Case Briefs

VT High Court Adopts Allocation, Requires Policyholder to Pay For Uninsured Periods

In a homeowners' claim involving environmental contamination, the Vermont Supreme Court applied the non-business pursuits exception to the business pursuits exclusion. It also found that the owned property exclusion does not bar coverage for the remediation of the insured's property to the extent the remediation is to prevent contamination to others' property, including contamination to groundwater. The court additionally applied a continuous trigger, and adopted pro rata allocation of defense and indemnity expenses, including allocation to the policyholder for uninsured periods. Towns v. Northern Security Insurance Co., No. 2007-089, 2008 WL 2941568 (Vt. Aug. 1, 2008).

This coverage dispute arises out of a homeowner's use of debris from his waste-hauling business to fill areas of his own property. The homeowner lived at the site in question from 1972 to 1987 and had homeowner's insurance for that property from 1983 to 1987. During the time the homeowner resided there, he “diverted a substantial amount of waste and debris from his waste hauling business” to use as fill on the property. After he sold this property, the new homeowners were concerned about the waste and contacted the attorney general's office, which concluded that the policyholder had effectively operated an unlicensed solid-waste facility on the property. The homeowner was ordered to remediate the site. In addition, groundwater contamination was later discovered at the site and was in excess of certain enforcement standards under the Vermont Water Quality Standards.

The court first considered the lower court's application of a business pursuits exclusion to preclude coverage for the costs associated with the environmental enforcement action. The business pursuits exclusion barred coverage for damage “arising out of business pursuits of any insured” except for “activities which are ordinarily incident to non-business pursuits.” The court stated that the exception may apply when the damage “did not 'contribute to or further the interest of the insured's business' and [was] not 'directly related to that business ”” (quoting Vermont Mutual Insurance Co. v. Gambell, 689 A.2d 453 (Vt. 1997)). It concluded that the homeowner's personal use of waste on his property fell within the non-business pursuits exception where the homeowner had testified that he did not save money by depositing debris at his home and that he used the debris as fill on his property only to improve the site and not for any business purpose. The court also noted that in rural Vermont at that time homeowners commonly obtained and deposited their own fill on their property. Thus, while the debris originated from the homeowner's business, the court held that that was not the test for the business pursuits exclusion.

The court also addressed the owned-property exclusion, which bars coverage, in relevant part, for damage “to property owned by the insured ' ” The court opined that this exclusion “ allowed for remediation expenses incurred in connection with the insured's property when necessary to prevent further injury to property owned by others.” It reached the same conclusion with respect to groundwater below the insured's property. The court remanded, therefore, for consideration as to whether and to what extent the remediation costs were incurred to prevent damage to third-party property, such as the ground water contamination, and to what extent the costs were incurred solely to remediate the policyholder's own property, the latter being excluded.

The court rejected the insurer's argument that groundwater contamination only constituted “property damage” when the levels of contamination exceeded state and federal clean-water laws and regulations. The court stated that the policy language provided no support for this argument, but also found that the groundwater contamination exceeded certain Vermont enforcement standards.

The court then turned to the issues of trigger of coverage and allocation. The lower court had applied a continuous trigger, and the insurer argued that a manifestation trigger should be applied. The homeowner's policy had expired prior to the manifestation of the contamination. The court affirmed the application of a continuous trigger, under which coverage for damage that occurred continuously is triggered from the date of exposure or initial injury through later policy periods, to the long-term environmental damage at issue. The court also found that the record supported the conclusion that environmental damage had occurred during the policy period.

The court next affirmed the lower court's pro rata allocation of defense and indemnity costs based on the insurer's time on the risk, allocating uninsured periods to the policyholder. The court stated that, as other jurisdictions had held, the “time on the risk” method of allocation was “most consistent with the continuous-trigger rule and the occurrence-based policy provision limiting coverage to damages occurring during the policy term on which it is based.” Doing so, the court allocated costs to the homeowner for those years he was self-insured, reasoning that it was fair to hold the policyholder responsible for a share of defense and indemnity expenses if he chose to assume the risk. Under this allocation theory, the homeowner was required to bear 75% of the defense and indemnity expenses.

Laura A. Foggan, Benjamin Theisman and Mary Catherine Martin, of Wiley Rein LLP, contributed this month's case brief.

VT High Court Adopts Allocation, Requires Policyholder to Pay For Uninsured Periods

In a homeowners' claim involving environmental contamination, the Vermont Supreme Court applied the non-business pursuits exception to the business pursuits exclusion. It also found that the owned property exclusion does not bar coverage for the remediation of the insured's property to the extent the remediation is to prevent contamination to others' property, including contamination to groundwater. The court additionally applied a continuous trigger, and adopted pro rata allocation of defense and indemnity expenses, including allocation to the policyholder for uninsured periods. Towns v. Northern Security Insurance Co., No. 2007-089, 2008 WL 2941568 (Vt. Aug. 1, 2008).

This coverage dispute arises out of a homeowner's use of debris from his waste-hauling business to fill areas of his own property. The homeowner lived at the site in question from 1972 to 1987 and had homeowner's insurance for that property from 1983 to 1987. During the time the homeowner resided there, he “diverted a substantial amount of waste and debris from his waste hauling business” to use as fill on the property. After he sold this property, the new homeowners were concerned about the waste and contacted the attorney general's office, which concluded that the policyholder had effectively operated an unlicensed solid-waste facility on the property. The homeowner was ordered to remediate the site. In addition, groundwater contamination was later discovered at the site and was in excess of certain enforcement standards under the Vermont Water Quality Standards.

The court first considered the lower court's application of a business pursuits exclusion to preclude coverage for the costs associated with the environmental enforcement action. The business pursuits exclusion barred coverage for damage “arising out of business pursuits of any insured” except for “activities which are ordinarily incident to non-business pursuits.” The court stated that the exception may apply when the damage “did not 'contribute to or further the interest of the insured's business' and [was] not 'directly related to that business ”” (quoting Vermont Mutual Insurance Co. v. Gambell , 689 A.2d 453 (Vt. 1997)). It concluded that the homeowner's personal use of waste on his property fell within the non-business pursuits exception where the homeowner had testified that he did not save money by depositing debris at his home and that he used the debris as fill on his property only to improve the site and not for any business purpose. The court also noted that in rural Vermont at that time homeowners commonly obtained and deposited their own fill on their property. Thus, while the debris originated from the homeowner's business, the court held that that was not the test for the business pursuits exclusion.

The court also addressed the owned-property exclusion, which bars coverage, in relevant part, for damage “to property owned by the insured ' ” The court opined that this exclusion “ allowed for remediation expenses incurred in connection with the insured's property when necessary to prevent further injury to property owned by others.” It reached the same conclusion with respect to groundwater below the insured's property. The court remanded, therefore, for consideration as to whether and to what extent the remediation costs were incurred to prevent damage to third-party property, such as the ground water contamination, and to what extent the costs were incurred solely to remediate the policyholder's own property, the latter being excluded.

The court rejected the insurer's argument that groundwater contamination only constituted “property damage” when the levels of contamination exceeded state and federal clean-water laws and regulations. The court stated that the policy language provided no support for this argument, but also found that the groundwater contamination exceeded certain Vermont enforcement standards.

The court then turned to the issues of trigger of coverage and allocation. The lower court had applied a continuous trigger, and the insurer argued that a manifestation trigger should be applied. The homeowner's policy had expired prior to the manifestation of the contamination. The court affirmed the application of a continuous trigger, under which coverage for damage that occurred continuously is triggered from the date of exposure or initial injury through later policy periods, to the long-term environmental damage at issue. The court also found that the record supported the conclusion that environmental damage had occurred during the policy period.

The court next affirmed the lower court's pro rata allocation of defense and indemnity costs based on the insurer's time on the risk, allocating uninsured periods to the policyholder. The court stated that, as other jurisdictions had held, the “time on the risk” method of allocation was “most consistent with the continuous-trigger rule and the occurrence-based policy provision limiting coverage to damages occurring during the policy term on which it is based.” Doing so, the court allocated costs to the homeowner for those years he was self-insured, reasoning that it was fair to hold the policyholder responsible for a share of defense and indemnity expenses if he chose to assume the risk. Under this allocation theory, the homeowner was required to bear 75% of the defense and indemnity expenses.

Laura A. Foggan, Benjamin Theisman and Mary Catherine Martin, of Wiley Rein LLP, contributed this month's case brief.