Aetna Cas. & Sur. Co. v. Com.

Decision Date22 September 2005
Docket NumberNo. 2002-SC-407-DG.,No. 2002-SC-307-DG.,No. 2002-SC-408-DG.,2002-SC-307-DG.,2002-SC-407-DG.,2002-SC-408-DG.
Citation179 S.W.3d 830
PartiesAETNA CASUALTY & SURETY COMPANY, et al., Appellants, v. COMMONWEALTH of Kentucky, Natural Resources and Environmental Protection Cabinet, et al., Appellees, and Westinghouse Hittman Nuclear, Inc., et al., Cross-Appellants, v. Aetna Casualty & Surety Company, et al., Cross-Appellees, and Atcor, Inc., et al., Cross-Appellants, v. Aetna Casualty & Surety Company, et al., Cross-Appellees.
CourtUnited States State Supreme Court — District of Kentucky
Opinion of the Court by Justice SCOTT.

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 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.

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, U.S. 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 clean-up 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 jury verdict

By order dated March 3, 1997, the Jefferson Circuit Court allowed the "f...

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