Travelers Cas. & Sur. Co. v. Providence Wash. Ins. Co.

685 F.3d 22

TRAVELERS CASUALTY AND SURETY COMPANY, Plaintiff, Appellant,

v.PROVIDENCE WASHINGTON INSURANCE COMPANY, INC., Defendant, Appellee.

No. 11–2193.

United States Court of Appeals, First Circuit.

Heard April 3, 2012.

Decided July 11, 2012.

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.

Before HOWARD, LIPEZ and THOMPSON, Circuit Judges.

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”). See42 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 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.

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 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., 120 R.I. 511, 388 A.2d 25, 26 (1978). Before delving into the particulars of the case we outline the legal landscape.

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, 103 R.I. 623, 240 A.2d 397, 403 (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 (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.

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...