The First Circuit Court of Appeals has upheld a district court decision that vacated a jury verdict awarding insurance coverage to an insured party with respect to contaminated property. Boston Gas Co. v. Century Indem. Co., No. 11-1931 (1st Cir. 1/18/13). The insured lost its verdict because a critical legal principle changed during the course of the litigation which involved one of several former manufactured gas plant (MGP) sites formerly operated by Boston Gas Co., at which soil and groundwater contamination required Boston Gas to spend money for cleanup.

The case had been tried on the theory that Massachusetts law would apply a jointand- several liability allocation principle to the site if any covered property damage occurred during any portion of the policy period. The relevant policies ran from 1951 to 1969, and, if damage occurred during any of the covered years, the result under that legal standard would be judgment for the entire cleanup cost against the insurer, even though Boston Gas operated the site from 1908 to 1969.

Previous litigation involving another former Boston Gas MPG site and the same insurer had resulted in an appeal of a $6.1-million jury verdict. Because the legal standard for allocation of policy proceeds was a question of state law, the federal appeals court in that case certified the question to the Massachusetts high court, which determined that under Massachusetts law allocation of the policy proceeds would be pro rata, requiring the insurer to pay only for the actual losses incurred during the insurer’s policy. If it were impossible to prove precisely what damage occurred during the policy period, Massachusetts would allow allocation based on the insurer’s “time on the risk.”

During the trial at issue in this appeal, Boston Gas presented evidence and arguments that the site was damaged by releases during each year that it was operated as an MGP, with ongoing damage after operations ceased. The jury found, via special verdict, that damage had occurred separately during each year of the policy period as well as before and after, and determined that the insurer was liable for the cleanup costs for all affected property except that owned by Boston Gas. The jury assessed damages at $1.7 million.

The District Court for the Eastern District of Massachusetts vacated the verdict on the ground that the finding of liability was inconsistent with the new legal standard governing allocation of liability to the insurer. The court held, and on appeal the First Circuit agreed, that Boston Gas was judicially estopped from arguing that damage had occurred only during the policy years, which would increase its recovery under the new legal test. The court further found that Boston Gas could not seek allocation based on the insurer’s time on the risk because it had made no effort to develop and present evidence of the specific damage that occurred in each year of the policy period, as required under the newly articulated Massachusetts law.

The First Circuit remanded the case for further proceedings with the admonition that it was “unusually complicated” and urged the parties to consider settlement.