Maska U.S., Inc. v. Kansa General Ins.

• Decision Date: 01 August 1998
• Docket Number: Docket Nos. 98-9385
• Citation: 198 F.3d 74
• Court: U.S. Court of Appeals — Second Circuit
• Parties: (2nd Cir. 1999) MASKA U.S., INC., Plaintiff-Appellee, v. KANSA GENERAL INSURANCE COMPANY, AMERICAN HOME ASSURANCE COMPANY, NEW HAMPSHIRE INSURANCE COMPANY, SCOTTISH & YORK INSURANCE COMPANY, RELIANCE INSURANCE COMPANY, CIGNA INSURANCE COMPANY, Defendants, ZURICH INSURANCE COMPANY and UNITED STATES FIRE INSURANCE COMPANY, Defendants-Appellants. (L), 98-9387(C)

Page 74

198 F.3d 74 (2nd Cir. 1999)

MASKA U.S., INC., Plaintiff-Appellee, v. KANSA GENERAL INSURANCE COMPANY, AMERICAN HOME ASSURANCE COMPANY, NEW HAMPSHIRE INSURANCE COMPANY, SCOTTISH & YORK INSURANCE COMPANY, RELIANCE INSURANCE COMPANY, CIGNA INSURANCE COMPANY, Defendants, ZURICH INSURANCE COMPANY and UNITED STATES FIRE INSURANCE COMPANY, Defendants-Appellants.

Docket Nos. 98-9385(L), 98-9387(C)

August Term, 1998

UNITED STATES COURT OF APPEALS SECOND CIRCUIT

Argued: June 8, 1999

Decided: Nov. 29, 1999

Appeal from a judgment entered by the United States District Court for the District of Vermont (Murtha, C.J.), following a jury trial, ordering defendant insurance carriers to indemnify and reimburse plaintiff for liability costs and related defense costs associated with environmental contamination at plaintiff's manufacturing facility.

Reversed.

JOHN E. FAILLA, Morgan, Lewis & Bockius LLP, New York, NY (Catherine A. Ludden and Jennifer A. Roney, on the brief), for plaintiff-appellee.

WILLIAM H. QUINN, Pierson Wadhams Quinn & Yates, Burlington, VT, for defendant-appellant Zurich Insurance Company.

ROGER E. WARIN, Steptoe & Johnson LLP, Washington, D.C. (Shannen W. Coffin, on the brief), for defendant-appellant United States Fire Insurance Company.

Before: LEVAL and SOTOMAYOR, Circuit Judges, and TRAGER, District Judge.^*.

SOTOMAYOR, Circuit Judge:

This appeal involves a dispute between an insured, Maska U.S.A., Inc. ("Maska"), and two of its insurance carriers, Zurich Insurance Company ("Zurich") and United States Fire Insurance Company ("U.S. Fire") (collectively, the "insurers"), concerning coverage for liability costs and related defense costs incurred in connection with environmental contamination at Maska's manufacturing facility in Bradford, Vermont. The insurers appeal from a judgment entered by the United States District Court for the District of Vermont (Murtha, C.J.) following a jury verdict in Maska's favor. For the reasons that follow, we reverse the judgment below and hold that the Zurich and U.S. Fire policies exclude coverage for the environmental liability claims at issue in this case.

BACKGROUND

Maska is a Vermont corporation that manufactured National Hockey League jerseys at its facility in Bradford, Vermont (the "Bradford facility") from 1983 to 1995. Maska used the chemical solvent perchloroethylene ("perc") to dry-clean fabric used in the production process. For approximately six years, Maska discharged wastewater containing perc into floor drains, which emptied into the ground east of the manufacturing building. In September 1989, the Vermont Department of Environmental Conservation ("VDEC") observed the wastewater discharges during a routine inspection of the Bradford facility and ordered Maska to stop that practice. Maska's subsequent investigation revealed perc contamination of the soil and groundwater at the Bradford facility, which Maska reported to VDEC.

In August 1991, VDEC directed Maska to provide additional information about the extent of the perc contamination for purposes of developing a viable cleanup strategy. VDEC informed Maska that the Bradford facility had been included in the U.S. Environmental Protection Agency's Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), a computerized database containing information about sites being evaluated under the federal Superfund program, and would also be listed on the Vermont Hazardous Sites List, "a list of locations within the state which may pose a threat to human health or the environment." In June 1996, Maska entered into a consent decree with the State of Vermont in which the company agreed to clean up the contaminated soil and groundwater at an estimated cost of approximately $2.5 million. In the meantime, T. Copeland & Sons, Inc. ("Copeland"), which owned property adjacent to the Bradford facility, brought suit against Maska alleging that the company's operations had resulted in contamination of the Copeland property. Maska settled the Copeland litigation in June 1995 for $7 million. Maska also purchased a second adjoining property for $125,000 after the owners, the Dunnack family, complained that the perc contamination had migrated beneath their home.

In April 1992, Maska contacted its insurance carriers, including defendants, seeking insurance coverage for these claims under a series of primary and excess general liability policies covering the period between February 1, 1983, and April 24, 1993. ¹. The carriers declined coverage, citing a series of so-called "pollution exclusions" in the policies that purportedly relieved the carriers of any obligation to indemnify or defend the company with respect to environmental liability claims of the type asserted against Maska. Maska brought this action in August 1993 alleging that the carriers had breached their duty to indemnify the company for its environmental cleanup and settlement costs, as well as their duty to defend Maska against the VDEC, Copeland and Dunnack claims. ².

Following discovery, Maska moved for partial summary judgment against its primary carriers, Kansa, Zurich and American Home, limited to their duty to defend. In September 1996, Magistrate Judge Jerome J. Niedermeier issued a report recommending that the district court grant Maska's motion. The magistrate judge found that the Vermont Department of Banking and Insurance ("VDBI"), the state agency charged with pre-approving all insurance policies sold to Vermont insureds, had consistently disapproved policies containing pollution exclusions. On that basis, the magistrate judge concluded that the "pollution exclusions were invalid as violative of Vermont public policy as manifested in VDBI policy." The district court agreed, concluding that "pollution exclusion provisions are uniformly unenforceable in the State of Vermont." Accordingly, in December 1996, the district court granted summary judgment to Maska on the ground that Kansa, Zurich and American Home had breached their duty to defend against the underlying environmental liability claims. ³. The case then proceeded to trial on Maska's claims for indemnification.

While this case was pending in the district court, Kansa, a Finnish corporation, declared bankruptcy. Liquidation proceedings subsequently commenced both in Finland and in Canada, where Kansa had a branch office. In April 1995, the United States Bankruptcy Court for the Southern District of New York entered an order enjoining the enforcement of any judicial order or award in the United States against Kansa or against Kansa's property in the United States. In May 1997, after the district court in this case granted summary judgment against Kansa and the other primary carriers, Maska served proof of its claims against Kansa on the court-appointed liquidator in Canada. The liquidator disallowed Maska's claims, and the Canadian courts subsequently determined that any judgment rendered by the district court in this case would not be enforceable in Canada. Recognizing that the various bankruptcy court rulings made it impossible to enforce a judgment against Kansa in either the United States or Canada, Maska voluntarily dismissed its claims against Kansa in June 1998. Maska then moved for summary judgment against excess insurer U.S. Fire, arguing that as a result of Kansa's insolvency, U.S. Fire was obliged to "drop down" to defend Maska in Kansa's place. The district court agreed and granted Maska's motion.

Shortly before trial on Maska's indemnification claims, Maska reached settlements with American Home, Cigna and New Hampshire Insurance Company. Maska's claims against Zurich, U.S. Fire and Reliance were then tried to a jury from June 29 to July 8, 1998. By special verdict, the jury found that a covered occurrence had taken place during certain of the Zurich and U.S. Fire policy periods, that Maska's indemnity damages totaled $4,081,746 and that Maska spent $5,069,321 to defend itself against the underlying claims. ⁴. After the verdict, the district court allocated $1,411,688.08 of Maska's total indemnity damages to Zurich and $527,936.80 to U.S. Fire, these sums representing each insurer's time on the risk. The court also held that Zurich and U.S. Fire were jointly and severally liable for Maska's approximately $5 million in defense costs. This appeal followed.

DISCUSSION

In this diversity action, we must decide whether under Vermont law, ⁵. the Zurich and U.S. Fire insurance policies provide coverage for the liability costs and related defense costs that Maska incurred in connection with the environmental contamination of the Bradford facility and neighboring properties. ⁶. We review the district court's determination of this state law question de novo. See State of New York v. Blank, 27 F.3d 783, 788 (2d Cir. 1994). For purposes of our analysis, we look to the state's decisional law, as well as to its constitution and statutes. See Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir. 1994). To the extent that state law is uncertain or ambiguous, this Court must "carefully . . . predict" how the state's highest court would resolve the uncertainty or ambiguity. See id. In making this prediction, we give the "fullest weight" to pronouncements of the state's highest court, here the Vermont Supreme Court, while giving "proper regard" to relevant rulings of the state's lower courts. See id. We may also consider "decisions in other jurisdictions on the same or analogous issues." Leon's Bakery, Inc. v. Grinnell Corp., 990 F.2d 44, 48 (2d Cir. 1993).

I. Zurich Policies

Zurich issued two primary liability policies to Maska, covering the periods February 21, 1986, to April 1, 1988 and April 1, 1988, to October 24, 1988. Each of the Zurich policies contains an "absolute pollution exclusion," which excludes all coverage for "[l]iability of the Insured arising out of the actual, alleged or threatened discharge, dispersal,...