Domtar, Inc. v. Niagara Fire Ins. Co.

• Decision Date: 06 August 1996
• Docket Number: Nos. C0-95-2626,C7-95-2638 and C9-95-2673,s. C0-95-2626
• Parties: DOMTAR, INC., Respondent (C0-95-2626; C7-95-2638), Appellant (C9-95-2673), v. NIAGARA FIRE INSURANCE COMPANY, et al., Appellants (C7-95-2638), Respondents (C0-95-2626; C9-95-2673), Canadian General Insurance Company, et al., Respondents, Certain Underwriters at Lloyd's of London et al., Appellants (C0-95-2626), Respondents (C7-95-2638; C9-95-2673).
• Court: Minnesota Court of Appeals

Page 738

552 N.W.2d 738

DOMTAR, INC., Respondent (C0-95-2626; C7-95-2638) Appellant (C9-95-2673), v. NIAGARA FIRE INSURANCE COMPANY, et al., Appellants (C7-95-2638), Respondents (C0-95-2626; C9-95-2673) Canadian General Insurance Company, et al., Respondents Certain Underwriters at Lloyd's of London et al., Appellants (C0-95-2626), Respondents (C7-95-2638; C9-95-2673).

Nos. C0-95-2626, C7-95-2638 and C9-95-2673.

Court of Appeals of Minnesota.

Aug. 6, 1996.

Review Granted Oct. 17, 1996.

Syllabus by the Court

1. An insurer is only liable for pollution property damage that occurs during the policy period, and a trial court may allocate damages on a pro rata basis to the insured for periods of time when damage occurred but no coverage has been shown.

2. To determine coverage, pollution damage that occurs during a policy period is considered an "accident" within the meaning of that term in an excess liability insurance policy. A jury's finding that an insurer has failed to prove that no appreciable property damage occurred during a policy period will not be set aside unless no reasonable mind could have made such a finding.

3. An owned-property exclusion, denying coverage for harm to the insured's own premises, does not affect a claim of loss for property that the insured has already sold, unless the clause expressly excludes coverage for previously alienated premises.

4. As a defense against a coverage claim, the known-loss doctrine is a fundamental principle of law, independent of coverage or exclusion language in a policy. The rule applies if it is shown that the insured purchased the coverage with knowledge that the loss had already occurred. The doctrine does not apply upon proof that the insured merely knew of the acts leading to its loss.

5. Presumptively, investigative and governmental oversight expenses to be paid by the insurer should be treated as a satisfaction of part of its total indemnity obligation. But the insured may rebut the presumption, so that such expenses are designated as defense costs, where it is shown that the insurer has refused to defend and the expenses are incurred not only to comply with regulatory demands but also to avoid more onerous demands.

6. An insured may recover pre-tender defense costs where the insurer has consistently refused coverage, there is no evidence that the insurer would have responded favorably to an earlier tender, and the defense was tendered at the earliest feasible time.

Douglas L. Skor, Kathleen Erickson DiGiorno, Paul C. Thissen, Briggs and Morgan, P.A., St. Paul, Paul Anton Zevnik, John L. Osborne, Zevnik, Horton, Guibord and McGovern, P.C., Washington, DC, for respondent-appellant Domtar, Inc.

Thomas A. Person, Arthur, Chapman, McDonough, Kettering & Smetak, P.A., Minneapolis, for appellants-respondents Niagara Fire Ins. Co. et al.

Larry Hanson, Chris Kabella, Moore, Costello & Hart, St. Paul, for respondents Canadian General Ins. Co. et al.

Thomas P. Kane, Kenneth H. Podpeskar, Oppenheimer Wolff & Donnellly, St. Paul, Gary W. Werterberg, Joseph A. Hinkhouse, Lord, Bissel & Brook, Chicago, IL, for appellants-respondents Lloyd's of London et al.

Charles E. Lundberg, Bassford, Lockhart, Truesdell & Briggs, P.A., Minneapolis, for amicus curiae Insurance Environmental Litigation Ass'n.

Laura A. Foggan, Elizabeth A. Eastwood, Treg A. Julander, Wiley, Rein & Fielding, Washington, DC, of counsel, for amicus curiae.

Considered and decided by KLAPHAKE, P.J., CRIPPEN and HUSPENI, JJ.

OPINION

CRIPPEN, Judge.

The trial court held that three insurers (Lloyd's of London, Continental Insurance Company, and Niagara Fire Insurance Company) were liable to indemnify Domtar, Inc. for part of an environmental loss. The court also concluded that two of the insurers (Niagara and Continental) had a liability of $1.154 million for the cost of defending the underlying action by the Minnesota Pollution Control Agency and $1.664 million for expenses in this action. Domtar challenges the trial court's decision to allocate to Domtar the responsibility for damage to the site during the periods of time when Domtar evidently did not have insurance coverage. In separate appeals, now consolidated with Domtar's appeal, the insurers challenge the indemnity, defense, and costs and fees awards. We affirm.

FACTS

1. Contamination.

From 1924 to 1929 and from 1934 to 1948, Domtar, previously known as Dominion Tar and Chemical Company, and its subsidiary, American Tar and Chemical Company, owned and operated a coal tar processing plant in Duluth, Minnesota. Domtar's operations were located on 11 acres of an industrial site encompassing approximately 230 acres of land and river bed.

Domtar's plant closed in 1948, and the property was sold in 1955. At that time, Domtar's equipment was disassembled and its tanks were demolished.

In August 1987, the Minnesota Pollution Control Agency (MPCA) initiated a remedial investigation of the 230-acre site. The MPCA determined that the area was polluted with coal tar and by-products. In 1991, the agency issued a Request for Response Action, naming Domtar as a responsible party for part of the site.

Initially, Domtar's liability was estimated at approximately $7 million for two units, known as the Tar Seeps Unit and the Soil Operable Unit, and $200-300 million for another unit, known as the Sediments Operable Unit. The Sediments Operable Unit was not included in the 1991 action, and through the time of trial, no action request had been issued for the Sediments Operable Unit.

2. Insurance.

Between 1956 and 1970, Domtar purchased primary and excess liability coverage from several insurers, including Lloyd's, Niagara, and Continental. Niagara and Continental (referred to jointly as "Continental") insured Domtar under comprehensive general liability insurance policies in the amount of $5 million per policy period between 1965 and 1970. Lloyd's insured Domtar under excess liability policies between 1956 and 1965 and between 1966 and 1969. Domtar had insurance from another carrier, Canadian General, for the years between 1956 and 1965, and coverage under those policies is being disputed in another action. There is no evidence of insurance coverage for Domtar before 1956 or after 1970.

3. Insurers' liability for indemnification.

Domtar asked its 1956-1970 insurers to defend against the MPCA's request action, to investigate the site, and to pay for any clean-up costs. The insurers refused to defend or indemnify Domtar for the damage to the site. Domtar then commenced this declaratory judgment against the insurers.

A jury found that pollution property damage commenced in 1933 and that some damage took place while Domtar was insured by Continental and Lloyd's. The jury found that the insurers had failed to prove that no appreciable pollution property damage took place during the policy periods. Finally, the jury found that the insurers failed to prove that Domtar had acted or had failed to act with the intent to cause injury to property.

The trial court concluded that the insurers were liable to indemnify Domtar for the costs to clean up the site. But the court determined that the clean-up costs should be allocated by dividing the remediation costs by the number of years between 1933 and the year that clean-up begins. The effect of this method was to hold Domtar itself liable for damages allocated to the years between 1933 and 1956, and after 1970.

4. Insurers' liability for costs and fees.

The trial court awarded Domtar approximately $1.683 million for its fees and costs incurred in this action to determine the insurers' defense and indemnification obligations. The court later reduced that award by the amount of Domtar's pre-tender expenditures, approximately $20 thousand.

The court also awarded Domtar approximately $1.154 million for its fees and costs incurred in defending the underlying MPCA action. The court did not reduce this award by the amount of Domtar's pre-tender expenditures.

ISSUES

1. Could the court lawfully allocate liability for pollution property damage to Domtar for damage during periods of time when Domtar could not establish coverage?

2. Did the trial court err by holding the insurers liable for appreciable pollution property damage during the policy periods?

3. Was it error to refuse to hold that principles of known loss and fortuity precluded coverage for pollution damage to the site?

4. Does the law permit the conclusion that Domtar's expenses for investigation and oversight by the MPCA constituted part of its defense costs?

5. Did the court err by refusing to reduce Domtar's cost-of-defense award by pre-tender costs incurred in defending the MPCA action?

ANALYSIS

1. Allocation of liability to Domtar.

By allocating losses proportionally over the years between 1933 and the date the site clean-up began, the trial court found indemnity coverage for only those sums allocated to years that Domtar was insured. This method of allocation left Domtar uncovered for clean up costs attributed to the years 1933 to 1956 and after 1970, when Domtar had no recoverable insurance. ¹

This "pro rata by time on the risk" method of allocation was approved by the supreme court in Northern States Power Co. v. Fidelity and Cas. Co., 523 N.W.2d 657 (Minn.1994) (hereinafter NSP ). In environmental contamination cases, where damages have occurred over multiple policy periods,

the trial court should presume that the damages were continuous from the point of the first damage to the point of discovery or cleanup.

* * * * * *

[C]ontamination of the groundwater should be regarded as a continuous process in which the property damage is evenly distributed * * *.

Id. at 664.

The NSP court dealt directly with apportionment among insurers and did not specifically address the question of whether damages should be allocated on a pro rata basis for periods when there was no insurance. But the court stated that the "pro rata time on...