Overton v. Consolidated Ins. Co.

Citation145 Wn.2d 417,145 Wash.2d 417,38 P.3d 322
Decision Date17 January 2002
Docket NumberNo. 70562-3.,70562-3.
PartiesJerry OVERTON f/d/b/a Spokane Transformer Company; and Richard Boyce, Respondents, v. CONSOLIDATED INSURANCE COMPANY, an Indiana Corporation, Petitioner, and Industrial Indemnity Insurance Company of the Northwest, a Washington corporation, Defendant.
CourtUnited States State Supreme Court of Washington

Wilson, Smith, Cochran, Dickerson, David Michael Jacobi, Seattle, for Indemnity Insurance Company.

Thorsrud, Cane & Paulich, Russell Charles Love, Seattle, for Petitioners.

Heller, Ehrman, White & McAuliffe, Michael Richard Wrenn, Seattle, for Plaintiff Boyce.

Witherspoon, Kelley, Davenport & Toole, R. Max Etter, Spokane, Heller, Ehrman, White & McAuliffe, John Matthew Geyman, Michael Richard Wrenn, Seattle, for Respondents.


This proceeding arises out of two comprehensive general liability policies purchased on behalf of an electrical transformer manufacturing and repair business. After suit was commenced by the current owners of the site for contribution of cleanup costs under the Model Toxics Control Act, chapter 70.105D RCW, the insureds tendered defense to their insurers. When both insurers rejected the tender, the insureds sued, claiming breach of contract, bad faith denial of coverage, and violation of the Consumer Protection Act, chapter 19.86 RCW. The ultimate question is whether an existing contamination of the insured's property known by the insured prior to purchasing an insurance policy, but which results in liability to a third party subsequent to the purchase, is an "occurrence" triggering coverage. We conclude it is not.


This proceeding has a long and colorful history, involving, among other things, toxic chemicals and politicians. Beginning in 1961, the Spokane Transformer Company operated an electrical transformer manufacturing and repair facility located in Spokane, Washington. Spokane Transformer used various hazardous materials in its operations, including polychlorinated biphenyls (PCB). The initial owner of this business was Richard Boyce, who sold it to Jerry Overton in 1972. Overton continued operating the electrical transformer business for another couple of years, leasing the underlying property from Boyce.

In 1976, Environmental Protection Agency (EPA) inspectors took two soil samples from the Spokane Transformer site. Test results revealed elevated levels of PCB contamination in one of those samples. When Department of Ecology (DOE) regulators informed Overton of the test results, he acknowledged oil-filled transformers were made on the site, but denied the use of any fluids containing PCB. According to a DOE report on the visit, Overton's position was that there was no problem and that, even if the soil were contaminated, it was not his responsibility to clean it up. Although the EPA recommended the Spokane Transformer site be inspected further to determine the extent of PCB contamination, no further action was taken.

The following year, 1977, Spokane Transformer purchased a comprehensive general liability (CGL) policy from Industrial Indemnity Company. The policy named Spokane Transformer, Overton, and Boyce as insureds. Two years later in 1979, Spokane Transformer purchased another CGL policy from Consolidated Insurance Company with the same insureds. (Since these policies both originate out of Spokane Transformer and have the same named insureds, we refer to the insureds collectively as Spokane Transformer.) The Industrial policy expired in 1980, while the Consolidated policy ran until 1982. Meanwhile, Spokane Transformer ceased operations and was liquidated in 1979. There is no evidence Spokane Transformer informed either Industrial or Consolidated about the EPA test results when the policies were purchased.

The property upon which the Spokane Transformer facility had been located was eventually purchased by Paul and Mary Ann Gisselberg in 1981. Some years after the purchase, they conducted their own environmental audit of the property as part of a refinancing arrangement and discovered the preexisting PCB contamination.

The Gisselbergs initiated remedial measures to clean up the property, and sent Overton, now a member of the Arizona House of Representatives, a demand letter notifying him they would seek contribution from him as a "potentially liable person" under the Model Toxics Control Act, chapter 70.105D RCW. Overton forwarded the demand letter to Consolidated and Industrial, which proceeded to investigate the claim. Meanwhile, the Gisselbergs filed their suit against Overton and Boyce for contribution toward the cleanup cost. When Overton and Boyce tendered defense of the action to Industrial and Consolidated, both insurers rejected the tender asserting: (1) the claim was a known loss; (2) previously known and existing damage could not be a covered "occurrence"; (3) the pollution exclusion applied because release of the pollutants was expected; and (4) the owned-property exclusion applied.

The underlying Gisselbergs suit eventually spawned the coverage litigation before us. These proceedings began in 1998 when Spokane Transformer sued Consolidated and Industrial for breach of contract, bad faith, and violation of the Consumer Protection Act. The insurers moved for summary judgment and the trial court ultimately granted the motion dismissing all claims. In so doing the court ruled there was neither a covered "occurrence" under the policy nor evidence of bad faith or violation of the Consumer Protection Act.1 Upon the insureds' appeal, the Court of Appeals reversed on the coverage issue, holding a question of fact remained as to whether a covered "occurrence" had taken place. Overton v. Consolidated Ins. Co., 101 Wash.App. 651, 659, 6 P.3d 1178 (2000). But the court affirmed the holdings that Consolidated and Industrial did not act in bad faith or otherwise violate the Consumer Protection Act by rejecting the tender. Id. at 661, 6 P.3d 1178.

Both sides appealed the Court of Appeals' decision. Consolidated seeks review of the reinstatement of the coverage claim. Spokane Transformer seeks review of the bad faith and Consumer Protection Act claims. Industrial has not joined Consolidated's petition, but opposed review of Spokane Transformer's claims. We granted review. 143 Wash.2d 1008, 21 P.3d 291 (2001).

The questions we must decide are (1) whether Spokane Transformer's knowledge of PCB contamination prior to the purchase of the insurance policies precludes coverage; and (2) whether the insurers acted in bad faith or in violation of the Consumer Protection Act when they rejected Spokane Transformer's tender.


The outcome of this case depends on a proper interpretation of the insurance policies issued by Consolidated and Industrial. Interpretation of insurance policies is a question of law, in which the policy is construed as a whole and each clause is given force and effect. Pub. Util. Dist. No. 1 v. Int'l Ins. Co., 124 Wash.2d 789, 797, 881 P.2d 1020 (1994). The terms of a policy should be given a "fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance." Sears v. Grange Ins. Ass'n, 111 Wash.2d 636, 638, 762 P.2d 1141 (1988) (citing E Z Loader Boat Trailers, Inc. v. Travelers Indem. Co., 106 Wash.2d 901, 907, 726 P.2d 439 (1986)).


For coverage under the type of CGL policy at issue here, an insured must show some form of harm caused by an "occurrence." Queen City Farms, Inc. v. Cent. Nat'l Ins. Co., 126 Wash.2d 50, 70-71, 882 P.2d 703, 891 P.2d 718 (1994). The Consolidated CGL insurance policy provides:

The company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of
Coverage A. bodily injury, or
Coverage B. property damage
to which this insurance applies, caused by an occurrence....

Clerk's Papers (CP) at 295. The critical terms for our consideration are "occurrence," "property damage," and "damages." The two former are defined in the policy:

"occurrence" means 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;
"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[.]

CP at 296.

Thus, the plain language of the policy covers only (i) accidents which, (ii) during the policy period, (iii) result in property damage (iv) that is neither expected nor intended (v) from the standpoint of the insured.

To be an "occurrence," a harmful event must be "neither expected nor intended from the standpoint of the insured." CP at 296. The Court of Appeals properly recognized this clause describes "the subjective state of mind of the insured with respect to the property damage." Overton, 101 Wash. App. at 658, 6 P.3d 1178. In other words, property damage that is expected or intended by the insured does not warrant coverage. Queen City Farms, Inc., 126 Wash.2d at 70-71, 882 P.2d 703.

In Time Oil Co. v. Cigna Property & Casualty Insurance Co., the court, applying Washington law, held the risk of liability was no longer unknown when the insured received notice indicating a "substantial probability" the loss would occur. 743 F.Supp. 1400, 1414-15 (W.D.Wash.1990). The Court of Appeals distinguished Time Oil based on an official EPA notice to the insured of its status as a potentially responsible party. Overton, 101 Wash.App. at 659,6 P.3d 1178 (citing Time Oil Co., 743 F.Supp. at 1404). Undeniably, there was no such official notification of liability here. The Court of Appeals went on to state that...

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