FL Aerospace v. Aetna Cas. & Sur. Co.

• Decision Date: 17 March 1990
• Docket Number: 88-2106,Nos. 88-2051,s. 88-2051
• Citation: 897 F.2d 214
• Parties: , 58 USLW 2531, 20 Envtl. L. Rep. 20,582 FL AEROSPACE, Plaintiff-Appellant, Cross-Appellee, v. AETNA CASUALTY & SURETY CO., Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 214

897 F.2d 214

31 ERC 1276, 58 USLW 2531, 20 Envtl.

L. Rep. 20,582

FL AEROSPACE, Plaintiff-Appellant, Cross-Appellee, v. AETNA CASUALTY & SURETY CO., Defendant-Appellee, Cross-Appellant.

Nos. 88-2051, 88-2106.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 29, 1989.

Decided March 1, 1990.

Rehearing and Rehearing En Banc Denied March 17, 1990.

Wallace K. Sagendorph (argued), Troy, Mich., for plaintiff-appellant.

Robert D. Brignall (argued), Charles W. Browning, Vandeveer, Garzia, Tonkin, Kerr, Heaphy, Moore & Sills, Detroit, Mich., for defendant-appellee.

Before: MERRITT, Chief Judge; RYAN, Circuit Judge; and BROWN, Senior Circuit Judge.

BAILEY BROWN, Senior Circuit Judge.

FL Aerospace ("Aerospace"), the successor in interest to Midland-Ross Corporation ("Midland-Ross"), the original insured party under Comprehensive General Liability ("CGL") policies issued by Aetna Casualty & Surety Company ("Aetna"), appeals a bench trial decision of no cause of action in favor of Aetna. ¹ Aetna cross-appeals the district court's denial of its motion for summary judgment and cross-appeals the bench trial decision to the extent that it denied some of Aetna's defenses. This diversity action arose out of Aetna's refusal to indemnify Midland-Ross for money Midland-Ross expended to settle two private nuisance actions and to pay Midland-Ross' assessed portion of costs associated with an Environmental Protection Agency ("EPA")-mandated clean-up of the Berlin and Farro industrial waste site ("Berlin & Farro site") in Swartz Creek, Michigan. Aetna refused to indemnify Midland-Ross, contending that, in violation of policy provisions, Midland-Ross had failed to give proper notice of the claims and had made voluntary payments, that the clean-up costs were not "damages" and the loss did not constitute an "occurrence" within the meaning of the policy, and that the policy's pollution exclusion provision barred recovery.

After denying Aetna's motion for summary judgment, ² the district judge found that there was an "occurrence" within the meaning of the policy and that the pollution exclusion was not a bar to recovery; however, he also found that Midland-Ross had failed to notify Aetna timely in writing as required by the policy and that this failure materially prejudiced Aetna. The district judge also found that any payments made to settle the nuisance claims and the clean-

up claim were voluntary. He held, therefore, that there was no cause of action against Aetna. We believe, however, that the pollution exclusion provision does bar recovery under the facts of this case; therefore, we do not reach the other issues. Accordingly, we affirm the judgment of no cause of action in favor of Aetna on that basis.

FACTS

Midland-Ross was insured for the period January 1, 1966 through January 1, 1975, under CGL policies issued by Aetna. During the period between April, 1973 and September, 1975, Midland-Ross had liquid industrial waste removed from its manufacturing facility in Owosso, Michigan by Berlin & Farro, which was licensed by the state of Michigan to haul and store industrial waste. Berlin & Farro transported the liquid waste in its trucks and stored it at its site in Swartz Creek.

Midland-Ross was named as one of numerous defendants in two separate civil actions in nuisance filed in October, 1983 and March, 1984, respectively, by individuals living near the Berlin & Farro site. We will refer to these actions in this opinion as the Bradford and Acker actions. The plaintiffs in both actions alleged that the waste at the site had contaminated the earth there and that the contamination was likely to migrate to their residences. They alleged bodily injury and property damage as a result of the nuisance created by the Berlin & Farro site.

In addition to this potential tort liability, Midland-Ross received notification from the EPA in September, 1983, that an investigation of the Berlin & Farro site had resulted in a finding that Midland-Ross was possibly in violation of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Secs. 9601-9675. Subsequently, Midland-Ross consented to pay its share of EPA-mandated clean-up costs in an amount equal to the percentage Midland-Ross' waste was to the total waste stored at the Berlin & Farro site.

Although Midland-Ross' representatives spoke informally with Aetna's sales agent in late 1983 about the filing of the Bradford action, no written notice was given concerning the civil actions until November, 1984; and none was given regarding the EPA matter until June, 1985, some fifteen months after Midland-Ross had agreed to pay its portion of the clean-up costs. Midland-Ross eventually was assessed a clean-up amount of $508,561.00, and it settled the Bradford and Acker matters in late 1986 for a total of $61,503.42. Once all settlements were final and binding on Midland-Ross, the company requested reimbursement for the clean-up and settlement amounts, as well as for related attorney fees and costs. Some seven weeks later, after having received no favorable response from Aetna, Midland-Ross filed this action.

Aetna moved for summary judgment, contending that, on the undisputed record, each and all of its defenses heretofore stated prevented recovery. The district court held that the payment required in the clean-up proceeding was "damages" within the meaning of the policy and that the other defenses of Aetna raised issues of fact that could not be disposed of at the summary judgment stage.

During the trial, the district court heard uncontroverted testimony from John Shauver of the EPA about contamination at the site. Shauver testified that he investigated the Berlin & Farro site following complaints in 1972-73 about odors and the general operation of the incinerator. Either he or others employed by him were at the site at least weekly during the period 1972 through January 1, 1975, when Aetna's coverage applied.

Shauver learned that Berlin & Farro maintained plastic-lined storage lagoons for liquid waste. Each truck that transported waste into the site was required to carry a liquid waste removal record that identified the waste source and the description and quantity of waste involved. Shauver recalled that some of the vehicles carried waste from Midland-Ross' facility in Owosso.

Shauver testified that because truck drivers were usually in a hurry or not paying attention, it was not uncommon for them to pull hoses out of the lagoon without first allowing the hoses to drain, thereby allowing one or two gallons of waste to fall onto the ground outside of the lagoon. Because Shauver and other EPA employees were not present at all times and Berlin & Farro operated the site twenty-four hours a day, he could not testify as to the total amount of spillage. He estimated, however, that there was a substantial amount. Notwithstanding that estimate, he did not testify that any of the spillage came from the Midland-Ross facility.

Shauver also testified that in 1978, the north lagoon swelled and exceeded its bank as a result of severe storms, and in 1981, while Berlin & Farro was attempting to solidify the north lagoon, contaminated soil became mixed with uncontaminated soil, resulting in the need for a clean-up by a state agency. Both of these events, of course, came well after Aetna's coverage had ceased.

After the bench trial, the district court found that there was an "occurrence" within the meaning of the policy and that the "sudden and accidental" exception to the pollution exclusion clause applied so that the pollution exclusion clause did not bar recovery. However, the district court found that informal verbal communications with Aetna's sales agent did not satisfy the policy's notice requirement, that the written notice to Aetna was untimely and prejudicial to Aetna, and that any payments by Midland-Ross were voluntarily made. The court granted judgment of no cause of action in favor of Aetna.

ANALYSIS

We conclude, as we have heretofore indicated, that the district court erred in its determination that the pollution exclusion provision does not apply. Accordingly, because we conclude that the pollution exclusion does apply, we affirm the district court's decision dismissing the claim against Aetna.

Aetna's policy provides coverage for bodily injury or property damage caused by an occurrence. An "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[.]

The policy excludes coverage, however, for damage that is caused by pollution, unless the damage is caused by a "sudden and accidental" discharge, dispersal, release or escape of the pollutant. The pollution exclusion provides in its entirety:

This insurance does not apply:

....

(f) to 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 gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

(Emphasis added.) There is no question but that any damages in this case were caused by pollution. It is the "sudden and accidental" exception to the pollution exclusion that we must interpret to decide whether or not coverage is barred in this case.

We begin by stating the well-known rule that a federal court sitting in a diversity case must apply the state law that the state court in that state would apply. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Furthermore, the federal court must apply a state's law in accordance with the controlling decisions of the highest court of that state. Vandenbark v....