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New Castle County v. Hartford Acc. and Indem. Co.

filed: July 28, 1992.

NEW CASTLE COUNTY
v.
HARTFORD ACCIDENT AND INDEMNITY COMPANY, A CORPORATION OF THE STATE OF CONNECTICUT, HOME INSURANCE COMPANY, A CORPORATION OF THE STATE OF NEW HAMPSHIRE, NEW HAMPSHIRE INSURANCE COMPANY, A CORPORATION OF THE STATE OF NEW HAMPSHIRE, CONTINENTAL CASUALTY COMPANY, A CORPORATION OF THE STATE OF ILLINOIS, UNITED STATES FIRE INSURANCE COMPANY, A CORPORATION OF THE STATE OF NEW YORK, INSURANCE COMPANY OF NORTH AMERICA, A CORPORATION OF THE STATE OF PENNSYLVANIA, CONTINENTAL INSURANCE COMPANY, A CORPORATION OF THE STATE OF NEW HAMPSHIRE, UNITED STATES LIABILITY INSURANCE CO., A CORPORATION OF THE STATE OF PENNSYLVANIA, NATIONAL UNION FIRE INSURANCE COMPANY, A CORPORATION OF THE COMMONWEALTH OF PENNSYLVANIA, TWIN CITY FIRE INSURANCE COMPANY, A CORPORATION OF THE STATE OF MINNESOTA, AETNA CASUALTY AND SURETY COMPANY, A CORPORATION OF THE STATE OF CONNECTICUT, AND ZURICH INSURANCE COMPANY, A SWISS CORPORATION, CONTINENTAL CASUALTY COMPANY ("CNA"), APPELLANT



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE. (D.C. Civil Action No. 85-00436)

Before: Greenberg and Nygaard, Circuit Judges, and Pollak, District Judge*fn*

Author: Nygaard

Opinion OF THE COURT

NYGAARD, Circuit Judge.

This diversity case is a protracted insurance dispute which has spanned seven years and produced six published opinions. This one makes seven. Continental Casualty Company appeals from a declaratory judgment in favor of New Castle County declaring that under the comprehensive general liability insurance policy Continental has a duty to defend and indemnify New Castle for liability incurred when it discharged pollutants. The district court reasoned that because New Castle was unaware the substance it discharged was a contaminant, the pollution exclusion clause did not apply. The parties raise many issues and assignments of error. The sole issue is really whether the term "contaminants" in the pollution exclusion clause carries an implied scienter element. We hold that the term is plain and unambiguous under Delaware law and when a polluter discharges contaminants, whether or not he knows them to be contaminants, coverage is excluded under the insurance policy. We will reverse and remand with instructions to enter a judgment for Continental.

I.

We will recapitulate the facts and procedures only insofar as they are necessary to decide the narrow issue before us. For a complete factual recitation and procedural history, see New Castle County v Hartford Accident & Indem Co, 933 F.2d 1162, 1167-76 (3d Cir 1991) (New Castle V); New Castle County v Hartford Accident & Indem Co, 778 FSupp 812, 813-14 (D Del 1991) (New Castle VI).

New Castle had been insured by twelve insurance companies against liability for damages caused by discharging pollutants. The policies issued were post-1970, comprehensive general liability insurance policies and were standard throughout the insurance industry. Only two provisions of the policy need Discussion, the "occurrence" and "pollution exclusion" clauses. The occurrence clause provides coverage for the insured for damages "caused by an occurrence." An occurrence is defined as an accident that during the policy period results in damage "neither expected nor intended" by the insured. The pollution exclusion clause, however, excludes coverage for damage arising out of the "discharge . . . of . . . contaminants"; but coverage is still provided if "such discharge . . . is sudden and accidental."

New Castle had incurred liability in three separate lawsuits, the gist of which being that New Castle poisoned the local drinking water when it discharged leachate from two landfills, Langollen and Tybouts Corner. New Castle filed this action against its twelve insurers and sought a declaration that they must defend and indemnify it. The insurers denied coverage. New Castle eventually settled with all the insurers except Continental.

The issue of whether Continental must defend and indemnify New Castle for damages caused by the Tybouts Corner operation was tried before the district court without a jury. The court upheld a previous ruling that the term "sudden and accidental" in the pollution exclusion clause was ambiguous under Delaware law and construed it to mean "unexpected." New Castle III, 725 FSupp at 813 (citing New Castle County v Hartford Accident & Indem Co, 673 FSupp 1359, 1364 (D Del 1987) (New Castle I)). Since both the pollution exclusion and the occurrence clauses focus on the intent of the insured, the court conflated the two clauses into a single inquiry of whether New Castle expected pollution damage. Id. The district court found that New Castle did not expect off-site pollution to occur. It therefore held that an occurrence had taken place, that the pollution exclusion clause did not exclude coverage, and that Continental had a duty to defend and indemnify New Castle in the three underlying lawsuits. Id at 816. Continental appealed.

We upheld the determination that an occurrence took place and triggered the insurance coverage. New Castle V, 933 F.2d at 1191-92. We also upheld the Conclusion that the term "sudden and accidental" in the pollution exclusion clause was ambiguous and we construed it to mean "unexpected and unintended." Id at 1192-98. But we held that the district court erred when it considered the occurrence and pollution exclusion clauses coextensive. Id at 1162. We distinguished the occurrence clause, which focuses on damage, from the pollution exclusion clause, which focuses on discharge. The crux of this distinction is: The occurrence clause provides coverage when the damage was unexpected and unintended, though caused by an intentional act, whereas the pollution exclusion clause excludes coverage except when the discharge was unexpected and unintended. So an insured can point to unexpected and unintended damage as a result of a deliberate act of discharge, and therefore have an occurrence, yet still be excluded from coverage because the discharge was expected and intended.

We concluded that the damage/discharge distinction could prove dispositive because there is evidence that New Castle, while not expecting the Tybouts Corner landfill to produce off-site environmental damage, did expect the landfill to discharge leachate. Id at 1202. Because the district court treated the two clauses as coextensive, it never decided whether New Castle expected the discharge of pollutants. We remanded to determine "whether the County expected the Tybouts Corner landfill to discharge leachate." Id.

The district court on remand found, and New Castle did not seriously dispute, that New Castle knowingly discharged leachate. But for the first time New Castle raised a distinction between "leachate" and "contaminant." New Castle VI, 778 FSupp at 817. New Castle asserted that while leachate, the substance it discharged, is widely known today to be a contaminant, it did not know this at the time of the discharge or contract formation. The parties did not dispute the definition of leachate, an "aqueous liquid that contains soluble or suspended matter acquired as the water percolates through solid waste, soil, underlying mineral strata, or other materials." New Castle V, 933 F.2d at 1167 n.5 [Footnote omitted]; New Castle III, 725 FSupp at 803 n.4 [Footnote omitted] Nor did they contest that leachate is a contaminant; but they vigorously disputed the meaning of the term "contaminants." The district court agreed with New Castle and construed the pollution exclusion clause as excluding coverage only if the insured discharged a substance known to be a contaminant at the time of contract formation. New Castle VI, 778 FSupp at 820. It then found that New Castle was unaware leachate was a contaminant at that time and therefore the insurance policy still covered New Castle.

Continental appeals again, contending (1) that New Castle waived the "known contaminant" argument, (2) that we determined in New Castle V leachate fell within the meaning of the term "contaminants," (3) that the clause is unambiguous and neither distinguishes nor qualifies the term "contaminants," and (4) that even if New Castle's argument ...


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