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The Colorado Supreme Court this week ruled that Firm client Exelon did not automatically lose insurance coverage and its contractual right to be defended merely because its former subsidiary, Cotter Corporation, followed the relatively common practice of depositing waste in unlined ponds or landfills because there remained a question whether the insured company “expected and intended” contaminants to migrate either off its property or into the groundwater. Cotter Corporation v. American Empire Surplus Lines Insurance Company, No. 02SC707 (Colo. May 17, 2004).
The case arose from a declaratory judgment action initiated by Cotter Corporation, a uranium mill operator, against its insurance providers. Cotter sought a court ruling that the various policies issued by its insurers required them to both defend the company in certain tort actions and indemnify it for any resulting liability. In response, the insurers contended that the qualified pollution exclusion clauses contained in the policies precluded coverage.
In Cotter Corp. v. American Empire Surplus Lines Insurance Co., however, the court of appeals affirmed the district court’s grant of summary judgment in favor of the insurers on the ground that seepage should have been expected because they had not stored the alleged contaminants in lined containers or landfills. The court of appeals held that the pollution exclusion clauses did not require either the primary insurers to defend Cotter or any of the excess insurers to indemnify Cotter.
“Contrary to the court of appeals’ reasoning, qualified pollution exclusion clauses do not automatically exclude coverage if the insured expected seepage from unlined tailings ponds. We hold that coverage exists if Cotter did not expect and intend contaminants to migrate either off its property or into the groundwater,” the Colorado Supreme Court said in its decision.
The Supreme Court also held that Cotter was entitled to a defense from the insurers, reversing the rulings by the appellate and trial courts. The insurers had refused to defend Cotter in the underlying suits, which date back to 1989, even though the insurers did not contend that the underlying complaints – which included claims based on negligence and strict liability – fell entirely outside the scope of their defense obligations. At the Supreme Court, the insurers asserted that because the underlying litigation was complete, they could rely on evidence developed during the litigation of those cases to affirm their refusal to defend. Wholly rejecting insurers’ argument, the Supreme Court instead reaffirmed that the proper analysis of a recalcitrant insurers’ duty to defend is to look to the face of the underlying complaint. “We do not intend to create an incentive for insurers to refuse to defend in the hope that litigation will reveal that no duty to defend exists.”
Partner Barry Levenstam, who led the Jenner & Block team in this case, said that court clearly rejected several key arguments the courts below had erroneously relied upon. “These errors exposed by the state supreme court nearly provided several insurance companies the means to escape their contractual obligations to insure Exelon, ” he said. Mr. Levenstam is Co-Chair of the Firm's Appellate and Supreme Court Practice Group.
“This decision saves Exelon from bearing substantial litigation costs and reminds insurers of their contractual duty to defend,” said Associate John P. Wolfsmith of Jenner & Block’s Insurance Litigation and Counseling Practice Group, who was also part of the Firm’s team.
Rounding out the Jenner & Block team in this matter were Insurance Litigation and Counseling Practice Group Partner Christopher C. Dickinson and Associate Melinda E. Cupps. The case was argued before the Court by Joseph Dominguez of Exelon.
The case now returns to the district court for trial.
For the full text of the court’s decision, please click here.