Arco Industries Corp. v. American Motorists Ins. Co.

Decision Date18 April 1995
Docket NumberNo. 4,Docket Nos. 96782-96784,4
Citation531 N.W.2d 168,448 Mich. 395
PartiesARCO INDUSTRIES CORPORATION, and Frederick C. Matthaei, Jr., Plaintiffs-Appellants, and Robert Ferguson, Plaintiff, v. AMERICAN MOTORISTS INSURANCE COMPANY, Defendant-Appellee, and Home Indemnity Company, Consolidated American Insurance, CNA Insurance Company, Indiana Insurance Company, Argonaut Insurance Company, and Kemper Insurance Company, Defendants. Calendar
CourtMichigan Supreme Court

Honigman, Miller, Schwartz & Cohn by Jay E. Brant, Philip A. Grashoff, Jr., Mark A. Goldsmith, and Daniel G. Helton, Detroit, and Butler, Durham & Svikis by Sidney D. Durham and Andis Svikis, Parchment, for plaintiffs.

Miller, Canfield, Paddock & Stone by Kevin J. Moody and Clifford T. Flood, Lansing, and Drinker, Biddle & Reath by T. Andrew Culbert and Paul H. Saint-Antoine, Philadelphia, PA, for defendant.

Harwood, Lloyd by Edward Zampino, Peter E. Mueller, and Victor C. Harwood, III, Hackensack, NJ and Vandeveer, Garzia by Charles W. Browning, and Alison L. Thorburn, Detroit, for amicus curiae Aetna Cas. & Sur. Co.

Richard Halprin, Huntington Woods, Anderson, Kill, Olick & Oshinsky, P.C. by Eugene R. Anderson, Bennett Ellenbogen, and Sarah B. Hechtman, of counsel, New York City, and Martha Churchill, Gen. Counsel, Chicago, IL, for amicus curiae Mid-America Legal Foundation.

Warner, Norcross & Judd by Paul T. Sorensen, Grand Rapids, and Covington & Burling by Gregg H. Levy, Eric C. Bosset, and Stacey L. Dogan, Washington, DC, for amici curiae Masco Corp., Dow Corning Corp., Dow Chemical Co., and Upjohn Co.

Stephen M. Kelley, P.C. by Stephen M. Kelley, Detroit, Wiley, Rein & Fielding by Laura A. Foggan, John E. Barry, and William A. McGrath, of counsel, Washington, DC, for Ins. Environmental Litigation Ass'n.


MALLETT, Justice.

We granted leave in this case to determine whether an insurance company, American Motorists Insurance Company (AMICO), has the duty to indemnify its insureds, Arco Industries Corporation and Frederick C. Matthaei, Jr., 1 for costs it incurred in defending an action brought by the Department of Natural Resources to compel Arco to remedy chemical contamination at its manufacturing plant. Specifically, we must determine whether the chemical contamination at Arco's plant between 1968 and 1974 was "expected or intended from the standpoint" of the insured.

At the conclusion of a bench trial before Kalamazoo Circuit Court Judge William Schma, AMICO was ordered to indemnify Arco. The circuit court found that the insurance company was liable because Arco had not expected or intended to harm the environment as a result of its manufacturing process. AMICO appealed, and the Court of Appeals reversed holding that Arco expected or intended to contaminate the environment. 198 Mich.App. 347, 497 N.W.2d 190 (1993).

We hold that the Court of Appeals failed to apply the correct legal standard in determining whether Arco expected or intended the contamination. The Court of Appeals should have applied a subjective, rather than an objective, standard of review. Furthermore, we hold that the Court of Appeals erred in reversing the trial court's findings of fact. The Court of Appeals wrongly disregarded the trial court's evaluation of evidence presented at trial. Lastly, we remand the duty to defend issues to the Court of Appeals for further consideration. Accordingly, we reverse in part, and remand for further proceedings, in favor of Arco. We do not retain jurisdiction.


Plaintiff Arco Industries Corporation is a small automotive parts manufacturer that has operated a manufacturing plant in Schoolcraft, Michigan, since 1967. As part of the manufacturing process, the automotive parts are dipped into liquid plastisol or vinyl. Volatile organic compounds (VOCs) such as perchloroethylene, trichloroethylene, 1-2 dichloroethylene and vinyl chloride, were used to clean the parts during the manufacturing process and to remove plastisol from the plant floors. The plant floor was designed with a trench drain system that drained waste from the plant floor into an unlined seepage lagoon located in the back of the plant. As a result, VOCs contaminated the seepage lagoon and ground water.

In November, 1985, the Department of Natural Resources notified Arco that the seepage lagoon was contaminated with VOCs, and records indicated that Arco was the source of the contamination. After Arco's failure to resolve the problem, the DNR filed suit against Arco in federal court in an attempt to compel Arco to remedy the VOC contamination and collect claimed response costs. 2 Subsequently, the State of Michigan and Arco entered into a consent decree whereby Arco agreed to pay the state $450,000 in response costs together with attorney fees. Arco also agreed to develop and implement a multimillion dollar ground water and soil remediation program.

Arco's insurer, AMICO, refused to defend or indemnify in the underlying litigation alleging that the insurance contract did not cover this type of incident. As a result, on February 4, 1987, Arco filed suit against AMICO, seeking to compel the insurer to honor its contractual obligations. In response to the suit, AMICO's defense was that this type of incident was not a covered "occurrence" within the meaning of the applicable comprehensive liability policies because Arco either expected or intended the pollution that resulted from its manufacturing process.

The trial court found that the contamination was not anticipated by Arco, and that there was no "showing that there was an intention by anyone to contaminate." Thus, on September 28, 1990, a judgment was entered compelling AMICO to pay its allocated share (68.63 percent) of all indemnifiable losses up to the aggregate limits of AMICO's coverage of $3.5 million.

The Court of Appeals, however, reversed the trial court's decision and held that AMICO did not have the responsibility to defend or indemnify Arco. The Court held that there were clearly intentional discharges of VOCs by Arco employees and Arco either should have foreseen the result of the intentional acts, knew, or should have known that such practices would result in a substantial probability that VOCs would contaminate the soil and ground water. 198 Mich.App. at 352-353, 497 N.W.2d 190.

This conclusion was based on the following:

Defendant presented the testimony of numerous former Arco employees who testified that they had intentionally dumped or squeegeed VOCs into the drains that led to the seepage lagoon. Several of these former employees also testified that they had observed other Arco employees doing the same. One of plaintiffs' witnesses testified that he observed an Arco employee deliberately dump 150 to 165 gallons of VOCs directly onto the bare ground behind the plant. This witness also testified that he observed an Arco employee deliberately dumping VOCs into the drains. Former Arco employees also testified that VOCs were used to mop the plant floors from at least 1964 to 1979. The mopping was often performed on and around the drains that led directly to the unlined lagoons. Given the frequency and volume of mopping required to clean the plant floors, some of the VOCs would invariably go into the drains and be washed into the lagoons. Furthermore, plaintiffs' expert testified that during the manufacturing process, VOCs were discharged into the lagoon during defendant's coverage period. Additionally, Arco's plant chemist testified that he knew at the time he began employment with Arco in 1972 that VOCs should not be discharged into the unlined lagoon because they would degrade the environment. [Id. at 352, 497 N.W.2d 190.]

We hold that the Court of Appeals applied an incorrect legal standard in determining whether Arco intended or expected to contaminate the environment. The trial court properly found that Arco's employees did not intentionally release VOCs with the subjective intent or expectation to harm the environment. The Court of Appeals erred in ignoring the trial court's findings of fact with respect to this issue. Because the Court of Appeals did not reach the duty to defend issues, we remand these issues to the Court of Appeals for consideration. Accordingly, we reverse in part, and remand for further proceedings.


Initially, in determining whether AMICO must indemnify Arco, we must look to the language of the insurance policy and interpret the terms in accordance with the well-established Michigan principles of construction. Michigan Millers Mutual Ins. Co. v. Bronson Plating Co., 445 Mich. 558, 567, 519 N.W.2d 864 (1994).

First, an insurance policy must be enforced in accordance with its terms. Upjohn Co. v. New Hampshire Ins. Co., 438 Mich. 197, 207, 476 N.W.2d 392 (1991). We will not hold an insurance company liable for a risk it did not assume. Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 567, 489 N.W.2d 431 (1991); Kaczmarck v. La Perriere, 337 Mich. 500, 60 N.W.2d 327 (1953).

Second, we cannot create ambiguity where the terms of the contract are clear. Churchman, supra at 567, 489 N.W.2d 431; Metropolitan Property & Liability Ins. Co. v. DiCicco, 432 Mich. 656, 666, 443 N.W.2d 734 (1989), reh den with addenda to opinion 433 Mich. 1202, 446 N.W.2d 291 (1989), citing Edgar's Warehouse, Inc. v. United States Fidelity & Guaranty Co., 375 Mich. 598, 134 N.W.2d 746 (1965); Patek v. Aetna Life Ins. Co., 362 Mich. 292, 106 N.W.2d 828 (1961); Dimambro-Northend Associates v. United Construction, Inc., 154 Mich.App. 306, 313, 397 N.W.2d 547 (1986); Farm Bureau Mutual Ins. Co. v. Hoag, 136 Mich.App. 326, 332, 356 N.W.2d 630 (1984). Where there is no ambiguity, we will enforce the terms of the contract as written. Stine v. Continental Casualty Co., 419 Mich. 89, 114, 349 N.W.2d 127 (1984); Murphy v. Seed-Roberts Agency, Inc., 79 Mich.App. 1, 7-9, 261 N.W.2d 198 (1977). However, where an ambiguity exists, this...

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