American National Fire Insurance v. B&L Trucking & Construction Co.

Johnson, J.

This case presents the issue of whether pollution cleanup costs should be allocated between insurer and insured when the pollution occurred over many years and the insured was insured during only a portion of the entire polluting period. Eagle Trucking, Inc. and its owner, William Fjetland, were held liable in a CERCLA¹ action for a percentage of the cleanup costs of a contaminated landfill. Fjetland brought claims against its insurers seeking coverage for these costs. The trial court allocated costs between insured and one of its insurers, The Maryland/Northern Insurance Company of New York, on a pro rata basis. The Court of Appeals, however, held that because of ambiguity in the insurance policy language, costs may not be allocated. We affirm the Court of Appeals.

FACTS

Fjetland² operated several businesses, including Eagle Trucking and B&L Trucking & Construction (Fjetland). Fjetland hauled smelter slag from the copper smelter owned by Asarco Incorporated (Asarco) to the log yards in the Port of Tacoma. The slag was used as ballast for log export companies’ yards. Although slag was once thought to be inert, experts later determined when ground up, mixed with wood waste, and exposed to water, it leached contaminants.

In 1978, Fjetland purchased the B&L Landfill site (Landfill), which is located in a wetlands area in Milton, Washington. Shortly after purchasing the property, Fjetland began hauling slag, mixed with wood waste, from the log yards to the Landfill. These materials were removed from log yards to the Landfill in order to make room for fresh materials, which provided new working surfaces for loading equipment and log storage. At the end of 1980, the Landfill was closed and the permit for the Landfill was withdrawn because of new legislation relating to the definition of wetlands and the filling of those lands. Fjetland continued to dump materials in the Landfill, but for purposes of contouring the land.

Throughout the years in question, Fjetland had purchased comprehensive general liability insurance (CGL insurance) from a number of insurance companies, including The Maryland/Northern Insurance Company of New York (Northern) and American National Fire Insurance (American National). Each policy issued by Northern lists as insureds, among others, both William Fjetland and Eagle Trucking. The policies were issued as follows: (1) an annual policy issued August 15, 1978 and canceled as of May 3, 1979 (Policy 78-79); (2) a policy issued August 11, 1980 through August 11, 1983, renewed annually (Policy 80-83); and (3) an annual policy issued August 11, 1983 through August 11, 1984 (Policy 83-84). Other policies included Policy 84-85 from United Pacific and Policy 85-86 from American National.

High levels of arsenic and other metals were discovered around the Tacoma tideflats area in 1980 and testing of the Landfill in early 1982 revealed arsenic in the Landfill. In an action under CERCLA to determine allocation of remediation costs for the Landfill, the United States District Court determined liability as follows: Asarco would bear 79 percent; Murray Pacific (a log yard owner), 7 percent; William Fjetland, 7 percent; and Eagle Trucking, 7 percent. Another Fjetland entity, B&L Trucking, was found not liable. The court made clear it was not assessing liability against Fjetland or Eagle Trucking for pre-1981 activities and that slag, not wood waste, caused the damage.

As one of Fjetland’s insurers, American National sought a declaratory judgment in state court that it was not responsible to cover contamination costs at the Landfill and also sought contribution and/or indemnity from Northern and other insurers. Northern cross-claimed, seeking a declaration of no coverage. Fjetland cross-claimed against all insurers. The trial court found the United Pacific policy did not afford coverage. Several parties were dismissed; some settled. Northern and Fjetland remain.

Prior to trial, Northern sought summary judgment on a number of issues. The trial court granted summary judgment for Northern as to liability under all policies that terminated before 1981, basing its decision on the United States District Court’s ruling in the CERCLA action that Fjetland and Eagle Trucking had no liability prior to 1981. The trial court denied summary judgment for Northern that Policy 83-84 did not provide coverage because the Landfill was not listed as part of Fjetland’s insured premises. Northern also sought a ruling that the pollution clause excluded coverage because Fjetland had intentionally discharged waste at the Landfill. The court denied the motion, finding there was a question of fact as to whether Fjetland had knowledge he was discharging waste materials.

Also prior to trial, the court ruled on cross-motions for summary judgment regarding whether remediation costs should be allocated between insurer and insured. Fjetland argued its insurers have a joint and several obligation to provide full coverage. Northern argued a proportionate share of the costs should be allocated between insured and uninsured periods and, therefore, Fjetland should share liability with its insurer. The court ruled the costs would be allocated equally on a pro rata/per year basis between insurer and insured based on insured and uninsured periods. Uninsured periods include the years following the month and year in which the jury determined the insured’s expected property damage at the Landfill. In a separate ruling, the court determined the allocation period would begin January 1981 and end April 29, 1987, which is the date Fjetland received the cleanup order.

The case was then tried to a jury with the sole issue being whether Fjetland or Eagle Trucking “expected” damage at the Landfill and, if so, what was the earliest date of expected damage. The jury found Fjetland or Eagle Trucking expected damage as of June 1982. The trial court entered a declaratory judgment, incorporating its previous rulings on summary judgment motions and also ruling Northern had an obligation for coverage under Policy 80-83 for the period August 11, 1980 through August 11, 1981; Northern had an obligation for coverage under Policy 80-83 for the period August 11, 1981 through June 1982 (based on the jury’s finding of “expected” damages); Northern had no obligation for coverage under Policy 82-83 and no obligation under Policy 83-84. Attorney fees were awarded Fjetland in the amount of $133,911.99. Northern was, therefore, obligated under its policies in effect between 1981 and June 1982 only and was liable for two-sevenths of the remediation costs.

The parties cross-appealed. The Court of Appeals affirmed most of the judgments of the trial court, but reversed the ruling regarding allocation. The court held the policy provisions of “occurrence” and the “pollution exclusion” had been met and, because of ambiguity in the policy language, there should be no allocation of damages, even though Fjetland was insured during only a portion of the polluting period. American Nat’l Fire Ins. Co. v. B&L Trucking & Constr. Co., 82 Wn. App. 646, 651, 920 P.2d 192 (1996). We accepted review of the allocation issue. The issue before us is whether pollution cleanup costs should be allocated between insurer and insured when the pollution occurred over many years and the insured was insured during only a portion of the entire polluting period.

ANALYSIS

Neither Northern nor Fjetland challenge the trial court’s rulings regarding which policies provide coverage. The issue before us is not which policies are triggered, but rather, whether the triggered policies cover costs incurred after June 1982. This is solely an allocation issue and requires us to analyze the language of the policies. The triggered policies are Policy 80-81 and Policy 80-83 through June 1982.

Under the policies at issue, Northern insured Fjetland, stating:

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 at 233.

“[Pjroperty damage” means (1) physical injury to or destruction of tangible property which occurs during the policy period ....

“ [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 ....

Clerk’s Papers at 537.

Northern argues the plain language of the insurance policy limits Northern’s liability to damage occurring during the policy period. Northern integrates the above policy language, inserting the definition of “property damage” into the occurrence clause and states it agreed only:

to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of physical injury to or destruction of tangible property which occurs during the policy period to which this insurance applies and is caused by an occurrence.

Pet. for Review at 8. Northern states because it can be responsible only for property damage occurring during the policy period, its liability ends when the triggered policy periods end.

Fjetland, on the other hand, relies on the all sums language of the occurrence clause and proposes the policy language should be interpreted in the following manner: if the insured’s liability is “because of” property damage during the policy period, the insurer is then responsible for all sums the insured is legally obligated to pay. In other words, once a policy is triggered, that policy remains on the risk for continuing damage. Fjetland argues the policy is ambiguous with regard to coverage for continuing property damage because the policy language is susceptible to two reasonable interpretations, and therefore its own (the insured’s) interpretation must prevail.³

The two seminal cases on the allocation issue are Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), and Keene Corp. v. Insurance Co. of N. Am., 667 F.2d 1034 (D.C. Cir. 1981). Forty-Eight Insulations held when an insured had periods during which it was uninsured, defense costs for occurrences taking place outside the policy period must be allocated between insurer and insured on a pro rata basis. In disagreeing with the proposition that an insurer must bear all costs of defense whenever any policy is triggered, the Forty-Eight Insulations court found an insurer must bear the entire cost of defense only when there is no reasonable means of prorating the costs of defense between the covered and not covered items. Forty-Eight Insulations, 633 F.2d at 1224 (citing National Steel Constr. Co. v. National Union Fire Ins. Co., 14 Wn. App. 573, 543 P.2d 642 (1975)). Keene, on the other hand, held the insured must be able to collect from any insurer whose policy is triggered the full amount of indemnity due, subject only to the “other insurance” provisions. Keene, 667 F.2d at 1050. The Keene court stated its holding was consistent with one of our Court of Appeals decisions to allocate liability among insurers when more than one insurer covers a loss. Keene, 667 F.2d at 1050 (citing Gruol Constr. Co. v. Insurance Co. of N. Am., 11 Wn. App. 632, 524 P.2d 427 (1974)).

In Gruol, the Court of Appeals addressed a similar, although not identical, issue. An insured brought an action against an insurer for failure to defend against a contractor. Damage was caused to an apartment building by dry rot, which resulted from improper backfilling during construction. The court held the dry rot, as the resulting damage from the improper backfilling, was the “occurrence” for purposes of the insurance policy. Because the dry rot was continuous, coverage was proper against insurers whose policies covered the “occurrence,” even though the initial negligent act of improper backfilling took place within the period of another insurance company’s coverage. Gruol, 11 Wn. App. at 635. The Gruol court held when an insured sustains damages of a continuing nature, its insurers are jointly and severally liable. Gruol, 11 Wn. App. at 637-38. All insurers providing coverage during any portion of the total time period of the continuing damage were held hable for the total amount of the continuing property damage. We agree with Fjetland that Gruol stands for the proposition that all insurers on the risk during the time of ongoing damage have a joint and several obligation to provide full coverage for all damages. We also agree with the Keene court’s finding that its holding is consistent with the Gruol decision.⁴

When we examine the case law on allocation, in conjunction with what type of trigger analysis is employed, the different results regarding this issue become clearer. For instance, in Villella v. Public Employees Mut. Ins. Co., 106 Wn.2d 806, 725 P.2d 957 (1986), we discussed Gruol and also cited to Keene and Forty-Eight Insulations in our discussion regarding triggering of coverage. The issue in Villella was whether a homeowner’s policy covered damage occurring after the policy period when the process allegedly

causing the damage began during the policy period, but the damage itself occurred later. We held there was no continuing process of damage to the residence, the policy required that damage occur during the policy period, and, therefore, the policy did not cover the damage. Villella, 106 Wn.2d at 812-14. In discussing Gruol, Keene, and Forty-Eight Insulations, we noted that under either the continuous damage theory adopted in Gruol or the triple trigger theory adopted in Keene, coverage under the occurrence clause requires the insured to sustain damage during the effective period of the policy. Villella, 106 Wn.2d at 814. In other words, when damage occurs during a policy period, that policy is triggered.

In Villella, we addressed the effect of continuing property damage on the triggering of insurance policies. In that case, we quoted Forty-Eight Insulations, which stated: “[W]hen courts are dealing with property damage situations where damages slowly accumulate, courts have generally applied the exposure theory. So long as there is tangible damage, even if minute, courts have allowed coverage from that time.” Villella, 106 Wn.2d at 814 (quoting Forty-Eight Insulations, 633 F.2d at 1222 n.18). Hence, in Villella, we accepted that when damage is continuing, all triggered policies provide full coverage. Northern’s argument that it can be held Hable only for property damage occurring during the policy period is misguided. This argument addresses only which policies are triggered, not whether costs should be allocated, a point overlooked by the dissent.

In Queen City Farms, Inc. v. Central Nat’l Ins. Co., 126 Wn.2d 50, 882 P.2d 703 (1994), 891 P.2d 718 (1995), we discussed both the occurrence and pollution exclusion clauses in a case with facts similar to those in the case at hand. In Queen City Farms, a disposal pond leaked and contaminated groundwater. A declaratory judgment was sought to hold various CGL insurance policies hable for the costs of the cleanup. In discussing the occurrence clause, we held that for an occurrence to occur the harm must be “unexpected.” No coverage is extended where the harm is expected or intended. Queen City Farms, 126 Wn.2d at 71. We also recognized that gradual polluting events fit within the occurrence clause, provided they are “unexpected or unintended.” Queen City Farms, 126 Wn.2d at 86-88. In discussing the pollution exclusion, we stated the polluting event is the discharge, dispersal, release, or escape from the place of containment into or upon the land, the air, or the water, including groundwater. Queen City Farms, 126 Wn.2d at 79. We held that under the pollution exclusion clause, damage is not covered if it is “expected or intended.” Queen City Farms, 126 Wn.2d at 87.

Northern and the dissent assert because the jury found that Fjetland “expected” damage as of June 1982, the policy precludes any recovery after that date and the Court of Appeals ruling effectively invalidates the jury’s finding. This assertion, however, is based on an incorrect reading of the occurrence clause and a confusion of the pollution exclusion clause and allocation issues. The occurrence in this case is the continuing damage caused by the leaching, and the trial court determined which policies were triggered under the occurrence clause. Under the pollution exclusion language, Northern would not be liable for costs incurred because of intentional polluting. The pollution exclusion clause excludes damage arising from discharge of waste materials, but the exclusion does not apply if the discharge is “sudden and accidental.” Under our decision in Queen City Farms, sudden and accidental means unexpected or unintended. Queen City Farms, 126 Wn.2d at 90. The jury’s finding that Fjetland “expected” damage after June 1982 precludes the policies after that date from being triggered. It does not, as the dissent urges, preclude Northern’s liability under the triggered policies for continuing damage.

As stated previously, the trigger of coverage is not before us. And the event that triggers coverage does not define the scope of the coverage. Rather, the question before us is: Once a policy is triggered by continuous damage, is damage covered under that triggered policy after the policy has expired or after damage is expected? Although the question of trigger and the question of allocation are separate, the rationale used to trigger the policy often points to the proper method of apportioning coverage between triggered policies. Kenneth S. Abraham, Environmental Liability Insurance Law 119 (1991). Under the terms of the relevant policies, an occurrence includes “continuous or repeated exposure to conditions.”⁵ Usually, when a continuous trigger is utilized, costs are not apportioned between triggered policies, but insurers, rather, are held jointly and severally liable. Abraham, supra, at 119.

Northern and the dissent argue we are dealing with uninsured years here. They each contend if Fjetland is not held liable for a portion of the cleanup costs, he is essentially being awarded coverage for periods when he was not insured. As noted by the Court of Appeals and discussed below, if Northern intended solely to be hable on a pro rata basis it could have included that language in its policy. More importantly, however, when dealing with uninsured years, for allocation purposes, we are dealing with years that would be triggered if a policy were applicable in that year. Abraham, supra, at 126. No policies after June 1982 would have been triggered in this case because of the occurrence and pollution exclusion clauses. We are not dealing with uninsured years.

With these principles and the case law on allocation in mind, we now turn to an analysis of the policy language. In Washington, insurance policies are construed as contracts. Findlay v. United Pac. Ins. Co., 129 Wn.2d 368, 378, 917 P.2d 116 (1996). An insurance policy is construed as a whole, with the policy being given a “fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.” Key Tronic Corp. v. Aetna (CIGNA) Fire Underwriters Ins. Co., 124 Wn.2d 618, 627, 881 P.2d 201 (1994) (quoting Grange Ins. Co. v. Brosseau, 113 Wn.2d 91, 95, 776 P.2d 123 (1989)). If the language is clear and unambiguous, the court must enforce it as written and may not modify it or create ambiguity where none exists. McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 733, 837 P.2d 1000 (1992). If the clause is ambiguous, however, extrinsic evidence of the intent of the parties may be relied upon to resolve the ambiguity. Findlay, 129 Wn.2d at 374. Any ambiguities remaining after examining applicable extrinsic evidence are resolved against the drafter-insurer and in favor of the insured. Queen City Farms, 126 Wn.2d at 68; American Star Ins. Co. v. Grice, 121 Wn.2d 869, 878, 854 P.2d 622 (1993), supplemented on other grounds by 123 Wn.2d 131, 865 P.2d 507, 44 A.L.R.5th 905 (1994). A clause is ambiguous when, on its face, it is fairly susceptible to two different interpretations, both of which are reasonable. Morgan v. Prudential Ins. Co., 86 Wn.2d 432, 435, 545 P.2d 1193 (1976).

Looking at the policy in light of our rules of construction, we find the language is, at the least, fairly susceptible to different, reasonable interpretations and is, therefore, ambiguous. If the insurer wished to limit its liability through a pro rata allocation of damages once a policy is triggered, the insurer could have included that language in the policy. See Monsanto Co. v. C.E. Heath Compensation & Liab. Ins. Co., 652 A.2d 30, 35 (Del. 1994) (“The majority of courts have held that without a pro rata clause in the policies, the insurance companies cannot limit their obligations to a pro rata share or portion of [the insured’s] liabilities”). Here, there is no such language.⁶ The average person purchasing insurance would construe the policy language to provide indemnity for an injury once the policy was triggered. Because the language is, at the least, ambiguous, and because we discern no extrinsic evidence from the record indicating an intent by both parties to exclude coverage, we must resolve the ambiguity in favor of the insured. American Star Ins. Co., 121 Wn.2d at 878 (where insurance policy exclusion is ambiguous and in absence of evidence showing an understanding that coverage was intended to be excluded, policy is construed to provide coverage). We hold that once a policy is triggered, the policy language requires insurer to pay all sums for which the insured becomes legally obligated, up to the policy limits.⁷ Once coverage is triggered in one or more policy periods, those policies provide full coverage for all continuing damage, without any allocation between insurer and insured. See Aerojet-Gen. Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 948 P.2d 909, 70 Cal. Rptr. 2d 118, 128 (1997) (“if specified harm is caused by an included occurrence and results, at least in part, within the policy period, it perdures to all points of time at which some such harm results thereafter”) (emphasis added).

In Olds-Olympic, Inc. v. Commercial Union Ins. Co., 129 Wn.2d 464, 471, 918 P.2d 923 (1996), we stated:

[An] insurance obligation is interpreted in a fashion consistent with the undertaking described in the policy label. Insureds are not purchasing “almost comprehensive” coverage. CGL policies are marketed by insurers as comprehensive in their scope and should be strictly construed when the insurer attempts to subtract from the comprehensive scope of its undertaking.

Following this strict construction rule leads us to the result in this case that damages not be allocated between Northern and Fjetland.

Northern contends the Court of Appeals’ opinion violates principles of fairness and public policy because it provides a policyholder who purchases just one year of insurance the same protection as those who purchase insurance annually. This argument is without merit. Northern drafted the policy language; it cannot now argue its own drafting is unfair. Further, because insurance policies are considered contracts, the policy language, and not public policy, controls. We will not add language to the policy that the insurer did not include.⁸ Instead, Northern agreed to pay “all sums” arising out of an “occurrence” which, by its own policy definition, may take place over a period of time.

Northern also cites Waite v. Aetna Cas. & Sur. Co., 77 Wn.2d 850, 467 P.2d 847 (1970) for the proposition that our case law permits allocation of liability between Northern and Fjetland. In Waite, however, we did not address this issue. Rather, in Waite, we concluded the trial court had a reasonable basis for allocating defense costs between insured and insurer because certain items claimed by insured under the policy were not covered claims but were excluded. Waite, 77 Wn.2d at 858-59. Here, we are not addressing the issue of allocation in the context of a noncovered claim.

Fjetland requests attorney fees for responding to Northern’s appeal to this court. Attorney fees were awarded at the trial court. The Court of Appeals affirmed that award and awarded attorney fees on appeal based on Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991), which held an award of fees is required in any legal action where the insurer compels the insured to assume the burden of legal action to obtain the full benefit of his insurance contract. Olympic S.S., 117 Wn.2d at 53. Under Olympic S.S., attorney fees may also be awarded on appeal. Olympic S.S., 117 Wn.2d at 53. We, therefore, award Fjetland attorney fees for this appeal in an amount to be determined by the Commissioner.

We affirm the Court of Appeals.

Dolliver, Smith, Guy, and Talmadge, JJ., concur.

1 Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601-9675.

2 During the course of these proceedings, William Fjetland died; Camille Fjetland is his successor.

3 We note we have reviewed the numerous amici briefs and responses filed in this case, which argue theories based on joint and several liability, the plain terms of the contract, trigger analysis, and allocation case law.

4 The dissent claims Gruol is inapposite because it involved “a single injury which worsened over several policy periods,” dissent at 434, and the insured maintained coverage “throughout the period of the damage.” Dissent at 434. These differences, however, do not require the conclusion the dissent urges. As noted above, Gruol is persuasive as to its holding on joint and several liability. Namely, that in a continuing damage situation, each insurer is held jointly and severally liable for the full amount of damage, regardless of the amount that occurred during its policy period. That Fjetland did not maintain insurance over the entire period of damage is of no moment.

5 The dissent accuses the majority of ignoring the policy language. Dissent at 432. However, this very definition of “occurrence,” found in Northern’s insurance contract, contemplates the facts of this case.

6 While arguing we have “rewritten the policy,” dissent at 436, the dissent attempts to impose a pro rata allocation where no pro rata clause appears in the language of the insurance contract and was not bargained for between the parties. By so doing, it is actually the 'dissent, not the majority, which has altered the understanding between the parties.

7 We emphasize this rule does not apply to situations where the insured continues to exacerbate the pollution damage. The known-risk doctrine would apply in those cases and would preclude coverage during a policy period in which the insured continued to knowingly pollute.

8 By not holding Fjetland liable, the dissent warns that the majority has created “moral hazard” by not providing insureds who become aware of pollution damage enough incentive to remedy damages caused by the pollution. Dissent at 432-33. Under the dissent’s theory, however, the insured would be in a better position to remain totally ignorant of pollution damage in the first place. Such a policy encourages, rather than discourages, destruction of our environment.