Headwaters Res., Inc. v. Ill. Union Ins. Co.

• Decision Date: 20 December 2012
• Docket Number: Case No. 2:09–cv–1079 DN.
• Citation: 913 F.Supp.2d 1210
• Parties: HEADWATERS RESOURCES, INC., Plaintiff, v. ILLINOIS UNION INSURANCE COMPANY and ACE American Insurance Company, Defendants.
• Court: U.S. District Court — District of Utah

913 F.Supp.2d 1210

HEADWATERS RESOURCES, INC., Plaintiff,
v.
ILLINOIS UNION INSURANCE COMPANY and ACE American Insurance Company, Defendants.

Case No. 2:09–cv–1079 DN.

United States District Court,
D. Utah,
Central Division.

Dec. 20, 2012.

[913 F.Supp.2d 1211]

Bruce A. Maak, Jeffrey D. Stevens, Bryan S. Johansen, Parr Brown Gee & Loveless, Salt Lake City, UT, Thomas B. Alleman, Amy Marie Stewart, Cox Smith Matthews Inc., Dallas, TX, Leslie Sara Hyman, Pullman Cappuccio Pullen & Benson LLP, San Antonio, TX, for Plaintiff.

Scott M. Lilja, Van Cott Bagley Cornwall & McCarthy, Salt Lake City, UT, William F. Knowles, Megan K. Kirk, Cozen & O'Connor, Seattle, WA, for Defendants.

MEMORANDUM DECISION AND ORDER GRANTING SUMMARY JUDGMENT IN FAVOR OF DEFENDANTS
DAVID NUFFER, District Judge.

This is an insurance coverage case arising out of seven commercial general liability insurance policies issued by Defendants Illinois Union Insurance Company and ACE American Insurance Company to Headwaters, Inc. and its subsidiaries (including Plaintiff Headwaters Resources, Inc.) from approximately March 2003 to October 2009. Headwaters Resources has

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asserted claims in this case for breach of contract and bad faith, alleging that Illinois Union and ACE American breached the terms of the insurance policies by denying coverage for two lawsuits filed against Headwaters Resources in Virginia state court without conducting a meaningful investigation.¹

Illinois Union and ACE American have moved for summary judgment on both of Headwaters Resources' claims, arguing that the claims made in the Virginia lawsuits were excluded from coverage by the pollution exclusions contained in the policies, and that Illinois Union and ACE American were therefore entitled to decline coverage.² Headwaters Resources also filed a motion for summary judgment, arguing that the allegations made in the Virginia lawsuits, along with information available to Illinois Union and ACE American, created a possibility for liability covered under the policies, thereby triggering the insurers' duty to pay for defense costs.³

As outlined below, the complaints in the Virginia lawsuits alleged bodily injury and property damage arising out of the actual or threatened dispersal of pollutants from waste that was processed by Headwaters Resources. These allegations fall squarely within the pollution exclusions contained in the insurance policies. Accordingly, Illinois Union and ACE American properly declined coverage under the policies for the Virginia lawsuits. Summary judgment is therefore GRANTED in favor of Illinois Union and ACE American on both of Headwaters Resources' claims.⁴

UNDISPUTED FACTS The Insurance Policies

There are seven commercial general liability insurance policies at issue in this case. The first four policies were issued by Illinois Union, covering March 1, 2003–March 14, 2004 (the “2003–2004 Policy”); March 15, 2004–March 15, 2005 (the “2004–2005 Policy”); March 15, 2005–October 1, 2005 (the “2005–2005 Policy”); and October 1, 2005–October 1, 2006 (the “2005–2006 Policy”). The last three policies were issued by ACE American, covering October 1, 2006–October 1, 2007 (the “2006–2007 Policy”), October 1, 2007–October 1, 2008 (the “2007–2008 Policy”), and October 1, 2008–October 1, 2009 (the “2008–2009 Policy”). The 2003–2004 Policy was issued to ISG Resources, Inc., which was later renamed Headwaters Resources, Inc. after it was acquired by Headwaters, Inc.⁵ In April 2004, ISG Resources acquired VFL Technology Corporation, which was a separate subsidiary of

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ISG Resources/Headwaters Resources until 2008 when it was merged into Headwaters Resources.⁶ The rest of the policies were issued to Headwaters, Inc. and listed both Headwaters Resources and VFL as named insureds.⁷

Generally, each of the policies provides insurance coverage for “bodily injury” and “property damage” caused by an “occurrence,” which is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” ⁸ In place of a duty to defend, the policies require the insurer to reimburse defense costs for lawsuits seeking covered damages once the insured's retention amount is reached. Each of the policies contains a coverage exclusion for “pollution,” although the language of the pollution exclusions varies among the policies.

The Underlying Litigation

In 2009, two lawsuits were filed against Headwaters, Inc., VFL Technology Corporation, and several other defendants in the Circuit Court for the City of Chesapeake, Virginia. The first complaint was filed in March 2009 by 395 purported current or former residents of the City of Chesapeake who allegedly lived in close proximity to 220 acres of unimproved and swampy agricultural land referred to as the “Fentress Site” that was located in the middle of a populated residential community.⁹ The first lawsuit is referred to as the “Fentress” lawsuit after its first named plaintiff, the Fentress Family Trust. The second complaint was filed in August 2009 by 62 plaintiffs who likewise allegedly lived near the Fentress Site.¹⁰ The second lawsuit is referred to as the “Sears” lawsuit after its first named plaintiff, Daryl Sears. Both lawsuits mistakenly named Headwaters, Inc. as a defendant, but later substituted Headwaters Resources, Inc. as the proper defendant.¹¹

The Fentress and Sears complaints allege that between 2002 and at least March 2007, VFL and other defendants dumped 1.5 million tons of “toxic coal ash and binding agent” on the Fentress Site under the “guise” of building a golf course.¹² Coal ash, including fly ash and bottom ash, is alleged to be a “coal combustion waste product” created in the generation of electricity at coal-fired power plants.¹³ The coal ash that was dumped at the Fentress Site allegedly came from a clay-lined landfill at the Chesapeake Energy Center after Dominion Virginia Power received a letter warning from the Virginia Department of Environmental Quality about excessive coal ash buildup. ¹⁴ The complaints further allege that Dominion's plan was to dump its excessive coal ash at the Fentress Site under the guise of using it as structural fill to sculpt a golf course, but in reality the Fentress Site was a “toxic waste dump.” ¹⁵

The Fentress and Sears plaintiffs allege that the coal ash dumped at the Fentress

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Site contained “toxic substances” (including arsenic, lead, mercury, ammonia nitrates, chromium, beryllium, zinc, thallium, boron, barium, and magnesium) that have and continue to leach into the ground water and into the wells of the plaintiffs.¹⁶ Accordingly, they seek “damages for losses to real and personal property, personal injuries, loss of quality of life, economic losses to business disruption, out-of-pocket expenses, and medical monitoring of their exposure to toxic compounds in coal ash and binding agent and potential health effects that may result.” ¹⁷

These forceful allegations are tempered somewhat by other allegations in the complaints. Both complaints allege that Dominion hired VFL as its “coal ash management consultant” and commissioned feasibility studies for the proposed use of fly ash as fill material for construction of a golf course of the Fentress Site.¹⁸ The feasibility studies were conducted by URS Corporation, “a global engineering, construction and technical services firm.” ¹⁹ The plan allegedly called for adding a “binding agent,” which Headwaters Resources identifies as cement kiln dust, to the fly ash in certain quantities to prevent or reduce leaching of materials from the fly ash. ²⁰ Dominion allegedly sought a permit from the City of Chesapeake prior to beginning work.²¹ As Dominion's coal ash management consultant, VFL purchased and operated a portably fly ash pug mill at Dominion's Chesapeake Energy Center, which VFL used to mix the fly ash and cement kiln dust.²² VFL then transported the “coal ash and binding agent” to the Fentress Site.²³ The complaints both concede that the golf course was in fact built and opened at the Fentress Site.²⁴

Counsel for the parties represented at oral argument on the summary judgment motions that the Fentress and Sears lawsuits have not yet been resolved.

Headwaters Resources' Insurance Claim

Headwaters Resources sought reimbursement of defense costs for the Fentress and Sears lawsuits under the policies issued by Illinois Union and ACE American beginning in July 2009.²⁵ Correspondence and other materials provided by Headwaters Resources in connection with its insurance claim described the Fentress and Sears lawsuits consistent with the allegations outlined above. ²⁶

In making their coverage determination, Illinois Union and ACE American also had

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access to the information concerning Headwaters Resources' coal ash business contained in their underwriting files. The insurance applications and other materials in the underwriting files show Illinois Union and ACE American were aware that Headwaters Resources and its predecessors derived their revenue from collecting, disposing, and recycling fly ash and selling fly ash products.²⁷ The underwriting files also contained materials showing that Headwaters Resources' use of fly ash was apparently accepted in the industry. For example, a website printout from the Coal Combustion Products Partnership (sponsored in part by the EPA) contained in the underwriting file lists potential fly ash applications, including “[f]ill material for structural applications and embankments,” “[i]ngredient in waste stabilization and/or solidification,” and “[i]ngredient in soil modification and/or stabilization.” ²⁸

On November 9, 2009, Illinois Union and ACE American declined Headwaters Resources' insurance claim after concluding that coverage for the Fentress and Sears lawsuits was precluded by the pollution exclusions in the policies. ²⁹ This decision was made based on the allegations made in the...