Crystal Bay General Imp. Dist. v. Aetna Cas. & Sur.

• Decision Date: 26 May 1989
• Docket Number: Civ. No. N-87-365 BRT.
• Parties: CRYSTAL BAY GENERAL IMPROVEMENT DISTRICT, a governmental agency with jurisdiction in Washoe County, State of Nevada, Plaintiff, v. The AETNA CASUALTY AND SURETY COMPANY and Aetna Life & Casualty, Defendants.
• Court: U.S. District Court — District of Nevada

713 F. Supp. 1371

CRYSTAL BAY GENERAL IMPROVEMENT DISTRICT, a governmental agency with jurisdiction in Washoe County, State of Nevada, Plaintiff, v. The AETNA CASUALTY AND SURETY COMPANY and Aetna Life & Casualty, Defendants.

Civ. No. N-87-365 BRT.

United States District Court, D. Nevada.

May 26, 1989.

William Patterson Cashill, Reno, Nev., for plaintiff.

Beasley & Holden, Gayle Brooks, Reno, Nev., for defendants.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

BRUCE R. THOMPSON, District Judge.

Plaintiff has filed a complaint for monetary damages and declaratory relief. Plaintiff's complaint is in five counts. The first is entitled "bad faith," the second "unfair insurance practices," the third "breach of the implied covenant of good faith and fair dealing," the fourth "breach of fiduciary duty," and the fifth "declaratory relief." The declaratory relief sought is a declaration that defendant's insurance policy covered plaintiff's losses and defendant is barred from recovering the $96,000 which it paid, or "loaned" to plaintiff, in effectuating a settlement. Defendant filed a motion for summary judgment on the first, second and third claims for relief. It might just as well have moved against the whole complaint, but this suggestion is mooted by the fact that plaintiff has moved for summary judgment on defendant's counterclaims for reimbursement of the $96,000 which defendant paid.

STATEMENT OF UNDISPUTED FACTS

The plaintiff is Crystal Bay General Improvement District (CBGID) and the defendants are The Aetna Casualty and Surety Company and Aetna Life and Casualty (Aetna).

On June 18, 1982, Aetna issued a comprehensive general liability policy to CBGID. The term of this policy of insurance was for one year. By reason of this contract of insurance, Aetna agreed to pay on behalf of CBGID:

... All sums which the insured (CBGID) shall become legally obligated to pay as damages because of

Bodily injury or property damage to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient ...

The term "property damage" is defined in the policy as follows:

`Property damage' means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.

"Occurrence" is defined as:

... An accident, including continuous or repeated exposure to conditions which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured;

Thus, generally speaking, the grant of insurance coverage in this policy extends coverage to those situations where there existed an occurrence which caused bodily injury or property damage. However, there were several exceptions made to this grant of coverage. One of these exceptions was where the damages in question were caused by pollution and the "discharge, dispersal, release or escape" of such pollutants was both unintentional and occurred gradually over time. The exception stated that the policy of insurance did not furnish coverage for

(f) ... Bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gasses, waste materials or other irritants, contaminants or pollutants into or upon the land, the atmosphere of any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

On September 26, 1984, Theodore D. Geiszler, Doreen Geiszler and Stephen M. Kaiser filed a complaint against CBGID in the Washoe County District Court. Also named as defendants in that proceeding were Incline Village General Improvement District and CH2M Hill. Although several distinct claims for relief were asserted, each claim was founded upon the same essential facts. It was the position of plaintiffs Geiszler and Kaiser that the defendants had caused noxious, septic odors to emanate from the Gonowabie Pump Station and be blown into plaintiffs' property by prevailing winds. This allegation formed the basis of plaintiffs' causes of action for nuisance (first claim), continuing trespass (second claim), intentional infliction of emotional distress (third claim), and negligence (fourth claim). Under these claims, the plaintiffs Geiszler and Kaiser sought (1) general damages, (2) punitive damages, (3) an order requiring the abatement of the nuisance, and (4) an order requiring the relocation of the sewer line to a more convenient location.

After CBGID had been served with civil process, it tendered the defense of this lawsuit to Aetna. This was done by Jack I. McAuliffe in a letter he wrote to Bill Parish at the Lucini Parish Insurance Agency on October 16, 1984. Aetna accepted CBGID's tender, and immediately assigned Paul Hamilton, a local Reno trial attorney, to handle CBGID's defense. Mr. Hamilton's first act was to obtain an open extension of time from plaintiff's attorney, Stephen Scheerer, within which to answer the Geiszler complaint.

Because counsel for third party claimants was unwilling to delay the prosecution of his clients' claims indefinitely, CBGID was put on notice on March 25, 1985, of the need to file a responsive pleading. This fact prompted Aetna to formally acknowledge the fact that it had accepted CBGID's tender of defense under a full reservation of its right to later disclaim coverage for all or a portion of that relief obtained by third party claimants should that relief be outside the coverage furnished by Aetna under its policy of liability coverage. Aetna further pointed out that its policy of insurance provided indemnity coverage for only that liability which was legally imposed upon CBGID for bodily injury and property damage resulting from its activities, and that liability coverage for an award of punitive damages would not be furnished in the event a court deciding such an issue were to conclude that an agreement to insure against punitive damages would be contrary to the public policy of the state of Nevada. Aetna then apprised CBGID that it would conduct a coverage investigation into this matter, saying:

We will conduct any investigation and/or activity in connection with this claim under a full reservation of the Company's right to disclaim coverage at a later date. Also, the sending of this letter does not constitute a waiver of any other terms or limitations of your policy which may become applicable as further information becomes known.

In March of 1987, the claims of Theodore D. Geiszler and Steven M. Kaiser against CBGID were settled. Under this Settlement Agreement no sums of money were to be paid to third party claimants Theodore D. Geiszler and Steven M. Kaiser for damage done to their property. Rather, all sums contributed, with the exception of not more than $17,000, which was to constitute reimbursement for third party claimants' legal fees and engineering costs, were to be used for the construction of improvements to CBGID's sewer collection facilities. Specifically, a bypass system rerouting the sewage disposed through the old Washoe County Sewer District No. 1 would be built; the Gonowabie Pump Station would be remodeled so as to properly handle the decreased flow of effluent from just CBGID; and the existing force main from the Gonowabit Pump Station would be replaced with a small diameter pipe. The Settlement Agreement was not to become fully operative until a contract for the execution of these improvements had actually been executed before April 1, 1987. Once such a contract had been executed, regardless of whether the construction of these improvements was ever completed, CBGID and Incline Village General Improvement District would have satisfied their obligations under the Settlement Agreement and been entitled to third party claimants' dismissal of the lawsuit brought against them.

The amount which CBGID was required to contribute as its share of this Settlement Agreement was $96,000. Aetna preserved the right to establish through its coverage investigation or, if necessary, in an independent judicial proceeding, that Aetna's policy of insurance did not afford indemnity coverage for either all or a part of those sums advanced by Aetna in behalf of CBGID under the Settlement Agreement. CBGID accepted the proposal on or about March 9, 1987. As a consequence, Aetna contributed the sum of $96,000 which was necessary to complete the Settlement Agreement. In addition, by a separate document entitled "Mutual Release," Aetna and CBGID preserved those rights which each might have against the other. Paragraph 3 of the release expressly stated:

3. Aetna Life and Casualty Company specifically reserves its right to commence an action against its insured CBGID for the recovery of any monies advanced on behalf of CBGID by the terms of the `Settlement Agreement' (Exhibit 1) in the event that Aetna Life and Casualty Company determines that insurance coverage does not exist and CBGID reserves its right to commence an action against its insurer, Aetna Life and Casualty Company and its agents, attorneys and representatives, for the recovery of any and all costs, including attorney's fees and damages arising out of Aetna Life and Casualty providing a defense to this action, and Aetna Life and Casualty Company's handling of CBGID's claim, as well as any other matters relating to Aetna Life and Casualty Company's relationship with CBGID as insurer to insured. This Release is not

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