Court Denies Stacking But Finds Insurer Liable For Mine Suit Including Punitive Damages

A New Mexico federal court, applying New Mexico law, ruled that Mid-Continent Casualty Co. (“Mid-Continent”) must cover a $1 million award including both compensatory and punitive damages against a mine operator in a suit which alleged the company’s extraction of salt from an underground cavern damaged neighboring properties. This ruling came after the Tenth Circuit reversed an earlier decision in the insurer’s favor.

The coverage dispute stemmed from an underlying lawsuit for property damage that occurred as a result of I&W, Inc.’s (“I&W”) mining of salt between 1995 and 2008. I&W was found to be 100% negligent for property damage and also found to have been reckless or wanton. Based on these findings, the jury awarded the plaintiffs $703,000 in compensatory damages and $300,000 in punitive damages. Mid-Continent issued commercial liability policies to I&W for successive 12-month policy periods from June 1, 2000 through June 1, 2009. Each policy had limits of $1,000,000 per occurrence and $2,000,000 in the aggregate, with the exception of the 2003-04 policy, which had $2,000,000 per occurrence limits.

Mid-Continent sought a declaration that the insurance policies did not cover the claims asserted against I&W because:  (1) the damage was expected or intended and therefore there was no occurrence, and (2) that the jury award was for economic losses, which were not covered under any of the policies. I&W and the plaintiffs in the underlying suit argued that all of the Mid-Continent policies provided coverage because property damage was caused by an “occurrence” during the policy periods and damages resulted from the property damage, therefore, it should be able to stack the policies to optimize coverage. The federal court held that its previous rulings and the 10^th Circuit’s affirmation of those findings made it clear that Mid-Continent was obligated to indemnify I&W for the compensatory damages awarded in the state court lawsuit, by holding that there was an occurrence that resulted in property damage.

As to the issue of whether coverage was available under all of the policies, the court found that only the 2003-04 Mid-Continent policy, which provided the highest per occurrence limits, was triggered. The court found the 2003-04 policy applied based on the reasoning of the Texas Supreme Court in American Physicians Insurance, which when presented with a similar issue, declined to stack the policies, but applied the policy period with the highest limits. I&W and the underlying plaintiffs had argued for the court to apply a continuous trigger of coverage; however, the court found such theory inappropriate because I&W could not establish when any loss occurred. The court noted that New Mexico law had declined to adopt any one theory of coverage and instead viewed the issue as a matter of contract law. With respect to the argument in favor of stacking the policies, the court noted that under New Mexico law, stacking may be appropriate either when it is granted by the express terms of the policy or on the grounds of public policy. The court found that there was no language in the policies that would allow stacking and there was no case law to support a finding based on public policy.

As to the issue of whether coverage was available for punitive damages, the court found that New Mexico law permits such coverage if allowed under the insurance policies. The Mid-Continent policies did not specifically address punitive damages. In finding that the policies provided such coverage, the court specifically rejected Mid-Continent’s argument that because its policies did not define “punitive damages” there was no possibility that there would be such coverage. Moreover, punitive damages were not included in the policies’ stated exclusions.  According to the court, “the policy language indicated that punitive damages would not be treated any differently from other damages.” The policies provided that Mid-Continent must pay “those sums that the insured becomes legally obligated to pay as damages because of … property damage.” Contrary to Mid-Continent’s arguments, the court found that the jury’s award of punitive damages was as much because of property damage as the compensatory damages.  The court also rejected Mid-Continent’s argument that public policy precluded coverage for the punitive damage award, finding that there was no authority in New Mexico to support such a position.

Based on the previous rulings and the 10^th Circuit’s holding that there was an occurrence under the policies, the district court also rejected Mid-Continent’s argument that because the jury found I&W was wanton and reckless there was no occurrence. Moreover, the court noted that “[t]he jury found that I&W was negligent and reckless, but did not find that the damage was expected or intended.” Mid-Continent Cas. Co. v. I&W, Inc., No. CIV-11-0329 WJ/LAM (D. N.M. Feb. 10, 2015); Mid-Continent Cas. Co. v. I&W, Inc., No. Civ-11-0329 WJ/LAM (D. N.M. Feb. 11, 2015).