Zrz Realty v. Beneficial Fire and Cas. Ins.

194 P.3d 167

222 Or. App. 453

ZRZ REALTY COMPANY, an Oregon corporation, for itself and as trustee of the Zidell Remediation Funding Trust, an Oregon trust; Zidell Marine Corporation, a Washington corporation; Tube Forgings of America, Inc., an Oregon corporation; and Pon Exploration, Inc., a Delaware corporation, fka Zidell Explorations, Inc., an Oregon Corporation, Plaintiffs-Respondents, Cross-Appellants, v. BENEFICIAL FIRE AND CASUALTY INSURANCE COMPANY, succeeded in interest by J.C. Penney Life Insurance Company, et. al., Defendants, and Certain Underwriters at Lloyd's of London, and Certain London Market Insurance Companies, aka "Lloyds," including the following defendant companies: Assicurazioni Generali S.P.A., Insurance Company of North America (UK) Ltd., Commercial Union Assurance Company, PLC, Edinburgh Assurance Company, Ltd., Ocean Marine Insurance Company, Ltd., World Auxiliary Insurance Corporation, Ltd., Cornhill Insurance Company, Ltd., Dominion Insurance Company, Ltd., Eagle Star Insurance Company Ltd., the Threadneedle Insurance Company Ltd., Excess Insurance Company Ltd., London & Edinburgh General Insurance Company Ltd., New Zealand Insurance Company, Ltd., Road Transport & General Insurance Company, Ltd., South British Insurance Company, Ltd., Ulster Marine Insurance Company, Ltd., the United Scottish Insurance Company, Ltd., Yorkshire Insurance Company, Ltd., Hansa Re & Marine Insurance Company (UK) Ltd., La Reunion Francaise (UK) Ltd., Economic Insurance Company Ltd., Norwich Union Fire Insurance Society, Ltd., Firemen's Insurance Company of Newark New Jersey, Swiss Union General Insurance Company, Ltd., Leadenhall Insurance Company, Ltd., Bishopgate Insurance Company, Ltd., Home Insurance Company, Nippon Fire & Marine Insurance Company (UK) Ltd., Switzerland General Insurance Company, Ltd., River Thames Insurance Company, Ltd., Royal Insurance Company Ltd., British Fire Insurance Company, Ltd., British & Foreign Insurance Company, Ltd., National Provincial Insurance Company, Ltd., the Scottish Lion Insurance Company, Ltd., Skandia Marine Insurance Company (UK), Ltd., Drake Insurance Company, Ltd., Sphere Insurance Company, Ltd., Sphere Drake Insurance Company PLC, Alliance Assurance Company, Ltd., British Law Insurance Company, Ltd., and Continental Assurance Company of London, Ltd., Liverpool Marine & General Insurance Company, Ltd., Phoenix Assurance Company Ltd., Fine Art & General Insurance Company, Ltd., Anglo-French Insurance Company, Ltd., Baloise Marine Insurance Company, Ltd., Baltica Insurance Company (UK) Ltd., Fuji Fire & Marine Insurance Company (UK), Ltd., R.W. Gibbon Group, La Preservatrice Group, Switzerland General Insurance Company (London) Ltd., Yasuda Fire & Marine Insurance Company, Ltd., Iron Trades Mutual Insurance Company, Ltd., Minster Insurance Company Ltd., Reliance Insurance Company, Sirius (UK) Insurance PLC, Indemnity Marine Assurance Company, Ltd., London & Hull Maritime Insurance Company, Ltd, and Associated Companies, C.A. Parr Agencies, Ltd., Sun Insurance Office, Marine Insurance Company, Limited, and Sumitomo Marine & Fire Insurance Company, Limited, Defendants-Appellants, Cross-Respondents.

970806226.

A121145.

Court of Appeals of Oregon.

Argued and Submitted January 10, 2008.

Decided October 1, 2008.

Thomas W. Sondag, Portland, argued the cause for appellants — cross-respondents. With him on the briefs were Kirklin Folawn LLP, John Folawn, and Lane Powell PC.

Bruce L. Campbell, Portland, argued the cause for respondents — cross-appellants. On the answering/cross-opening brief were Miller Nash LLP, William H. Walters, Dean D. Dechaine, Anderson Kill & Olick, P.C., Robert M. Horkovich and Edward J. Stein. With him on the reply brief were Miller Nash LLP, Bend, Dean D. Dechaine and Michelle E. Barton, Portland.

Gregory L. Baird, Portland, and Gordon & Polscer, LLP, filed the briefs amicus curiae for Complex Insurance Claims Litigation Association.

Before WOLLHEIM, Presiding Judge, and SERCOMBE, Judge, and RIGGS, Senior Judge.

WOLLHEIM, P.J.

This insurance coverage dispute involves environmental contamination that resulted from plaintiffs' dismantling of navy and merchant marine vessels at a site along the Willamette River. Plaintiff ZRZ Realty owns that site, known as the "Moody Avenue site." The other plaintiffs conducted operations at the site or are successors-in-interest to prior site operators. We refer to plaintiffs collectively as "Zidell."

Zidell initially brought this action against a number of its insurers, asserting various claims for damages and seeking a declaration of coverage with regard to future environmental cleanup costs. By the time of trial, most of the insurers had settled, but defendants on appeal, Certain Underwriters at Lloyd's of London and Certain London Market Insurance Companies (referred to collectively as "London"), remained in the case.¹ Zidell's claims for breach of contract and declaratory judgment against London were tried to the court, and the court made extensive findings of fact and conclusions of law. In short, the court ruled that London was obligated to pay Zidell's costs of defense and determined how future coverage would be allocated under various policies. The trial court then entered judgment awarding attorney fees to Zidell in excess of $1.3 million; declaring that certain London defendants were obligated to pay Zidell's future defense costs in responding to a claim by the Department of Environmental Quality (DEQ); and stating that the parties' future rights and obligations were circumscribed by the court's findings and conclusions. The court later entered a supplemental judgment that awarded Zidell additional attorney fees.

London appeals the judgment and supplemental judgment, and Zidell cross-appeals. On appeal, we conclude that, on some of the policies, the trial court erred in allocating the burden of proof with respect to whether the environmental contamination was "expected and intended" by Zidell and that the case must therefore be remanded for a new trial on the breach of contract and declaratory judgment claims. Accordingly, we reverse the judgment in favor of Zidell and vacate the supplemental judgment for attorney fees. At the request of the parties and because certain issues are likely to arise on remand, we also address a number of the trial court's other rulings.

I. BACKGROUND

In 1919, Zidell established a scrap metal business at Moody Avenue on the bank of the Willamette River. After World War II, Zidell began acquiring decommissioned navy and merchant marine ships, towing them up the Columbia and Willamette Rivers to the Moody Avenue site, and dismantling them. Between 1947 and 1978, Zidell dismantled upward of 200 ships and, at the height of its business, processed 2,000 to 3,000 tons of steel each day.

The scrapping operation was, by all accounts, messy business. Various metals, petroleum products, tributyltin, polychlorinated biphenyl (PCB), asbestos, and other contaminants were present on the ships. For instance, on ships built prior to 1960, nearly every surface was covered in lead-based, anti-corrosive paint. The typical "Liberty" ship that was dismantled at the Moody Avenue site contained approximately 80 tons of dried paint; the typical "Victory" ship contained approximately 100 tons of dried paint. PCB was present in paint, hydraulic oil, fluorescent light fixtures, electric cables, transformers, wires, and gaskets on ships, and the scrapping of a single "C-4" vessel could generate 75,000 pounds of PCB-contaminated material. As vessels were cut up piece by piece and moved in and out of the water, a number of those hazardous substances entered the Willamette River and the soil and groundwater at and around the Moody Avenue site. Additional contamination resulted from fires, spills, and barge-building activities that occurred at the site over the years.

Eventually, DEQ became concerned about environmental contamination in sediments at the Moody Avenue site and, in May 1994, issued a "potentially responsible party" notice to Zidell. DEQ demanded that Zidell investigate and clean up certain damaged property, including the groundwater, Willamette River, sediments, and subsurface soil contamination at and around the Moody Avenue site. Zidell undertook that investigation as well as various efforts at remediation. In July 1994, Zidell sent a letter to its insurers regarding the potentially responsible party notice that Zidell had received from DEQ. In response, the insurers denied coverage. Zidell subsequently brought this action seeking coverage for existing and future environmental cleanup costs at the Moody Avenue site.

During the majority of the scrapping operation—that is, from 1956 through 1983— Zidell was insured under various London policies that provided different types of coverage. For example, Zidell purchased primary and excess comprehensive general liability insurance policies from London. Between 1970 and 1977, London also sold Zidell "bumbershoot" policies, which were designed to cover excess maritime liability and certain nonmarine exposures related to marine operations. In addition, London specifically provided coverage to Zidell for ship dismantling under "open cover" marine policies. Under the "open cover" policies, Zidell declared specific vessels for coverage instead of obtaining a separate policy for each vessel. Those policies provided, among other things, primary protection and indemnity coverage for all declared vessels awaiting or undergoing scrapping or repair and resale—that is, as long as Zidell's liability arose "by reason of interest in the vessel."

In its operative complaint, Zidell alleged that London had breached its obligations under various policies by failing to pay for costs associated with the investigation and remediation of contamination at the Moody Avenue site. Specifically, Zidell alleged that London

"refused or otherwise...