Domtar, Inc. v. Niagara Fire Ins. Co.

Page 724

563 N.W.2d 724

DOMTAR, INC., Appellant (C9-95-2673), Respondent (C0-95-2626, C7-95-2638), v. NIAGARA FIRE INSURANCE COMPANY, et al., Appellants (C7-95-2638), Respondents (C0-95-2626, C9-95-2673) Canadian General Insurance Company, et al., Respondents Certain Underwriters at Lloyd's of London, et al Appellants (C0-95-2626), Respondents (C7-95-2638 C9-95-2673).

Nos. C0-95-2626, C7-95-2638 and C9-95-2673.

Supreme Court of Minnesota.

May 29, 1997.

Syllabus by the Court

1. Pursuant to Northern States Power Co. v. Fidelity & Cas. Co. of New York, 523 N.W.2d 657 (Minn.1994), the insured in this case is responsible for property damage allocated to self-insured periods.

2. The insurance policy language and the evidence in the record do not support the insurers' arguments based on owned-property exclusions; absence of appreciable damage; expected property damage; absence of an "accident"; insufficient evidence of primary coverage; "lack of fortuity"; "known loss"; or exclusion pursuant to a retrospective premium adjustment endorsement.

3. Awards of defense and litigation costs were proper, except for that portion of the defense costs incurred before the insured tendered a defense request to its insurers.

Briggs & Morgan, Douglas L. Skor & Scott G. Knudson, St. Paul, Zevnik Horton Guibord & McGovern LLP, Paul Anton Zevnik & John Osborne, Washington, DC, for Appellant/Respondent Domtar, Inc.

Moore, Costello & Hart, Larry Hanson, St. Paul, for Respondent Canadian General Ins. Co. & Scottish and York Ins. Corp., Ltd.

Arthur, Chapman, McDonough, Kettering & Smetak P.A., Thomas A. Pearson, Minneapolis, for Appellants/Respondents Niagara Fire Ins. Co. & Continental Ins. Co.

Oppenheimer Wolff & Donnelly, Thomas P. Kane & Kenneth H. Podpeskar, St. Paul, Lord, Bissel & Brook, Gary W. Westerberg & Joseph A. Hinkhouse, Chicago, IL, for Respondents/Appellants Certain Underwriters at Lloyd's of London & World Auxiliary Ins. Co.

Hubert H. Humphrey, III, Attorney General, John K. Lampe, Assistant Attorney General, St. Paul, for amicus curiae State.

Bassford, Lockhart, Truesdell & Briggs, P.A., Charles E. Lundberg, Mineapolis, Wiley, Rein & Fielding, Laura A. Foggan, Lon A. Berk & Luis de la Torre, Washington, DC, for amicus curiae Insurance Environmental Litigation Ass'n.

Austin & Abrams, P.A., Jerome B. Abrams, Fredrikson & Byron, Thomas Fraser & Richard Snyder, Minneapolis, for amicus curiae Certain Insurers of Minnesota Mining & Manufacturing Co.

Zelle & Larson, LLP, Dale I. Larson, James S. Reece & Sandra Wallace, Maslon Edelman Borman & Brand, Gary J. Haugen, David F. Herr & R. Lawrence Purdy, Minneapolis, for amicus curiae Minnesota Mining & Manufacturing Co.

Heard, considered, and decided by the court en banc.

OPINION

KEITH, Chief Justice.

This case presents several issues regarding the scope of comprehensive general liability insurance for environmental contamination. Domtar, Inc. initiated this action against fifteen insurers in 1991, seeking: (1) a declaration that its insurers are obligated to indemnify Domtar for environmental damage arising from Domtar's operation of a tar refining plant at the St. Louis River/Interlake/Duluth Tar Site ("the Site"); (2) a declaration that its insurers have a duty to defend Domtar against demands for response action and damages claims from the Minnesota Pollution Control Agency; (3) breach-of-contract damages for the insurers' refusals to defend; and (4) litigation costs incurred in this action. The case proceeded to trial against four defendants who insured Domtar from 1956 through 1970: Continental Insurance Co. and Niagara Fire Insurance Co. (collectively "Continental") as primary insurers, and Certain Underwriters at Lloyd's of London and World Auxiliary Insurance Co. Ltd. (collectively "Lloyd's") as excess insurers. ¹

The trial court concluded that: (1) clean-up costs should be allocated evenly from the inception of the environmental damage to the inception of clean-up efforts and that each insurer was liable only for the damage during those years in which its policies were on the risk; (2) Continental was liable for $1,154,318.50 for breaching its duty to defend Domtar ("defense costs"); and (3) Continental was liable for $1,663,674.25 in attorney fees and expenses incurred by Domtar in this action ("litigation costs"). The court of appeals affirmed. Domtar, Inc. v. Niagara Fire Ins. Co., 552 N.W.2d 738, 742 (Minn.App.1996) ("Domtar II "). Domtar, Continental, and Lloyd's all petitioned for further review. We affirm the trial court's rulings, except with respect to the award of defense costs incurred before Domtar tendered a defense request to its insurers.

I. Facts and Procedural History

Domtar owned and operated a tar refining plant on the north bank of the St. Louis River in Duluth during the first half of this century. The Site in question encompasses about 230 acres of land and river embayment. Domtar operated its plant on 5 to 6 acres of the Site from 1924 to 1929 and from 1934 to 1948, when the plant closed. The plant was dismantled in 1954 or 1955 and the property was sold to Morton Salt Co. in 1955. An automobile salvage yard now occupies the property. Pollution was detected at the river embayment in 1979, and the entire 230-acre area is now a Superfund site.

In 1987, the Minnesota Pollution Control Agency ("MPCA") began a remedial investigation of the Site. That investigation revealed that hazardous substances had been released into the soil and groundwater. On November 28, 1990, the MPCA sent notice to Domtar that it had been identified as a responsible party. The MPCA determined that further investigation and evaluation of the contamination at the Site were necessary and, on March 26, 1991, the agency issued a Request For Response Action ("RFRA") to Domtar and two other responsible parties.

The 1991 RFRA requested response action in two areas of the Site: the "Tar Seeps Unit" and the "Soils Operable Unit." Domtar estimated that its liability for clean-up at these two units would be $7 million. At the time of trial, the MPCA had not yet determined a suitable remediation program for these two units, nor had it requested response action from Domtar for a third unit at the Site, the "Sediments Operable Unit," an area that includes the river embayment. The MPCA had estimated that clean-up costs at the Sediments Operable Unit would total $200-$300 million. According to the parties, the MPCA reversed its position and issued an RFRA to Domtar for the Sediments Operable Unit on March 26, 1996.

According to testimony at trial, the MPCA clean-up plan is likely to require removal of contaminants from the soil as well as continuous monitoring of the groundwater to ensure that soil remediation provides adequate protection. One purpose of soil remediation at the Site is to protect the groundwater, although the MPCA had not ordered Domtar to remove chemicals from the groundwater at the time of trial. Testing indicates that the groundwater has been contaminated with carcinogenic coal tar derivatives.

After receiving notice from the MPCA, Domtar searched its records and identified potentially liable insurers. On July 2, 1991, Domtar first notified Continental and Lloyd's of the MPCA action and demanded that the insurers defend Domtar against the MPCA's response requests, investigate Domtar's portion of the Site, and pay for clean-up costs. Eight days later, on July 10, 1991, Domtar filed this action against various insurers, including Continental and Lloyd's. Continental and Lloyd's subsequently denied coverage and refused to defend.

The case was tried before a Ramsey County jury in early 1995. Domtar did not attempt to prove coverage before 1956 (because the policies were lost) or after 1970 (because those insurers were dismissed by Domtar before trial, and such evidence was ruled inadmissible). ² Domtar did produce evidence of insurance from 1956 to 1970 ranging from $2.1 to $10.0 million of property-damage coverage per year. ³

Precisely how Domtar contributed to pollution at the Site, and when environmental damage took place, were contested issues at trial. The record discloses two general causes of Domtar's share of the contamination. First, expert opinion and direct evidence indicated that routine waste-handling practices and accidental spills and leaks at the plant were sources of the pollution. For example, Lloyd's expert asserted that one storage tank or its pipes--last used prior to 1933--leaked and contaminated the soil and groundwater. There was also testimony that waste (e.g., liquid spills and solid materials such as ash, "clinker" from the boiler, and waste tar paper) was buried in or spread on the soil during the plant's operation. Second, Domtar's expert pointed to the decommissioning process as the primary cause of the pollution. In his opinion, the bulk of the damage arose from discharges when storage tanks were dismantled before the property was sold in 1955. A 1948 inventory indicated that 50,000 gallons of "sludge or residual muck" were left in Domtar's tanks at the time operations ceased. When the property was sold in 1955, a tank base was left in the ground and a two-to-three-foot layer of coal tar derivatives was subsequently found at that location. An area including that tank base is now the Tar Seeps Operable Unit.

There was some agreement that the contamination could not be apportioned among causes. Domtar's expert concluded that the damage was continuous and indivisible, and Lloyd's expert conceded that leakage to the groundwater from the abandoned tank base had become commingled with and inseparable from other migrating contaminants. There was no dispute that all of the pollution from the plant was discharged before Domtar sold the property and before Domtar purchased insurance from the defendants.

The experts disagreed, however, on the extent of additional environmental damage after the plant was...