Taos Ski Valley, Inc. v. Nova Cas. Co.

• Decision Date: 25 August 2017
• Docket Number: No. 16-2118,16-2118
• Parties: TAOS SKI VALLEY, INC., Plaintiff - Appellant, v. NOVA CASUALTY COMPANY, Defendant - Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

TAOS SKI VALLEY, INC., Plaintiff - Appellant, v. NOVA CASUALTY COMPANY, Defendant - Appellee.

No. 16-2118

UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

August 25, 2017

(D.C. No. 1:15-CV-00323-MCA-SCY)

(D.N.M.)

ORDER AND JUDGMENT^*

Before HOLMES, PHILLIPS, and MORITZ, Circuit Judges.

In October 2013, Taos Ski Valley, Inc. (TSV) discovered that an oil-and-water separator on its federally leased property had released hydrocarbon contaminants into the soil at the company's ski resort in New Mexico. To abate the contamination and to protect nearby ground and surface water, TSV spent over a million dollars remediating the site. TSV had a commercial general-liability insurance policy with the Nova Casualty Company (Nova) and sought indemnification for its clean-up expenses. When Nova denied coverage under the insurance policy's owned-property exclusion (the Owned-Property Exclusion), TSV sued for declaratory relief in federal court in the District of New Mexico. But the district court granted Nova's Motion toDismiss and later denied TSV's Motion for Reconsideration. TSV appealed. We affirm.¹

I

When TSV's environmental contractor first discovered the contamination, he collected a series of soil and water samples for scientific analysis. Tests of the samples revealed that diesel and petroleum levels exceeded permissible levels under New Mexico environmental regulations. Apart from these violations, the contamination posed risks to the nearby Rio Honda, a body of surface water regulated by the federal Clean Water Act, and to the aquifer beneath the contamination. TSV claims that the regulatory violations subjected it to immediate third-party liability to state and federal environmental authorities.²

TSV's ski resort operates on federal land under a special-use permit from the U.S. Department of Agriculture. The permit requires TSV to pay the "full cost of anydamage" caused by its own "negligence or activities." R. vol. 1 at 8. TSV notified the relevant state and federal authorities of the contamination and "coordinated and implemented necessary corrective measures" to abate the contamination and protect the threatened water resources. Appellant Opening Br. at 9. TSV's remediation program succeeded, and the company even received federal commendation for its diligent clean-up efforts.

Before TSV started its remediation, it notified Nova (through Nova's designated agent, Safehold Special Risk) of the contamination and the environmental harm. TSV requested that Nova acknowledge its responsibility under its insurance policy to indemnify TSV for the cost of the clean-up. The policy at issue (the Policy) was effective from November 1, 2013 to November 1, 2014.³ The Policy's insuring clause states that Nova "will pay those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." R. vol. 5 at 173. It goes on to state that Nova "will have no duty to defend the insured against any 'suit' seeking damages for . . . 'property damage' to which this insurance does not apply." Id.

In October 2014, Nova notified TSV that it was denying TSV insurance coverage for the clean-up costs. As support for its denial, Nova cited the Owned-Property Exclusion located in Section 2(j)(1) of the Policy, which excluded coverage for damage to "Property you own, rent, or occupy, including any costs or expensesincurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property . . . ." Id. at 176.⁴

TSV and Nova then traded several volleys of letters and legal opinions about the Owned-Property Exclusion. TSV alleged that the Owned-Property Exclusion was inapplicable because TSV was seeking indemnification for its costs in abating third-party public and environmental injuries rather than first-party injury to its own property. In March 2015, Nova again denied coverage.

In April 2015, TSV sued Nova for declaratory relief in federal court in the District of New Mexico. Nova filed a Motion to Dismiss, relying on the Owned-Property Exclusion. TSV then filed a Motion for Certification of Question of State Law to the New Mexico Supreme Court, arguing that state-court guidance was needed to decide this issue of first impression under New Mexico law.⁵ The district court never ruled on the motion, instead simply deciding the case.

In December 2015, the district court granted Nova's Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6). The district court concluded that the broad language in Nova's Owned-Property Exclusion distinguished it from the narrowerlanguage in the owned-property exclusions at issue in TSV's cited cases. The district court concluded that the broader language "render[ed] [TSV's] reading of [the] policy unreasonable." R. vol. 6 at 237.

Alternatively, TSV argued that the district court should not enforce the Owned-Property Exclusion, asserting that the exclusion violates New Mexico public policy. In TSV's view, a court's enforcing the exclusion (if interpreted as the district court did) would lead insureds to delay clean-ups until after environmental contamination damaged neighboring property or water. The district court rejected this argument, based partly on its view that insureds opting for delay would make themselves vulnerable to the policy exclusion for damage "expected or intended from the standpoint of the insured." R. vol. 5 at 174. TSV moved for reconsideration, which the district court summarily denied. TSV appealed.

II

TSV asks us to reverse the district court's dismissal of its complaint against Nova. We review de novo a district court's dismissal based on Federal Rule of Civil Procedure 12(b)(6). Horwitz v. Schneider Nat., Inc., 992 F.2d 279, 281 (10th Cir. 1993). A complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). We must accept a complaint's allegations as true, but that acceptance "is inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The obligation of the insurer is a question of contract law and will be determined by reference to the terms of the insurance policy." Knowles v. United Servs. Auto. Ass'n, 832 P.2d 394,396 (N.M. 1992). In construing exclusionary clauses in New Mexico, courts must try to give effect to the reasonable expectations of the insured. Id.

In urging us to reverse the district court, TSV's primary argument is that Nova owes it coverage not for first-party damages, but only for third-party liability that it argues the Owned-Property Exclusion does not reach. Pointing to the insuring clause, TSV argues that to read the Exclusion as foreclosing coverage for the prospective third-party claims of New Mexico and the United States would "eviscerate the essence of a third-party liability policy." Appellant Opening Br. at 35. The New Mexico Supreme Court, TSV notes, construes exclusionary clauses narrowly, Knowles, 832 P.2d at 396, enforcing only those not "in irreconcilable conflict with the insuring clause," id. at 398. Such a conflict exists here, TSV argues, because the district court's interpretation of the Owned-Property Exclusion cuts strongly against the pro-coverage expectation suggested by the broad language of the Policy's insuring clause and even by the word "general" in the Policy's title. Appellant Opening Br. at 36. Thus, TSV posits that the Owned-Property Exclusion excludes coverage for first-party property damage, but not coverage for third-party liability arising from an event on the insured's property that caused first-party property damage.⁶

TSV's interpretation runs counter to the Policy's language.⁷ The Policy's insuring clause first sets out that Nova "will pay those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." R. vol. 5 at 173. The Policy later lists multiple exclusions for damages to which the policy does not apply, including the Owned-Property Exclusion. That Exclusion denies coverage for damage to "[p]roperty you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for . . . restoration . . . of such property for any reason, including prevention of . . . damage to another's property." Id. at 176 (emphasis added).

We read the Policy as one "complete and harmonious instrument designed to accomplish a reasonable end." Knowles, 832 P.2d at 396 (quoting Safeco Ins. Co. of Am., Inc. v. McKenna, 565 P.2d 1033, 1037 (N.M. 1977)). In doing so, we concludethat this language narrowed the definition of property damage that can give rise to covered third-party liability. To be covered, the liability cannot be for damage to property that the insured party owns, rents, or occupies. Thus, the Exclusion defeats coverage for TSV's remediation costs incurred because of soil contamination on the resort's land, no matter that the reason for the costs was third-party liability. And that coverage limitation creates no irreconcilable conflict with the insuring clause; it simply creates an exclusion to it. See United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644, 650 (N.M. 2012) ("An exclusion does not conflict with an insurance policy's insuring agreement simply because it affords less or different coverage as compared with what the policy would provide without the exclusion; that is the very purpose of an exclusion, to restrict the scope of the policy beyond what would otherwise be covered.")

In addition, we see another problem with TSV's argument. TSV argues that the policy exclusion applies only to first-party-property-damage claims and not to third-party-liability claims, pointing out that the Exclusion does not contain the word "liability." See R. vol. 5 at 176. But we must...