages as a result
of being bitten by the insured's dog .
- 29-
B . Costs in excess of policy limits.
As noted earlier, the limit of liability of the ANI policies is measured by both
damages and costs of defense cumulatively incurred by any or all potential insureds .
The majority opinion holds that because ANI breached its contractual obligation to
defend Appellees in the CERCLA proceedings, it must pay the full amount of defense
costs and fees even if payment of those sums, in addition to the so-called "CERCLA
damages," would exceed the policy limits, citing Eskridge v. Educator and Executive
Insurers, Inc . , 677 S.W.2d 887 (Ky. 1984), and Grimes v. Nationwide Mutual Insurance
Co. , 705 S .W.2d 926 (Ky. App . 1985) . The issue in those cases, however, was whether
a liability insurance company that wrongly denied coverage and declined to defend a
suit against the insured is liable for a iudgment against the insured in excess of the
policy limits. The theory behind that principle is that the judgment might not have
exceeded the policy limits if the insurer had provided a defense . Eskridge , 677 S .W .2d
at 899; Grimes , 705 S.W.2d at 932. That is not the issue here . The only damages
sustained by Appellees as a result of ANI's refusal to provide a defense are the defense
costs themselves, not an excess judgment that might have been avoided if a defense
had been provided .
As held by the Court of Appeals, the measure of damages for a breach of
contract is "that sum which will put the injured party into the same position he would
have been in had the contract been performed ." Perkins Motors, Inc. v. Autotruck Fed.
Credit Union , 607 S .W.2d 429, 429-30 (Ky. App. 1980) . See also State Prop . and Bldgs
Comm'n of Dep't of Fin. v . H . W. Mille r Constr . Co. , 385 S .W.2d 211, 214 (Ky. 1964)
("[D]amages should not exceed the sum that is reasonably required in order to put the
owner in the same position in which he would have been had the contract been
- 30-
performed .") ; Robinson v. W. Union Tel. Co. , 68 S .W. 656, 658 (Ky. 1902) ("[T]he
declared object of awarding damages is to give compensation for pecuniary loss ; that is,
to put the plaintiff in the same position, so far as money can do it, as he would have
been if the contract had been performed . . . .") (internal citation and quotation omitted) .
The purpose of damage awards in breach-of-contract cases is to compensate the
injured party for loss occasioned by the conduct of the breaching party, not to penalize
the wrongdoer or to award the plaintiff a windfall . Farmers & Bankers Life Ins . Co. v.
St. Regis Paper Co . , 456 F.2d 347, 351 (5th Cir. 1972) ; see also Safeco Ins. Co. of Am .
v . City of White House, 191 F .3d 675, 693 (6th Cir. 1999). The same principle applies
when an insurer breaches its contractual obligation to defend the insured against a suit
falling within the coverage of the policy .
[W]hen an insurer wrongfully refuses to defend on the ground that the
claim against its insured is not within the coverage of the policy, the
insurer is guilty of a breach of contract which renders it liable to the
insured for all the damages that naturally flow from the breach . Such a
breach of contract renders the insurer liable to pay such damages as will
place the insured in a position equally as good as the insured would have
occupied had the insurance contract been fully and properly performed
from the beginning, including, in a proper case, the amount of the
judgment against the insured.
44 Am . Jur. 2d Insurance § 1406 (footnotes omitted) . See also, e.- _, Primrose
g
Operating Co. v. Nat'l Am . Ins. Co. , 382 F.3d 546, 559 (5th Cir. 2004) (holding in action
for breach of insurer's duty to defend suit brought for pollution damage that "[a] breach
of the duty to defend entitles the insured to the expenses it incurred in defending the
suit, including reasonable attorney's fees and court costs.") .
Had ANI provided Appellees a "defense" in the CERCLA proceedings, they
would not have incurred the expense of retaining their own counsel or other costs and
fees required for the defense, subject to the "limit of liability" condition of their policies .
- 3 1-
Requiring ANI to reimburse those costs dollar-for-dollar, plus interest, up to the limit of
liability would place Appellees in the same position they would have been in had the
breach not occurred . By holding that the breach of the duty to defend defaults the
policy's limit of liability condition, the majority has either arbitrarily rewritten the parties'
contracts, thus impairing the obligations of contract, or arbitrarily imposed, sua sponte ,
punitive damages in violation of KRS 411 .184(4) ("In no case shall punitive damages be
awarded for breach of contract ."). Section 2 of our Constitution prohibits the exercise of
arbitrary power by any public body, including this Court . Ky. Milk Mktg . and
Antimonopoly Comm'n v. Kroger Co. , 691 S.W .2d 893, 899 (Ky. 1985) ("No board or
officer vested with governmental authority may exercise it arbitrarily.") . Section 2
applies not only to fundamental human rights, but to economic and business rights as
well. Cf. Stephens v. State Farm Mut. Auto. Ins. Co . , 894 S .W.2d 624, 627 (Ky. 1995) .
Accordingly, I dissent.
Roach, J., joins this opinion except for its reliance on Section 2 of the
Constitution of Kentucky.
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2002-SC-307-DG
AETNA CASUALTY & SURETY
COMPANY, ET AL .
V
APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-214
JEFFERSON CIRCUIT COURT NO . 87-CI-3359
COMMONWEALTH OF KENTUCKY,
NATURAL RESOURCES &
ENVIRONMENTAL PROTECTION
CABINET, ET AL .
APPELLEES
AND
2003-SC-407-DG
WESTINGHOUSE HITTMAN
NUCLEAR, INC ., ET AL.
V
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-213 & 214
JEFFERSON CIRCUIT COURT NO . 87-CI-3359
AETNA CASUALTY & SURETY
COMPANY, ET AL .
AND
CROSS-APPELLANTS
CROSS-APPELLEES
2003-SC-408-DG
ATCOR, INC ., ET AL.
CROSS-APPELLANTS
ON APPEAL FROM COURT OF APPEALS
2000-CA-114 & 2000-CA-213 & 214 & 215
JEFFERSON CIRCUIT COURT NO . 87-CI-3359
V
AETNA CASUALTY & SURETY
COMPANY, ET AL .
CROSS-APPELANTS
ORDER GRANTING PETITION FOR MODIFICATION
The petition for modification filed by the Appellants/Cross-Appellees, Aetna
Casualty & Surety Company, et al ., is hereby granted.
The Opinion of the Court rendered herein on September 22, 2005, is hereby
modified by the substitution of pages 1, 2, 9, 12, and 17, hereto attached, in lieu of said
pages as originally rendered . Said modifications do not affect the holding of the
Opinion or the Dissenting Opinion but are made for clarification purposes only.
All concur.
Entered : January 19, 2006 .
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