State v. BP PLC

• Decision Date: 12 August 2020
• Docket Number: #28933
• Parties: The STATE of South Dakota, the South Dakota Petroleum Release Compensation Fund, Plaintiff and Appellant, v. BP PLC, BP America, Inc., BP Products North America, Inc., BP West Coast Products, LLC and its predecessor companies and subsidiaries, Defendants and Appellees.
• Court: South Dakota Supreme Court

948 N.W.2d 45

The STATE of South Dakota, the South Dakota Petroleum Release Compensation Fund, Plaintiff and Appellant,

v.BP PLC, BP America, Inc., BP Products North America, Inc., BP West Coast Products, LLC and its predecessor companies and subsidiaries, Defendants and Appellees.

#28933

Supreme Court of South Dakota.

ARGUED ON JANUARY 14, 2020

OPINION FILED August 12, 2020

JUDITH K. ZEIGLER WEHRKAMP, Special-Appointed Assistant Attorney General, Harrisburg, South Dakota, MATTHEW J. HERMAN, ROBERT M. FOOTE of Foote, Mielke, Chavez & O'Neil, LLC, Geneva, Illinois, MICHAEL L. MURPHY of Bailey & Glasser LLP, Washington, D.C., Attorneys for plaintiff and appellant.

JEFFERY D. COLLINS, THOMAS G. FRITZ of Lynn Jackson Shultz & Lebrun P.C., Rapid City, South Dakota, DAVID ZOTT, MARTIN L. ROTH, DANIEL L. SIEGFRIED of Kirkland & Ellis LLP, Chicago, Illinois, Attorneys for defendants and appellees.

JENSEN, Justice

[¶1.] The State of South Dakota and the South Dakota Petroleum Release Compensation Fund (Fund) sought to recover payments made to the predecessor and subsidiary companies of BP plc (hereafter jointly referred to as "BP") for the costs of cleaning up environmental contamination from underground petroleum storage tanks (UST) at 27 BP sites in South Dakota.¹ The Fund also sought to recover payments made to third parties for cleanup costs at 19 other UST sites in South Dakota. The Fund referred to these latter claims as "indirect claims," alleging that BP was responsible for cleanup costs because it had previously owned or operated the USTs at the 19 sites.

[¶2.] The circuit court initially granted BP's motion for summary judgment on all but one of the 19 indirect claims, determining the claims were time-barred by the applicable statute of limitations. Later, the circuit court granted BP's motion for summary judgment on the Fund's remaining claims against BP. The Fund appeals, arguing that the circuit court erred in dismissing its claims. The Fund also argues the circuit court abused its discretion in denying its motion for discovery sanctions. We affirm.

Facts and Procedural History

[¶3.] In 1988, the South Dakota Legislature created the Fund, administered by the Department of Environment and Natural Resources (DENR). The Fund was designed to assist eligible UST owners and operators with environmental cleanup costs for spills or leaks of petroleum products from USTs. The Fund provides reimbursement of up to $1 million, less a $10,000 deductible, for cleanup costs at eligible UST sites. Revenue for the Fund is generated by a two-cent per gallon fee paid by bulk gasoline marketers and importers, such as BP.

[¶4.] To receive reimbursement for environmental cleanup costs, a UST owner or operator must submit an application to the Fund, disclose any available insurance coverage for the contamination, and execute a subrogation assignment that transfers to the Fund the applicant's rights of action and claims which the applicant may have against any party, including insurers, who may be liable to indemnify any remediation costs at a UST site. The UST owner or operator must also certify that no settlement or release has been or will be made with any party responsible for the cleanup costs without the written consent of the Fund.

[¶5.] Between 1990 and 2002, BP submitted applications and received approximately $3.1 million in total payments from the Fund for cleanup costs at 27 eligible UST sites in South Dakota. The contamination at the 27 sites was reported to have occurred between 1987 and 1998. The largest single reimbursement paid to BP for cleanup costs at any of the 27 sites was $677,800. The individual reimbursements at other sites were less than $500,000. BP's applications claimed there was no insurance coverage to indemnify the cleanup costs. BP also submitted letters with the applications representing it was self-insured for the UST contamination events for which BP sought reimbursement. In a 1992 cover letter forwarding an application to the Fund that sought reimbursement for seven sites, BP stated the liability insurance "does not provide coverage for the referenced sites as, inter alia , remediation expenses do not exceed the [policy] deductible." The Fund reimbursed BP without further inquiry or investigation into possible insurance coverage.

[¶6.] Starting in the 1950s, BP purchased comprehensive general liability (CGL) insurance for liabilities arising from its operations. The CGL policies purchased by BP were high deductible plans. The earliest policies had a self-insured retention (SIR) of $500,000 per occurrence and provided no indemnity to BP for claims that did not exceed the SIR. In 1971, the SIR for BP's CGL policies was increased to $2.5 million per occurrence. In 1972, BP increased the SIR for its CGL policies to $5 million per occurrence and maintained the SIR at that level thereafter.

[¶7.] By at least 1973, the CGL polices purchased by BP also contained pollution exclusions for liability arising from gradual releases of pollutants. Coverage was only afforded under these exclusions if the occurrence was "sudden and accidental." In 1985, the CGL polices purchased by BP included "absolute" pollution exclusions that barred coverage for liability arising from any pollution claim, including UST cleanup costs. The policies also contained "owned property exclusions" that precluded coverage for damage due to an occurrence on BP's property, and limited liability coverage to property damage owned by third parties.

[¶8.] In the 1990s, London Market² and other CGL insurers became increasingly concerned about contingent liabilities under previously issued CGL policies for large-dollar environmental pollution claims at industrial sites, such as refineries. Insurers began filing coverage lawsuits against petroleum companies, such as BP, to quantify and reduce their exposure under these policies. In 1993, BP filed a lawsuit against London Market and other CGL insurers seeking a declaration of coverage for pollution costs at 23 large industrial sites, under CGL policies issued by the insurers to BP between 1959 and 1985. The estimated liabilities at each site ranged from $23 million to $220 million. None of the sites involved USTs or gas stations, nor were any of the sites located in South Dakota.

[¶9.] Several years after BP filed suit, BP and its insurers began settlement negotiations. To achieve finality, the insurers conditioned settlement of the 23 large-dollar claims on a buyback by the insurers of all estimated liabilities under the CGL insurance policies purchased by BP during this time. To facilitate these discussions, BP retained a team of consultants to prepare a Settlement Report to quantify BP's total environmental contamination exposure before absolute pollution exclusions were introduced into the CGL policies on June 1, 1985.

[¶10.] The Settlement Report primarily discussed the liabilities at the 23 industrial sites that were the subject of the litigation. The Settlement Report included a chapter discussing the potential environmental contamination at BP's gas stations, terminals, and bulk plants, which BP referred to as its "marketing system." Because the cleanup costs for USTs at these sites generally did not exceed the SIRs in BP's policies, the report discussed a "single occurrence theory" in an effort to aggregate the cleanup costs for all USTs into a single occurrence. This theory posited that the single occurrence was BP's decision in 1917 to sell refined petroleum products at retail by storing and selling these products from company-owned above ground tanks and USTs. BP calculated the potential cleanup costs for thousands of retail outlets, over many decades, by estimating a per-station figure and multiplying it by the total number of BP gas stations, so that the total cleanup costs for USTs owned and operated by BP exceeded the SIRs. These calculations only included pollution at UST sites that occurred prior to the introduction of the absolute pollution exclusions in the CGL polices on June 1, 1985.

[¶11.] The individuals involved in settlement negotiations testified that the insurers rejected BP's "single occurrence theory" for the USTs. However, between September 1997 and April 1998, BP entered into settlement agreements with the insurers for as much as $205 million for the 23 large-dollar industrial sites that were the subject of the litigation. The settlements were significantly less than the total cost of $2.7 billion calculated by BP to clean up these industrial sites. The settlement agreements provided that the payments did not include any amounts BP had received or might receive in the future from state or federal UST reimbursement funds.

[¶12.] In 2010, the Fund filed suit against BP, seeking to recover $3.1 million previously paid by the Fund to BP for the cleanup costs at 27 UST sites in South Dakota. The Fund alleged that settlements between BP and its insurers were made in violation of the Fund's subrogation rights and that BP engaged in fraud by failing to disclose the coverage lawsuits and settlements. The Fund alleged several theories of liability and rights to reimbursement from BP: Count I (violations of SDCL Ch. 34A-13 and ARSD 74:32:01, et. seq. for failure to disclose and misrepresentation of certain information required to be provided by statute); Count II (alleging statutory and other subrogation rights against settlement monies received from insurers); Count III (unjust enrichment); Count IV (fraudulent concealment and fraudulent misrepresentation); Count V (fraud).

[¶13.] The Fund filed an amended complaint on July 7, 2015, alleging an additional claim for strict liability (Count VI). The Fund alleged in these "indirect claims" that it had reimbursed third parties for cleanup cost at 19 UST sites in South Dakota, and that BP was strictly liable for these costs under SDCL 34A-2-96 because BP had previously owned or operated the sites. Finally, in Count VII of the complaint, ...