Travelers Casualty & Surety Co. v. Providence Washington Insurance

United States Court of Appeals
For the First Circuit
No. 11-2193
TRAVELERS CASUALTY AND SURETY COMPANY,
Plaintiff, Appellant,
v.
PROVIDENCE WASHINGTON INSURANCE COMPANY, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. William E. Smith, U.S. District Judge]
Before
Howard, Lipez and Thompson,
Circuit Judges.
Robert A. Kole, with whom John A. Nadas, Nellie E. Staley,
Choate, Hall & Stewart LLP, Jason C. Preciphs, R. Kelly Sheridan
and Roberts, Carroll, Feldstein & Peirce, were on brief for
appellant.
Todd D. White, with whom Katy A. Hynes, John T. Mulcahy and
Adler Pollock & Sheehan P.C. were on brief, for appellee.
July 11, 2012
HOWARD, Circuit Judge. Invoking diversity jurisdiction,
appellant Travelers Casualty and Surety Company, Inc. ("Travelers")
sought a declaratory judgment that appellee Providence Washington
Insurance Company, Inc. ("PWIC") is obliged to join in the defense
of New England Container Company, Inc. ("NE Container" or "NECC"),
in connection with a contribution action involving clean-up costs
for the Rhode Island Centredale Manor Superfund Site ("Superfund
Site" or "Site"). Granting summary judgment to PWIC, the district
court ruled that PWIC did not owe NE Container a duty to defend in
the underlying action. On Travelers' appeal, we reverse the
decision, vacate the judgment, and remand.
I. Background
The dispute between the two insurance companies stems
from efforts that the Environmental Protection Agency ("EPA")
initiated over a decade ago to remediate environmental
contamination at the Superfund Site under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA").
See 42 U.S.C. §§ 9601-9675. This case touches only the tip of the
litigation iceberg regarding the Site.1 To decide it, we broach
Rhode Island law on the duty to defend in the environmental damage
context, albeit under circumstances in which the Rhode Island
1
See, e.g., Emhart Indus., Inc. v. Century Indem. Co., 559
F.3d 57 (1st Cir. 2009); Century Indem. Co. v. Liberty Mut. Ins.
Co., 815 F. Supp. 2d 508 (D.R.I. 2011); Century Indem. Co. v.
Liberty Mut. Ins. Co., 708 F. Supp. 2d 202 (D.R.I. 2010).
-2-
Supreme Court has had little opportunity to apply its own
precedents.
The catalyst for this litigation occurred in 2000, when
the EPA issued a unilateral administrative order to compel several
entities, including NE Container and Emhart Industries, Inc.
("Emhart"), to remove hazardous substances that had been disposed
of at the Site as part of the former operations of several
companies. The agency noted that hazardous substances had been
found in surface and subsurface soil, in sediment, and in the
groundwater and surface water of the adjacent Woonasquatucket
River. It described Emhart as a successor to the liability of
several chemical companies that had operated at the Site from about
1943 to approximately 1971 and had buried drums and other
containers at the Site. The EPA also stated that NE Container had
conducted business operations at the Site from approximately 1952
to around 1969. Those operations included obtaining 55-gallon
drums containing residual chemicals, disposing of drum residuals in
the soil, and incinerating the residuals. Finally, the current
owners of the Site property were identified as two limited
partnerships that had acquired the property in 1976 and 1982,
respectively, and had constructed two high-rise apartment
buildings, a roadway and parking lots in the mid-1970s and the
early 1980s.
-3-
Some years after the administrative order was issued, in
2006 Emhart filed federal and state court actions against NE
Container and the two NE Container insurers that are the parties
currently before us ("Emhart action" or "Emhart complaint").2 Each
action levied essentially the same general claims: that NE
Container is liable for at least some of the response costs that
Emhart has been paying, and would pay in the future, in connection
with the clean-up of the Superfund Site; and that NE Container's
insurers are obliged under their policies to provide coverage to NE
Container for any monies that it owes Emhart in relation to the
Site response costs.3 The insurers had provided general commercial
liability policies to NE Container during different time periods
from the late 1960s through the mid-1980s. Travelers' policies
extended from 1969 to 1982, and PWIC's policies spanned the years
1982 to 1985.
NE Container subsequently tendered the Emhart action to
its insurers. Travelers agreed to contribute to NE Container's
defense pursuant to a reservation of rights, while PWIC took the
position that it had no duty to defend. Travelers has since
2
In its brief, appellee PWIC remarks in passing that "[a]
direct action against a third-party's insurer's [sic], when the
third-party is neither deceased nor bankrupt, is unusual at best,
and arguably prohibited by statute." It provides no developed
argument on the matter, and we give it no further attention. See
United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990).
3
For ease, we henceforth refer to the complaints in the
singular.
-4-
incurred significant defense costs associated with the Emhart
action, bringing us to the matter that is the basis for this
appeal.
In 2010, Travelers filed the instant action in federal
court, seeking a judgment compelling PWIC to contribute to NE
Container's defense in the Emhart action and an award for PWIC's
fair share of the past defense costs that Travelers has incurred.
The two insurance companies eventually filed cross-motions for
summary judgment. The district court ruled that PWIC was not
contractually obligated to defend NE Container in the Emhart
action, observing that, "the alleged property damage occurred
before the commencement of [the PWIC policy period between 1982 and
1985]." This timely appeal followed. As we explain, the district
court mistakenly focused solely on the timing of the insured's
alleged polluting activities, rather than also considering the
potential timing of property damage caused by those activities.
II. Analysis
This diversity case is governed by Rhode Island
substantive law. Our review is de novo because the question of an
insurer's duty to defend is one of law in Rhode Island. See Flori
v. Allstate Ins. Co., 388 A.2d 25, 26 (R.I. 1978). Before delving
into the particulars of the case we outline the legal landscape.
-5-
A. Rhode Island Insurance Law
Generally speaking, an insurer's obligations toward its
insured are two-fold: a duty to defend and a duty to indemnify.
See, e.g., Mellow v. Med. Malpractice Joint Underwriting Ass'n of
R.I., 567 A.2d 367, 368 (R.I. 1989) (per curiam). "[T]he duty to
defend is broader in its scope than the duty of an insurer to
indemnify, and its existence does not depend on whether the injured
party will ultimately prevail against the insured." Employers'
Fire Ins. Co. v. Beals, 240 A.2d 397, 403 (R.I. 1968), abrogated on
other grounds by Peerless Ins. Co. v. Viegas, 667 A.2d 785 (R.I.
1995). Whether an insurer's duty to defend arises from the
inception of a lawsuit against its policyholder hinges
on whether the complaint in the underlying
tort action alleges facts and circumstances
bringing the case within the coverage afforded
by the policy. That question is resolved by
comparing the complaint in that action with
the policy issued by the insurer; if the
complaint discloses a statement of facts
bringing the case potentially within the risk
coverage of the policy the insurer will be
duty-bound to defend irrespective of whether
the plaintiffs in the tort action can or will
ultimately prevail.
Flori, 388 A.2d at 26 (emphasis added); accord Hingham Mut. Fire
Ins. Co. v. Heroux, 549 A.2d 265, 266 (R.I. 1988).
Rhode Island thus applies the common "pleadings test."
See Progressive Cas. Ins. Co. v. Narragansett Auto Sales, 764 A.2d
722, 724 (R.I. 2001); see also Emhart Indus., 559 F.3d at 75
-6-
(reviewing Rhode Island law). As suggested by its name, the
pleadings test focuses on the pleading allegations without
consideration of extrinsic evidence; therefore, the duty to defend
may arise even where "known facts conflict with the facts alleged
in the . . . complaint." Flori, 388 A.2d at 26; see also Beals,
240 A.2d at 403 (concluding that "a liability insurer's duty to
defend is predicated not upon information in its possession which
indicates or even proves non-coverage, but instead upon the
allegations in the complaint filed against the insured").
Once triggered, an insurer's duty to defend continues
until the coverage question is resolved either by the establishment
of facts showing no potential for coverage or by the conclusion of
the underlying lawsuit. See Shelby Ins. Co. v. Ne. Structures,
Inc., 767 A.2d 75, 77 (R.I. 2001); Conanicut Marine Serv., Inc. v.
Ins. Co. of N. Am., 511 A.2d 967, 971 (R.I. 1986). An insurer may
seize the initiative and seek resolution of coverage questions,
including the duty to defend, in a declaratory judgment action.
See Emhart Indus., 559 F.3d at 74 (construing Rhode Island law);
Conanicut Marine, 511 A.2d at 971 & n.10; see also Beals, 240 A.2d
at 401.
Against this legal backdrop, we set forth the pertinent
policy language as informed by Rhode Island law. We then describe
the Emhart complaint, and finally turn to assess the grant of
summary judgment.
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B. Providence Washington Policies
The general grant of coverage and duty to defend
provisions provide:
The company will pay on behalf of the insured
all sums which the insured shall become
legally obligated to pay as damages because of
. . . property damage . . . to which this
insurance applies, caused by an occurrence,
and the company shall have the right and duty
to defend any suit against the insured seeking
damages on account of such . . . property
damage, even if any of the allegations of the
suit are groundless, false or fraudulent.
(Emphasis added.) An "occurrence" is defined as "an accident,
including continuous or repeated exposure to conditions which
results in . . . property damage neither expected nor intended from
the standpoint of the insured." (Emphasis added.) In turn,
"property damage," is defined, in part, as "physical injury or
destruction of tangible property which occurs during the policy
period, including the loss of use thereof at any time resulting
therefrom . . . ." (Emphasis added.) With respect to property
damage caused by pollution, the policies provide:
This insurance does not apply . . . to . . .
property damage arising out of the discharge,
dispersal, release or escape of smoke, vapors,
soot, fumes, acids, alikis, 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.
-8-
(Emphasis added.)
Rhode Island case law provides a gloss on the meaning of
the term "occurrence" as set forth in the PWIC policies --
particularly in the environmental pollution context. Especially
germane here, the state supreme court has addressed "when there has
been an 'occurrence' sufficient to trigger coverage under a general
liability policy [where] the insured sustains a chemical spill that
results in a property loss that is not discovered until years after
the spill took place." CPC Int'l, Inc. v. Northbrook Excess &
Surplus Ins. Co., 668 A.2d 647, 649 (R.I. 1995), clarification
denied, 673 A.2d 71 (R.I. 1996). The court determined that the
policy terms "property damage" and "occurrence" were "inextricably
intertwined," and that coverage extended to
an event that results in compensable property
damage during the policy period. In other
words, there can be no occurrence under the
policy without property damage that becomes
apparent during the policy period, and
property loss and compensable damages cannot
be assessed unless the property damage is
discovered or manifests itself.
Id. at 649 (emphasis added). Ultimately, it held that "coverage
under a general liability policy is triggered by an occurrence that
takes place when property damage, which includes property loss,
manifests itself or is discovered or in the exercise of reasonable
diligence is discoverable." Id. at 650; see also Textron, Inc. v.
Aetna Cas. and Sur. Co. ("Textron-Wheatfield"), 754 A.2d 742, 745
(R.I. 2000); Textron, Inc. v. Aetna Cas. and Sur. Co. ("Textron-
-9-
Gastonia"), 723 A.2d 1138, 1141 (R.I. 1999) (holding that each part
of the CPC Int'l test "independently triggers liability coverage
under an occurrence-based policy"); 4 Jeffrey E. Thomas et al., New
Appleman on Insurance Law Library Edition § 27.01[7][f] (2010)
(summarizing Rhode Island's approach for environmental property
damage coverage triggers).
The parties agree that the only CPC Int'l trigger
category that potentially is implicated in the present
circumstances is that an occurrence takes place when the property
damage "was discoverable in the exercise of reasonable diligence
during the policy period, notwithstanding the fact that it was not
actually discovered." Textron-Gastonia, 723 A.2d at 1143. For
this trigger category to implicate coverage under an occurrence-
based policy, the Rhode Island Supreme Court has explained that
the contamination [must] not only exist during
the period of coverage, but also be
discoverable in the exercise of reasonable
diligence. In other words, in order to
trigger coverage in the absence of actual
discovery, [the insured] must have had some
reason to test for contamination, and must
actually have been able to discover it in the
exercise of reasonable diligence.
Id. at 1144 (citation omitted); see also Textron-Wheatfield, 754
A.2d at 745 (citing Textron-Gastonia in distilling the components
required for the discoverable in the exercise of reasonable
diligence coverage trigger). The obligation to exercise reasonable
diligence calls upon a reviewing court to examine what the insured
-10-
"should have known," see CPC Int'l, Inc. v. Northbrook Excess &
Surplus Ins. Co., 144 F.3d 35, 43 n.6 (1st Cir. 1998) (interpreting
Rhode Island law); it does not, however, require the business
operator "to go around looking to find out if [it is] contaminating
anything," Textron-Wheatfield, 754 A.2d at 746 (internal quotation
marks omitted).
Accordingly, in the context of the pleadings test, the
Emhart complaint gives rise to PWIC's duty to defend NE Container
if its allegations show the potential that property damage was
discoverable in the exercise of reasonable diligence during the
policy period, between 1982 and 1985.
C. Allegations in the Emhart Complaint
The complaint first sketches the EPA's charges against
the multiple polluters of the Site, including the 1999 notice of
potential liability issued to NE Container and the EPA's demand in
2000 that Emhart remediate the Site and reimburse the EPA for the
response costs. The EPA also issued a unilateral administrative
order to NE Container and Emhart, as well as to other entities,
requiring them to undertake certain time-critical actions to
remediate the environmental conditions at the Site. The complaint
identifies the Site as two parcels of land and portions of the
adjacent Woonasquatucket River and its floodplain. According to
the complaint, the EPA still needed to complete a "Remedial
-11-
Investigation to characterize the nature and extent of the
contamination at the Site . . . ."
The Emhart complaint also describes NE Container's
alleged polluting activities at the Site. It alleges that NE
Container operated a facility for reconditioning steel drums on a
portion of the Site from about 1952 until the early 1970s; that the
drums "often contained small amounts of residue" including
trichorophenol; and that during its business operations NE
Container had "incinerated the drums that it received" and "spills
and leaks of the residual contents of the drums" occurred when they
were brought to the incinerator. The complaint further states:
·[T]he actions of NECC in incinerating drums,
as part of the reconditioning process,
resulted in the "release" into the
"environment," within the meaning of 42 U.S.C.
§§ 9601(8) and 9601(22), of various cogeners
of dioxin;
·In addition to the release of dioxin, the
operations of NECC resulted in the "release"
into the "environment," within the meaning of
42 U.S.C. §§ 9601(8) and 9601(22), of other
"hazardous substances," within the meaning of
42 U.S.C. § 9601(14);
·[D]uring the period in which NECC was an
operator of a portion of the Site, there was
"disposal," within the meaning of 42 U.S.C.
§ 9601(29), of "hazardous substances," within
the meaning of 42 U.S.C. § 9601(14), at the
Site as a result of the activities of NECC;
·[A]s a result of activities conducted at the
Site by NECC, there have been "releases" or
threatened "releases," within the meaning of
-12-
42 U.S.C. §§ 9601(8) and 9601(22), of
"hazardous substances," within the meaning of
42 U.S.C. § 9601(14), at and from the Site.
·The aforesaid releases or threatened releases
of hazardous substances at the Site have
caused Emhart to incur necessary "response"
costs, within the meaning of 42 U.S.C.
§ 9601(25), . . . [for which] NECC is liable
to Emhart for its proportional share . . . .
·[T]here is a controversy between Emhart and
NECC concerning the nature and extent of the
obligation of NECC to pay for anticipated
future response costs with respect to the
Site.
The complaint describes Emhart's liability for Site
clean-up as based on the activities of a predecessor chemical
manufacturing company that conducted business operations on a
portion of the Site from the 1940s through about 1968. Ultimately,
Emhart sought, among other things, an award for "the damages to
which it is entitled as a result of the conduct of New England
Container Company, Inc."4
4
As noted, the complaint also levied claims against Travelers
and PWIC as NE Container's insurers in connection with the policies
that they had provided to NE Container. Emhart sought a judgment
that, among others things, both Travelers and PWIC were obligated
"to satisfy [NE Container's] obligations to Emhart with respect to
the damages that Emhart will recover if it prevails." In 2007, the
district court issued an order severing and staying Emhart's claims
against Travelers and PWIC, "pending resolution of the underlying
cost recovery action between Emhart and [NE] Container . . . ."
Emhart Indus., Inc. v. New England Container Co., Inc., et. al, No.
06-CV-218S (D.R.I. Aug. 15, 2007) (Order).
-13-
D. The District Court's Analysis
The district court determined that the complaint failed
to show that the damage potentially "occurred" between 1982 and
1985. The court observed that by 1982, the start date of the PWIC
insurance policy, NE Container no longer had any operations on the
Centredale Manor Site, and there was no allegation that NE
Container had any connection with the property in question during
the mid-1980s policy time frame. Remarking that it had found no
Rhode Island court decision holding that the coverage trigger "was
satisfied when the policy period did not correspond at all to the
period during which the insured conducted its allegedly harmful
activities," the district judge underscored that, here, "there is
not even a small speck of an overlap between the policy period and
the period of the insured's allegedly damaging activities."
We agree with Travelers that looking only to the timing
of NE Container's alleged polluting activities is too narrow a
focus, and that Rhode Island law requires consideration of the
potential timing of the property damage itself.
It is true, as the district court noted, that there is a
dearth of Rhode Island case law on the bounds of the reasonable
diligence coverage trigger. In fact, Textron-Gastonia and Textron-
Wheatfield are about the only cases in which the state supreme
court has explored the scope of this coverage trigger, see also
Truk-Away of R.I., Inc. v. Aetna Cas. & Sur. Co., 723 A.2d 309-14-
(R.I. 1999), but neither case did so in the context of an insurer's
duty to defend, see Emhart Indus., 559 F.3d at 69 (discussing
Textron cases and concluding that neither provided a holding on the
insurers' duty to defend). Even with little express direction from
state precedents, however, we are confident that the "discoverable
in the exercise of reasonable diligence" coverage trigger does not
require a temporal overlap between the policy period and the
insured's active business operations during which the allegedly
damaging activity took place. See, e.g., Travelers Indem. Co. v.
Children's Friend & Serv., No. PC98-2187, 2005 WL 3276224, at *10-
11 (R.I. Super. Ct. 2005) (unpub.) (ruling that under an
occurrence-based general liability policy, the timing of the
"property damage" is the relevant focal point for determining the
potential for coverage and the insurer's duty to defend, and
emphasizing that whether the causative event happened during or
before the policy period is not material); Ins. Co. of N. Am. v.
Kayser-Roth Corp., No. PC 92-5248, 1999 WL 813661, at *13, 27-28,
35 (R.I. Super. Ct. 1999) (unpub.) (following the CPC Int'l trigger
framework and ruling that, at a time when the insured had already
closed its facility and long sold the property to a third party,
the insured could have discovered with reasonable diligence the
environmental property damage resulting from a chemical spill event
that took place during its business operations).
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As construed by the Rhode Island courts, the very aim of
that state's coverage trigger is to make clear that a covered
"occurrence" can indeed take place when the latent injury or damage
becomes manifest at some point down the road from the actual
polluting event or activity. See Textron-Wheatfield, 754 A.2d at
746. The Rhode Island Supreme Court has explained that the
reasonable diligence category of coverage trigger, in particular,
is meant to address
the problem of latent injury (such as asbestos
poisoning) or latent damage (such as
groundwater contamination), when the injury or
damage, although covered by the policy, is not
immediately discernible or occurs after an
unexpected event sets in motion a series of
incidents that eventually results in the
manifestation of the damage.
Id. And, the tandem Textron decisions neither purport to truncate,
nor operate to truncate, the supreme court's holding in CPC Int'l,
which rejected a trigger-of-coverage test premised on when the
injury-causing event occurred in favor of one focusing on the
manifestation, discovery or discoverability with reasonable
diligence of the resulting property damage. See CPC Int'l, 668
A.2d at 649-50. Instead, both cases simply display the application
of the precedent established under CPC Int'l in the summary
judgment setting, further clarifying that the trigger categories
are independent of one another such that actual discovery of the
property damage during the policy period is not required. See
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Textron-Wheatfield, 754 A.2d at 745-46; Textron-Gastonia, 723 A.2d
at 1141-42.
To be sure, in both Textron cases the insureds' polluting
activity during the operation of their respective business
facilities (including spills and leaks into the soil) overlapped
with the policy periods at issue. See Textron-Wheatfield, 754 A.2d
at 744, 747; Textron-Gastonia, 723 A.2d at 1139, 1143-44. Also in
both cases, with respect to the insureds' reason to test for, and
their ability to discover, the environmental damage during the
policy period, the Rhode Island court noted evidence that their
former employees had personal knowledge of the polluting activity
taking place during the business operations. See Textron-
Wheatfield, 754 A.2d at 747; Textron-Gastonia, 723 A.2d at 1143-44.
One lesson to be drawn from these cases is that the ultimate
resolution of the coverage trigger question between the insured and
its insurer depends on evidence that the insured had some reason to
test for the contamination and must actually have been able to
discover it in the exercise of reasonable diligence during the
policy period. But, we read neither case as requiring a temporal
overlap between the policy period and the alleged polluting
activity during an entity's business operations. In each case, the
state supreme court simply was addressing the facts of the case as
presented.
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It may be difficult to unearth evidence and prove for
indemnity purposes that property damage occurred in accord with the
reasonable diligence coverage trigger during a time frame when the
insured has long ceased its business operations that coincided with
the pollution activity. Still, there is a vast array of factual
circumstances in the progressive environmental damage context, and
we must take our cue from the Rhode Island court's demarcation of
an "occurrence" coverage trigger for delayed manifestation
scenarios. Cf. Emhart Indus., 559 F.3d at 69 (concluding that the
state court's silence on the duty to defend issue does not
sufficiently support [the insurer-appellant's] claim that the Rhode
Island Supreme court would not apply the pleadings test in the
CERCLA context). Accordingly, we do not subscribe to the district
court's narrower view that the Emhart complaint failed to show the
potential that reasonably discoverable property damage occurred
during the mid-1980s simply because there was no overlap between
the policy period and NE Container's polluting activities. Without
this constraint, we consider de novo whether the allegations in the
complaint triggered PWIC's duty to defend. See Flori, 388 A.2d at
26.
E. Sufficiency of the Allegations under the Pleadings Test
PWIC contends that the occurrence of third-party property
damage at the Site during the policy period that is attributable to
NE Container's alleged polluting activities "is never even
-18-
intimated" in the Emhart complaint. Further, it says that there is
a "complete absence" of any allegations showing that NE Container
had a reason to test for environmental contamination or that any
such property damage was capable of detection during the policy
periods. In contrast, Travelers, although acknowledging that the
Emhart complaint does not expressly identify the date on which
property damage was discoverable at the Site, urges that a fair
reading of the allegations in accord with the broad pleadings test
shows a potential for coverage. Travelers has the better view.
The Emhart complaint alleges that the EPA named both
Emhart and NE Container, among others, as the sources of the
environmental damage found throughout the Superfund Site, a site
that incorporates a broad swath of contaminated land and water
extending beyond the boundaries of NE Container's former facility.
The complaint's description of NE Container's polluting activities
consists of "spills and leaks" of chemical-laden residuals from the
drums, as well as the release of hazards resulting from the
incineration of the drums. This pollution may have taken place
during the entire course of the facility operations, allegedly
spanning from 1952 until the early 1970s. Additionally, according
to the complaint, NE Container's activities caused releases of
hazardous substances "at and from the Site." Finally, the
complaint notes that the eventual discovery of widespread
environmental damage in the late 1990s allegedly showed damage both
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at and in the vicinity of the NE Container site, including both
land and water contamination.
Fairly read, these allegations give rise to the potential
that NE Container's polluting activities may have spanned two
decades, and that the pollution migrated from NE Container's
property and eventually caused damage to surrounding land and
waterways, which damage was discovered in 1999. While the
complaint does not include specific allegations showing when
property damage became detectable, the potential magnitude of NE
Container's alleged polluting activities supports a reasonable
inference that property damage was discoverable in the exercise of
reasonable diligence some time before its actual discovery,
including during the policy period. Certainly, the complaint
raises many questions about the timing and scope of the damage
allegedly caused by NE Container, and about whether NE Container
had a reason to test for damage at the Site and could have detected
damage during the policy period. But faithful application of the
pleadings test leads us to conclude that the allegations give rise
to the potential that a state of facts exists demonstrating that
environmental property damage caused by NE Container was
discoverable in the exercise of reasonable diligence at the Site
during the PWIC policy period.
It also bears observing that the question of when latent
environmental damage became reasonably discoverable is ultimately
-20-
a fact-intensive matter, often requiring considerable investigation
which may not necessarily take place prior to the inception of a
private contribution action between multiple polluters. Indeed,
while the specific timing of the discoverability of latent property
damage allegedly caused by the defendant-polluter is crucial for
purposes of implicating coverage under a particular insurance
policy, it is not central to the private contribution action. Cf.
Emhart Indus., 559 F.3d at 66, 75 (noting that the EPA document
does not speak to the discoverability of the environmental damage
because such issue is unrelated to CERCLA liability). Thus, the
lack of additional specificity in the Emhart complaint does not
foreclose the insurer's duty to defend its insured where the
allegations show a potential that a state of facts exists that will
bring the case within the coverage afforded under the policy.
PWIC acknowledges -- as it must -- that under Rhode
Island law, neutral or ambiguous allegations do not foreclose an
insurer's duty to defend. But it contends that the complete
absence of specific allegations connecting NE Container to the
property during the policy period precludes the Emhart complaint
from being characterized as ambiguous or neutral on the potential
for coverage. We disagree.
We previously have remarked that Rhode Island law on the
duty to defend "may mean that when one cannot tell what claim is
being asserted against the insured but it may be one covered by the
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policy . . . the duty to defend continues, at least until the scope
of the claim is brought into focus." Hartford Fire Ins. Co. v.
R.I. Pub. Transit Auth., 233 F.3d 127, 131 (1st Cir. 2000). Rhode
Island cases display a consistent message: lack of specificity in
a complaint leaving in doubt whether a state of facts exists
showing the case is within the risk of coverage, or pleadings that
display the existence of a question of fact regarding coverage,
trigger the duty to defend, and that duty continues until such time
as facts are shown to foreclose coverage (or the parties settle).
See, e.g., Allstate Ins. Co. v. Russo, 641 A.2d 1304, 1306 (R.I.
1994); Shelby Ins. Co., 767 A.2d at 77; Flori, 388 A.2d at 27;
Beals, 240 A.2d at 403. An insurer has no duty to defend at the
inception of a lawsuit against its insured only where the pertinent
charging document plainly shows no potential for coverage. See,
e.g., Sanzi v. Shetty, 864 A.2d 614, 618 (R.I. 2005); Truk-Away,
723 A.2d at 311-12; Craven v. Metro. Prop. and Cas. Ins. Co., 693
A.2d 1022, 1022 (R.I. 1997) (mem.); Viegas, 667 A.2d at 789; see
also Narragansett Jewelry Co., Inc. v. St. Paul Fire and Marine
Ins. Co., 555 F.3d 38, 41 (1st Cir. 2009) (applying Rhode Island
pleadings test to hold that the insurer had no duty to defend where
the allegations in the complaint plainly compelled a conclusion
that an exclusion to coverage applied).5
5
In unrelated litigation, the district court has concluded
that Rhode Island law permits it to look beyond the complaint when
necessary "to avoid permitting the pleading strategies, whims, and
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Our reading of Rhode Island law on the liberality of the
pleadings test for purposes of the duty to defend also is
consistent with the approach of other jurisdictions that abide by
the pleadings test or some corollary thereto. The cases generally
hold that an insurer has a duty to defend its insured where the
complaint allegations are vague, ambiguous, or incomplete such that
the potential for coverage exists. See, e.g., New York v. Blank,
27 F.3d 783, 790 (2d Cir. 1994) (interpreting New York law and
collecting cases); Monsler v. Cincinnati Cas. Co., 598 N.E.2d 1203,
1206 (Ohio 1991); Marleau v. Truck Ins. Exch., 37 P.3d 148, 153
(Or. 2001); Parker v. Hartford Fire Ins. Co., 278 S.E.2d 803, 804
(Va. 1981); Truck Ins. Exch. v. Vanport Homes, Inc., 58 P.3d 276,
281-82 (Wash. 2002) (en banc); see also William T. Barker, New
Appleman on Insurance: Current Critical Issues in Insurance Law §
III.C (April 2007) (emphasizing that "given the vagueness of notice
pleading, the insured ought not to be deprived of a full defense of
a covered claim" arising from ambiguities; "ambiguities in the
complaint must be construed in favor of coverage until those
ambiguities can be resolved.").6
vagaries of third party claimants to control the rights of parties
to an insurance contract," and "to ensure a degree of
'reasonableness.'" See Allstate Ins. Co. v. Greloch, No. 11-015,
2011 WL 4351630, at *4 n.3 (D.R.I. 2011) (unpub.) (internal
quotation marks and citations omitted). This approach is not
discussed by the parties.
6
PWIC urges a more exacting review of the Emhart complaint,
arguing that a direct action against third-party insurers "raises
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On another front, PWIC also argues that following
Travelers's reading of the Emhart complaint is akin to adopting the
"continuous trigger" test, which PWIC says is contrary to Rhode
Island's test under CPC Int'l. We disagree.
Generally stated, a "continuous trigger" coverage
standard "charges a loss to policies in effect from the time of
exposure to manifestation, and, thus, presumes injury from the time
of exposure through manifestation." Emhart Indus., 559 F.3d at 77(emphasis added) (internal quotation marks omitted). In contrast,
Rhode Island's pleadings test triggers the duty to defend only when
the pleading allegations show the potential that property damage
occurred during the policy period. See id. at 77-78; see also 23
Eric Mills Holmes, Holmes' Appleman on Insurance 2d § 145.3[2][a]
(2003) (interim volume) (characterizing the CPC Int'l Rhode Island
standard as a manifestation trigger of coverage); Thomas, supra §
27.01[7][g] (explaining the overlap between coverage trigger
theories).7 As our holding in this case does not presume injury
the bar" with respect to what Emhart had to establish in the
complaint. Because PWIC provides no legal authority for this
approach, we do not address its merits. See Zannino, 895 F.2d at
17. For the same reason, we do not consider the appellee's
contention that NE Container "could not have had any reason to
test" for pollution damage because it lacked a legal right to enter
the Site property during the relevant policy period.
7
It is not necessarily certain that the Rhode Island Supreme
Court has put to rest the continuous trigger test in the
environmental context. See Textron-Gastonia, 723 A.2d at 1141
("Because we conclude that liability under the policy may be
established by one of the recognized CPC tests, we need not address
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from the time of exposure to manifestation, it compels neither a
defense nor indemnity under a continuous trigger rubric. We
conclude only that the complaint allegations show the potential
that property damage was discoverable in the exercise of reasonable
diligence during the mid-1980s.
PWIC's final argument is that NE Container's polluting
activity does not comport with the definition of "occurrence" and,
moreover, it implicates the pollution exclusion under PWIC's
policies. We are not convinced.
As explained earlier, an "occurrence" covered under the
PWIC policies means "an accident, including injurious exposure to
conditions, which results in . . . property damage neither expected
nor intended from the standpoint of the insured." With respect to
property damage that is caused by pollution, the PWIC policies
cover property damage arising from the "discharge, dispersal,
release or escape" of a contaminant only if such activity or event
was "sudden and accidental." See Textron-Wheatfield, 754 A.2d at
750 (construing the pollution exclusion to mean that coverage is
barred for the intentional or reckless polluter).
the continuous trigger-of-coverage standard."); see also Emhart
Indus., 559 F.3d at 79 (declining to address merits of the
appellee's "considered dicta" argument regarding the Textron-
Gastonia remark, because the appellee had failed to distinguish CPC
Int'l as the operative ruling). We have no need to wade into this
thicket.
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The Emhart complaint describes NE Container's polluting
activity as including the spilling and leaking of chemical-laden
residual contents of the drums when bringing the drums to the
incinerator. Without addressing how this complaint allegation
could be said to prevent the potential for coverage, PWIC points
only to the 2000 EPA unilateral administrative order as support for
its position that "there is no indication in any of the charging
documents that NECC's course of conduct [during its regular
operations] was accidental or unintentional." The EPA order
generally avers that NE Container "dispos[ed] of certain drum
residuals in the soil at the Site and incinerat[ed] other drum
residuals at the Site." Yet, PWIC makes no attempt to demonstrate
how these general allegations foreclose the potential that such
activity and resulting damage conform to the terms of coverage
under its policies. See, e.g., id. (holding that while the
pollution exclusion "bars coverage for the intentional or reckless
polluter," it provides coverage to the insured which acts in good
faith but "still experiences unexpected and unintended releases of
toxic chemicals that cause damage," and also noting that whether an
insured was an intentional or reckless polluter is "usually a
matter for fact-finding at trial").
Moreover, there is no indication in the record that the
EPA document was attached to the Emhart complaint, and PWIC makes
no effort to address well-established state law forbidding
-26-
consideration of extrinsic evidence when applying the pleadings
test. See Flori, 388 A.2d at 26; Beals, 240 A.2d at 403; Thomas,
93 A.2d at 312. Rather, it cites to Emhart Indus., 559 F.3d 57, to
support its cursory suggestion (posited in the statement of facts
of its appellate brief) that an EPA unilateral administrative order
can be considered a charging document for purposes of the duty to
defend. While this may be true where an insurer is asked to
provide a defense against an EPA action, that is not this case;
PWIC is being called upon to join the defense of its insured in a
private contribution action.
PWIC also says in passing (again, in the statement of
facts) that the 2000 EPA action "is incorporated by reference in
the [Emhart] Complaint." State law, however, points another way,
and PWIC has not given any attention to that authority. See, e.g.,
Bowen Court Assocs. v. Ernst & Young, LLP, 818 A.2d 721, 726 (R.I.
2003) (holding that the mere fact that a pleading mentions or
refers to a document, without attaching it to the pleading, does
not cause that document to be incorporated by reference as if the
pleader had appended it to the pleading).
In the end, we conclude that under the pleadings test,
the Emhart complaint triggered PWIC's duty to defend under its
policies issued in the mid-1980s. In so holding, we recognize that
there is exponentially more to this sprawling litigation than the
Emhart complaint and the PWIC policies. Litigation involving
-27-
environmental damage at the Superfund Site was well on its way
prior to the 2006 Emhart action, and the Emhart action had advanced
beyond a nascent stage by the time Travelers pursued its 2010
action against PWIC. The duty to defend question before us,
however, begins and ends with the Rhode Island pleadings test.
Having concluded this task, our review is complete.8
III. Conclusion
We reverse the district court's decision, vacate the
judgment in favor of PWIC, and remand for the district court to
enter judgment in favor of Travelers that the Emhart complaint
triggered PWIC's defense obligations under its policies. Any
remaining requests for relief sought by Travelers will be addressed
by the district court in due course.
8
PWIC advanced other arguments before the district court to
negate its duty to defend, such as late notice and known loss,
which the court rejected. PWIC does not challenge these rulings.
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