Emhart Industries, Inc. v. Century Indemnity Co.

United States Court of Appeals
For the First Circuit

Nos. 07-2806
07-2821

EMHART INDUSTRIES, INC.,

Plaintiff-Appellee, Cross-Appellant,

v.

CENTURY INDEMNITY COMPANY, as an indirect successor to
Insurance Company of North America,

Defendant-Appellant, Cross-Appellee,

HOME INSURANCE COMPANY; NORTH RIVER INSURANCE CO.;
ONEBEACON AMERICA INSURANCE COMPANY; US FIRE INSURANCE CO.,

Defendants, Cross-Appellees,

LIBERTY MUTUAL INSURANCE COMPANY,

Defendant.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

[Hon. William E. Smith, U.S. District Judge]

Before

Torruella, Boudin, and Howard,
Circuit Judges.

John L. Altieri, Jr., with whom Boutin & Altieri, P.L.L.C.,
Lawrence A. Nathanson, and Siegal & Park, was on brief for Century
Indemnity.
Jack R. Pirozzolo, with whom John A. Shope, Sarah Cooleybeck,
Kirk G. Hanson, David E. Cole, Jeremy A.M. Evans, and Foley Hoag
LLP, was on brief for Emhart Industries.
Kevin J. O'Connor, with whom Peter C. Netburn, and Hermes,
Netburn, O'Connor & Spearing, P.C., was on brief for OneBeacon
America.
Mark T. Nugent, with whom John T. Harding and Morrison Mahoney
LLP, was on brief for North River.

March 13, 2009

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 TORRUELLA, Circuit Judge. This insurance coverage

dispute arises from efforts by the Environmental Protection Agency

("EPA") to remediate contamination at the Centredale Manor

Superfund site (the "Site") in North Providence, Rhode Island.

In 2000, the EPA designated Plaintiff-Appellee/Cross

Appellant Emhart Industries, Inc. ("Emhart") a Potentially

Responsible Party ("PRP") for the cleanup costs of the Site under

the Comprehensive Environmental Response, Compensation, and

Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. Consequently,

Emhart made a demand for coverage on its insurers, which include

Defendant-Appellant/Cross-Appellee Century Indemnity Company

("Century"), and Defendants/Cross-Appellees The North River

Insurance Company ("North River") and OneBeacon America Insurance

Company ("OneBeacon"). Emhart later sued Century, OneBeacon, and

North River, among others, to cover its cleanup and defense costs.

After trial, a jury found that Century, OneBeacon, and

North River did not owe Emhart coverage for cleanup costs.

However, the district court awarded summary judgment for Emhart on

its claim that Century owed it a duty to defend in the EPA matter.

The district court later found that Century breached that duty and

assessed the total costs of defense of the underlying EPA action as

damages, but only up to the date of the jury's finding that Century

did not owe a duty to indemnify.

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 Century appeals the allowance of summary judgment in

Emhart's favor as to Century's duty to defend. In the alternative,

Century contends that it should not be saddled with the entirety of

the defense costs incurred up to the jury finding. Emhart

cross-appeals, contending that the duty to defend continues, that

it is entitled to total indemnity costs for Century's breach of the

duty to defend, and that the district court committed various

errors with respect to the jury verdict.

After careful consideration, we affirm the district court

with respect to all issues on appeal.

I. Background

The following derives from the extensive record, which

includes the parties' stipulations, trial testimony, and other

evidence submitted at trial and at a post-trial evidentiary

hearing.

A. Factual Background

1. The Contamination of the Site

The Site totals a little over nine acres. It is bordered

on the west by the Woonasquatucket River and on the east by a

drainage swale that empties into a wooded wetland to the south.

The Site is a flood plain for the river.

From 1944 to 1968, Atlantic Chemical Company, which later

became Metro-Atlantic, Inc. ("Metro-Atlantic"), leased a portion of

the Site, where it operated a chemical plant. Beginning in 1964,

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and for a period of less than one year, Metro-Atlantic manufactured

hexachlorophene, a substance used in pHisoHex disinfecting soap.

Dioxin is a byproduct of the hexachlorophene manufacturing process.

Even at very low levels, dioxin poses significant risks to human

and ecological health.

During this time, from 1952 to 1969, an unrelated

company, New England Container Corporation ("NECC"), operated a

steel drum reconditioning facility on a portion of the Site. NECC

refurbished drums from at least two companies that manufactured and

sold 2,4,5-trichlorophenol, which yields dioxin when combusted.

Refurbishing of the drums requires the dumping of the chemical

residue inside the drums and then incinerating the insides. Other

fires and incineration at the NECC facility may have contributed to

the dioxin contamination. Flooding also may have dispersed dioxin

onto the Site from other areas.

In 1968, Metro-Atlantic merged with Crown Chemical

Corporation to form Crown-Metro, Inc. ("Crown-Metro"), and

thereafter ceased operations at the Site as of the merger date.

Through a series of mergers and acquisitions, Emhart became the

corporate successor to Metro-Atlantic and Crown-Metro.

2. The EPA Action

The EPA first discovered dioxin on the Site in 1998. On

June 21, 1999, the EPA issued a Request for Information to Emhart

concerning the Site pursuant to § 104(e) of CERCLA, 42 U.S.C.

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§ 9604(e), and pursuant to the Resource Conservation and Recovery

Act ("RCRA"), 42 U.S.C. § 6927.

On February 28, 2000, after preliminary studies and

investigations, the EPA sent Emhart a Notice of Potential Liability

under CERCLA for the Site (the "PRP Letter"), identifying Emhart as

a PRP. Among other things, the PRP Letter required Emhart to pay

costs of $947,140.89 incurred to date, as well as future costs, and

mandated such actions as constructing a soil cap, implementing

flood control measures, and removing contaminated soil and river

sediments. The PRP Letter also identified five other PRPs,

including NECC, but Emhart remains the only PRP that is financially

viable. Liability under CERCLA is strict as well as joint and

several.

On April 12, 2000, the EPA issued to Emhart and others a

Unilateral Administrative Order for Removal Action (the "UAO")

requiring that certain remedial work be performed on the Site. The

EPA has also issued a second and third Unilateral Administrative

Order for Removal Action (the "second UAO" and "third UAO,"

respectively). The anticipated cost of remediation is likely to

exceed $100 million.

3. Century and Emhart

From the beginning of the EPA action, Emhart and Century

scuffled over coverage. Some of this scuffling is relevant to this

appeal.

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 On July 21, 1999, shortly after issuance of the Request

for Information, Emhart's broker sent a letter giving notice of the

Request for Information to Century and other "Interested

Underwriters," seventeen in all. The letter demanded that each

recipient provide "defense and indemnification" and advised the

insurers that Emhart had already secured outside counsel, Swidler

Berlin, to provide a "prompt and proper" defense. The letter

identified four excess policies issued by Century, but did not list

the Century policies at issue in this case. The broker also

forwarded, along with the Request for Information, a memorandum

detailing the various mergers and transactions that resulted in

Emhart's succession to the rights of Crown-Metro under the

policies. As with the Request for Information, on March 14, 2000,

Emhart forwarded copies of the PRP Letter to the same group of

insurers. On April 21, 2000, Emhart sent copies of the UAO to the

same group. Emhart has also engaged in individual communications

with one of its insurers, Liberty Mutual. Liberty Mutual would

later settle with Emhart for $250,000.

On November 22, 2000, after issuance of the UAO, Emhart's

attorney wrote Century seeking information, for the first time,

regarding policies issued to Crown-Metro. The letter attached a

1969 excess policy which Emhart had recently located, and requested

that Century conduct a review of its records for any other policies

it may have issued to Crown-Metro. The 1969 policy attached to

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that letter is the Century excess policy ("the Century Excess

Policy") at issue in this case.

Initially, by letter dated December 12, 2000, Century

refused to perform a broad search and denied coverage on the

Century Excess Policy, stating that, because Crown-Metro had merged

into Emhart after the expiration of the Century Excess Policy,

Emhart was not entitled to coverage. On January 3, 2001, Emhart

responded by reiterating its request for a broad search. Emhart

also reiterated facts (facts previously provided in the memorandum

accompanying its mass notices) that it was a corporate successor to

Crown-Metro, and asked Century to reconsider its position on

corporate succession.

On January 11, 2001, Century informed Emhart that it

reversed its position, and stated that Emhart may have succeeded to

Crown-Metro's insurance policies. However, Century insisted that

Emhart had to provide proof of exhaustion of the underlying policy

(which neither party had located yet) in order to obtain the

benefits of the Century Excess Policy.

Emhart subsequently filed this lawsuit on January 25,

2002. On August 29, 2002, Century commenced a new search for

possible policies, prior to any discovery requests made by Emhart.

During this second search, in October 2002, Emhart served document

requests and interrogatories relating to, among other things, any

Century policies insuring Crown-Metro.

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 The second search finally identified the Century primary

policy ("the Century Primary Policy") sometime around January 2003,

but it was not disclosed to Emhart until July 10, 2003.

Consequently, on January 27, 2004, Century moved to amend its

answer to add a counterclaim seeking a declaration that it had no

duty to defend or indemnify under the Century Primary Policy.

Century then denied coverage two days later, on January 29, 2004.

Emhart's counterclaim-in-reply sought a declaration that Century

owed duties to defend and indemnify under the Century Primary

Policy.

B. The Policies

There are four policies at issue in this appeal: (1) the

Century Primary Policy, (2) the Century Excess Policy, (3) an

umbrella excess policy issued by OneBeacon (the "OneBeacon

Policy"), and (4) an excess policy issued by North River (the

"North River Policy").

1. The Century Primary Policy

Century issued the Primary Policy to Crown-Metro in

February 1969, two months after Crown-Metro's merger with Metro-

Atlantic and concurrent termination of all Metro-Atlantic

operations at the Site. The Century Primary Policy was in effect

from February 15, 1969 to January 1, 1970, with a coverage limit of

$100,000. The insuring agreement of the 1969 primary policy

provides:

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 The Company will pay on behalf of the Insured
all sums which the Insured shall become
legally obligated to pay as damages because of
. . . property damage to which this insurance
applies, caused by an occurrence and the
Company shall have the right and duty to
defend any suit against the Insured seeking
damages on account of such . . . property
damage, even if any of the allegations of the
suit are groundless, false or fraudulent . . .
but the Company shall not be obligated to pay
any claim or judgment or to defend any suit
after the applicable limit of the Company's
liability has been exhausted by payment of
judgments or settlements.

The Policy provides that "[t]his insurance applies only to . . .

property damage which occurs during the policy period." "Property

Damage" is defined as "injury to or destruction of tangible

property."

The Policy defines "occurrence" as "an accident,

including injurious exposure to conditions, which results, during

the policy period, in . . . property damage neither expected nor

intended from the standpoint of the Insured."

2. The Century Excess Policy

The Century Excess Policy was in effect during the period

from December 1, 1968 to January 1, 1970. The limits of liability

are $1 million in excess of the $100,000 of coverage provided under

the Century Primary Policy.

The Excess Policy, which is substantially similar to the

Century Primary Policy, provides that it "will indemnify the

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insured for ultimate net loss in excess of the retained limit."

Moreover, it provides that:

If limits of liability of the underlying
insurance are exhausted because of . . .
property damage . . . during the period of
this policy [Century] will have the right and
duty to defend any suit against the Insured
seeking damages on account of such . . .
property damage . . . even if any of the
allegations of the suit are groundless, false
or fraudulent, and may make such investigation
and settlement of any claim or suit as it
deems expedient.

Unlike the Century Primary Policy, the Century Excess Policy

contains a "waste products" exclusion, providing that the Policy

"shall not apply to . . . [i]njury to or destruction of property

caused by intentional or willful introduction of waste products,

fluids or materials . . . into any soil or inland or tidal waters,

irrespective of whether the insured possessed knowledge of the

harmful effects of such acts."

3. The OneBeacon Policy

The OneBeacon Policy, issued to Crown-Metro under the

name of the Employers' Surplus Lines Insurance Company, was an

umbrella policy with limits of $4 million in excess of the $1.1

million coverage provided by the Century Primary and Excess

Policies. This Policy was in effect from April 24, 1969 to

January 1, 1970. The OneBeacon Policy incorporates the terms and

conditions of the Century Excess Policy with respect to the duty to

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defend and duty to indemnify. However, unlike the Century Excess

Policy, there is no exclusion for "waste products."

4. The North River Policy

The North River Policy, a "Commercial Comprehensive

Catastrophe Liability Policy," insures Emhart and its predecessor.

The policy period ran from January 1, 1984 to December 31, 1984.

The North River Policy provided $15 million of property damage

coverage in excess of $1 million. Under the policy, North River

agrees to pay on behalf of the Insured the
ultimate net loss in excess of the retained
limit hereinafter stated, which the Insured
may sustain by reason of the liability imposed
upon the Insured by law or assumed by the
Insured under contract, for . . . Property
Damage Liability . . . arising out of an
occurrence.

Similarly to the Century and OneBeacon Policies, an "occurrence" is

defined as "[i]njurious exposure to conditions which results in

. . . Property Damage neither expected nor intended from the

standpoint of the Insured." The North River Policy also contains

a pollution exclusion. Of significance to this appeal, the

pollution exclusion contains a standard exception for releases or

dispersals that are "sudden and accidental."

C. Procedural History

After the filing of the suit and the various

counterclaims, Emhart moved twice for summary judgment with respect

to Century's duty to defend. The district court denied both of

Emhart's motions, in orders dated May 17, 2005 and August 4, 2006.

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 The May 17, 2005 order resulted from an extensive report

and recommendation by a magistrate judge issued on February 15,

2004. That report, which the district court adopted in full,

focused on the Century Excess Policy, and denied summary judgment

as to indemnification and defense costs "[u]ntil a determination of

[Century's] obligation under [the Century Primary Policy] has been

made." The report also found separately that New York law applied

to the North River Policy.

The August 4, 2006 order resulted from rulings made on

the bench by the district court the previous day. With respect to

Century's duty to defend, the district court ruled from the bench

that such a duty turns on Century's duty to indemnify, and

subsequently denied summary judgment because of factual disputes

regarding the duty to indemnify.

In the fall of 2006, the district court conducted a six-

week trial on the issue of indemnity. On October 19, 2006, the

jury returned a verdict, responding to questions concerning issues

pertinent to whether Century, OneBeacon, and North River owed a

duty to indemnify. With respect to Century and OneBeacon, the jury

found that the dioxin contamination was not "discoverable in the

exercise of reasonable diligence" during the relevant policy

periods. With respect to North River, the jury found that the

pollution exclusion barred coverage. The effective result of the

verdict, which the district court would memorialize in a later

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final judgment, was to find that Century, OneBeacon, and North

River owed no duty to indemnify.

After trial, the district court returned to the issue of

whether Century owed a duty to defend, ordering the parties to file

supplemental briefing. In an order dated May 1, 2007, the district

court awarded summary judgment in Emhart's favor, holding that

Century owed Emhart a duty to defend under both the Century Primary

Policy and Century Excess Policy. The district court further held

that Century's duty to defend ceased as of the date of the

October 19, 2006 jury verdict. In the same order, the district

court found that Emhart had not shown that OneBeacon owed a duty to

defend, as it had not shown that the Century Excess Policy was

exhausted. The district court then scheduled an evidentiary

hearing to determine the extent of Emhart's defense costs, the

amount of those costs that Century should bear, whether Century

breached its duty to defend under either (or both) Policies, and

the appropriate damages if Century did breach its duty.

In June and July 2007, the district court conducted a

post-trial evidentiary hearing on the issues identified in its

May 1, 2007 order. On September 26, 2007, the district court

issued a memorandum and order that addressed these issues, provided

its reasoning for its rulings in the May 1, 2007 order, and

addressed other pre- and post-trial motions. See Emhart Indus.,

Inc. v. Home Ins. Co., 515 F. Supp. 2d 228 (D.R.I. 2007).

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 In its memorandum and order, the district court

explained, in an early footnote, its reluctance to address the duty

to defend issue until after the trial on the duty to indemnify. It

stated:

This odd chronology is in great part due to
the complexities of this case, and in some
small measure to this writer's reluctance to
find a duty to defend at all. As the reader
will see below, the Rhode Island Supreme Court
has not had occasion to apply its relevant
precedents to circumstances quite like these.

Id. at 233 n.8. Nevertheless, the district court held that Century

owed a duty to defend under both Policies because they satisfy the

"pleadings test" under Rhode Island law, since "the charging

documents," in this case the PRP Letter, the UAO, the second UAO,

and the third UAO, alleged claims that were "potentially within the

. . . risk of coverage." Id. at 237-43 (Primary Policy); id. at

243-46 (Excess Policy). In so ruling, the district court noted

that "[t]he application of the pleadings test here may seem unduly

burdensome on Century, but Rhode Island precedents are clear." Id.

at 246.

Ruling that Century had a duty to defend, the district

court further found that Century had, in fact, breached its duty,

and that Century owed damages in the amount of approximately $4.2

million, the total costs of defense of the underlying EPA action

and related proceedings up to the date of the jury verdict finding

no coverage. Id. at 250-57. Of significance to this appeal, the

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district court also held that Emhart was not entitled to total

indemnity costs as damages for Century's duty to defend. Id. at

263.

The September 26, 2007 memorandum and order also

addressed other issues pertinent to this appeal. The district

court rejected OneBeacon's claim that it was entitled to

reformation of the OneBeacon Policy to include the "waste products"

exclusion found in the Century Excess Policy, but, in any event,

found no coverage since the Century Policies had not been

exhausted. Id. at 246-50. The district court also explained its

prior rejection of Emhart's request for a "continuous trigger" jury

instruction, rather than a "discovery/manifestation/discoverability

trigger" instruction, holding that such a "continuous trigger"

instruction had not yet been adopted by Rhode Island courts. Id.

at 265. The district court likewise rejected Emhart's request to

certify the instruction issue to the Rhode Island Supreme Court.

Id. The district court further rejected Emhart's claim that it

failed to use an "objective" standard in its trigger jury

instruction. Id. With respect to the North River Policy, the

district court rejected Emhart's claim that Rhode Island law

applied to the Policy, instead relying on the magistrate judge's

report to hold that New York law applied. Id. at 266. The

district court further rejected Emhart's claim that the court erred

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in its instruction concerning the "sudden and accidental" exclusion

in the North River Policy. Id. at 267-68.

On November 17, 2007, the district court issued a final

judgment that consolidated and memorialized its various findings

and rulings. This appeal and cross-appeal followed.

II. Discussion

The parties present several issues in this appeal and

cross-appeal. We address each in turn.

A. Century's Duty to Defend

1. Application of the Pleadings Test

In its appeal, Century challenges the district court's

allowance of summary judgment in Emhart's favor, holding that

Century owed a duty to defend to Emhart under both the Century

Primary Policy and the Century Excess Policy. We review a district

court's award of summary judgment de novo. First Marblehead

Corp. v. House, 473 F.3d 1, 5 (1st Cir. 2006). We may affirm

summary judgment on any ground manifest in the record. See CMI

Capital Mkt. Inv., LLC v. González-Toro, 520 F.3d 58, 60 (1st Cir.

2008).

Century contends that the district court erred in

applying the "pleadings test" to both Policies to determine whether

Century owed a duty to defend. The "pleadings test" under Rhode

Island law "requires the trial court to look at the allegations

contained in the complaint, and if the pleadings recite facts

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bringing the injury complained of within the coverage of the

insurance policy, the insurer must defend irrespective of the

insured's ultimate liability to the plaintiff." Shelby Ins. Co. v.

Ne. Structures, Inc., 767 A.2d 75, 76 (R.I. 2001) (internal

quotation omitted); see also Employers' Fire Ins. Co. v. Beals, 240

A.2d 397, 402-03 (R.I. 1968). "[I]n other words, when a complaint

contains a statement of facts which bring the case within or

potentially within the risk coverage of the policy, the insurer has

an unequivocal duty to defend." Beals, 240 A.2d at 403.

As background, the district court, despite some

reluctance, addressed whether Century owed a duty to defend by

applying the pleadings test to the "charging documents" in this

case, which the district court identified as the PRP Letter and the

first, second, and third UAOs. Emhart, 515 F. Supp. 2d at 237.

The documents alleged that "[h]azardous substances were disposed of

at the Site as part of the former operations of several chemical

companies," and that Emhart "is . . . a successor to liability of

several chemical companies which operated at the Site from

approximately 1943 to approximately 1971." Id. (quoting the UAO,

and noting that the other charging documents echo these

allegations). Although the charging documents alleged "hazardous

substances were disposed of" during the relevant policy periods,

they were silent as to whether such substances were "discoverable

at the Site in 1969," which the district court found to be a

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requirement to allege an "occurrence" under the Century Policies.

See id. at 238; see also CPC, Int'l, Inc. v. Northbrook Excess &

Surplus Ins. Co., 668 A.2d 647, 649 (R.I. 1995) (holding that "an

'occurrence' under a general liability policy takes place when

property damage, which includes property loss, manifests itself or

is discovered or in the exercise of reasonable diligence, is

discoverable."). The charging documents were silent on the issue

of discoverability because it is irrelevant for purposes of

determining CERCLA liability. See generally 42 U.S.C. § 9607

(a)(2).

The district court construed such silence against

Century, and found a duty to defend because of "Century's failure

to establish the absence of any such potential" for coverage.

Emhart, 515 F. Supp. 2d at 239. Moreover, the district court

rejected Century's plea to look at extrinsic evidence outside the

charging documents to show the absence of coverage, noting that the

"duty to defend exists, if at all, 'regardless of the actual

details of the injury or the ultimate grounds on which the

insured's liability to the injured party may be predicated.'" Id.

at 240 (quoting Beals, 240 A.2d at 402).

On appeal, Century does not contend that the district

court misapplied the pleadings test. Rather, it argues that the

district court's decision to use the pleadings test was error. In

essence, Century builds upon the district court's rumination that

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"the Rhode Island Supreme Court has not had occasion to apply its

relevant precedents to circumstances quite like these," id. at 233

n.8 (emphasis added), to argue that the Rhode Island Supreme Court

would not apply its "relevant precedents" to a case like this.

Century argues that extending the application of the

pleadings test to this case would contravene the purposes of the

test, which Century maintains are twofold: (1) to ensure a prompt

defense of the suit and (2) to avoid litigating in the coverage

case an issue to be decided in the merits case. For support,

Century relies on Beals, a Rhode Island Supreme Court case that

provided one of the first articulations of the pleadings test. See

240 A.2d at 402. Beals involved a declaratory judgment action

brought by the insurer over whether it owed a duty to defend and

indemnify to an insured, a child who caused injuries to a

schoolmate with a pencil. Id. at 399. Noting that a declaratory

judgment action is "[o]ftentimes . . . the most expeditious and

fairest method by which" to determine coverage, the Court

nevertheless upheld the trial court's dismissal of the action to

avoid a "'dress rehearsal of an important issue to be tried in the

injury suit.'" Id. at 400-01.

As to a prompt defense of the suit, Century points out

that Emhart was able to select its own counsel, Swidler Berlin,

well before it sent any notice to any insurer, that it incurred

approximately eighteen months worth of expenses prior to locating

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the Century Policies at issue in this case, and that, rather than

having to rely on a single insurer, Emhart had multiple insurers to

choose from to provide a defense. According to Century, Emhart did

not require a prompt defense, but reimbursement. As to avoidance

of litigation of merits issues, Century argues that there was no

risk of litigating in the coverage case an issue to be decided in

the EPA action, since, as noted by the district court, "the

charging documents" were "silent with respect to whether dioxin was

discoverable at the Site in 1969," the determinative fact for

purposes of coverage. Emhart, 515 F. Supp. 2d at 238. With

neither purpose met, Century argues that the Rhode Island Supreme

Court, per Beals, would not apply the pleadings test to this case.

Century reads too much into Beals. In Beals, the Rhode

Island Supreme Court addressed whether the trial court abused its

discretion in dismissing the declaratory judgment action, since,

under Rhode Island law, the granting of a declaratory judgment is

"purely discretionary." 240 A.2d at 400-01. As put by the Rhode

Island Supreme Court, "[t]he narrow issue raised by this appeal is

whether or not the trial justice in denying insurer's request for

a declaratory judgment so abused his discretion as to warrant a

reversal of his actions." Id. at 400. It was in the context of

this "narrow issue" that the Rhode Island Supreme Court discussed

its concern with "expeditious" resolution of the coverage issue and

the need to avoid a "dress rehearsal" of any merits issues. Only

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after finding that the trial court did not abuse its discretion did

the Rhode Island Supreme Court make a "comment relative to the duty

owed by an insurer to the insured" and discussed the "pleading

test." Id. at 402. Thus, the "purposes" that Century identifies

go to the appropriateness of declaratory relief, not the

appropriateness of applying the pleadings test.

In fact, in Beals and subsequent case law, the pleadings

test has only been circumscribed in very narrow circumstances not

applicable here. As articulated in Beals, the pleadings test

applies when the policy provides coverage "even if any of the

allegations of the suit are groundless, false or fraudulent." See

id. at 399 (quoting language of policy at issue); see also id. at

402 ("As a general rule, where the particular policy requires

insurer to defend even if the suit is groundless, false or

fraudulent, the insurer's duty to defend is ascertained by laying

the tort complaint alongside the policy . . . . ") (emphasis

added). Both Century Policies contain this "groundless, false or

fraudulent" language verbatim.

The one exception, identified by both parties, Peerless

Ins. Co. v. Viegas, 667 A.2d 785 (R.I. 1995), is inapposite. In

Peerless, which involved allegations of sexual molestation of a

minor, the Rhode Island Supreme Court looked beyond the pleadings,

which alleged "negligence," to infer as a matter of law that the

alleged conduct was intentional, and thus subject to the

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"intentional act" exclusion of the homeowners policy at issue in

the case. Id. at 788-89 ("A plaintiff, by describing his or her

cat to be a dog, cannot simply by that descriptive designation

cause the cat to bark."). Unlike in Peerless, the charging

documents in this case did not contain a misstated cause of action

(or similar allegations), which would have required that the

district court find a potential for coverage as a matter of law.

Nevertheless, Century argues that the case law does not

support imposition of the pleadings test here. Century points out

that the Rhode Island Supreme Court has only applied the "pleadings

test" in tort cases involving a single insurer.1 Admittedly, the

1
These cases are: Howard v. Guidant Mut. Ins. Group, 785 A.2d 561
(R.I. 2001) (insurer had no duty to defend because allegations that
disclosure of sexual relations resulted in injury were excluded by
sexual misconduct language of policy); Progressive Cas. Ins. Co. v.
Narraganset Auto Sales, 764 A.2d 722 (R.I. 2001) (applying
pleadings test and ruling automobile insurer selected by insured
had duty to defend tort claim against insured); Shelby Ins., 767
A.2d (duty to defend tort claim continued for single insurer
selected because answer raised possibility of coverage); Allstate
Ins. Co. v. Russo, 641 A.2d 1304 (R.I. 1994) (applying pleadings
and finding homeowners' insurer had no duty to defend tort claim
for misrepresenting financial institution's solvency); Mellow v.
Med. Malpractice Joint Underwriting Ass'n of R.I., 567 A.2d 367
(R.I. 1989) (applying test where malpractice insurer refused to
defend insured and where allegation that injury caused by privacy
violation was potentially covered); Hingham Mut. Fire Ins. Co. v.
Heroux, 549 A.2d 265 (R.I. 1988) (single selected insurer had duty
to defend underlying tort claim filed by motorist); Flori v.
Allstate Ins. Co., 388 A.2d 25 (R.I. 1978) (insurer had duty to
defend tort action where pleadings alleged negligence, insured
requested an actual defense from insurer, and insurer refused to
defend citing policy exclusion); Beals, 240 A.2d (negligence claim
based on injuries to a child struck by a pencil held by a
schoolmate).

-23-
circumstances of this case bear little resemblance to the single-

insurer tort cases that Century inventories. Likewise, the Rhode

Island Supreme Court has not explicitly applied the pleadings test

to the CERCLA context with multiple insurers. Nevertheless, we

agree with the district court that "the precedents are clear,"

Emhart, 515 F. Supp. 2d at 246, that the pleadings test applies to

the Century Policies at issue.

However, Century maintains that the Rhode Island Supreme

Court has, in fact, refused to extend the "pleadings test" to

environmental proceedings when it had the opportunity to do so,

citing three cases: Truk-Away of Rhode Island, Inc. v. Aetna Cas.

& Sur. Co., 723 A.2d 309 (R.I. 1999); Textron, Inc. v. Aetna Cas.

& Sur. Co., 723 A.2d 1138 (R.I. 1999) ("Textron-Gastonia");

Textron, Inc. v. Aetna Cas. & Sur. Co., 754 A.2d 742 (R.I. 2000)

("Textron-Wheatfield").

In Truk-Away, which arose from an EPA CERCLA action

relating to contamination of a landfill, the insurers moved for

summary judgment on both the duty to defend and the duty to

indemnify. 723 A.2d at 310. With respect to the duty to defend,

the insurers contended that "the EPA order did not contain any

allegations of loss that occurred during the effective periods of

the now-expired policies." Id. at 311-12. The trial court allowed

the insurers' motions for summary judgment as to the insured's

claims on the duty to indemnify and the duty to defend. Id. at

-24-
310, 312 & n.5. On appeal, the Rhode Island Supreme Court affirmed

the trial court, and held that "a careful review of the pleadings,

memoranda, and affidavits reveals to us, as it apparently did for

the trial justice, that the plaintiffs merely discuss the existence

of general solid waste disposal at the site between 1969 and 1985,"

but no occurrence within the relevant policy periods to trigger

coverage. Id. at 313 (emphasis added). Century relies on this

"affidavits" language to assert that, in Truk-Away, the Rhode

Island Supreme Court eschewed the pleadings test and engaged in

fact finding to resolve the duty to defend issue.

Century also claims that the court similarly did not

apply the pleadings test in Textron-Gastonia and Textron-

Wheatfield. Century claims that in Textron-Gastonia, the Rhode

Island Supreme Court purportedly resolved the duty to defend issue

on the basis of affidavits and deposition testimony relating to

discoverability. See 723 A.2d at 1144. In Textron-Wheatfield,

Century claims that the Court reversed and remanded the suit

without specific direction to apply the pleadings test to the duty

to defend issue. See 754 A.2d at 747.

Century's reliance on Truk-Away, Textron-Gastonia, and

Textron-Wheatfield is unavailing. As to Truk-Away, Century asks us

to read the Rhode Island Supreme Court's reliance on "a careful

review of the pleadings, memoranda, and affidavits," 723 A.2d at

313, in disposing of both the duty to defend and duty to indemnify

-25-
to mean that the Court looked at outside materials to determine the

insurer's duty to defend. This is too strained a reading. More

plausibly, the Rhode Island Supreme Court found no evidence of an

occurrence within the relevant policies' coverage periods anywhere,

including the "affidavits," but also the "pleadings." In fact, the

Rhode Island Supreme Court described the defendant insurers' motion

for partial summary judgment as to the duty to defend this way:

"[T]he defendants asserted that they had no present duty to defend

the plaintiffs because the EPA order did not contain any

allegations of loss that occurred during the effective periods of

their now-expired policies." Id. at 311-12 (emphasis added). This

language in Truk-Away strongly suggests that both the defendant

insurers and the Rhode Island Supreme Court anticipated the

application of the pleadings test to determine the insurers' duty

to defend, since this language frames the duty to defend issue as

turning on the allegations contained in the charging documents, in

that case the EPA order.

Century attempts to rehabilitate Truk-Away by arguing

that the EPA charging documents there were only silent as to

whether there was an occurrence, since there was some evidence of

"general solid waste disposal at the site" within the relevant

policy periods. See id. at 313. According to Century, had the

Rhode Island Supreme Court in Truk-Away applied the "pleadings

test," then the Court would have construed this silence against the

-26-
insurers in that case, and at least found a duty to defend up to

the allowance of summary judgment in the insurers' favor as to the

duty to indemnify, essentially adopting the approach taken by the

district court in this case.

Again Century reads too much into Truk-Away. In Truk-

Away, the Rhode Island Supreme Court did not just find "silence."

Instead, the Court found that even if such disposal was reasonably

discoverable during the policy period, "[i]t is clear that the EPA

order was concerned exclusively" with contamination outside the

relevant policy periods. See id. at 313 (emphasis added).

Accordingly, the charging documents in Truk-Away were not only

silent as to coverage, but contained no potential for coverage

whatsoever.

Century also reads too much into Textron-Gastonia and

Textron-Wheatfield. In Textron-Gastonia the Rhode Island Supreme

Court did not apply the pleadings test because the duty to defend

was not at issue. Instead, the case concerned recovery for costs

incurred in a voluntary cleanup, and, thus, there was no suit to

defend. See Textron-Gastonia, 723 A.2d at 1140-41 (instituting

voluntary cleanup effort at Gastonia site upon discovery of

contamination of on-site soil). Likewise, in Textron-Wheatfield,

the Rhode Island Supreme Court did not address the duty to defend

at all. See 754 A.2d at 744 (discussing issues on appeal as

whether the court "incorrectly applied the trigger-of-coverage

-27-
doctrine" under Rhode Island law and (2) whether the trial court

"erred in holding that the pollution-exclusion clauses" precluded

coverage). Century points to pleadings in both Textron-Gastonia

and Textron-Wheatfield that suggest that the duty to defend was one

of the issues presented to the Rhode Island Supreme Court. Even if

true, the Rhode Island Supreme Court never discussed the duty to

defend issue in either case. Such silence does not sufficiently

support Century's claim that the Rhode Island Supreme Court would

not apply the pleadings test in the CERCLA context.

Century also asserts a number of policy arguments against

the imposition of the pleadings test to this case. For example,

Century argues that, in the multiple insurer context, the pleadings

test can be used as a "weapon to be wielded at will" against an

individual insurer, essentially allowing an insured to pick its

insurer for defense purposes. We need not address these concerns

here, since the doctrine is clear, and this Court, sitting in

diversity, will not overrule the Rhode Island Supreme Court based

on policy arguments alone. It was not error for the district court

to apply the "pleadings test" to this case.

2. Allocation of Defense Costs

Century contends in the alternative that the district

court erred, as a matter of law, in allocating to Century the total

defense costs incurred prior to the jury verdict. We review this

ruling of law de novo. See Salve Regina Coll. v. Russell, 499 U.S.

-28-
225, 232 (1991) (holding that Courts of Appeals must review de novo

district courts' determinations of state law).

As background, the district court, in awarding total

defense costs for Century's breach of the duty to defend, rejected

Century's claim that Century was "only responsible for a 'pro rata

share' of the underlying defense costs." Emhart, 515 F. Supp. 2d

at 254. In particular, the district court declined to adopt an

alternative scheme of allocation proposed by Century based upon the

"time-on-the-risk," which, according to Century, would limit the

defense costs "based on the ratio between the periods of Century's

coverage [approximately a year] . . . and the period of dioxin

exposure alleged by the EPA (fifty-eight years)." Id. at 254-55.

In rejecting the scheme, the court relied upon the "all

sums" language in the Century Primary Policy, which obligated

Century to pay "all sums which the Insured . . . shall become

legally obligated to pay as damages because of . . . property

damage," and which further provided that Century "shall have the

right and duty to defend any suit against the Insured seeking

damages on account of such . . . property damage." Id. at 255.

The district court also relied upon language in the Century Excess

Policy that provided that Century "will indemnify the Insured for

ultimate net loss in excess of the retained limit," further

providing, mirroring the language in the Primary Policy, that

Century "will have the right and duty to defend any suit against

-29-
the Insured seeking damages on account of such . . . property

damage." Id. Taken together, the district court interpreted the

"all sums" and "ultimate net loss" language contained in the

Policies as placing no limit on the amount of defense costs that

could be allocated to Century. See id. at 254-55 ("Nothing in this

language limits Century's defense obligation . . . .").

For further support of this "all sums" approach, the

district court relied upon the Rhode Island Supreme Court's

decision in Ins. Co. of N. Am. v. Kayser-Roth Corp., 770 A.2d 403

(R.I. 2001). In Kayser-Roth, the Rhode Island Supreme Court

imposed most of the indemnity costs on the breaching insurer

despite "the existence of Kayser-Roth's other insurance." See id.

at 414; see also Emhart, 515 F. Supp. 2d at 255 (applying Kayser-

Roth for "'all sums' method," although noting that the Rhode Island

Supreme Court did not endorse this approach "in direct terms").

Based on this authority in Kayser-Roth, the clear and

unambiguous terms of the "all sums" and "ultimate net loss"

language of the Policies, and the rule that any ambiguities should

be "strictly construed against the insurer," see Sentry Ins. Co. v.

Grenga, 556 A.2d 998, 999 (R.I. 1989), the district court adopted

this "all sums" approach. According to the district court, the

clear and ambiguous terms of the Policies, combined with the Rhode

Island case law, "is enough to defeat Century's complex (and, based

-30-
on its ultimate result here, ridiculous) allocation scheme."

Emhart, 515 F. Supp. 2d at 255.

Century argues that the district court committed error in

using an "all sums" approach to allocate defense costs. Century

first contends that the district court, in relying on the "all

sums" and "ultimate net loss" language, ignored the language

stating that the Policies "appl[y] only to . . . property damage

which occurs during the policy period." Century argues that this

"during the policy" language limited the amount of defense costs

recoverable.

We do not agree that the "during the policy period"

language in the Policies limits the amount of recovery. Century

relies on Textron, Inc. v. Aetna Cas. & Sur. Co., 638 A.2d 537

(R.I. 1994) ("Textron-BMI") for the proposition that such language

does limit recovery. There, Textron, a "named insured," acquired

a company after the relevant policy period. Id. at 538. Textron

sought coverage for the acquired company's conduct during the

policy period, arguing that Textron's insurance should cover the

acquired entity's conduct. Id. at 539. The Rhode Island Supreme

Court rejected Textron's claim, interpreting the "during the policy

period" language of the policy at issue to exclude the acquired

company from the "named insureds" since, during the policy period,

Textron "had no relationship to the site or to the polluter." Id.

at 540-43. In so holding, the Rhode Island Supreme Court viewed

-31-
"the policies in their entirety and us[ed] the plain, ordinary, and

usual meaning of the words" to refuse to extend coverage to Textron

when, during the policy period, it "had no relationship or

connection to" the party that actually caused the damage during the

policy period. Id. at 541. Century contends that the "during the

policy period" language in the Policies similarly restricts the

extent of coverage when reading the Policies as a whole.

We view the matter differently. Textron-BMI only

addressed whether the "during the policy period" language prevented

Textron from recovering for damage caused by a party not named as

an insured. It did not address the issue of whether such "during

the policy period" language limited the amount recoverable for a

breach of the duty to defend.

Even if the "during the policy period" somehow could be

extended to limit the total amount recoverable, such an

interpretation would contravene the clear and unambiguous terms of

the Policies and lead to absurd results. The Rhode Island Supreme

Court has eschewed "engag[ing] in mental or verbal gymnastics to

hurdle over the plain meaning of the policy's language." Am.

Commerce Ins. Co. v. Porto, 811 A.2d 1185, 1193 (R.I. 2002). As

stressed by the Court in Textron-BMI, both the "rules of contract"

and the "rules of common sense" apply in construing an insurance

policy. See Textron-BMI, 638 A.2d at 541.

-32-
 The "all sums" and "ultimate net loss" language of both

Policies do not admit to any limitation, temporal or otherwise.

Instead, under the Century Primary Policy, the "during the policy

period" language is employed to define an "occurrence" under the

policy. Similarly, although the Century Excess Policy does not

have a separate "occurrence" definition, the "during the policy

period" language is used within the conditional clause defining an

occurrence that triggers coverage: "If the limits of liability of

the underlying insurance are exhausted because of . . . property

damage . . . during the policy period." (emphasis added). While

the Rhode Island Supreme Court has not addressed this precise

issue, the Massachusetts Appeals Court has taken the above

"trigger" interpretation as the more reasonable one under Illinois

and Massachusetts law. See Chi. Bridge & Iron Co. v. Certain

Underwriters at Lloyd's London, 797 N.E.2d 434, 436, 440-41 (Mass.

App. Ct. 2003) (holding that "property damage taking place during

the policy period is what triggered [the insurer's] obligation to

indemnify, but the policy did not confine the extent of coverage to

the policy period in which the property damage occurred.").

Construing the language in the way that Century proposes

would also lead to absurd results. It would require the Court to

divide the defense costs incurred in this case in such a way as to

limit Century's share to the damage caused by Metro-Atlantic during

the brief period it purportedly contaminated the Site. Century

-33-
proposed before the district court an allocation scheme based on

the ratio of time covered by the Policies (approximately one year)

as compared to the total time covered by the EPA action

(approximately fifty-eight years), greatly diminishing Century's

coverage. Such an allocative mechanism borders on the arbitrary,

since other schemes could be proposed. Tellingly, Century does not

propose such a scheme (or any scheme) in this appeal.2 But more

importantly, there is no connection between limiting coverage by

the policy period and the amount of defense costs, which weighs

strongly against reading the Policies in the way that Century

proposes.

Century also argues that the district court failed to

follow Rhode Island precedent by refusing to allocate damages on a

pro rata basis, which would involve dividing Emhart's total defense

2
In fact, as the district court noted, to adopt this "time-on-
the-risk" allocation borders on adopting a "continuous trigger"
theory of coverage, in which the existence of dioxin "triggers"
coverage every year. See Emhart, 515 F. Supp. 2d at 256. However,
as the district court noted, and as we discuss in more detail
below, "the Rhode Island Supreme Court has adopted a separate, more
circumscribed trigger theory." Id. (citing cases).

To take a simple example, suppose that, over a 40-year period,
there were three "occurrences" of dioxin contamination, one in year
1, one in year 20, and one in year 40. According to Century, if
the "policy period" of the Primary and Excess Policies occurred
during year 1, then Century would only be liable for 1/40th of the
defense costs, rather than a more equitable 1/3rd. More
importantly, under Rhode Island Law, "occurrence-based" policies
that covered years without an occurrence, such as year 5, would not
have to extend coverage at all, so it is unclear why such insurers
would have to share in the costs.

-34-
costs among Emhart's multiple insurers. Century contends that this

approach, which it dubs "proportionate share setoff," is mandated

by two Rhode Island Supreme court decisions. The first, Peloso v.

Imperatore, involved the breach of a duty to defend by two

concurrent insurers. 434 A.2d 274, 277 (R.I. 1981). The insured

subsequently brought suit against those two insurers for

reimbursement of defense costs. The trial court allocated damages

proportionally among both insurers, and the Rhode Island Supreme

Court affirmed, holding that "it is proper to prorate defense costs

between concurrent insurers when . . . both insurers have

wrongfully refused to defend an insured." Id. at 279. It noted

that failure to prorate would "promote a rule whereby '[t]he

insurer who wrongfully breached its duty to defend would be awarded

a bonus for having done so, by having another company bear the

cost.'" Id. (quoting Marwell Constr., Inc. v. Underwriters at

Lloyd's, London, 465 P.2d 298, 313 (Alaska 1970)).

The second case is Kayser-Roth. Century emphasizes the

fact that the Kayser-Roth court discussed with approval a Third

Circuit case, Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440

(3d Cir. 1996). In Koppers, the Third Circuit reversed and

remanded the trial court's imposition of the total costs of defense

on an excess insurer without reducing it by the amount of the

insured's settlements with other insurers. Id. at 1456. Reviewing

Pennsylvania precedent, the Third Circuit held that

-35-
 non-settling excess insurers are jointly and
severally liable for the full amount of the
loss in excess of: the sum of (1) the policy
limits of the directly underlying, 'exhausted'
primary policies, and (2) the combined pro
rata shares of other settling (primary and
excess) insurers.

Koppers, 98 F.3d at 1455 (emphasis added); see also Kayser-Roth,

770 A.2d at 414 (quoting this language). Although the Kayser-Roth

Court did not apply this Koppers rule, it noted that "a setoff may

be applied in an appropriate case." 770 A.2d at 414. Century

contends that Peloso and Kayser-Roth compel the use of a

proportionate share set-off approach to this "appropriate" case.

We disagree. Unlike in Peloso, there is only one

breaching party in this case, Century. Accordingly, the concern

with a breaching party receiving "a bonus for having done so" is

not implicated in this case. Peloso, 434 A.2d at 279. Moreover,

for whatever reason, Century did not implead other possible

breaching insurers to split the defense costs.

As to Kayser-Roth, we disagree with Century's reading of

the case. In Kayser-Roth the Rhode Island Supreme Court addressed

the narrow issue of whether a non-settling insurer who breached

both the duty to defend and the duty to indemnify, First-State, was

entitled to a set-off based on settlements reached by other

insurers. See 770 A.2d at 412. The trial court allowed a narrow

set-off based on a known settlement, but precluded First State from

introducing evidence of other insurers who could have covered

-36-
Kayser-Roth's losses, in part because the proffered documents had

"no probative value," and in part because First State was precluded

from obtaining settlement documents due to alleged discovery

misconduct. See id. at 413. Although the Rhode Island Supreme

Court discussed the set-off rule in Koppers, it relied upon the

"two different principles" that Koppers was based on: "contract

principles and equitable principles." See id. at 414. Applying

these principles, the Rhode Island Supreme Court affirmed the

district court's imposition of the near total costs to First State

because of the lack of evidence of other set-offs and

considerations of policy not pertinent here. Id. at 414.

Thus, it is difficult to see how Kayser-Roth supports

Century's claim that the district court erred. In fact, the

opposite is true. As in Kayser-Roth, the district court applied

contract principles by imposing the total defense costs to Century,

a breaching insurer, due in this case to the "all sums" language of

the Policies. See id. at 414 (noting with approval that, in

Koppers, the Third Circuit applied the same approach due to the

"all sums" language in policies at issue). Moreover, as in Kayser-

Roth, the district court applied equitable principles in giving

Century a set-off for the Liberty Mutual settlement, the only known

settlement. See Emhart, 515 F. Supp. 2d at 256-57.

Century argues that, unlike in Kayser-Roth, there was no

misconduct committed by Century that would have precluded Century

-37-
from proving other set-offs. Accordingly, Century argues, it is at

least entitled to a remand to prove those set-offs. We disagree.

As an initial matter, Century had such an opportunity to prove

additional set-offs and failed to do so. Moreover, because there

is no evidence in the record that other insurers had a duty to

defend, any evidence proposed by Century would only consist of

possible insurers, and thus would be too general to provide a basis

for a set-off. See Kayser-Roth, 770 A.2d at 413 (rejecting

evidence of other potential set-offs in part because proffered

documents had "no probative value"). Finally, both Kayser-Roth and

Koppers focus on set-offs based on prior settlements, not just

possibilities of coverage. In fact, the Koppers language quoted by

Kayser-Roth, and highlighted by Century, states that the insurer is

entitled to a set-off based on "the combined pro rata shares of

other settling (primary and excess) insurers." Koppers, 98 F.3d at

1455 (emphasis added); see also Kayser-Roth, 770 A.2d at 414

(quoting this language). This is exactly what the district court

did in this case.

In sum, we find no error in the district court's

allocation of defense costs.

B. The Duty to Defend and Its Breach

1. Limitation of Duty to Defend and Damages Up
to Jury Verdict

In its cross-appeal, Emhart argues that the duty to

defend continues. Accordingly, Emhart contends that the district

-38-
court erred in limiting the damages from Century's breach of the

duty to defend to only those costs accrued as of the date of the

jury verdict. Emhart also contends that the district court erred

by holding that OneBeacon did not have a duty to defend under the

OneBeacon Policy. As with all rulings of law, we review de novo.

The district court held that "[a]ny duty to defend Emhart

in the present case . . . ceased as of the date the jury found in

favor of the insurers on the issue of indemnity." Emhart, 515 F.

Supp. 2d at 249 & n.22. The district court acknowledged that,

generally, "[a]n indemnity finding favorable to an insurer does not

erase that insurer's defense obligations, as long as the pleadings

test has been satisfied." Id. at 242 n.18. However, the district

court held that such a duty ends upon "a finding that the claims do

not fall within the risk of coverage; here, the date of the jury's

verdict." Id. (citing Shelby, 767 A.2d at 77); see also id. at 249

n.22 (citing a number of cases supporting the proposition that a

duty to defend ends when it is shown that there is no potential for

coverage).

We agree with the district court's analysis. Emhart

argues that the duty to defend continues because the risk of

coverage contained in the EPA charging documents remains. In

particular, Emhart asserts (without pointing to anything in the

record) that the EPA has not decided the scope of CERCLA liability

for the Site, and, consequently, the EPA remains free to make

-39-
additional allegations and findings that may affect the insurers'

duties to indemnify. According to Emhart, the possibility for

coverage, and the resultant duty to defend, remains.

We reject Emhart's claim. Under Rhode Island law,

questions of coverage, including the duty to defend, may be

addressed in a separate declaratory judgment action. See Conanicut

Marine Servs., Inc. v. Ins. Co. of N. Am., 511 A.2d 967, 971 n.10

(R.I. 1986). The parties brought such a declaratory action in this

case, and the jury's findings of fact proved that indemnification

coverage was not possible, thereby negating any duty to defend.

See, e.g., Shelby, 767 A.2d at 77 ("The plaintiff has a duty to

defend the underlying action at trial until there has been a

finding of fact that the cause of the collapse was excluded from

coverage under the policy or until settlement has been reached.").

Emhart attempts to distinguish this case law. It claims

that although, as a general proposition, a duty to defend can be

determined through a separate declaratory judgment action, in this

case the EPA is not bound by the district court's findings.

According to Emhart, "[t]his [is] not a case where a declaratory

judgment was used to negate coverage on grounds completely

unrelated to the underlying allegations, such as late notice to the

insurer."

However, this case is closer to a "late notice" situation

than Emhart asserts. Although the EPA is not bound by the district

-40-
court's findings, the EPA will not make any determination with

respect to the discoverability of the pollutants at issue in this

case, because such a determination is completely unrelated to

CERCLA liability. See Emhart, 515 F. Supp. 2d at 238 (noting that

"[o]f course . . . the charging documents are silent with respect

to whether dioxin was discoverable at the Site in 1969"); see also

42 U.S.C. § 9607(a) (indicating that liability is strict). As in

a "late notice" declaratory judgment action, the only way to

resolve the issue of discoverability is through a separate

declaratory judgment action, which is exactly what happened in this

case.

Even so, Emhart contends that the jury verdict did not

preclude coverage. Emhart maintains that Metro-Atlantic is not

responsible for the pollutants. NECC is. Consequently, the jury

may have determined that the pollutants were not "discoverable in

the exercise of reasonable diligence during the policy periods"

because Metro-Atlantic was not responsible for those pollutants, as

it would have no reason to test for pollution unless it had

contributed to the pollution itself.

Emhart misstates the basis for the duty to defend. The

Century Policies do not provide an all-encompensing defense.

Instead, the duty to defend under the Policies only arises when,

under the pleadings test, the charging documents allege claims that

fall "within or potentially within the risk coverage of the

-41-
policy." Beals, 240 A.2d at 403. Here, the charging documents in

the EPA action provided such a "potential[]" until the jury verdict

showed that any dioxin contamination was not reasonably

discoverable, thereby removing all doubt. The fact that Emhart may

be innocent of that dioxin contamination is completely irrelevant

to discoverability.

2. OneBeacon's Duty to Defend

In its cross-appeal, Emhart also contends that OneBeacon

owes a prospective duty to defend, that the duty to defend

continues and that the limits of the Century Policies are likely to

be reached. Because Emhart's claim is premised on its prior claim

that the duty to defend continues, we reject it. For the same

reasons, we do not address OneBeacon's claim that the OneBeacon

Policy is entitled to reformation.

3. Indemnity as Damages

Emhart also argues in its cross-appeal that it is

entitled to full indemnity costs as damages. It relies on

Conanicut Marine Servs., Inc. v. Ins. Co. of N. Am., 511 A.2d 967

(R.I. 1986), in which the Rhode Island Supreme Court awarded total

indemnity costs as damages for a breach of the duty to defend. We

review de novo.

Conanicut was a slip-and-fall case where a customer

injured herself at a marina and sued for damages. The marina

unsuccessfully sought a defense from its insurer. The marina later

-42-
settled the claim for $18,000, and then sued the insurer to recover

the settlement amount. In affirming judgment for the marina, the

insured, the Rhode Island Supreme Court held that:

where an insurer refuses to defend an insured
pursuant to a general-liability policy, the
insurer will be obligated to pay, in addition
to the costs of defense and attorneys' fees,
the award of damages or settlement assessed
against the insured.

Id. at 971 (emphasis added). The Conanicut court noted that

indemnity as damages would apply even if the judgment or settlement

exceeds the policy limits. Id. at 971 & n.9; see also Asermely v.

Allstate Ins. Co., 728 A.2d 461, 464 (R.I. 1999) (insurer who

refuses to settle a claim within policy limits is liable for excess

judgments).

Emhart pressed its claim for indemnity as damages under

Conanicut to the district court, but the court refused. The

district court engaged in a lengthy discussion of possible

exceptions Century could claim to avoid indemnity as damages,

rejecting all and noting that "[t]his leaves Century standing on a

precipice." See Emhart, 515 F. Supp. 2d at 260.3

The district court, however, ultimately refused to apply

Conanicut on two grounds. First, the district court predicted that

3
Much of the district court's discussion of these exceptions
depended on the back and forth between Century and Emhart over
locating the Century Primary Policy. Since we affirm the district
court in holding that Conanicut does not apply on other grounds, we
do not need to discuss this back and forth in any detail.

-43-
Rhode Island courts would not apply Conanicut in circumstances like

these, relying on case law that allows a court to "'overrule' an

outmoded decision by predicting that the state's highest court

would, if presented with the opportunity, do the same." See id. at

261 (citing, among other cases, Quint v. A.E. Staley Mfg. Co., 172

F.3d 1, 17 (1st Cir. 1991)). The district court based that

prediction on a number of grounds. It noted that a number of

courts have rejected the use of "estoppel" in this context; that

is, estopping an insurer from disclaiming a duty to indemnify where

the insurer has breached the duty to defend. Id. (citing cases).

Moreover, Rhode Island state courts have similarly rejected the use

of estoppel to extend the scope of insurance coverage. See id. at

261-62 (citing cases). Rhode Island state courts have not applied

Conanicut since it was promulgated, and courts in other

jurisdictions have rejected applying a similar Conanicut rule in

the CERCLA context. Id. at 262 (citing cases). Taken together,

the district court concluded that it was unlikely that the Rhode

Island courts would apply Conanicut on an "estoppel" rationale to

this context. Id. at 262.

Second, the district court ruled that, under Rhode Island

law, "the proper measure of damages for breach of contract is that

which the injured party can tie to the breach itself." Id. at 263.

Since "Emhart has not proven any contract damages beyond the costs

-44-
of defense," the district court held that Emhart was not entitled

to indemnity. Id.

We agree with the second ground. Both parties spill a

lot of ink on the first ground, arguing back and forth over whether

Rhode Island courts would extend Conanicut to this case, citing

numerous authorities. However, in its briefing Emhart contends

that "Conanicut is not based on principles of estoppel or waiver,"

and, accordingly, it is only entitled to "the full amount which

will compensate the insured for all the detriment caused by the

insurer's breach of the express and implied obligations of the

contract." Conanicut, 511 A.2d at 971 (quoting Comunale v. Traders

& Gen. Ins. Co., 328 P.2d 198, 202 (Cal. 1958)) (emphasis added).

Thus, Emhart argues that Conanicut is entirely consistent with

existing Rhode Island precedent, and does not require this Court to

address whether it is "outmoded" in the least.

Of course, Emhart cannot, and does not, show that the

entire cost of the cleanup was caused by the breach. To get around

this, Emhart conceives of Conanicut as "implicitly" promulgating a

"bright line" rule that applies given the inherent difficulty in

determining the damages caused by a breach of the duty to defend.

As Emhart admits, Conanicut itself does not contain any such

"bright line" language. Emhart only points to an unpublished

opinion that rationalizes a similar rule in this way. See Total

Petroleum, Inc. v. Hartford Acc. & Indem. Co., No. 96-1736, 1997 WL

-45-
704932, at *3 (6th Cir. Nov. 7, 1997) (unpublished decision) ("One

basis for this rule seems to lie in the law's reluctance to allow

the insurer to benefit from the uncertainty created when it

renounces its duty.").

Even if Conanicut could be read as imposing a bright line

rule for the imposition of damages, which we doubt, at a minimum

Emhart would still have to provide some showing that Emhart's

failure to defend caused it damage with respect to its liability in

the EPA proceedings. As with all breaches of contract, the burden

is on the breached party to prove damages. See George v. George F.

Berkander, Inc., 169 A.2d 370, 373 (R.I. 1961) (affirming trial

court's determination that "the complainant had failed to sustain

the burden of proving that he had incurred any damage by reason of

the breach.") (emphasis added). There is nothing in the record to

suggest that Emhart incurred any damages from Century's breach

beyond its defense costs, thus triggering such a bright line rule.

Moreover, in the absence of some showing of damage,

applying Conanicut "mechanical[ly]," see Emhart, 515 F. Supp. 2d at

260, would risk conflicting with Rhode Island and Supreme Court

precedent, since the only remaining rationale for imposition of

damages would be estoppel or punitive. As noted earlier, Rhode

Island courts have refused the application of "estoppel" to extend

insurance coverage. See, e.g., Zarrella v. Minn. Mut. Life Ins.

Co., 824 A.2d 1249, 1260-61 (R.I. 2003) (holding, without

-46-
discussing Conanicut, that the "doctrine of equitable estoppel

shall not apply . . . to enlarge the scope of insurance benefits").

It would also put this Court in the thorny position of determining

whether such an award, to the tune of close to $100 million, would

violate the Due Process Clause. Cf. State Farm Mut. Ins. Co. v.

Campbell, 538 U.S. 408 (2003) (striking down $145 million punitive

damages award against insurance carrier, where jury held that

plaintiff was entitled to only $1 million in compensatory damages).

The district court was therefore correct to demand some

evidence of a relationship between Century's breach and Emhart's

damages, thus avoiding significant issues concerning Rhode Island

precedent, not to mention constitutional law. Cf. United States v.

Vilches-Navarrete, 523 F.3d 1, 10 n.6 (1st Cir. 2008) ("The maxim

that courts should not decide constitutional issues when this can

be avoided is as old as the Rocky Mountains and embedded in our

legal culture for about as long."). We accordingly find no error.

C. The Jury Verdict

In its cross-appeal, Emhart also raises various

challenges to the jury verdict.

1. "Continuous Trigger" or "Injury-in-Fact"
Instruction

Emhart challenges the district court's jury instruction

with respect to the appropriate "trigger of coverage" for the duty

to indemnify under the Century Policies and the OneBeacon Policy.

Emhart contends that the district court should have instructed the

-47-
jury using a "continuous trigger" or "injury-in-fact" standard. A

"continuous trigger" standard "charges a loss to policies in effect

from the time of exposure to manifestation," and, thus, presumes

injury from the time of exposure through manifestation. Emhart,

515 F. Supp. 2d at 256. In contrast, an "injury-in-fact" standard

triggers coverage only when an "injury" occurs during the policy

period.

A refusal to give an instruction is "'reversible error

only if the requested instruction was (1) correct as a matter of

substantive law, (2) not substantially incorporated into the charge

as rendered, and (3) integral to an important point in the case.'"

Seahorse Marine Supplies, Inc. v. P.R. Sun Oil Co., 295 F.3d 68, 76

(1st Cir. 2002) (quoting United States v. DeStefano, 59 F.3d 1, 2

(1st Cir. 1995)).

We reject Emhart's claim. All three Policies trigger

coverage based upon an "occurrence" during the relevant policy

periods. This Court certified the question of what trigger applies

to such occurrence policies to the Rhode Island Supreme Court in

CPC Int'l, Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d

647 (R.I. 1995). As put by the Rhode Island Supreme Court:

The question certified by the First Circuit
asks us to determine, under Rhode Island law,
when there has been an "occurrence" sufficient
to trigger coverage under a general liability
policy when the insured sustains a chemical
spill that results in a property loss that is
not discovered until years after the spill
took place. We answer that an "occurrence"

-48-
 under a general liability policy takes place
when property damage, which includes property
loss, manifests itself or is discovered or in
the exercise of reasonable diligence, is
discoverable.

Id. at 649 (emphasis added). The district court relied on CPC to

instruct the jury in this case, stating the issue on the verdict

form as follows: "With respect to the Century Primary, Century

Excess, and OneBeacon Policies, was dioxin contamination

discoverable in the exercise of reasonable diligence during the

policy periods?" Since the parties did not dispute that the dioxin

contamination at issue in this case failed to manifest itself and

was not discovered during the Century and OneBeacon policy periods,

the district court focused solely on whether the dioxin

contamination was "discoverable in the exercise of reasonable

diligence during the policy periods." See Emhart, 515 F. Supp. 2d

at 238.

We start backwards. Emhart contends that it was entitled

to an "injury-in-fact" instruction, but that is exactly what the

district court provided. In devising what the district court

called a "discovery/manifestation/discoverability trigger" for

occurrence-based policies, see id. at 265, the CPC Court explicitly

incorporated an "'injury-in-fact' theory." CPC, 668 A.2d at 649;

see also id. at 649-50 (finding support for test in Eagle-Picher

Indus., Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12, 24 (1st Cir.

1982), which interpreted "occurrence" under the policy to mean "no

-49-
more than that [the] injury must result during the policy period."

(emphasis added)). The CPC court simply provided a more technical

definition of "injury-in-fact" in this context, one that not only

requires damage, but that the damage be manifest, discovered, or

discoverable. Thus, an "injury-in-fact" theory was "substantially

incorporated into the charge as rendered." Seahorse Marine

Supplies, 295 F.3d at 76.

Emhart's claim concerning the "continuous trigger"

standard also falters. Here Emhart contends that the plain terms

of the Policies permit recovery so long as there is an occurrence,

defined under the Policies as "injurious exposure to conditions,

which results, during the policy period, in . . . property damage

. . . neither expected nor intended from the standpoint of the

insured." Based on this language, Emhart argues that all that was

needed was a showing of "exposure to conditions" causing "property

damage" during the relevant policy periods, which Emhart provided.

However, substantially similar terms were used in the

policy at issue in CPC, where an "occurrence" was defined as "[a]n

accident, event or happening including continuous or repeated

exposure to conditions which results, during the policy period, in

. . . Property Damage . . . neither expected nor intended from the

standpoint of the Insured." CPC, 668 A.2d at 649. The Rhode

Island Supreme Court interpreted this language to mean that "there

can be no occurrence under the policy without property damage that

-50-
becomes apparent during the policy period." Id. (emphasis added).

Thus, it concluded that "'[p]roperty damage' and 'occurrence' are

. . . inextricably intertwined." Id. Under the Policies in this

case, "property damage" and "occurrence" are also "inextricably

intertwined," since, as in the policy in CPC, there is no

"occurrence" unless there was "property damage . . . during the

policy period." Accordingly, Emhart fails to show why CPC would

not apply to the "occurrence"-based Policies in this case.

Next, Emhart claims that the "considered dicta" of the

Rhode Island Supreme Court supports the use of a "continuous

trigger" standard. See Honey Dew Assocs., Inc. v. M & K Food

Corp., 241 F.3d 23, 27 (1st Cir. 2001) (absent a definitive ruling

by the state's highest court, the federal courts may refer to

"considered dicta" to ascertain how the state court would rule).

Emhart cites Textron-Gastonia, where the court found coverage based

on the discovery/manifestation/discoverability trigger and, thus,

did "not address the continuous trigger-of-coverage standard." 723

A.2d at 1141. Emhart also cites Truk-Away, where the insured

pressed a "continuous-trigger" standard, but the court found no

coverage since there was no evidence of property damage, continuous

or otherwise, during the policy periods. 723 A.2d at 313.

Even if this so-called "considered dicta" supported the

use of a "continuous trigger" standard, Emhart would still have to

distinguish CPC, which is the definitive ruling with respect to

-51-
triggers of coverage for "occurrence"-based policies. See Textron

-Wheatfield, 754 A.2d at 745-46 (reiterating CPC discoverability

standard, noting that "the 'discoverability' trigger in [CPC]

descends from a long and venerable line of insurance cases.");

Textron-Gastonia, 723 A.2d at 1144 ("Textron's burden . . . is not

met by merely establishing evidence to suggest that the

contamination was present during the policy period. Rather, CPC

requires that the contamination not only exist during the period of

coverage, but also be discoverable in the exercise of reasonable

diligence.") (emphasis added). Emhart has not done so, and,

accordingly, we find no error.

2. "Objective" Standard

Emhart argues in the alternative that the district court

erred in instructing the jury to consider whether Crown-Metro

subjectively had a reason to test for contamination. "We review

jury instructions de novo. We reverse the giving of an instruction

if it (1) was misleading, unduly complicating, or incorrect as a

matter of law, and (2) adversely affected the objecting party's

substantial rights." SEC v. Happ, 392 F.3d 12, 28 (1st Cir. 2004)

(citations and quotation marks omitted).

The district court used the following trigger instruction

with respect to Century and OneBeacon:

Under the circumstances of this case, the
Century and OneBeacon policies can be
triggered only if property damage was

-52-
 discoverable in the exercise of reasonable
diligence during the policy periods.

That is, whether by exercising
reasonable diligence Crown-Metro, the
successor to Metro-Atlantic, could have
discovered the dioxin contamination during the
policy periods applicable to the Century and
OneBeacon policies. Note that Emhart does not
need to show that property damage was actually
discovered during the policy periods.

With respect to the question of whether
the property damage was discoverable in the
exercise of reasonable diligence, you must
consider two issues. The first is was dioxin
contamination capable of being detected at the
site during the policy periods. This requires
Emhart to show that dioxin contamination
actually existed at the site during the policy
period as well as the existence of technology
and expertise that could have detected that
dioxin contamination.

The second issue is did Crown-Metro
have a reason to test for dioxin contamination
at the site during the policy period or other
contamination that would have led to the
discovery of dioxin contamination at the site
during the policy period.

Considering all of the evidence then,
you must decide whether Crown-Metro, in the
exercise of reasonable diligence, could have
discovered the dioxin contamination.

Emhart objects to this language: "The second issue is did Crown-

Metro have a reason to test for dioxin contamination at the site

during the policy period or other contamination that would have led

to the discovery of dioxin contamination at the site during the

policy period." (emphasis added).

-53-
 We see no error. The Rhode Island Supreme Court has

described the discovery/manifestation/discoverability trigger in

precisely those terms. See, e.g., Textron-Wheatfield, 754 A.2d at

745 ("the insured had reason to test for the property damage");

Textron-Gastonia, 723 A.2d at 1144 ("Textron must have had some

reason to test for the contamination"). Moreover, throughout the

instruction the district court emphasized that the contamination

was discoverable in the "exercise of reasonable diligence," which

entails taking an objective perspective. (emphasis added).

3. Choice of Law for North River Policy

We turn to the North River Policy. Emhart argues that

this Court should certify the question of what state law would

apply to the North River Policy, which does not have a choice-of-

law provision. Emhart contends that Rhode Island law applies to

the Policy. However, based on the magistrate judge's report in

this case, the district court applied New York law to the North

River Policy.

In the report, the magistrate judge applied a 2004

precedent, DeCesare v. Lincoln Benefit Life Co., 852 A.2d 474, 483-

84 (R.I. 2004), to determine what choice-of-law principles apply to

the North River Policy. DeCesare held that "[i]n the absence of a

contractual stipulation about which law controls, Rhode Island's

conflict-of-laws doctrine provides that the law of the state where

the contract was executed governs." Id. at 483-84. On that basis,

-54-
the Magistrate Judge applied New York law, since the parties

stipulated that the North River Policy was executed in New York.

We see no basis for certifying the issue to the Rhode

Island Supreme Court. DeCesare remains good law, and nothing

subsequent to DeCesare holds to the contrary. At best, Emhart only

shows that pre-DeCesare precedent may apply an "interest-weighing"

analysis. See, e.g., Gordon v. Clifford Metal Sales Co., 602 A.2d

535, 538-39 (R.I. 1992) (applying "interest-weighing" analysis

based upon Title 6 of the Rhode Island Uniform Commercial Code).

Thus, we find the law "sufficiently clear" to make "certification

. . . both inappropriate and an unwarranted burden on the state

court." See In re Citigroup, Inc., 535 F.3d 45, 62 (1st Cir.

2008).

4. "Sudden and Accidental" Exclusion

Finally, and in the alternative, Emhart claims that the

district court committed error in its instruction concerning the

"sudden and accidental" exclusion of the North River Policy. As

with our review of the previous jury instructions, we review de

novo.

The "sudden and accidental" exclusion allows for coverage

if a "discharge, dispersal, release, or escape" that otherwise

satisfies the pollution exclusion of the North River Policy was

"sudden and accidental." The jury found that the "sudden and

accidental" exclusion did not apply in this case.

-55-
 Emhart objects to the following language in the

instruction:

Moreover, once you've determined when the
initial release occurred, intervening events,
although they might be sudden and accidental,
cannot be considered for purposes of the
exception to the exclusion.

Thus, for instance, where the initial
release discharged pollutants onto the land,
an intervening fire or flood cannot satisfy
the sudden and accidental exception. Instead,
you must determine whether the initial
discharge event was itself sudden. It may be
the case, however, that the fire was the
initial discharge event, assuming that the
fire caused the at-issue property damage, in
which case it would be proper to determine
whether this event was sudden.

(emphasis added). Emhart claims that the district erred in

focusing solely on the initial dispersal, and that it is entitled

to coverage because it presented evidence of subsequent flooding

that "dispersed" the contaminants onto the Site.

Emhart relies on a single case, Farm Family Mut. Ins. Co.

v. Bagley, 409 N.Y.S. 2d 294 (App. Div. 1978), where the New York

Appellate Division distinguished between "discharge" and

"dispersal," and held that "the word 'dispersal' may refer to the

original release or it may refer to a secondary dissemination after

the original release." Id. at 296 (quoting Webster's Third New

World Dictionary) (emphasis added). The district court relied on

a more recent case, Northville Indus. Corp. v. Nat'l Union Fire

Ins. Co., 679 N.E.2d 1044 (N.Y. 1997), where the New York Court of

-56-
Appeals, when interpreting the same policy language, did not make

the distinction and, instead, held that "[t]he focus . . . is on

the initial release of the pollutant, not on . . . the timespan of

the eventual dispersal of the discharged pollutant in the

environment." Id. at 1048. Emhart tries to parse Northville,

arguing that it is factually distinct and that its pronouncement is

dictum. We see no indication that Northville would not apply to

this case. See Employers Ins. of Wausau v. Duplan Corp., 1999 WL

777976, at *11-12 (S.D.N.Y. Oct. 20, 1999) (holding, following

Northville, that "sudden and accidental" precluded liability for

subsequent dispersals of discharged contaminants due to fires and

floods).

III. Conclusion

For the foregoing reasons, we affirm the district court

in all respects.

Affirmed.

Costs to the prevailing parties.

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