Missouri Upholds Pollution Exclusion to Relieve Insurance Company from Duty to Defend Toxic Tort Claims Arising from Industrial PollutionNovember 27, 2017 | Martha Charepoo
In a recent decision, the Missouri Supreme Court for the first time considered the meaning and application of a pollution exclusion in a commercial general liability policy, landing unanimously on the side of the insurance company in favor of denying coverage to the insured. In Doe Run Resources Corp. v. St. Paul Fire and Marine Ins. Co. et al., the Supreme Court decided whether a policy’s pollution exclusion relieved the insurer from having to defend a lead mining company in numerous toxic tort lawsuits alleging injury from industrial pollution emitted from an overseas operation. The outcome turned on whether the exclusion was ambiguous, and, therefore, should be construed against the insurer in favor of coverage.
In defending its decision to deny coverage, the insurer had to contend with Missouri appellate precedent relied upon by the insured that found, where the insured’s business involved chemicals that might be deemed “pollutants”, a pollution exclusion is inconsistent with the insured’s reasonable expectations of coverage. Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W.2d 510 (Mo. App. S.D. 1999). The trial court adopted Hocker and found that the pollution exclusion created an ambiguity in the policy because it did not specifically identify lead as a pollutant. Consequently, the trial court construed the exclusion against the insurer and entered summary judgment in the insured’s favor on coverage. The Court of Appeals agreed that the pollution exclusion was ambiguous and did not bar coverage for the toxic tort claims.
On transfer from the Court of Appeals, the Supreme Court took the opposite view of Hocker and instead followed a more recent Eighth Circuit decision involving the same insured (Doe Run) which upheld a pollution exclusion and applied it to claims alleging injury from exposure to hazardous waste byproducts of the insured’s production process. Doe Run Res. Corp. v. Lexington Ins. Co., 719 F.3d 876 (8th Cir. 2013). In doing so, the Supreme Court distinguished the facts of Hocker, which involved failure of a gasoline storage tank at a gas station, releasing 2,000 gallons of gasoline into the ground causing damage to neighboring property. The court said that this case is completely different because the alleged exposure here was to toxic lead byproducts released into the air by the insured’s production process, not the insured’s lead products themselves. In framing the facts of the case in this way, the court found this case to be identical to Lexington in which the Eighth Circuit found that a nearly identically worded pollution exclusion barred toxic tort coverage for claims from the insured’s Missouri facility.
As a result of Doe Run, Missouri law is now clear that pollution exclusions are not inherently ambiguous as to toxic tort claims arising from exposure to industrial pollution rather than the insured’s product themselves, and insurers can probably rely on such an exclusion to deny coverage in such cases.
The Eighth Circuit Court of Appeals, in Donaldson v. Nat’l Union Fire Ins. Co. of Pittsburg, recently upheld the denial of benefits under an ERISA-governed insurance policy because the plan administrator’s interpretation of the disputed policy language was found to be reasonable.
Michele Donaldson filed a claim for accidental death and spousal benefits under an insurance policy issued to Schwan’s Shared Services, LLC by National Union Fire Insurance Company of Pittsburgh, PA. Mrs. Donaldson’s claim arose after her husband was killed in a motor vehicle accident in which his vehicle was struck by another that crossed into his lane of traffic. Mr. Donaldson was employed as a delivery driver with Schwan’s and was on his delivery route at the time of the accident.
The applicable insurance policy was an employee-benefit plan governed by the Employee Retirement Income Security Act (ERISA). The policy provided insureds with financial security in the event of an accidental death or injury when traveling on business. The policy provided “Hazards” that described specifically the circumstances under which coverage would be afforded.
Mrs. Donaldson filed her claim for accidental death and spousal benefits under Hazard H-12, which offered “24-Hours Accident Protection While On A Trip (Business Only).” National Union denied the claim under Hazard H-12 because Mr. Donaldson was not on a business trip at the time of his death; instead, he was operating a vehicle that he had been hired to operate. Following denial of her claim, Mrs. Donaldson filed a complaint in state court seeking an accidental death benefit on behalf of Mr. Donaldson’s estate in the amount of $286,000 and a spousal benefit of $50,000. Following removal to the United States District Court for the Eastern District of Arkansas, the district court found that denial of Mrs. Donaldson’s claim was appropriate because National Union had reasonably interpreted the Policy language and there was no abuse of discretion. Mrs. Donaldson’s complaint was dismissed with prejudice, which resulted in an appeal to the Eighth Circuit.
The ERISA-governed plan granted the plan administrator discretion to interpret the plan and to determine eligibility for benefits. The Eighth Circuit reviewed National Union’s decision to deny benefits under the abuse of discretion standard, which required the Court to uphold the insurer’s decision as long as it was based on a reasonable interpretation of the policy and was supported by substantial evidence. A number of relevant factors to aid the Court in its consideration have been determined in prior matters. See King v. Hartford Life & Accident Ins. Co., 414 F.3d 994, 999 (8th Cir. 2005). The dispositive factor, however, was whether the plan administrator’s interpretation of the disputed provisions was reasonable.
Interpretation of the policy at issue turned on whether an exception listed in Hazard H-12 applied to the circumstances of the accident. In its close examination of the policy language, the Eighth Circuit determined that the disputed exception language was ambiguous. The Court held that where the terms of the plan are susceptible to multiple, reasonable interpretations, a plan administrator’s choice among the reasonable interpretations is not an abuse of discretion. As both National Union and Mrs. Donaldson’s interpretations were equally reasonable, the Court deferred to the plan administrator’s interpretation of the disputed language and found no abuse of discretion by National Union. The district court’s decision was affirmed.
The opinion in its entirety may be found here.
Under existing Missouri law, there are no meaningful requirements for a time-limited settlement demand from the claimant sufficient to form the basis of a claim for bad faith refusal to settle. The new legislation enacts evidentiary rules that exclude evidence of a time-limited demand in a bad faith case, unless the demand meets the requirements of the statute. A demand that does not meet these requirements “shall not be considered as a reasonable opportunity to settle for the insurer” and “shall not be admissible” in any lawsuit seeking extracontractual damages.
Most significantly, the amendments to § 537.065 now bar an insured from entering into an agreement with the claimant unless the tortfeasor’s insurer has the opportunity to defend without a reservation of rights, but refuses to do so. Our read of the statute is that, if the insured wishes to refuse a defense offered under reservation, the insured must give the insurer an opportunity to withdraw its reservation and defend without reservation.
The amendments to § 537.065 now require that, where the insured tortfeasor has entered into a § 537.065 agreement with the injured claimant, no judgment may be entered against the insured before the tortfeasor’s liability insurer has been provided with written notice of the execution of the agreement, and at least 30 days have lapsed after the insurer’s receipt of such notice.
Insurers shall have 30 days after receipt of a notice that the insured has entered into a § 537.065 agreement to intervene in the underlying lawsuit. The insurer is entitled to intervene as a matter of right, not permissively at the discretion of the court.
Regardless of how the parties denominate their agreement, if it has the effect of a covenant not to execute against the insured, it will be treated as an agreement under the amended statute.
“‘Retroactive’ or ‘retrospective’ laws are generally defined, from a legal viewpoint, as those which take away or impair vested rights acquired under existing laws, or create a new obligation, impose a new duty, or attach a new disability in respect to transactions or considerations already past.” State ex rel. Clay Equip. Corp. v. Jensen, 363 S.W.2d 666, 668 (Mo. 1963). “We have many times held that a statute is not retrospective in its operation within the constitutional prohibition, unless it impairs a vested right. . . . Nor is an act retrospective if it but substitutes a remedy or provides a new remedy.” Id. at 669.
Rules of evidence are not deemed to be “vested,” substantive rights in Missouri. “A right to have one’s controversies determined by existing rules of evidence is not a vested right.” O’Bryan v. Allen, 108 Mo. 227, 232, 18 S.W. 892, 893 (1891). In O’Bryan, the Missouri Supreme Court held that rules of evidence “pertain to the remedies which the state provides for its citizens” and “they neither enter into and constitute a part of any contract, nor can be regarded as being of the essence of any right which a party may seek to enforce.” Id.
Like other rules affecting the remedy, they must, therefore, at all times be subject to modification and control by the legislature; and the changes which are enacted may lawfully be made applicable to existing causes of action even in those states in which retrospective laws are forbidden; for the law as changed would only prescribe rules for presenting the evidence in legal controversies in the future, and it could not, therefore, be called retrospective even though some of the controversies upon which it may act were in progress before.
O’Bryan, 108 Mo. at 232, 18 S.W. at 893.
The legislature has a clear and constitutional right to enact evidentiary statutes. St. Louis v. Cook, 359 Mo. 270, 274, 221 S.W.2d 468, 469 (1949). The Missouri Supreme Court in Jensen specifically held that evidentiary and procedural statutes apply to all actions within their scope, “whether commenced before or after the enactment, that is, unless a contrary intention is expressed by the legislature, and a statute affecting only the remedy may apply to a cause of action existing at the time the statute was enacted.” 363 S.W.2d at 669. Thus, an evidentiary statute applies to actions already on file at the time the statute becomes effective. “Laws which change the rules of evidence relate to the remedy only, may be applied to existing causes of action, and are not precluded from such application by the constitutional provision.” O’Bryan v. Allen, 108 Mo. 227, 231-32, 18 S.W. 892, 893 (1891). Evidentiary and procedural statutes apply to all pending cases which have not yet been reduced to a final judgment. Claspill v. Missouri P.R. Co., 793 S.W.2d 139, 140 (Mo. banc 1990).
In Enright, the Supreme Court entered an order of prohibition precluding discovery of hospital peer review committee materials based upon a statute enacted after the cause of action accrued. 706 S.W.2d at 856. In Claspill, the Supreme Court precluded enforced a statutory provision that excluded from evidence information that was compiled for purposes of developing a highway safety construction project. 793 S.W.2d at 140.
Accordingly, it should be settled law in Missouri that evidentiary and procedural statutes can be applied to any action, including any pending action, that is tried after the effective date of the statute.
III. EFFECTIVE DATES OF VARIOUS ASPECTS OF THE LEGISLATION.
This change to § 537.065 is a procedural change, which requires that notice be given to the insurer if the insured has entered into a § 537.065 agreement before judgment is entered against the insured. This should apply to bad faith claims that have accrued in the sense that the claimant has made a policy limits demand to settle that was not accepted, but not where a judgment has already been taken against the insured. Insurers should be prepared to argue that a judgment entered on or after August 28 is not valid if the insurer was not provided with 30 days’ written notice prior to its entry, even if the § 537.065 agreement was executed previously.
Policy limits demands made on or after August 28 must conform to the requirements of § 537.068, unless made within 90 days prior to a jury trial on the claim.
As we have previously discussed, the requirements of § 537.068 for a policy limits demand that would support a bad faith claim (that a demand be left open for 90 days and be accompanied by authorizations) are already required by the statute that authorizes recovery of prejudgment interest, Mo. Rev. Stat. § 408.040. In 2005, as part of comprehensive tort reform efforts, the legislature amended § 408.040 to provide that, before a settlement demand could trigger the accrual of prejudgment interest, it must be transmitted by certified mail, be accompanied by an affidavit of the claimant and, where applicable, medical or wage loss records and authorizations, and be left open for 90 days.
At least one court seemed to recognize the legislature’s intent that a demand in the format specified by § 408.040 was a necessary predicate for a bad faith claim. See Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 664 (Mo. App. W.D. 2008). In Johnson, the court held that claimants’ “demand letter satisfied the requisites of Section 408.040, RSMo 2000, which authorizes individuals with a claim like the Johnsons' to make a demand to an insurance company for either the policy limits or for a specific amount of money.”
Moreover, although claimants attempting the bad faith setup are in the habit of treating a policy limits demand as a one-time-only offer, there is usually no good faith basis for the drop-dead deadline. The intent of the original § 537.065, and certainly the intent of the statute as amended by the present legislation, is to allow the claimant to recover the insurance policy proceeds, not to “blow up” the limits of the policy and recover more than the liability limits. Accordingly, even where the claimant has previously made a demand that was not accepted prior to August 28, there appears to be no reason why the claimant could not be required to make a second demand in accordance with the new requirements, as the claimant has never had any substantive right under Missouri law to recover more than the insurance policy proceeds.
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