On June 18, 2013, the Second Circuit affirmed that a liability insurer was obligated to reimburse Olin Corporation for 100% of the defense costs it incurred defending against environmental contamination class action claims.  Olin Corporation v. Century Indemnity Company, No. 11-4579-cv (2d Cir. 6/18/2013).  The court found that the duty to defend was triggered under New York law, even though the complaints against Olin did not allege when individual injuries occurred and the homes at issue did not exist during the insurance policy periods.  The court further held that Olin was entitled to complete reimbursement of its defense costs, even for periods of self-insurance.

The underlying lawsuits arose out of Olin’s use of a manufacuring facility in Morgan Hill, California.  The plaintiffs, homeowners and residents near the Morgan Hill site, alleged that from 1956 through 1996, Olin carelessly disposed of potassium perchlorate at the site, which caused ongoing contamination and the creation of a highly toxic groundwater plume that polluted their drinking water wells and diminished the value of their homes. Olin eventually settled those claims and then sought reimbursement under liability policies issued by INA from 1956 to 1970.  INA and its successor corporation, Century Indemnity, denied that INA had a duty to defend because the plaintiffs’ homes were not constructed until after the expiration of the INA policies.

Stating that under New York law an “insurer must defend whenever the four corners of the complaint suggest — or the insurer has actual knowledge of facts establishing — a reasonable possibility of coverage,”  the Second Circuit affirmed that INA’s duty to defend was triggered.  The court ruled: “On their face, the complaints do not specify when injuries to individual homes or wells occurred but they do allege ongoing contamination of the groundwater plume beginning in 1956, which affected real property situated above it.  Olin’s policies with INA were in effect from 1956 to 1970, during this period of ongoing contamination.  In such circumstances, we conclude that the complaints’ allegation are sufficient to establish a reasonable possibility of coverage and therefore that the district court did not err in determining that INA had a duty to defend as shown by the face of the complaints.”

INA also argued that Olin’s defense costs should be prorated between INA and Olin to account for years of self-insurance during the contamination period. The district court had ruled that allocation between an insurer and an insured is not available as a matter of law, although it recognized that New York law is unsettled on that issue.  In the alternative, the district court also ruled that allocation was inappropriate because there was no determination as to when injury occurred to the plaintiffs’ property. The district court explained that there had been no jury determination in the underlying litigation as to when, if ever, negligent waste disposal occurred.  Nor was there definitive expert evidence concerning the pace of the migration of the contamination and the dates of initial contamination.  On that record, the Second Circuit agreed that there was no reasonable basis upon which to prorate defense costs between INA and Olin, and consequently, there was no error in the district court’s alternative conclusion.  In light of that ruling, the court declined to address the legal issue of whether defense costs may be allocated between an insurer and an insured for periods of self-insurance under New York law.

As previously discussed here, liability insurance coverage can provide a lifeline to defendants confronted with class action lawsuits. In fact, coverage for defense costs is likely to be the most crucial function of liability insurance for many class action defendants.  Because, as in this case, courts broadly construe the duty to defend (see my May 8 post), even when faced with vague and meritless class action complaints, defendants should carefully review their insurance policies immediately upon receipt of a class action complaint and provide notice of the claim under all potentially implicated policies