Pennsylvania Supreme Court Issues Two Important Insurance Coverage Opinions

Regulatory Estoppel and Pollution Exclusion With "Sudden and Accidental" Exception

In a 3-2 decision, with two justices abstaining, the Pennsylvania Supreme Court reversed and remanded the lower court's ruling that a pollution exclusion with an exception for the "sudden and accidental" discharge of pollutants bars coveragefor the results of a policyholder's long-term environmental pollution activities. In its ruling, the court expressly adopted "regulatory estoppel" as a bar to the contention that the "sudden and accidental" exception is limited to abrupt events. The case was remanded, in part, to allow the policyholder to prove its estoppel claim. On remand, the lower court will determine, among other things, whether insurers misled the Pennsylvania Insurance Department when seeking approval of the pollution exclusion. Sunbeam Corporation v. Liberty Mutual Insurance Company, 2001 WL 1249260 (Pa. 10/19/01).

The Coverage Action & Lower Court Rulings

In Sunbeam the policyholder filed suit seeking coverage for the costs of cleaning up environmental pollution caused by its manufacturing operations. The insurer contended that the "sudden and accidental" exception to the pollution exclusion did not apply. Rejecting the policyholder's contention that "sudden and accidental" means "unexpected an unintended.", Relying on an en banc decision of the Pennsylvania Superior Court, the lower court also held "that the plain meaning of the phrase 'sudden and accidental' requires that damages resulting from gradual releases of pollution are excluded from coverage." See, Lower Paxon Twp. v. U.S. Fidelity & Guranty Co., 557 A.2d 393 (Pa.Super. 1989). Accordingly, the trial court dismissed the policyholder's complaint with prejudice.

The lower court also rejected the policyholder's "regulatory estoppel" argument, in which the policyholder claimed that insurers represented to the Pennsylvania Insurance Department in a 1970 memorandum that the pollution exclusion did not reduce coverage under GL policies. Accordingly, the policyholder contended, insurers were estopped from arguing that the exclusion barred coverage for long-term pollution damage. The lower court concluded that the policyholder could not reasonably establish that the Insurance Department relied on any alleged representations concerning the scope of coverage.

The Pennsylvania Superior Court affirmed the lower court's ruling.

The Supreme Court Decision

The Supreme Court first held that the lower court erred in finding that Insurance Department could not have relied on insurers' alleged representations in 1970. On a motion to dismiss, the trial court was required to accept all pleaded facts as true.

The Supreme Court also held that, even without proving or pleading reliance by the Insurance Department, the allegation of estoppel should not have been dismissed. Equating "regulatory estoppel" with "judicial estoppel," the court held that the doctrine prohibits parties from switching legal positions to suit their own ends. The Supreme Court stated: "Having represented to the insurance department, a regulatory agency, that the new language in the 1970 policies 'sudden and accidental' did not involve a significant decrease in coverage from the prior language, the industry will not be heard to assert the opposite position when claims are made by the insured policyholders." The court remanded the case to allow the trial court to determine whether the purpose of the 1970 memorandum was to assure the Insurance Department that there was no change or reduction in the risks covered.

The Supreme Court also remanded the case to the trial court to determine whether the statement in the 1970 memorandum that "coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident," establishes that "sudden and accidental" has a specific custom and usage in the insurance industry and means "unexpected and unintended."

The two dissenting Justices found the majority's reliance on custom and usage in construing the pollution exclusion to be inconsistent with established precedent, and would have concluded that "sudden and accidental" include a temporal element connoting an event that is abrupt and lasting only a short time.

The Known Loss Doctrine

In a plurality decision in a case of first impression, the Pennsylvania Supreme Court recognized the "known loss" doctrine and affirmed a lower court's application of a broad standard for the application of the doctrine. Rohm & Haas Company v. Continental Casualty Company, 2001 WL 1245822 (Pa. 10/18/01). The court affirmed the judgment for the insurance carriers 4 to 3, but one Justice concurred in the result without endorsing the court's resolution of the "known loss" doctrine

The policyholder in Rohm &Haas sought coverage for the cost of cleaning up polluted soil, groundwater and surface water in the area of a former manufacturing site. Rhom & Haas purchased the site in June 1964, and shortly thereafter discovered that the site was extensively polluted with arsenic waste, a byproduct of its manufacturing operations. The site was added to the policyholder's insurance program in December 1964, after the contamination had been discovered.

Following trial of the coverage action, the jury found that Rohm & Haas failed to disclose material facts about the arsenic pollution at the facility when it purchased the excess liability policies at issue. The jury also found that at the time it contracted with its excess insurers, Rohm & Haas knew of damage or injury for which there would be legal liability large enough to reach the excess policies. The trial court granted the policyholder's motion for judgment notwithstanding the verdict (jnov), and the insurers appealed. On appeal, the Pennsylvania Superior Court found the that the trial court erred in granting jnov, and reinstated the jury's verdict. The policyholder then appealed to the Pennsylvania Supreme Court.

The Supreme Court first noted that the "known loss" doctrine had not been addressed by Pennsylvania courts, but was recognized in other states. The doctrine, said the court, had its roots in the fundamental requirement of fortuity in insurance law. The court also noted that Pennsylvania law had long required insurance applicants to make "full and fair disclosure of all things material to the insurable risk." The court was not persuaded by Rohm & Haas's contention that they were never explicitly asked whether a pollution problem existed at any of its facilities.

The court then concluded that a broad standard should govern application of the "known loss" doctrine, specifically "whether the evidence shows that the insured was charged with knowledge which reasonably shows that it was, or should have been, aware of a likely exposure to losses which would reach the level of coverage." The court thus rejected the policyholder's request to adopt a narrow construction of the doctrine, which would have required "certain knowledge of a particular liability large enough to reach the excess layers of insurance at the time of contracting."

The court also affirmed the jury's verdict on the insurers' fraud defense, and found that the trial court improperly directed a verdict in favor of the policyholder on the late notice defense because there was a disputed issue of fact as to whether the insurers were prejudiced by the late notice.

Justice Nigro agreed with the majority that the trial court erred in granting the policyholder jnov on the fraud claim, and found no need to address the merits of the known loss and late notice defenses.

The three dissenting Justices contended that the majority improperly focused on the existence of contamination rather than the potential for third-party liability. "The mere fact of contamination did not ineluctably suggest that there would be a third party liability claim at al, much less a claim that was likely to reach the excess policies."

Implications

- Pennsylvania has joined New Jersey in adopting a regulatory estoppel doctrine. Policyholders have contended that this doctrine should bar the enforcement of the pollution exclusion with an exception for the "sudden and accidental" discharge of pollutants, because, they contend, insurers represented to regulators that the exclusion would not significantly restrict coverage. Unlike the New Jersey Supreme Court, however, the Pennsylvania Supreme Court has remanded the case for factual findings. The result may ultimately very well be that the lower court rejects the policyholder's contention that there was any misrepresentation made to regulators. As such, the results of this decision should be closely followed.

- The ruling on "known loss" is also likely to have important consequences. By enforcing the fortuity requirement, the Pennsylvania Supreme Court has made clear that liability insurance contracts are not designed to cover the unavoidable consequences of policyholder conduct.

If you have any questions regarding this Alert or any other insurance coverage-related matter, please contact:

John P. Malloy assisted with the preparation of this Alert.

Copyright 2001 by Shaw Pittman LLP. All Rights Reserved. This publication is provided by Shaw Pittman for general information purposes; it is not and should not be used as a substitute for legal advice.