- First Circuit Affirms “Time on the Risk” Model for Resolving Insurance Claims at Contaminated Sites and the Limits to the Owned Property Insurance Exclusion
- March 7, 2013
- Law Firm: Bernkopf Goodman LLP - Boston Office
- In the latest stage of a long-running dispute between Boston Gas Company ("Boston Gas") and its insurer Century Indemnity Company ("Century"), the First Circuit Court of Appeals recently affirmed that insurance policy coverage for damages associated with contaminated property are properly based on the proportion of damages occurring during the policy period, not the entirety of the claimed damages. The Court also affirmed that the owned property exclusion from coverage does not apply where contaminant migration poses a significant risk to the public or to a third party's use and enjoyment of property.
In this procedurally complex case, Century first appealed a federal district court ruling which held it liable under a Commercial General Liability Policy ("CGL") for all of Boston Gas' hazardous material-related remediation costs at one historical manufactured gas plant ("MGP"). The district court applied an "all sums" (i.e., joint and several) approach whereby an insurer is held responsible for all remediation costs as long as some property damage occurred during the policy period. Finding that the applicability of the "all sums" approach had not yet been ruled upon in the Massachusetts courts, the First Circuit then certified the question to the Massachusetts Supreme Judicial Court ("SJC"). In Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 372 (2009), the SJC rejected the all sums rule and held such damages should be determined by a fact-based allocation of losses attributable to each policy and, where this determination cannot be reliably made, by the proportion of the time that the policy was in effect, i.e., the insurer's "time on the risk" from the event triggering the coverage.
Concurrently with the appeals court's deliberations, litigation continued in the district court between the same parties, on similar grounds, but for a different MGP site. In this second trial, the jury found that contamination occurred at the MGP site during all 18 years that Century provided coverage. It also found that Century was not liable for damages for one area of the site because of the applicability of the owned property insurance exclusion. Relying on the SJC's rejection of the all sums rule, the district court applied the time on the risk approach and thereby limited Century's liability to approximately 15% of total costs (i.e., for only 18 of the 121 years that Boston Gas claimed contamination occurred on the property). Boston Gas appealed, seeking 100% recovery of damages and arguing that the jury verdict could be read as the fact-based allocation of responsibility previously proposed by the SJC in its affirmation of the time on the risk approach. The First Circuit cited multiple grounds for rejecting Boston Gas' appeal, including the recognition that Boston Gas' attempts to construe the jury decision as an affirmation that all damage occurred during the 18 year coverage period was contrary to its representations during trial.
Boston Gas also appealed the district court's application of the owned property exclusion which absolved Century from paying damages for certain site areas. Boston Gas argued that air above and groundwater below the site surface are "owned" by the Commonwealth and thus contamination on all these site areas constitutes third party damage. Once again supporting the trial court, the First Circuit relied on precedent to state that "[t]he Commonwealth's extensive regulatory powers over groundwater are nevertheless not the legal equivalent of separate legal ownership by the Commonwealth of all groundwater on private property," quoting Walsh v. Hingham Mut. Fire Ins. Co., 24 Mass. L. Rptr. 51, 2008 WL 2097384 at 6, citing In re Opinion of the Justices, 300 Mass. 607, 612 (1938). In its opinion, which included a summary of Massachusetts case law on the subject, the First Circuit established that the necessary condition for overcoming the owned property insurance exclusion is a showing that the contamination for which coverage is sought is subject to migration which "poses a significant risk to the public or to private third parties," which the court found was absent. (Boston Gas Co. v. Century Indem. Co., No. 11-1931, 2013 WL 203578 (1st Cir. Jan. 18, 2013)).
Although the full impact of this case has yet to be seen, it clearly suggests that careful crafting of litigation/expert testimony strategy for pursuing environmental claims under CGL policies is now warranted to focus on demonstrating the maximum extent of possible damages during the policy period. Furthermore, industrial and commercial clients should conduct a realistic assessment of the likelihood that on-site releases will impact public or private third parties and, where this is unlikely (e.g. dense clay soils), consider additional coverage or enhanced environmental insurance policies.