Natl Electrical v. Gulf Underwriters ( 1998 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
NATIONAL ELECTRICAL
MANUFACTURERS ASSOCIATION,
Plaintiff-Appellee,
v. No. 97-2319
GULF UNDERWRITERS INSURANCE
COMPANY,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-96-985-A)
Argued: September 23, 1998
Decided: December 29, 1998
Before WIDENER and LUTTIG, Circuit Judges, and MAGILL,
Senior Circuit Judge of the United States Court of Appeals for the
Eighth Circuit, sitting by designation.
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Reversed by published opinion. Senior Judge Magill wrote the opin-
ion, in which Judge Luttig joined. Judge Widener wrote a concurring
opinion.
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COUNSEL
ARGUED: Don Wall Fowler, LORD, BISSELL & BROOK, Chi-
cago, Illinois, for Appellant. Lorelie Sue Masters, ANDERSON,
KILL & OLICK, L.L.P., Washington, D.C., for Appellee. ON
BRIEF: Hugh S. Balsam, LORD, BISSELL & BROOK, Chicago,
Illinois; Michael R. Goodstein, ARTER & HADDEN, Washington,
D.C., for Appellant. Koorosh Talieh, Michele A. Gallagher, ANDER-
SON, KILL & OLICK, L.L.P., Washington, D.C.; Dale R. Schmidt,
NATIONAL ELECTRICAL MANUFACTURERS ASSOCIATION,
Rosslyn, Virginia, for Appellee.
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OPINION
MAGILL, Senior Circuit Judge:
This case arises from a dispute between the National Electrical
Manufacturers Association ("NEMA") and Gulf Underwriters Insur-
ance Company ("Gulf") regarding Gulf's duty to defend third party
claims. NEMA argues the Gulf insurance policy's pollution exclusion
does not apply to relieve Gulf of its duty to defend NEMA in the
underlying claims and Gulf has an unqualified duty to defend NEMA
even though it is an excess insurer. We disagree with NEMA on both
counts and reverse.
I.
NEMA is a trade association; its members are manufacturers of
products that generate, transmit, distribute, and, in some cases, use
electrical energy. NEMA promotes the competitiveness of its mem-
bers by, among other things, developing technical standards for the
design, manufacture, and use of electrical manufacturing products.
NEMA filed a declaratory judgment action in the United States
District Court for the Eastern District of Virginia, seeking coverage
and defense costs1 in connection with direct claims against NEMA by
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1 Gulf owes NEMA the duty to defend and the duty to indemnify.
Before trial the parties agreed that the duty to indemnify issue was not
ripe because NEMA had not been held liable to pay damages in any
underlying claim. The district court considered only the question whether
Gulf had a duty to defend NEMA, which is the only issue before us.
2
a number of class action welders.2 These welders alleged NEMA
knew the dangers of exposure to manganese fumes but nevertheless
promulgated standards for its member companies permitting the use
of manganese in welding rods. Specifically, the welders claim they
were "exposed to welding fumes while using welding products or
being in the proximity of other persons using welding products," and
that, "[a]s a direct and proximate result of their exposure to welding
fumes," they suffer neurological injuries. Although NEMA has not
been found liable in the underlying actions and has been dismissed in
all but four of the actions, which are now consolidated as a single
class action, NEMA has incurred significant costs in defending the
suits. NEMA asserts the remaining underlying action represents mil-
lions of dollars in potential liability and defense costs for NEMA.
NEMA sued Gulf and six of its primary insurers in the declaratory
judgment action and subsequently settled with the six primary insur-
ers before trial. Gulf, an excess insurer, was the only insurer that did
not settle with NEMA. NEMA refused to disclose to Gulf the amount
and nature of its settlement agreements with its six primary insurers.
Before trial, Gulf moved for summary judgment, alleging a pollu-
tion exclusion in its policy precluded coverage as a matter of law for
the underlying actions. The district court denied Gulf's motion for
summary judgment, and concluded the pollution exclusion did not
relieve Gulf of its duty to defend NEMA. The case went to bench trial
on the merits before a different judge on the issue of whether Gulf
breached its duty to defend. Because the district court had already
determined the pollution exclusion did not relieve Gulf of this duty,
the only question at trial was whether, on account of the policy's
excess provisions, Gulf's duty to defend NEMA had not yet been trig-
gered.
The district court held Gulf had a duty to defend NEMA and
entered an amended judgment against Gulf for $120,637.70. Gulf
appeals the summary judgment ruling and judgment against it.
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2 Both parties agree the Gulf insurance policy is governed by the law
of the District of Columbia.
3
This Court reviews de novo the district court's denial of Gulf's
motion for summary judgment on the pollution exclusion issue.3
Benner v. Nationwide Mut. Ins. Co., 93 F.3d 1228, 1239 (4th Cir.
1996). As in the district court, this Court must construe all evidence
and make all inferences in the light most favorable to NEMA, the
non-moving party. Id. at 1241. The district court's conclusion of law
that the excess nature of the policy did not relieve Gulf of its duty to
defend is subject to de novo review by this Court. See Resolution
Trust Corp. v. Maplewood Investments, 31 F.3d 1276, 1281 n.7 (4th
Cir. 1994).
II.
District of Columbia courts have held the duty to defend is broader
than the duty to indemnify. Gulf is obligated to defend if any allega-
tions in the underlying actions potentially fall within the terms of its
coverage. American Continental Ins. Co. v. Pooya , 666 A.2d 1193,
1197 (D.C. 1995); see also Salus Corp. v. Continental Cas. Co., 478
A.2d 1067, 1069-70 (D.C. 1984) (noting if complaint contains any
allegation within policy's coverage insurer must defend entire law-
suit). Gulf's policy further extends the duty to defend claims against
NEMA even if "the allegations are groundless, false or fraudulent,"
as long as they are within the terms of coverage. Policy § 5.A.2. In
sum, Gulf is obligated to defend NEMA for any action if that action
contains any allegation potentially within the terms of coverage and
regardless of whether the claims are frivolous. Where the plain lan-
guage of an insurance contract is unambiguous, the court will adopt
the plain meaning whether favorable to the insured or not; ambiguities
will not be sought out. Medical Serv. of D.C. v. Llewellyn, 208 A.2d
734, 736 (D.C. 1965). The Gulf policy is a Specialty Errors and
Omissions policy covering:
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3 In finding that the pollution exclusion was ambiguous as a matter of
law, the district court sua sponte entered partial summary judgment for
NEMA on this issue. Thus, this Court is not precluded from reviewing
the district court's denial of Gulf's motion. See Chesapeake Paper
Prods. Co. v. Stone & Webster Eng'g Corp., 51 F.3d 1229, 1237 n.11
(4th Cir. 1995) (noting denial of summary judgment reviewable where
district court granted corresponding summary judgment for opposing
party).
4
The Development, publication, and dissemination of volun-
tary product, process or procedure standards including sur-
veys, reports and general information, educational programs
and seminars for the electrical manufacturers industry and
services related to accreditation of certification programs[.]
Policy § 1.4. However, Gulf's liability is limited by a specific pollu-
tion exclusion that relieves Gulf of its obligation to "defend Claims
arising directly or indirectly" from certain events. Policy § 5.B.1. Part
5.B.1.n excludes coverage for claims arising directly or indirectly
from:
The actual or threatened discharge, dispersal or release of
any Pollutant.... This exclusion is effective whether or not
the pollution was sudden, accidental, gradual, intended,
expected or preventable or whether or not any of You caused
or contributed to the pollution.
"Pollutant" means any solid, liquid, gaseous or thermal irri-
tant or contaminant, including, but not limited to:
1. smoke, vapor, soot, fumes, acids, alkalis,
chemicals, asbestos....
Policy § 5.B.1.n (last emphasis added).
To be effective, a provision that excludes coverage must be
explicit. Nationwide Mut. Ins. Co. v. Schilansky , 176 A.2d 786, 788
(D.C. 1961). The insurer bears the burden of establishing that an
exclusion bars coverage. Washington Sports and Entertainment, Inc.
v. United Coastal Ins. Co., 7 F. Supp. 2d 1, 7 (D.D.C. 1998) (applying
District of Columbia law).
NEMA argues the welders alleged a claim arising from negligence,
not pollution, and therefore that the pollution exclusion should not
operate to deny coverage with respect to the welder claims. Two fac-
tors militate against this argument: 1) NEMA commits itself that the
welder claims arise from exposure to pollution and 2) the fact that the
welders style their claims in negligence does not solve the pollution
exclusion issue before us.
5
First, NEMA's complaint asserts the welder claims arise from the
release of a gaseous pollutant, specifically, "fumes, particulates and
gases containing manganese." This Court need look no further than
the exclusion's plain language to conclude that it explicitly applies to
the underlying actions. The exclusion serves to relieve Gulf of its duty
to defend claims where those claims arise from "the creation of an
injurious condition involving any Pollutant" Policy § 5.B.1.n. The
exclusion defines "pollutant" to include any"solid, gaseous or thermal
irritant or contaminant," including "fumes," and operates to exclude
coverage "whether or not [NEMA] caused or contributed to the pollu-
tion." Id. As NEMA acknowledges, the welder claims arise from the
creation of injury resulting from exposure to manganese fumes, and
fumes qualify as a pollutant under the exclusion.
Second, the style of the welder claims is irrelevant to the issue
whether the claims fall within the ambit of the pollution exclusion.
See, e.g., American States Ins. Co. v. Skrobis Painting & Decorating,
Inc., 513 N.W.2d 695, 698-99 (Wis. Ct. App. 1994) (noting that
although theory of liability asserted may change, the occurrence that
caused injury will not and rejecting argument that nature of claim
alters applicability-of-exclusion analysis). Every action involving
bodily injury or property damage must assert some theory of liability
but the theory chosen has no impact on the cause of the injury. In ana-
lyzing the applicability of the exclusion, all that matters is whether the
injurious condition about which the welders complain arose from the
dissemination of a pollutant.
A number of courts have applied these exclusions literally even
where the underlying claims, like the claims here, alleged negligence.
See, e.g., American States Ins. Co. v. Nethery, 79 F.3d 473, 474-75,
477-78 (5th Cir. 1996) (enforcing exclusion to apply to allegations of
gross negligence); Cook v. Evanson, 920 P.2d 1223, 1224, 1227
(Wash. Ct. App. 1996) (enforcing pollution exclusion to apply to alle-
gations that concrete sealant was negligently applied); League of Min-
nesota Cities Ins. Trust v. City of Coon Rapids, 446 N.W.2d 419, 420,
422 (Minn. Ct. App. 1989) (enforcing exclusion to apply to allega-
tions of negligent failure to ventilate, negligent failure to maintain,
and negligent infliction of emotional distress).
NEMA urges this Court to consider its reasonable expectation of
coverage and to restrict application of the exclusion to only environ-
6
mental pollution. See, e.g., Enron Oil Trading & Transp. Co. v. Wal-
brook Ins. Co., 132 F.3d 526, 530-31 (9th Cir. 1997) (considering
reasonable expectations of policyholder and limiting scope of pollu-
tion exclusion); Stoney Run Co. v. Prudential-LMI Commercial Ins.
Co., 47 F.3d 34, 37 (2d Cir. 1995) (same); Regional Bank of Colo-
rado, N.A. v. St. Paul Fire and Marine Ins. Co., 35 F.3d 494, 496
(10th Cir. 1994) (same); Bituminous Cas. Corp. v. Advanced Adhesive
Tech., Inc., 73 F.3d 335, 339 (11th Cir. 1996) (construing insurance
policy so as to "most accurately reflect[ ] the intention of the parties
to the insurance contract").
The District of Columbia has rejected application of the
reasonable-expectation test where, as here, the insurance policy is
clear and unambiguous and contains neither technical terms nor terms
of art. Smalls v. State Farm Mut. Auto. Ins. Co. , 678 A.2d 32, 34
(D.C. 1996). Because the pollution exclusion unambiguously covers
the welder claims this Court will not apply the reasonable-expectation
test to limit the breadth of the pollution exclusion.4
Gulf's position that the exclusion should be read as written --and
not be limited to environmental pollution only--comports with the
well-settled rule of District of Columbia law that if a policy is plain
and unambiguous "the court will construe it without reference to any
acts or conduct of the parties thereto which evince their interpretation
of such contract." Bolle v. Hume, 619 A.2d 1192, 1197 (D.C. 1993)
(quotation omitted); see also American Red Cross v. Travelers Indem.
Co. of R.I., 816 F. Supp. 755, 758 (D.D.C. 1993) (applying District
of Columbia law and noting, "If the policy language is unambiguous,
the Court must apply the plain meaning of the language used and
should not consider extrinsic evidence as to how to interpret the pol-
icy.").
That the pollution exclusion at issue here clearly is not limited to
atmospheric or environmental pollution further supports the argument
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4 With respect to every claim that potentially falls within a policy
exclusion the insured will "expect" he has coverage. Were application of
the reasonable-expectation doctrine extended to unambiguous insurance
policies, the terms bargained for by the parties would too often be
ignored or modified.
7
that it should be enforced as written. See, e.g. , Board of Regents of
Univ. of Minn. v. Royal Ins. Co. of America, 517 N.W.2d 888, 893-94
(Minn. 1994) (holding pollution exclusion that did not limit its terms
to atmospheric pollution applied to claim arising from release of
asbestos fibers in enclosed environment).
III.
In the bench trial on the merits, the district court held that Gulf was
required to pay NEMA's defense costs regardless of whether the pol-
icy was excess or primary insurance. Gulf argues that its duty to
defend under its excess policy is not triggered until NEMA's primary
insurance is exhausted and NEMA has not proved exhaustion of its
primary coverage or other excess insurance.
The Gulf excess policy provision provides:
If other valid and collectible insurance is available to any of
You for any Claim We cover, this insurance is excess over
such other insurance, except when other insurance is pur-
chased by the Named Insured only to apply in excess of this
insurance and no other insurance exists.
Policy § 7.E. While the District of Columbia courts have not
authoritatively taken the position that an excess insurer's duty to
defend is not triggered until primary insurance is exhausted, two fed-
eral courts applying District of Columbia law have endorsed this
view. See Liberty Mut. Ins. Co. v. Travelers Indem. Co., 78 F.3d 639,
645 (D.C. Cir. 1996); St. Paul Fire and Marine Ins. Co. v. Children's
Hosp. Nat'l Med. Ctr., 670 F. Supp. 393, 402 n.17 (D.D.C. 1987)
(applying District of Columbia law and noting excess insurer's duty
to defend triggered only when limits of primary policy are exhausted).
Numerous other courts have reached the same conclusion. See, e.g.,
Western Alliance Ins. Co. v. Northern Ins. Co. of N.Y., 968 F. Supp.
1162, 1169 (N.D. Tex. 1997) (applying Texas law and noting primary
policy must first be exhausted before excess insurer becomes liable);
Kline v. Kemper Group, 826 F. Supp. 123, 130 (M.D. Pa. 1993)
(applying Pennsylvania law and noting excess policy"does not come
8
into play" until primary coverage limit has been reached);
International Envtl. Corp. v. National Union Fire Ins. Co. of
Pittsburgh, 843 F. Supp. 1218, 1224 n.3 (N.D. Ill. 1993) (applying
Illinois law and noting, "Generally, excess policies supplement pri-
mary policies, kicking in when losses exceed primary coverage.");
Signal Companies, Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 368
(1980) (noting, under California law, excess insurer has no duty to
participate in insured's defense until primary coverage has been
exhausted).
NEMA has not demonstrated it has exhausted its primary or other
excess insurance. The burden is on NEMA to establish compliance
with all policy conditions. See 19 Couch on Insurance 2d § 79:342
(noting conditions precedent must be proved by plaintiff who seeks
to recover on insurance policy; insured has burden of proving satis-
faction of policy obligations or waiver of them by insurer). At trial,
NEMA refused to disclose the terms of the settlements with its six
primary carriers and there was no evidence of other excess insurance.
Gulf has no duty to defend NEMA in the underlying actions.5
NEMA relies primarily on two cases in support of its assertion that
Gulf's status as excess insurer does not affect its duty to defend
NEMA. Keene Corp. v. Insurance Co. of North America, 667 F.2d
1034, 1047-48, 1050 (D.C. Cir. 1981); Reliance Ins. Co. v. St. Paul
Surplus Lines Ins. Co., 753 F.2d 1288, 1290-91 (4th Cir. 1985) (ana-
lyzing apportionment of liability between primary insurers only).
Keene and Reliance are inapposite because they did not consider an
excess policy like the one at issue in this case. The pertinent question
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5 The policy provides limited coverage for acts occurring between Sep-
tember 15, 1988, the retroactive date of the policy, and September 15,
1994, the inception date of the policy. For wrongful acts committed by
NEMA during this time, the burden on NEMA is even greater because
Part 5.C.2.b.3 imposes an additional condition. That section of the policy
provides Gulf's duties under the policy arise only if "[t]here is no other
valid and collectible insurance for the Claim ." Policy § 5.C.2.b.3. Gulf
has no duty to defend NEMA for acts committed during this time
because, besides failing to prove its primary policies have been
exhausted, NEMA has not proved it had no other valid and collectible
insurance covering its acts during this period.
9
here is not how to apportion liability among multiple primary insur-
ers, as was the case in Keene and Reliance, but rather whether NEMA
satisfied the conditions precedent to Gulf's excess coverage. Because
it has not, Gulf has no duty to defend NEMA in the underlying
claims.
IV.
Because the pollution exclusion unambiguously and explicitly
applies to exclude coverage and NEMA failed to prove primary or
other excess coverage exhaustion, Gulf had no duty to defend.
REVERSED
WIDENER, Circuit Judge, concurring:
I concur in the majority opinion.
Since the duty to defend in a case like this is broader than the insur-
ing clause, however, see Keene Corp v. Insurance Co. of North
America, 667 F.2d 1034, 1050 (D.C. Cir. 1981), I would have voted
to affirm were it not for the fact that NEMA refused to disclose
whether or not its primary coverage was exhausted, a condition for
liability under the excess coverage applicable here.
10