No. 04-228
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 50
TRAVELERS CASUALTY AND SURETY
COMPANY, a foreign corporation,
Plaintiff, Respondent and Cross-Appellant,
v.
RIBI IMMUNOCHEM RESEARCH, INC.,
a Delaware corporation,
Defendant and Appellant.
APPEAL FROM: District Court of the Twenty-First Judicial District,
In and for the County of Ravalli, Cause No. DV 99-218,
The Honorable Jeffrey H. Langton, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
J. Daniel Hoven, Browning, Kaleczyc, Berry and Hoven, P.C., Helena, MT
Michael R. Wrenn, Daniel A. Zariski, Samuel R. Watkins, Heller Ehrman
White & McAuliffe, LLP, Seattle, WA
For Respondent:
Ronald A. Bender, Worden Thane, P.C., Missoula, MT
Thomas S. James, Jr., Jessica L. Goldman, Summit Law Group, PLLC,
Seattle, WA
For Amicus Montana Petroleum Tank Release Compensation Board:
R. Allan Payne, Special Assistant Attorney General, Doney, Crowley,
Bloomquist & Uda, P.C., Helena, MT
For Amicus Complex Insurance Claims Litigation Association:
Julie A. Johnson, Teri A. Walter, Gough, Shanahan, Johnson and Waterman,
Helena, MT
Submitted on Briefs: January 11, 2005
Decided: March 1, 2005
Filed:
__________________________________________
Clerk
Justice Brian Morris delivered the Opinion of the Court.
¶1 We must determine whether a comprehensive general liability (CGL) policy provides
coverage for environmental damage caused by the intentional disposal of hazardous wastes
into a landfill that results in the unintentional migration of the wastes into the groundwater.
The Twenty-First Judicial District Court, Ravalli County, found that the policy’s pollution
exclusion bars coverage for the environmental contamination due to the intentional nature
of the dumping. We affirm the District Court’s decision to deny coverage to Ribi
Immunochen Research, Inc. (Ribi) under a CGL policy provided by Travelers Casualty and
Surety Company (Travelers).
¶2 The parties raise numerous arguments on appeal and cross-appeal, but we need
address only the following issues to resolve this matter:
¶3 1. Whether the District Court erred in determining that the CGL policy’s pollution
exclusion provision bars coverage for Ribi’s hazardous waste disposal in that the disposal
was not “sudden or accidental.”
¶4 2. Whether the District Court erred in determining Travelers had no duty to defend
Ribi against claims brought by third-parties for cleanup costs.
¶5 3. Whether the District Court erred in determining that Travelers may recoup its
defense costs expended on Ribi’s behalf for those claims that the District Court ultimately
determined were barred by the CGL policy’s pollution exclusion.
¶6 4. Whether the District Court erred in ordering Travelers to pay attorneys’ fees that
Ribi incurred in litigating pre-trial discovery motions.
¶7 Ribi also appeals the District Court’s dismissal of its contract-based claims against
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Travelers, including breach of the duty of good faith and fair dealing and violations of the
Unfair Claims Settlement Practices Act. We need not reach these issues, however, as our
decision to affirm the District Court’s conclusions denying coverage for Ribi’s
environmental contamination makes review of these matters unnecessary. See Story v. City
of Bozeman (1990), 242 Mont. 436, 791 P.2d 767 (holding that breach of good faith and fair
dealing claim requires showing of breach of contract); see also § 33-18-242(5), MCA (an
insurer may not be held liable under the Unfair Claims Settlement Practices Act if the insurer
had a reasonable basis in law or in fact for contesting the claim). Similarly, we resolve
Travelers’s narrow cross-appeal question regarding which party bears the burden of proving
an “occurrence” within the context of our analysis of the broader burden of proof discussion.
FACTUAL AND PROCEDURAL BACKGROUND
¶8 Ribi, a corporation located in Hamilton, Montana, at all times pertinent to these
proceedings, develops biopharmaceutical products. From 1981 to 1985, Ribi used toxic
solvents to extract and purify its products. Ribi routinely disposed of its hazardous wastes
at Bitterroot Valley Sanitary Landfill (BVSL) for most of this period. Ribi employees
transported containers of waste to BVSL each month and poured the liquid contaminants into
an open, unlined, earthen pit that measured six feet deep, four feet wide, and eight feet long.
Ribi recognized the hazardous nature of its chemical solvents, but hoped that much of the
waste would evaporate before migrating through the landfill into the shallow groundwater.
Subsequent analysis revealed, however, that the hazardous contaminants migrated into the
groundwater approximately 13 to 34 minutes after each disposal.
¶9 The Environmental Protection Agency (EPA) discovered groundwater and soil
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contamination in 1987 resulting from Ribi’s waste disposal at BVSL. The National Institute
of Health (NIH) later excavated and cleaned the contaminated soil and groundwater.
Neighboring property owners sued Ribi in 1993 for personal injury and property damages.
The State also sued Ribi in 1997 to recover its response costs arising from contamination in
and around the landfill. The next year, 1998, the United States sought contribution from
Ribi for NIH’s response costs. Ribi eventually settled the claims with all three parties. This
litigation arises from the relationship between Ribi and its insurer–Travelers–regarding
Ribi’s requests for insurance coverage and defense against those three claims.
¶10 Travelers issued the CGL policy to Ribi from 1982 through 1985. Ribi filed a claim
with Travelers to recover the cost of remediating the damages caused by the contamination.
In response, on December 6, 1993, Travelers executed a reservation of rights letter for the
neighboring property owners’ claims in which it informed Ribi that it owed no indemnity
obligation to Ribi and therefore no defense. Travelers also sent Ribi a separate letter on
February 10, 1994, regarding its intention to seek reimbursement for defense costs.
Travelers and Ribi eventually agreed that Travelers would pay fifty percent of Ribi’s defense
costs in its suit with the neighboring property owners.
¶11 Travelers executed additional reservation of rights letters on January 25, 1996, and
March 10, 1999, in response to Ribi’s further demand for defense and indemnity of claims
brought by the state and federal governments. Travelers again informed Ribi that it owed
no indemnity obligations and therefore no defense and also notified Ribi of its intention to
seek recoupment of any defense costs in the two government actions. Ribi raised no
objections and thereafter, Travelers defended Ribi under its reservation of rights, paying one-
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hundred percent of the defense costs in the government suits.
¶12 Ribi regularly submitted claims to Travelers for defense costs and indemnification
under the policies throughout these third-party lawsuits. Travelers denied Ribi’s claims and
finally brought an action seeking a declaration that it had no duty to provide insurance
coverage and defense for these environmental claims. Ribi counterclaimed against Travelers
for breach of contract, declaratory relief, breach of the covenant of good faith and fair
dealing and violations of the Unfair Claims Settlement Practices Act under § 33-18-201,
MCA.
¶13 Travelers filed a motion for summary judgment on December 12, 2001, on the
declaratory judgment issue and also sought to recoup expenses incurred as part of its defense
against the third-party suits. Travelers also refuted Ribi’s counterclaim that it had breached
the duty of good faith and fair dealing or violated the Unfair Claims Settlement Practices Act
in denying Ribi’s claims. The District Court granted summary judgment to Travelers on the
coverage issue thereby negating all of Ribi’s contract-based claims. The court further
allowed Travelers to recoup its defense costs in the government suits expended after March
10, 1999. With respect to the neighboring property owners’ suits, the District Court initially
denied Travelers’s recoupment claims, but later amended its order to include those costs
expended after February 10, 1994. This appeal followed.
STANDARD OF REVIEW
¶14 We review a district court’s decision to grant summary judgment de novo, based on
the same criteria applied by the district court. Counterpoint, Inc. v. Essex Ins. Co., 1998 MT
251, ¶ 7, 291 Mont. 189, ¶ 7, 967 P.2d 393, ¶ 7. As the material facts here remain
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uncontroverted, we limit our review to questions of law. Brabeck v. Employers Mut. Cas.
Co., 2000 MT 373, ¶ 8, 303 Mont. 468, ¶ 8, 16 P.3d 355, ¶ 8. The District Court interpreted
Travelers’s insurance contract in reaching its decision and this interpretation of an insurance
contract represents a question of law. Pablo v. Moore, 2000 MT 48, ¶ 12, 298 Mont. 393,
¶ 12, 995 P.2d 460, ¶ 12. We review a district court’s conclusion of law to determine
whether it is correct. Pablo, ¶ 12.
DISCUSSION
¶15 Whether the District Court erred in determining that the CGL policy’s pollution
exclusion provision bars coverage for Ribi’s hazardous waste disposal in that the
disposal was not “sudden or accidental.”
¶16 The District Court determined that Ribi’s disposal constituted an “occurrence,”
possibly triggering coverage under the CGL policy, but it found no coverage based upon the
fact that Ribi’s long-term disposal of hazardous wastes could not be deemed “sudden and
accidental” as defined in the CGL policy’s pollution exclusion. Ribi argues that the District
Court erred in determining that the “sudden and accidental” exception contains a temporal
element and instead contends that the term “sudden” should be understood to mean
unexpected, and not necessarily quick or abrupt. Ribi maintains, in other words, that even
though its disposal may have occurred over a period of years, the CGL policy should provide
coverage so long as the ultimate migration of the wastes into the groundwater was
unexpected and accidental. Thus, Ribi alleges that the ultimate migration of its waste into
the groundwater constituted the relevant event under the CGL policy’s pollution exclusion
rather than its intentional disposal in the landfill.
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¶17 General rules of contract law apply to insurance policies and we construe them strictly
against the insurer and in favor of the insured. Erickson v. Dairyland Ins. Co. (1990), 241
Mont. 119, 123, 785 P.2d 705, 707-08. Courts give the terms and words used in an
insurance contract their usual meaning and construe them using common sense. Hardy v.
Progressive Speciality Ins. Co., 2003 MT 85, ¶ 14, 315 Mont. 107, ¶ 14, 67 P.3d 892, ¶ 14.
Any ambiguity in an insurance policy must be construed in favor of the insured and in favor
of extending coverage. Farmers Alliance Mut. Ins. Co. v. Holeman, 1998 MT 155, ¶ 25, 289
Mont. 312, ¶ 25, 961 P.2d 114, ¶ 25. An ambiguity exists where the contract, when taken
as a whole, reasonably is subject to two different interpretations. Holeman, ¶ 25. Courts
should not, however, “seize upon certain and definite covenants expressed in plain English
with violent hands, and distort them so as to include a risk clearly excluded by the insurance
contract.” Johnson v. Equitable Fire & Marine Ins. Co. (1963), 142 Mont. 128, 131, 381
P.2d 778, 779.
A. Definition of “Occurrence”
¶18 At the outset we must determine whether the unintentional damage caused by Ribi’s
intentional disposal constitutes an “occurrence” as defined in the CGL policy. The CGL
policy’s intent is “to insure the acts or omissions of the insured, including his intentional
acts, excluding only those in which the resulting injury is either expected or intended from
the insured’s standpoint.” Northwestern Nat. Cas. Co. v. Phalen (1979), 182 Mont. 448,
455, 597 P.2d 720, 724 (emphasis added). Whether the resulting injuries were intended or
expected must be measured from the insured’s standpoint. Phalen, 182 Mont. at 455, 597
P.2d at 724.
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¶19 As defined in the CGL policy, an “occurrence” constitutes an accident that results in
property damage “neither expected nor intended from the standpoint of the insured.”
Travelers maintains in its cross-appeal that the District Court erred in determining that the
“neither expected nor intended” language in the CGL policy represents an exclusion to
coverage. As an exclusion, the District Court found that Travelers bears the burden of
proving that it applies. Travelers argues, instead, that the District Court should have
concluded that the “expected nor intended” language provides a grant of coverage and that
Ribi, as the insured seeking coverage, must prove that the damages arising from its disposal
of hazardous wastes were “neither expected nor intended.” We agree.
¶20 The definition of “occurrence” clearly constitutes an inseparable element of the CGL
policy’s insuring agreement, specifying a number of factors that must be present for
coverage to exist. Under the CGL policy’s definition of “occurrence,” Ribi could establish
coverage only if the property damage arising from its disposal of hazardous wastes had
occurred unexpectedly or unintentionally. To interpret the “neither expected nor intended”
language otherwise would force the insurer to provide coverage unconditionally for any
claims and under any circumstances until it could discover independently evidence of
damages caused by the insured. Fireman’s Fund Ins. Co. v. Ex-Cell-O Corp. (E.D. Mich.
1988), 702 F. Supp. 1317, 1328. Thus, on the face of the CGL policy, and under the rule
discussed below (¶ 29, infra) that the insured initially must prove a loss stemming from an
“occurrence” of the type included in the general coverage provision, the burden would be
upon Ribi to prove that its claim arose from facts that came within the CGL policy’s
definition of “occurrence.” We conclude, therefore, that the District Court improperly
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determined that the “neither expected nor intended” language in the CGL policy constitutes
an exclusion. This conclusion alone, however, does not bar coverage for Ribi; it merely
imposes on it the burden of establishing an “occurrence.”
¶21 The CGL policy’s core provision defines “occurrence” by reference to those accidents
or conditions that result in damage that was “neither expected nor intended.” This provision
contains no temporal component and focuses instead on the insured’s expectations regarding
damages. Thus, acts that take place over a significant period of time, but cause unexpected
damage fall within the definition of an “occurrence” and are entitled to coverage. Millers
Mut. Ins. Co. v. Strainer (1983), 204 Mont. 162, 663 P.2d 338 overruled on other grounds
(holding that intentional acts do not exclude coverage under the “occurrence” language
unless the injury was expected or intended).
¶22 Here the District Court found that Ribi clearly intended to dispose hazardous wastes
at BVSL for an extended period of time. The court found, however, that the parties disputed
whether Ribi intended or expected damage from this intentional discharge. Given this
disagreement and the fact that the resulting damages must be viewed from the insured’s
standpoint, we will assume for our purposes that an “occurrence” took place and coverage
existed. Phalen, 182 Mont. at 455, 597 P.2d at 724. This assumption transforms our inquiry
into whether the pollution exclusion clause in the CGL policy eliminates coverage for
damages arising out of the intentional disposal of hazardous wastes into or upon the land.
B. Pollution Exclusion and its “Sudden and Accidental” Exception
¶23 A separate pollution exclusion in the CGL policy restricts the otherwise broad sweep
of “occurrence.” It provides that the policy does not apply to property damages arising out
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of the disposal of hazardous wastes into or upon the land. The pollution exclusion clause’s
general thrust disavows any obligations by Travelers to provide coverage in cases such as
this where Ribi’s disposal of hazardous wastes caused the damages. The pollution exclusion
would proscribe Travelers’s coverage if we stopped here because Ribi’s hazardous wastes
undoubtedly contaminated neighboring soil and groundwater.
¶24 In this case, however, the CGL policy’s pollution exclusion contains an important
exception. This exception states that the exclusion does not apply if the disposal is “sudden
and accidental.” In other words, the pollution exclusion eliminates claims from coverage
unless the claim arises from the disposal of hazardous wastes deemed to be “sudden and
accidental.” Travelers contends that “sudden” includes a temporal element within the CGL
policy’s context that must be applied to Ribi’s disposal of hazardous wastes.
¶25 In Sokolowski v. American West Ins. Co., 1999 MT 93, 294 Mont. 210, 980 P.2d
1043, we discussed the meaning of a similar “sudden and accidental” provision in a
homeowner’s policy. There we concluded that the gradual accumulation of soot and smoke
on the walls, ceiling and floor of the insured’s home caused by prolonged burning of candles
during the holiday season did not constitute a “sudden” release of pollutants. Sokolowski,
¶ 17. We focused on the fact that the unambiguous language of the “sudden and accidental”
exception in a pollution exclusion clause in a homeowner’s policy contains a temporal
element. Sokolowski, ¶ 15. We noted that the very use of the two words “sudden” and
“accidental” reveals a clear intent to define them to state two separate requirements.
Sokolowski, ¶ 15. In other words, the word “sudden,” even if it includes the concept of
unexpectedness, also encompasses a temporal element, because the word “accidental”
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already expresses “unexpectedness.” Sokolowski, ¶ 15.
¶26 Thus, we concluded that in order for the word “sudden” to have significant purpose,
and not to be surplusage when used generally in conjunction with the word “accidental,” it
must have a temporal aspect to its meaning, and not merely a sense of something
unexpected. Sokolowski, ¶ 15. Further, recognizing our duty to interpret the contract as a
whole, the failure to show one condition, i.e., suddenness, negates the exception to the
pollution exclusion resulting in no coverage under the insurance policy. Sokolowski, ¶ 15
(citing § 28-3-202, MCA). We now extend Sokolowski’s holding to the standard pollution
exclusion in a CGL policy.
¶27 Ribi suggests that we should consider the drafting history of the “sudden and
accidental” pollution exclusion to determine its meaning. Extrinsic evidence may be used
as an aid in interpreting contract provisions, however, only when the language contained
therein is ambiguous. Section 28-2-905, MCA. We have declared identical policy language
in Sokolowski to be unambiguous, and, therefore, we deem it unnecessary to consider Ribi’s
arguments pertaining to the drafting history of the CGL policy’s pollution exclusion clause.
Sokolowski, ¶ 15.
C. Burden of Proof
¶28 Now that we have determined that the “sudden and accidental” exception to the
pollution exclusion contains a temporal element, we must address an issue of first
impression: which party bears the burden of proving that an exception to an exclusion
applies, such as the “sudden and accidental” exception at issue here. We agree with
Travelers that the insured bears the burden of proof.
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¶29 Courts generally allocate the respective burdens of proof to the insured and insurer
consistent with the basic distinction between coverage clauses and exclusionary clauses. The
insured must prove in the first place a loss stemming from an “occurrence” of the type
included in the general coverage provision. See, e.g., MacKinnion v. Truck Ins. Exchange
(Cal. 2003), 73 P.3d 1205, 1213. In turn, the insurer has the burden of proving the
applicability of an exclusionary clause, such as the pollution exclusion. See, e.g., United
States Fidelity & Guaranty (D. Kan. 1990), 734 F. Supp. 437, 442; Keggi v. Northbrook
Property and Cas. Ins. Co. (Ariz. 2000), 13 P.3d 785, 788. We agree with those courts that
have allocated the initial burden to the insured to establish that the claim falls within the
basic scope of coverage and shifted to the insurer the burden to establish that the claim
specifically is excluded.
¶30 We now turn to the third and final step in the process. Although courts remain split
on the issue, the majority return the burden of proving an exception to an exclusion to the
insured. For example, in St. Paul Fire & Marine Ins. v. Warwick Dyeing Corp. (1st Cir.
1994), 26 F.3d 1195, 1200, the court held that the insured who disposed of various waste
materials at a landfill bore the burden of proving that an exception to the pollution exclusion
applied. Likewise the court in Fireman’s Fund, 702 F. Supp. at 1328, determined that the
insured carries the burden of proving the exception to the pollution exclusion because the
insured possess the information pertaining to its activities. This allocation appropriately
aligns the burden with the benefit as the party seeking the benefit of a particular policy
provision bears the burden of proving its application. See Intel Corp. v. Hartford Accident
& Indem. Co. (9th Cir. 1991), 952 F.2d 1551, 1557.
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¶31 The CGL policy’s “sudden and accidental” exception creates coverage for
environmental contamination where it otherwise would not exist. Correspondingly, the
insured bears the burden of proving that the coverage stems from this exception: “[W]hen
a policy contains an exception within an exception, the insurer need not negative the internal
exception; rather, the [insured] must show that the exception from the exemption from
liability applies.” 19 G. Couch, Couch on Insurance 2d § 79.385, 338 (1983). Further, if
the burden were on the insurer to disprove the exception, the insured would have no
incentive to discover whether its disposed wastes gradually were migrating into neighboring
groundwater, because “preservation of ignorance would increase the likelihood of insurance
coverage.” Aeroquip Corp. v. Aetna Cas. and Sur. Co., Inc. (9th Cir. 1994), 26 F.3d 893,
895.
¶32 The District Court relied on Travelers Cas. & Sur. Co. v. The Superior Court of Santa
Clara (Cal. 1998), 75 Cal. Rptr.2d 54, for the proposition that the insurer has the burden of
making an affirmative showing in a summary judgment motion that the insured cannot
establish that the claims fall within the “sudden and accidental” exception to the pollution
exclusion. Travelers is not persuasive here. Forcing the insurer to prove a negative–that the
discharge was not all sudden and accidental–seems unfair where the insured solely possesses
the relevant information pertaining to its activities. Fireman’s Fund, 702 F. Supp. at 1328.
By contrast, it would impose an undue burden on the insurer to require it to discover
independently evidence of an insured’s sudden and accidental disposal of pollutants. We
conclude that Ribi had the burden of proving that its disposal of hazardous wastes into the
groundwater of neighboring property owners was “sudden and accidental.”
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D. Relevant Event Under the “Sudden and Accidental” Exception
¶33 Next, we must consider whether the “sudden and accidental” exception of the CGL
policy’s pollution exclusion focuses on Ribi’s initial disposal of the hazardous wastes or on
the subsequent migration of these wastes away from the disposal site and the corresponding
damage. Ribi maintains that the ultimate migration of its wastes into the groundwater
constitutes the relevant event under the CGL policy’s pollution exclusion rather than its
intentional disposal of them into the landfill.
¶34 Other courts have taken the opposite approach. For instance, the court in LaFarge
Corp. v. Travelers Indem. Co. (11th Cir. 1997), 118 F.3d 1511, held that under Florida law,
it is actual discharge, not resulting damages or contamination, that must be "sudden and
accidental" in order to fall within the exception to the pollution exclusion clause in
comprehensive general liability policies. As discussed previously, basic coverage under the
CGL policy arises from the occurrence of unintended damages. See ¶ 22. And the CGL
policy generally excludes from basic coverage those damages that arise from the disposal
of hazardous wastes. See ¶ 23. An important exception to the pollution exclusion exists,
however, for those discharges that are “sudden and accidental.”
¶35 We determine that the language of the CGL policy’s pollution exclusion clearly
excludes coverage for “property damage arising out of the discharge” of hazardous wastes
“into or upon the land” unless “such discharge . . . is sudden and accidental.” (Emphasis
added). The occurrence that must be sudden and accidental then, is the disposal of
hazardous wastes “into or upon the land” from which the property damage arose, not the
unexpected migration and corresponding damages. See, e.g., Warwick, 26 F.3d at 1203
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(under Rhode Island law, initial disposal of waste at landfill site was relevant discharge that
had to be sudden and accidental for coverage to exist under exception to pollution exclusion
clause in general liability policy; release of pollutants from landfill into surrounding
environment was not relevant discharge); Transamerica Ins. Co. v. Duro Bag Mfg. Co. (6th
Cir. 1995), 50 F.3d 370, 373 (holding under Kentucky law that coverage barred insured's
depositing of drums and fiberboard barrels containing ink and glue at landfill, when the
disposal took place on regular basis or in ordinary course of business).
¶36 To hold otherwise eliminates the distinction between unintentional and unexpected
disposal and unintentional and unexpected migration and corresponding damages. The court
in Queen City Farms, Inc. v. Central Nat. Ins. Co. of Omaha (Wash. 1994), 882 P.2d 703,
blurred this distinction when it held that “if the damage results from the dispersal of
materials into the groundwater from a place of containment where the insured believed they
would remain or from which they would be safely filtered, and that dispersal was unexpected
or unintended, then coverage is provided under the policies.” Queen City Farms, 882 P.2d
at 725. We determine instead, that whether the insured intended the hazardous wastes to
migrate into the groundwater and cause damage after the intentional disposal into the land
proves irrelevant. The disposal must be sudden and accidental to qualify for coverage, not
the migration and corresponding damage. Even were we to apply the “sudden and
accidental” exception to the ultimate migration of the wastes, in contradiction to our holding
today, the migration was not abrupt or quick, only unintentional. We conclude, therefore,
that the initial disposal, rather than the migration and any resulting damages, must be
“sudden and accidental” in order to fall within the exception to the CGL policy’s pollution
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exclusion clause.
¶37 Here Ribi intentionally disposed of hazardous wastes at the BVSL site over a three-
year period. If, as we have held, the term “sudden” constitutes both an “abrupt” and a
“quick” discharge, then without question disposing contaminants into or upon the land for
a period of three years cannot be construed as “sudden.” Indeed, Ribi’s employees
transported containers of waste to BVSL each month and poured the liquid contaminants into
an open, unlined, earthen pit that measured six feet deep, four feet wide, and eight feet long.
Ribi’s intentional disposal of hazardous wastes represents the relevant event and not the later
migration of hazardous wastes from the landfill into the groundwater and neighboring
property. Ribi’s disposal of hazardous wastes into BVSL cannot be construed either as
accidental or unexpected, and, therefore, the District Court correctly concluded that the CGL
policy’s pollution exclusion barred coverage.
¶38 Whether the District Court erred in determining Travelers had no duty to
defend Ribi against claims brought by third-parties for cleanup costs.
¶39 Ribi argues Travelers owed it a duty to defend against the third-party suits that alleged
liability potentially covered by the CGL policy. Moreover, Ribi contends that Travelers’s
declaratory judgment action forced the District Court to consider two issues of first
impression and such legal uncertainty on its own gives rise to a duty to defend.
¶40 We apply the “four-corners” rule as the policy’s language determines an insurer’s
duty to defend its insured. City of Bozeman v. AIU Insurance Co. (1993), 262 Mont. 370,
377, 865 P.2d 268, 272 (“a liability insurer has no duty to defend an action against its
insured when the claim or complaint clearly falls outside the scope of the policy’s
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coverage”). The acts giving rise to the claim form the basis for coverage, not any legal
theories contained in the underlying complaint. See New Hampshire Ins. Group v. Strecker
(1990), 244 Mont. 478, 481, 798 P.2d 130, 132 (holding that coverage could not be premised
upon theories of negligence in the underlying complaint where based upon numerous acts
of molestation that could not be deemed negligent acts). Simply put, if the asserted claim
is not covered by the policy, then the insurer has no duty to defend the insured. Insured
Titles, Inc. v. McDonald (1996), 275 Mont. 111, 116, 911 P.2d 209, 211.
¶41 The acts giving rise to the claims against Ribi are not in dispute. The third-party suits
alleged that Ribi intentionally disposed of hazardous wastes at BVSL. Thus, Travelers did
not need to resolve any factual disputes in analyzing its duty to defend. These circumstances
differ, therefore, from those in Farmers Union Mut. Ins. Co. v. Staples, 2004 MT 108, ¶ 24,
321 Mont. 99, ¶ 24, 90 P.3d 381, ¶ 24, where we held that an insurer could not look to facts
developed outside the policy language and the pleadings in analyzing its duty to defend.
¶42 As discussed previously, intentional disposal cannot be considered “accidental” under
the exception to the CGL’s pollution exclusion. See ¶ 26; see also Sokolowski, ¶ 15.
Further, Ribi’s continued disposal over several years cannot be construed as “sudden” under
the pollution exclusion. See ¶ 26; see also Sokolowski, ¶ 15. The CGL policy bars coverage
for the asserted claims because Ribi’s intentional and repeated acts gave rise to the third-
party suits. Accordingly, as no coverage existed, Travelers had no duty to defend Ribi.
Insured Titles, Inc., 275 Mont. at 116, 911 P.2d at 211.
¶43 Ribi contends nevertheless that certain of Travelers’s defenses present issues of first
impression in Montana thereby forcing Travelers to provide a defense. We disagree.
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¶44 The Alaska Supreme Court has concluded that the lack of court review of specific
policy language proves insufficient on its own to create a possibility of coverage that
requires a defense. Makarka v. Great American Ins. Co., (Alaska 2000), 14 P.3d 964, 970.
In Makarka, the insured sustained injuries in a collision arising from an earlier negligent
brake repair. Although the insured had cancelled her coverage before the accident, she
argued it remained in effect due to the fact that the faulty brake repair work took place
during the policy period. The insured based her claims on language in the policy that
allowed for recovery on injuries “to which this insurance applies.” The insurer denied
coverage based on the fact that the occurrence date of her injuries fell outside of coverage.
The Alaska Supreme Court held insurers who accurately interpret their policies and give the
insured timely notice of refusal need not provide a defense merely because a court has yet
to interpret that particular policy language. See Makarka, 14 P.3d at 970.
¶45 We similarly conclude the District Court properly determined that Travelers had no
duty to defend Ribi against claims brought by third-parties for cleanup costs. Travelers
responded to Ribi’s demand for defense and indemnity with three different reservation of
rights letters. Travelers denied coverage in each, stating its investigation and participation
in the defense under the policies took place under a continuing reservation of rights to
decline coverage at a later time. Travelers eventually denied the claims when its
investigation revealed Ribi intentionally had disposed of the hazardous wastes. Travelers’s
denial letters assessed Ribi’s claim for injury and accurately explained that the injury
occurred outside of the CGL policy’s scope. Thus, the District Court correctly rejected
Ribi’s claim that the novelty of Travelers’s defense on its own triggered a duty to provide
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a defense to the third-party suits. Makarka, 14 P.3d at 970.
¶46 Whether the District Court erred in determining that Travelers may recoup its
defense costs expended on Ribi’s behalf for those claims that the District Court
ultimately determined were barred by the CGL policy’s pollution exclusion.
¶47 Although the District Court initially denied Travelers’s recoupment costs for the
neighboring property owners’ suit, it later amended its order to include these costs in
addition to the costs expended in the government suits it awarded earlier. Ribi argues that
an insurer may not extinguish its duty to defend “potentially covered” claims retroactively
and that Travelers thereby waived its recoupment rights when its reservation on March 10,
1999, came five years after the initial tender of the third-party suits. Ribi further argues that
Travelers’s reservation letters proved ineffective because it never expressly accepted the
reservation and thus Travelers may not recoup its defense costs.
¶48 Travelers, on the other hand, contends that we should follow decisions from other
jurisdictions that allow an insurer to recover defense costs when the insurer had no duty to
defend. The court in Grinnell Mut. Reinsurance Co. v. Shierk (S.D. Ill. 1998), 996 F. Supp.
836, reviewed cases from other jurisdictions for guidance in deciding whether an insurer
could recover defense costs in an assault claim when it had no duty to defend under a
homeowner’s policy. The court in Grinnell determined that to be entitled to reimbursement,
an insurer must: (1) specifically reserve the right to seek reimbursement from the insured;
and (2) provide the insured with adequate notice of this potential reimbursement. Grinell,
996 F. Supp. at 839. The court held that the insured had accepted the benefit of the insurer’s
defense and was fully appraised that the insurer reserved its right to seek reimbursement in
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the event that it was later determined that it had no duty to defend the insured. Grinell, 996
F. Supp. at 839.
¶49 Similarly, in United Nat. Ins. Co. v. SST Fitness Corp. (6th Cir. 2002), 309 F.3d 914,
the court held that an insurer may recover defense costs when the insurer did not have a duty
to defend any of the asserted claims under a general liability policy where the insurer: (1)
timely and explicitly reserved the right to recoup the costs; and (2) provided specific and
adequate notice to the insured of the possibility of reimbursement. United, 309 F.3d at 921.
The court determined a reservation of rights proves enforceable where an insurer meets these
conditions even absent an express agreement by the insured. United, 309 F.3d at 921; see
also Colony Insurance Co v. G&E Tires & Service, Inc. (Fla. Cir. 2000), 777 So.2d 1034,
1039 citing RESTATEMENT (SECOND) OF CONTRACTS § 69 (1981) (“[a] party cannot accept
tendered performance while unilaterally altering the material terms on which it is offered”).
¶50 We likewise conclude the District Court properly determined that Travelers may
recoup its defense costs expended on Ribi’s behalf for those claims outside the CGL policy’s
pollution exclusion provision. Travelers timely and explicitly reserved its right to recoup
defense costs when it notified Ribi of the reservation prior to the payment of the defense
costs in letters dated February 10, 1994, for the neighboring property owners’ suit and
January 25, 1996, and March 10, 1999, for the state and federal government claims
respectively. Travelers expressly reserved its right to recoup defense costs if a court
determined that it had no duty to provide such costs. Travelers also provided specific and
adequate notice of the possibility of reimbursement. Ribi implicitly accepted Traveler’s
defense under a reservation of rights when it posed no objections. Under these
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circumstances, the District Court appropriately concluded that Travelers may recoup its
defense costs.
¶51 Whether the District Court erred in ordering Travelers to pay attorneys’ fees
that Ribi incurred in litigating pre-trial discovery motions.
¶52 Finally, Travelers argues in its cross-appeal that the District Court improperly
awarded Ribi attorneys’ fees to sanction Travelers for refusing to produce drafting history
relating to the CGL’s pollution exclusion. Travelers moved for a protective order on the
basis of our holding in Sokolowski that “sudden and accidental” was unambiguous as a
matter of law and included a temporal component. Travelers maintains that it sought the
protective order to avoid the costs associated with searching for and producing the
voluminous drafting history regarding the pollution exclusion. The District Court denied
Travelers’s motion and ordered Travelers to pay Ribi’s fees incurred in litigating the motion.
¶53 Travelers asked the District Court to reconsider its award of fees relating to the
protective order after the District Court ultimately determined on summary judgment that the
CGL policy’s pollution exclusion’s language was unambiguous and thereby rendered
extrinsic evidence inadmissible. Travelers argued that fees are warranted under Rule
37(a)(4), M.R.Civ.P., only if the losing party’s position was not “substantially justified” and
the District Court’s ruling on summary judgment verified the justification for its earlier
motion for a protective order. The District Court concluded, however, that Travelers’s
concerns of costs related to searching for and producing the drafting history were not
appropriate matters for a protective order during discovery, and thus, were not substantially
justified.
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¶54 The trial court has discretion to control discovery and determine from the
circumstances of the case whether the parties have complied with discovery requests. In re
H.D. (1992), 256 Mont. 70, 77, 844 P.2d 114, 119. We will reverse that determination only
if the substantial rights of the opposing party have been so materially affected as to allow a
possible miscarriage of justice. In re H.D., 256 Mont. at 77, 844 P.2d at 119. A court may
award costs under Rule 37(a)(4), M.R.Civ.P., for expenses incurred in relation to litigating
motions for a protective order. If the motion is denied, the court shall require the moving
party to pay the opposing party “the reasonable expenses incurred in opposing the motion,
including attorney fees, unless the court finds that the making of the motion was
substantially justified . . . .” Rule 37(a)(4), M.R.Civ.P.
¶55 We agree with the District Court that Ribi should have been allowed to discover the
drafting history of the CGL policy’s pollution exclusion and that Travelers, as the party
seeking protection, failed to show good cause for its omission. Although the issues were
ultimately adjudged in its favor, Travelers was not substantially justified seeking a protective
order at the time due to the substantial case law relying on the drafting history in interpreting
the “sudden and accidental” clause and its potential relevancy in aiding the court’s
determination. See, e.g., Textron v. Aetna Cas. & Sur. Co. (R.I. 2000), 754 A.2d 742, 751
(holding that the drafting history of the “sudden and accidental” exception to the pollution
exclusion clause of a CGL policy facilitated an interpretation of “sudden” to include
unexpected); Nestle Food Corp. v. Aetna Cas. & Sur. Co. (D. N.J. 1990) 135 F.R.D. 101,
104-105 (holding that the drafting history of operative language from a general liability
policy is discoverable when ambiguity in policy has not been resolved); Morton Intern, Inc.
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v. General Acc. Ins. Co. of America (N.J. 1993), 629 A.2d 831, 847-48 (holding that the
pollution exclusion’s drafting and regulatory history enhanced a fuller understanding of the
meaning of its terms). Further, the District Court found Travelers’s systematic obstruction
during discovery “clearly and unequivocally stonewalling,” and intentionally sought to
prevent the discovery of potentially relevant material.
¶56 The record reveals the District Court administered the discovery process fairly.
Thus, we conclude that the District Court exercised appropriate discretion in controlling
discovery and did not violate Travelers’s rights in compelling discovery and awarding fees.
In re H.D., 256 Mont. at 77, 844 P.2d at 119.
¶57 For the foregoing reasons, we affirm the District Court.
/S/ BRIAN MORRIS
We Concur:
/S/ KARLA M. GRAY
/S/ W. WILLIAM LEAPHART
/S/ JAMES C. NELSON
/S/ JOHN WARNER
/S/ PATRICIA O. COTTER
/S/ JIM RICE
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