Coffeyville Resources Refining & Marketing, LLC.
v. Liberty
Surplus Ins. Corp. et. al.(United States
District Court, District of Kansas, May 3, 2010)
This complex environmental
coverage matter arose out of a flood of the Verdigris River
on June 30, 2007. During the flood, a large amount of crude oil from policyholder’s
oil refinery was released into flood waters and was carried into Coffeyville, Kansas,
resulting in widespread environmental damage to downstream homes and
businesses. The policyholder alleged that as a result of this oil pollution
release and resulting environmental contamination, it incurred more than
$50,000,000 to investigate and remediate the contamination, and resolve claims
arising from the spill.
The policyholder filed the instant
coverage action, seeking coverage from four of its insurers for the
above-referenced remediation costs. Two
of the insurers, Liberty Surplus Insurance Company ("Liberty") and Illinois Union, issued
pollution legal liability policies to the refinery. The other two insurers, National Union and
Westchester Fire Insurance Company issued general liability policies to the
refinery. The refinery policyholder claimed the insurers breached their obligations
to indemnify it under various liability insurance policies issued. Thereafter, policyholder settled with Liberty, and as a result, coverage under the Liberty pollution policy
was exhausted. Policyholder, however,
continued the action against the remaining insurers asserting that the Illinois
Union policy was immediately excess to the Liberty policy. Illinois Union denied this allegation and
asserted that the National Union policy was primary excess.
After an extensive analysis and
discussion, the court held The Illinois Union policy coverage was triggered by
exhaustion of the Liberty policy and the $1
million SIR applicable to the Liberty
policy. Thus, the Illinois Union policy was primary coverage with respect to
the release from the refinery. As to property damage costs that were within the scope of coverage of both the
Illinois Union and National Union policies, the National Union policy was
excess, and was not triggered until all applicable coverage under the Illinois
Union policy was exhausted.
The further court held that the
Illinois Union coverage for property damage claims, when considered with that
policy's exclusion of clean-up costs, would lead a reasonable insured to
believe that the exclusion applies only to clean-up costs that result solely
from obligations under environmental laws. Thus, the exclusion did not limit or
effect the policy's coverage for property damage settlements. To the extent
restoration or repair costs for property were an allowable measure of property
damages, the Illinois Union policy provided coverage for reasonable settlement
of property damage claims based on such costs, even if such restoration costs
overlap with "clean-up cost" obligations under environmental laws.
The court noted that Restoration costs are ordinarily an allowable measure of
property damages if they do not exceed the pre-injury fair market value of the
property. In the case of residential property, such costs are allowable as
damages in excess of fair market value so long as they are not "wholly
disproportionate" to the value of the property.
Also, the court held that several
cost categories identified by the policyholder fell within the scope of
Illinois Union's coverage, including investigative and administrative expenses,
alternate living expenses, automobile damage, damage to personal property, bodily
injury claims, purchase of oil-impacted business and residential properties,
business interruption expenses, agricultural damage, and veterinary fees. There
are genuine factual issues in the record, however, concerning the extent of
such losses.
With respect to the refinery’s
claimed costs for categories such as demolition and removal of purchased
structures ($ 6.9 million) and oil removal from or disposal of impacted
property ($ 15.9 million), the court held that the refinery did not show, as a
matter of law, that such costs were paid in settlement of claims for property
damage, as distinct from payment of obligations under environmental laws. Thus,
the policyholder bore the burden of showing more likely than not that payment
of such costs actually resulted from settlement of its property damage
liability to third-party property owners on their claims. The same was true
with respect to expenses associated with those costs, such as laboratory
sampling and litigation support costs. To the extent the policyholder shows the
requisite connection to settlement of property damage claims, the costs fell
within the (now) primary coverage of the Illinois Union policy.
Also, the court held that the
uncontroverted facts established that the release of crude oil from the
refinery was "abrupt and neither expected nor intended by the
Insured" within the meaning of the National Union policy.
Additional significant holdings from the court included:
- The treatment of governmentally-mandated
"clean-up costs" under Endorsement 28 to the National Union
policy was deemed ambiguous. The court determined that because the
policy's coverage for "damages" could reasonably be construed to
include all clean-up costs incurred by the policyholder due to an
obligation to remedy harm to third-party property, the ambiguous allowance
for coverage of "third party clean-up loss, cost or expense" in
Endorsement 28 should be construed to provide coverage to the refinery for
its cost of cleaning up third party property, even if its obligation to do
so was based solely on a governmental order or requirement. Additionally, the policyholder’s release
of crude oil from its sewer system and the release of diesel oil were both
determined to be within the scope of coverage under the National Union policy.
- With respect to "clean-up costs" that were
within the scope of National Union coverage but excluded by the Illinois
Union policy, National Union's coverage was excess only of a $ 5 million
SIR. Because there was no other applicable insurance to cover such costs,
National Union was obligated, upon exhaustion of the $5 million SIR, to
"drop down" and cover such costs.
- Illinois Union's coverage for loss from property
damage included third-party "business interruption expense" and
residential "additional living expense" paid by the refinery in
settlement of property damage claims.
- Illinois Union's coverage for loss from property
damage included any payments by plaintiff to settle claims of liability
under K.S.A. § 65-6203(a)(1) for actual damage to property. With respect
to settlement of any claim seeking clean-up of affected property pursuant
to 65-6203(a)(2), Illinois Union's coverage applied as well.
- The policyholder did not show as a matter of law that
none of its remaining costs are based solely on government-mandated
remediation. Thus, summary judgment was inappropriate on several matters,
including whether any allocation can be made to account for non-covered
flood damage to real property, the cost-effectiveness of plaintiff's
residential purchase program, the extent to which costs allegedly
associated with that program are within the scope of Illinois Union's
property damage coverage (or alternatively National Union's coverage of
clean-up costs), and the appraisal of fair market values for pre-flood and
post-flood properties.
- The Illinois Union policy provided coverage for the
policyholder’s defense and claims resolution costs associated with
property damage claims. The record did not establish the extent of
plaintiff's losses attributable to property damage, and thus did not show
the extent of defense and adjustment costs owing under the Illinois Union
policy; and lastly,
The National Union policy did not promise
indemnification of the policyholder’s defense and investigative expenses when
National Union does not have a duty to defend.
For a copy of the decision click here
Jeffrey Kingsley and Paul Steck
Case provided courtesy of Lexis