Ruling in Fox River Cleanup Case Allows Insureds to Maximize Insurance Coverage
Insurance Coverage Litigation Update 06/22/10 Keith A. Bruett
The Fox River cleanup is the largest environmental cleanup in the history of Wisconsin (and one of the largest in the country), and has generated substantial litigation in multiple courts. Insurance coverage for the cleanup has been an important part of the equation, as the major parties targeted by the government for the Fox River cleanup have pursued (or are pursuing) coverage for that liability under their comprehensive general liability policies. Last year, Appleton Papers Inc. ("API") was involved in a lengthy jury trial with its insurers during which a number of issues were litigated and resolved favorably to API. In Westport Insurance Corporation v. API, the Wisconsin Court of Appeals District 1 recently affirmed these rulings, and in the process set favorable precedents for insureds, particularly in the area of "progressive" injury claims such as asbestos and environmental cases.
API acquired manufacturing facilities from NCR Corporation ("NCR") in the 1970s. As part of that acquisition, API
agreed to assume certain liabilities. The EPA later identified API as a potentially responsible party ("PRP") under applicable federal environmental law, in large part because of its status as the successor to NCR in connection with the Fox River cleanup liability. At the time of these notifications, the law in Wisconsin - per City of Edgerton v. General Casualty,
184 Wis.2d 750, 517 N.W.2d 463 (1994) - was that insurance coverage did not exist for this type of liability. Consequently, API resolved its liability vis a vis NCR (on a percentage basis; the actual amount of its exposure was unknown) before giving notice to its insurers.
In 2003, the Wisconsin Supreme Court overruled City of Edgerton in Johnson Controls, Inc. v. Employers Ins. Of Wausau, 2003 WI 108, 264 Wis.2d 60, 665 N.W.2d 257. At that point, insurance coverage entered the picture in a big way for funding the PRP's cleanup liability. API's insurers filed suit for a declaration that there was no coverage on any number of grounds, including late notice, known loss, after acquired liability, and expected and intended. In addition, API's excess insurers all sought a ruling that there is no excess insurance liability unless and until all of the underlying policies were exhausted.
Court of Appeals' Decision
During the pendency of the appeal, all insurers except Westport, which was an excess carrier for several of the years over which injury was alleged, settled with API. Various issues remained on appeal involving Westport. The Court of Appeals resolved these issues entirely in API's favor. Specifically, the Court of Appeals ruled:
- The trial court did not err in giving an instruction on late notice that allowed consideration of the fact that there was no coverage for environmental cleanup liability or any defense obligation triggered by a PRP Letter until the 2003 Johnson Controls decision, by which time API had provided notice.
- The trial court properly ruled that API's liability arose by virtue of federal law rather than the resolution with NCR, and thus that resolution did not breach "voluntary payment" provisions in API's policies.
- The trial court properly limited evidence pertaining to "known loss."
- The trial court properly established a procedure whereby a declaration of coverage could be utilized in post-trial proceedings to compel payment as API incurred covered costs.
- The trial court properly applied a "vertical exhaustion" theory for progressive injury cases, meaning that where policies were triggered for multiple years, the insured could select which policy year would respond to a loss and then go up the "tower" into excess layers without exhausting all primary coverage that might apply.
The latter ruling is particularly significant to Wisconsin insureds in progressive injury cases. Last year,
in Plastics Engineering Co. v. Liberty Mutual Ins. Co., 2009 WI 13, 315 Wis.2d 556, 759 N.W.2d 613, the
Wisconsin Supreme Court had adopted an "all sums" allocation method, meaning that in cases involving ongoing
injury, any policy that was triggered during the time of injury could be compelled to respond in whole up to its policy limits, even where there were years in which coverage did not exist. In so ruling, the Plenco Court had rejected the insurer's argument that it was only responsible for a reduced, "pro rata" portion of the loss based on the time on which
it was "on the risk." The Court of Appeals has now taken this one step further, finding that Plenco compels a further finding that excess policies should also be required to respond in full, even where other unexhausted primary policies
are still on the risk. The Court of Appeals found that "vertical exhaustion" is supported by the policy language, the established law in Wisconsin and the efficient administration of courts.
While a number of the rulings in the API case are important to insureds, the adoption of vertical exhaustion is most significant. Vertical exhaustion provides flexibility to insureds in situations where multiple insurance policies provide coverage over many years. Those situations typically arise with exposures such as asbestos or environmental liability that reach back decades, and some insurers may no longer be solvent. Absent vertical exhaustion, insureds might be deemed responsible for exhaustion of an insolvent primary layer from an earlier policy period before a solvent excess layer would attach. The decision also seems to lay to rest any notion that an insurer faced with full limits liability under "all sums" can seek contribution from insurers having policies containing large self-insured retentions, deductibles or reimbursement provisions that have the ultimate effect of placing a portion of the loss back on the insured. Indeed, it would appear that the decision could be used as the basis for a "selective tender" type of approach, adopted in some states, whereby insureds can simply choose the order in which their triggered policies respond to a given loss.
For more information on the Westport decision or any insurance coverage litigation questions, please contact Keith Bruett at (414) 277-5411 / [email protected] or your Quarles & Brady attorney.