INTRODUCTION
For a period of several years in the late 1970's, the Cities of Littleton and Englewood jointly operated a wastewater treatment plant. The residue from treating wastewater at their plant was classified as domestic sewage sludge, approved by the Environmental Protection Agency (EPA) and the Colorado Department of Health (CDH) as suitable for beneficial reuse as a soil supplement and fertilizer for application on crop lands, municipal parks and playgrounds, and residential home gardens. The cities disposed of any remaining sewage sludge at the Lowry Landfill also with EPA and CDH approval. The cities' sludge contained less than one quarter of one percent trace heavy metals, such as copper, zinc, lead, cadmium, nickel, manganese, etc. Lowry Landfill was deemed a Superfund site under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") in the mid-1980's. Following receipt of notice letters from the EPA regarding their status as potentially responsible parties for alleged release of "hazardous waste" under CERCLA and contamination of groundwater, the Cities notified their insurance carriers. Upon coverage denial, both cities initiated a declaratory judgment action.
On June 28, 1999, the Colorado Supreme Court issued a landmark decision addressing insurance coverage for the cities' alleged environmental liabilities. The new decision builds on the Supreme Court's 1991 opinion in Hecla Mining Company v. New Hampshire Insurance Company,(1) which held that the term "sudden and accidental" release or discharge in a standard form pollution exclusion clause meant "unexpected and unintended." In Compass Insurance Company v. City of Littleton(2), the Colorado Supreme Court held that insurance companies issuing standard form comprehensive general liability (CGL) policies had a duty to defend the Cities of Littleton and Englewood against the EPA's allegations of environmental liability.The insurance companies did not and could not bear their burden of establishing "that the allegations in the complaint are solely and entirely within the exclusions in the insurance policy. Under this exacting standard, the insurer bears the burden of establishing that the ["sudden and accidental"] exception to the pollution exclusion cannot apply to restore coverage."(3)
THE DUTY TO DEFEND AND THE "SECOND DISCHARGE" ANALYSIS
In Colorado, as in most states, it is axiomatic that "the duty to defend is broader than the duty to indemnify, and should be viewed separately."(4) When an insurance company seeks to avoid the duty to defend, Compass now puts the burden on insurers to establish the inapplicability of any exception to an exclusion to satisfy Hecla's requirement that "there is no factual or legal basis on which the insurer might eventually be held liable to indemnify the insured."(5) The standard form pollution exclusion provides:
This insurance does not apply . . . to bodily injury or property damage arising out of the discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alkalis, 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 or accidental.
The Supreme Court held that the PRP notice letters received by the cities were the "functional equivalent" of the complaint in Hecla, and that the carriers could not avoid their duty to defend based upon an examination of the allegations contained in the PRP letters.(6) See discussion infra. The Supreme Court ruled that it was not proper to look beyond the four corners of the EPA notice letter to the nature of the material disposed, as the Court of Appeals had done in reasoning that the duty to defend was triggered by a mixed question of law and fact as to the nature of the cities' sewage sludge. Instead, the Supreme Court premised its finding of a duty to defend after examining the notice letters in light of the exception to the exclusion: this exclusion does not apply if such discharge, dispersal, release or escape is sudden or accidental (meaning "unexpected and unintended" under Hecla).
To reach its holding, the Supreme Court declined to follow the Tenth Circuit's interpretation of the pollution exclusion in Broderick Investment Co. v. Hartford Accident & Indemnity Co.,(7) wherein the Circuit Court construed the exclusion as addressing the initial placement of the alleged polluting material into or upon the land. Rather, the Colorado Supreme Court was implicitly guided by Hecla which focused on the mining company's intent to discharge pollutants from the containment area in the mine, as opposed to their initial placement in the first instance.(8) The Supreme Court elected to follow the Washington State Supreme Court's precedent in Queen City Farms, Inc. v. Central National Insurance Company of Omaha,(9) which adopted the "second discharge analysis." In setting forth the law of Colorado, the Supreme Court explicitly found that the relevant polluting event for purposes of the pollution exclusion clause is the release or escape of pollutants from a containment area and not the initial placement of waste into the containment area.(10) Consequently, the insurance companies must now prove that the policyholder "expected and intended" the release of contaminants from the containment zone into groundwater to avoid their defense obligation. Since the PRP notice letters contained no such allegation, the carriers could not and cannot sustain their burden.
THE PLAIN AND ORDINARY MEANING AS UNDERSTOOD BY THE AVERAGE PURCHASER OF INSURANCE
In the Compass opinion, the Supreme Court continues to interpret undefined terms in an insurance policy according to their plain and ordinary meanings and according to the understanding of the average purchaser of insurance.(11) Relying on the analysis in Queen City Farms, the Colorado Supreme Court adopted the conclusion of the Washington Supreme Court that "the average purchaser of insurance would have understood that mere placement of wastes into a place which was thought would contain or filter the wastes would not have been an event which would fall within the [pollution] exclusion."(12) The court further refused to impose overly technical, constrained or arcane meanings to commonly used terms like "damages," "suit," "profits," and "joint venture."
The Supreme Court elected to address preliminary issues related to interpretation of the terms "suit" and "damages," both of which are standard concepts in CGL insurance policies, but are undefined. The Court again recognized the fundamental doctrine of contrapreferendum in insurance policy contract interpretation. An ambiguous provision must be construed against the drafter and in favor of providing coverage to the insured.(13) The Colorado Supreme Court joined many other jurisdictions in finding both terms to be ambiguous.(14)
With respect to the term "suit," the Court adopted the analysis of the Supreme Court of Michigan to wit "[t]he existence of these alternative and more general definitions of 'suit' persuasively suggests that a typical layperson might reasonably expect the term to apply to legal proceedings other than a court action initiated by a complaint."(15) An EPA notice letter pursuant to CERCLA is sufficiently coercive to be the "functional equivalent of a suit" within the meaning of the liability policies.(16)
Applying similar reasoning, the Supreme Court also concluded that government mandated response or cleanup costs under CERCLA constitute "damages" as the term is used in CGL insurance policies.(17) The Supreme Court declined the insurers' request that it draw a bright-line distinction between legal remedies and equitable remedies. Instead, the insurance companies were found to have failed to indicate a limited technical meaning of the term "damages" (if indeed it was ever their intent) despite having the opportunity to do so when the CGL policies were drafted.
THE JOINT VENTURE "EXEMPTION" (READ "EXCLUSION")
The last insurance coverage issue addressed by the Compass opinion was whether coverage was precluded by the joint venture clause contained in the policies of certain insurers.(18) A number of the insurance companies successfully argued in the Court of Appeals that the wastewater treatment plant operated jointly by the cities was a joint venture that should be exempted from coverage. Reversing the Court of Appeals on this issue, the focus of the analysis in the Supreme Court centered on the legal requirement that a joint venture be operated "for profit," and the Supreme Court found no evidence that the plant generated "profits."(19) Once again construing the undefined term as ambiguous in the context of an entity formed under an intergovernmental agreement for the limited purpose of providing more efficient municipal services on a non-profit basis, the Supreme Court squarely placed the burden on the insurance companies to establish that the exemption applies.(20) Unlike the pollution exclusion, the joint venture clause was not delineated an "exclusion" from coverage but carried under the "persons insured" section of the policy.(21) The court saw through this "wolf in sheeps clothing" disguise, and found the carriers could not escape their obligation to defend for failing to prove the elements of a joint venture.
CONCLUSION
The Colorado Supreme Court's en banc decision in Compass Ins. Co. v. City of Littleton has reaffirmed the Court's opinion in Hecla Mining, placing the burden on the insurance industry to escape the duty to defend under CGL policies for environmental liabilities that are unexpected and unintended. The Supreme Court's holding will activate many millions of dollars in insurance coverage for expensive defense and transaction costs in environmental actions, and will make it easier for claimants to access full indemnity coverage under "sudden and accidental" CGL policies. The decision is expected to significantly impact many other pending state and federal actions across the country as the decision strips Broderick of its vitality, supplanting it with the more policyholder-friendly "second discharge" analysis.
* Mr. Brady is a director/shareholder and Ms. Mayers is an associate of Grimshaw & Harring, P.C., Denver. The authors are insurance coverage lawyers acting as Special Counsel to the City of Littleton, and represented the City of Littleton in the Compass Ins. Co. v. City of Littleton action. The authors also wish to thank Kevin Hannon and the CTLA Amicus Committee for their assistance and support in filing Amicus briefs in their case.
ENDNOTES
1. 811 P.2d 1083 (Colo. 1991).
2. No. 96SC852 (Colo. June 28, 1999).
3. Compass, slip op. at 29-30 citing Hecla Mining, 811 P.2d at 1092. The Supreme Court acknowledged the opinion of the Court of Appeals in Public Serv. Co. v. Wallis & Cos., 955 P.2d 564, 568-69 (Colo. App. 1997), cert. granted, No. 97SC792 (Colo. May 26, 1998), wherein the Court of Appeals held that the insured bears the burden of proving an exception to an exclusion provision in an insurance contract, but recognized that the Wallis court distinguished a case concerning the duty to indemnify from a case involving a duty to defend. Id., n. 12.
4. Englewood and Littleton v. Commercial Union Assurance Co., 940 P. 2d 948, 953 (Colo. App. 1996).
5. 811 P.2d at 1090.
6. Compass, slip op. at 21-22, 29, 41-43.
7. 954 F.2d 601, cert. denied, 506 U.S. 865 (1992).
8. Compass, slip op. at 27.
9. 882 P.2d 703 (Wash. 1994).
10. Compass, slip op. at 27.
11. Id. at 27-28.
12. Id. at 28.
13. Id. at 32, 41, 44.
14. Id. at 41-42, 44.
15. Id. at 42 (quoting Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 519 N.W.2d 864 (Mich. 1994).
16. Id.
17. Id. at 43-44.
18. Id. at 31.
19. Id. at 32-36.
20. Id.
21. Id. at 31-32, 33.