Environmental Duty to Defend

AIG Must Defend Waste Transporter Insureds

A Texas federal district court, applying Texas law, held an insurer had a duty to defend in an underlying lawsuit which concerned the cleanup of a Superfund site where the insureds allegedly arranged for disposal of hazardous waste.  The court found that all of the policies at issue were potentially triggered, not just the earliest policy, because the underlying complaint alleged that the insureds delivered many different substances in different years.  The court also held that no exclusions applied to bar coverage.

AIG Specialty Insurance Company’s (“ASIC”)  insured USA Environment, L.P. (“USAE”) and Bayou City Environmental Services, L.P. (“Bayou” ) under eleven Commercial General Liability policies for the period of January 3, 2003 to January 3, 2014.  USAE and Bayou engaged in environmental activities on behalf of waste generators, including the brokering and transportation of waste material to sites.  The underlying lawsuit involves the environmental remediation efforts at a U.S. Environmental Protection Agency (“EPA”) Superfund site located in Pasadena, Texas.  The EPA informed USAE that it was a potentially responsible party (“PRP”) with respect to the Superfund site.  USAE notified ASIC of the EPA notice and submitted a claim for coverage, which ASIC denied.  A PRP group filed the underlying lawsuit against hundreds of defendants alleging that, from 2004 to 2008, USAE and Bayou each transported, or arranged for the transport and disposal of, waste materials to the site on behalf of themselves and various other parties.  Bayou filed a claim with ASIC for coverage.  Then, USAE and Bayou filed the coverage action seeking a declaration that ASIC had a duty to defend the insureds for the underlying lawsuit. The parties filed cross motions for summary judgment.

ASIC argued that the underlying complaint alleged “continuous and progressive injury” and, pursuant to the pollution exclusion, the injury was deemed to have occurred only on the date of first exposure or the inception date of the earliest policy.  The court disagreed with ASIC and concluded that all of ASIC’s policies were potentially triggered because of the underlying complaint’s “lack of specificity regarding what releases have occurred and caused property damage, plus the express allegations of historic and ongoing releases of substances generally.”

ASIC contended that coverage was barred by three exclusions: the pollution exclusion, the waste disposal site exclusion, and the aircraft, auto, or watercraft exclusion (the “Auto Exclusion”).  The insureds argued that the only relevant exclusion was the Auto Exclusion because endorsements found in the policies starting in 2011 deleted the waste disposal exclusion and created an exception to the pollution exclusion for “waste disposal sites.”  The court agreed with the insureds that the Auto Exclusion was the only applicable exclusion under the 2011 policy.  The insureds successfully made two arguments that the Auto Exclusion did not apply to preclude coverage for their claims, because: (1) the underlying complaint was silent as to how USAE and Bayou allegedly transported materials to the site and (2) the property damage alleged in the underlying complaint did not “arise out of use of an auto.”  The court ultimately held that ASIC had a duty to defend under the 2011 policy and, by failing to defend, that duty was breached. USA Environment, L.P. v. American Int’l Specialty Lines Ins. Co. n/k/a AIG Specialty Ins. Co., No. 4:16-cv-2216 (S.D. Tex.  July 7, 2017).