INSURER HOPES THIRD TIME A CHARM IN COURT REVIEW OF POLLUTION CLAUSE

MONTGOMERY, Ala.-An insurer is asking the Alabama Supreme Court to review for the third time in the same case the meaning of the sudden and accidental pollution exclusion, after the court late last month reversed its own pro-insurer decision.

Relying on a policyholder's version of the pollution exclusion's drafting history, Alabama's highest court on Dec. 20 ruled that insurers assured regulators a quarter century ago the exclusion did not bar coverage for unintended gradual pollution. That 7-1 decision reversed the court's own Aug. 30 ruling (BI, Sept. 9, 1996).

On Dec. 30, though, Wyoming's high court ruled the exclusion bars coverage of gradual pollution.

The court decided not to consider the exclusion's drafting history and instead focused on the meaning of the word "sudden." Given the word's own significance and considering its context in the exclusion, the exclusion bars coverage for losses resulting from gradual pollution, the court ruled unanimously.

The Wyoming Supreme Court's ruling is remarkably similar to the decision the Alabama Supreme Court reversed on rehearing.

Twenty state supreme courts to date have interpreted the sudden and accidental exclusion, which was included in comprehensive general liability policies from the early 1970s until 1986, when insurers adopted the absolute pollution exclusion. Policyholders hold an 11-9 advantage at the state supreme court level. But, the top courts in two influential states-California and New York-have not ruled on the issue.

State supreme courts rarely reverse their own decisions, but the Alabama court's turnabout marks the second reversal by a state's highest court on this issue.

The Florida Supreme Court in 1993 reversed itself and denied coverage after initially ruling 4-3 for policyholders in Dimmitt Chevrolet Inc. vs. Southeastern Fidelity Insurance Corp. (BI, July 5, 1993).

Attorneys were divided on the Alabama decision's potential influence on other courts.

"Courts will have ample information to go either way," said policyholder attorney William F. Greaney, a partner with Covington & Burling of Washington, who was not involved in the case.

Hackensack, N.J.-based insurer attorney Edward Zampino, who was not involved in the Alabama case but has filed amicus briefs for insurers in several other actions, including the Wyoming litigation, said: "Any time you get a supreme court ruling, you start playing the numbers game. It certainly helps the other side."

Insurer attorney Frank Winston Jr., who represented United States Fidelity & Guaranty Co. in the Alabama case, filed a request for a rehearing with the Alabama Supreme Court on Dec. 26.

"It's very disturbing" that the court's latest decision relies heavily on the exclusion's drafting and regulatory history in general but remains silent on the exclusion's regulatory history in Alabama, said Mr. Winston, a partner with Wiley, Rein & Fielding of Washington. He said a former Alabama regulator stated in an affidavit that the state's regulators understood that "sudden" meant abrupt.

The court also ruled that because coverage is not automatically excluded under the pollution exclusion, a jury now will have to determine whether the policyholder, metal finisher Alabama Plating Co. of Vincent, Ala., provided USF&G a late claim notice.

A state agency first ordered Alabama Plating in 1986 to clean up soil and ground water that were contaminated by the metals in the waste water the company dumped into containment ponds for decades under the direction of state and federal agencies.

Alabama Plating did not directly notify USF&G about its environmental liabilities until 1991. But, it did inform Glen Allen, Va.-based Hilb, Rogal & Hamilton Co., USF&G's agent, about its potential liabilities in 1985. HRH told Alabama Plating it was not covered and did not notify USF&G, according to court records.

Mr. Winston plans to ask the Supreme Court to rule that Alabama Plating's notice of a claim to USF&G was too late, because the policyholder was obligated to notify USF&G-not its agent-in writing of its potential liabilities.

That issue was not a factor in the Supreme Court's Aug. 30 ruling, because that decision upheld a lower court's summary judgments in favor of USF&G and two other insurers.

USF&G wrote primary coverage for Alabama Plating between 1955 and 1986, and Safety National Casualty Corp. and Ranger Insurance Co. wrote umbrella coverage for a few years during that period, said Alabama Plating attorney John Fried, a partner with Anderson Kill & Olick P.C. of New York. Alabama Plating's cleanup costs total about $3 million, much less than the limits the company purchased from the insurers, Mr. Fried said.

In its earlier decision, the Alabama Supreme Court said it would be rewriting Alabama Plating's insurance policies if it interpreted "sudden" as unexpected or unintended without attaching a temporal meaning to the word.

Despite the various definitions of "sudden," the context of its use in the pollution exclusion leads to the "inescapable conclusion" that insurers intended it to mean abrupt, the court ruled in August.

The court also said that Alabama Plating did not rebut affidavit testimony from the former Alabama deputy insurance commissioner.

But, in its Dec. 20 decision, the court ruled that "sudden" is ambiguous. The court then relied on the exclusion's drafting and regulatory history to determine the exclusion's intent. The Alabama court said several factors show that the exclusion was not intended to bar coverage for unintended gradual pollution. Most significantly, the court found:

Insurer executives wrote in technical papers and informed agents, brokers and regulators that earlier policies covered property and bodily injury claims resulting from gradual pollution and that the "sudden and accidental" exclusion bars coverage only for expected or intended pollution acts.

Before insurers adopted the pollution exclusion, courts already had ruled that the "sudden and accidental" clause in boiler and machinery policies provided coverage for gradual events.

The overall structure of CGL policies provides coverage for "gradual, repeated conditions," so the policies provide a context for determining that the exclusion does not bar coverage for unintended gradual pollution.

After ruling that the "sudden and accidental" clause does not bar coverage for unexpected and unintended releases of pollutants, the court states in a footnote that the release does not refer to Alabama Plating's waste water disposal methods. Instead, it refers to the migration of contaminants from the containment ponds into the soil and ground water, the court said.

That is "one of the most important parts of the opinion," said Mr. Fried, Alabama Plating's attorney.

Mr. Zampino, the insurer attorney who specializes in the exclusion's history, said the decision is "riddled with problems."

Most significantly, he said, pre-1970s policies did not cover repeated gradual pollution incidents. The policies covered one unexpected gradual pollution incident. "If the incident became part of repeated business operations, you're not covered," Mr. Zampino said.

Mr. Zampino also said that court interpretations of the "sudden and accidental" language in boiler and machinery policies were not uniform.

For example, he said, the Massachusetts Supreme Court did not apply its interpretation of the boiler and machinery policy clause to the pollution exclusion. In siding with insurers on the pollution exclusion in 1990, the Massachusetts court said the boiler and machinery clause applies to the period during which equipment is damaged. It ruled that the pollution exclusion refers to the manner in which pollutants were discharged, Mr. Zampino said.

And, contrary to the Alabama court's footnote, the exclusion does not limit pollution discharges to the migration of pollutants from a containment pond to the ground, Mr. Zampino said.

In Wyoming, the state Supreme Court followed the same line of reasoning the Alabama Supreme Court did in August and ruled that "sudden" unambiguously has a temporal meaning. The Wyoming court refused to find that "sudden" and "accidental" have synonymous meanings in the pollution exclusion.

The decision came in the middle of a federal district court case pitting Sinclair Oil Corp. against Republic Insurance Co., Royal Insurance Co. of America and Safeguard Insurance Co. The district court asked the Wyoming Supreme Court for guidance specifically on whether the pollution exclusion barred coverage for gradual pollution and whether the exclusion is ambiguous.

The Wyoming Supreme Court said that because of those narrow questions, it refused to consider the pollution exclusion's drafting and regulatory history, which is being argued at the district court level. But, the court notes elsewhere in the opinion that it could have reviewed the district court's full record.

"That may tell you something about what it thought of that argument" from policyholders on the exclusion's drafting and regulatory history, said Republic's attorney, James C. La- Forge, a partner with Chadbourne & Parke in New York.

Sinclair Oil's attorneys did not return phone calls.

Alabama Plating Co. and J.M. Rowe Jr. vs. United States Fidelity & Guaranty Co. et al., Alabama Supreme Court; No. 1941753.

Sinclair Oil Corp. vs. Republic Insurance Co. et al., Wyoming Supreme Court; No. 95-62