The Kansas City Southern Railway Company and Union Pacific Railroad Company v. The Wood Energy Group, Inc. and Chartis Specialty Insurance Company

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In 2009, Wood entered into an agreement with Union Pacific Railroad

Company (“Union Pacific”) for the recycling of creosote-treated wooden rail

crossties. Kansas City Southern Railway Company (“KCS”) entered into a

similar agreement with Wood the following year. Wood agreed to provide

supervision, labor, equipment, materials, transportation, and permits to

remove and dispose of the Railroads’ used crossties. The resulting materials

would be processed as fuel. Wood’s operations were to take place on

property (“site”) owned by Louisiana & North West Railroad Company

(“LNW”) in Gibsland, Louisiana, that was leased by Wood.

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Under the terms of the agreements with the Railroads, Wood agreed to

procure and maintain commercial general liability insurance and pollution

liability insurance during the life of the agreement.

AIG issued a primary policy with Wood as the named insured that

afforded commercial general liability and pollution legal liability coverage.

The policy period was from June 30, 2012, to June 30, 2013. AIG also

issued a commercial excess policy with Wood as the named insured. The

excess policy period was the same as for the primary policy. Coverage

under the excess policy would be triggered by coverage under the underlying

policy, which was the primary policy.

On February 6, 2012, the Environmental Protection Agency gave

notice to LNW of an administrative order for violation of the Clean Water

Act at the site. The alleged violations included the failure to obtain the

necessary permit, the failure to install adequate storm water controls, and the

discharge of a pollutant into the waters of the United States.

On July 10, 2012, the Louisiana Department of Environmental

Quality (“LDEQ”) gave Wood notice of a potential penalty regarding

violations at the site. Wood was accused of: (1) processing regulated solid

waste without a permit or authorization; (2) transporting regulated solid

waste to an unauthorized, nonpermitted facility; (3) failing to obtain an air

permit; and (4) failing to obtain a permit for water discharges.

In January of 2013, Wood filed for Chapter 11 bankruptcy. The next

month, Wood converted its bankruptcy to a Chapter 7 bankruptcy. Wood

left a literal mess for others to rectify.

On April 1, 2013, the LDEQ sent Wood a consolidated compliance

order and notice of potential penalty. The LDEQ asserted that Wood had

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lacked a permit or other authority to dispose of and/or process solid waste at

the site. The LDEQ had conducted a site inspection there on February 19,

2013, and had found large volumes of accumulated creosote-treated

crossties, which were considered solid waste, as well as several areas of

stained soils and areas of pooled water with an oily sheen. The LDEQ noted

that processing of solid waste at the site had stopped.

The LDEQ stated in the April 1 order and notice that it had found that

Wood had violated regulations by depositing and processing regulated solid

waste at the site without permit or authorization. Wood was ordered to

remove all deposited regulated solid waste to an authorized facility, excavate

areas of visibly contaminated soil, take any and all measures necessary to

meet and maintain compliance with the solid waste regulations, and submit a

written report detailing the actions to be taken to comply with the order.

On August 28, 2013, Commercial Insurance Associates wrote to AIG

that it had been instructed by Maggie Smith, the trustee of Wood’s

bankruptcy estate, to forward notice of a claim to AIG. The letter further

stated that it had received a “direct action” from LNW regarding pollution at

the site as well as notice from the LDEQ regarding Wood’s noncompliance

with Louisiana’s waste disposal regulations.

By letter to AIG dated August 28, 2013, LNW gave notice of a claim

against Wood under the primary and excess policies. The letter further

stated that LNW was providing notice to AIG for itself as an additional

insured under the policies as well.

On May 28, 2014, the LDEQ sent demand letters to KCS and Union

Pacific regarding site remediation. The LDEQ demanded the removal and

proper disposal of solid wastes at the site, the design and implementation of

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a remedial site investigation, and the design and implementation of any

corrective actions necessary to address potential contamination of soil and/or

groundwater at the facility. The letters informed the Railroads that soil and

groundwater samples collected and tested by LNW revealed concentration of

known hazardous substances in several soil samples that exceeded the

LDEQ’s standards for arsenic and various semivolatile organic compounds

including benzo(a)anthracene, benzo(a)fluoranthene, and benzo(a)pyrene.

The Railroads, along with LNW, cooperated with the LDEQ’s

demands to clean up the site. On March 31, 2016, KCS, in its capacity as an

additional insured and/or insured under the policies, made demand on AIG

to defend and indemnify it in connection with the site remediation. KCS

also stated it was making demand on AIG as Wood’s insurer. KCS’s letter

listed Wood as the insured, KCS as an additional insured, and the LDEQ as

a claimant.

On December 29, 2016, the Railroads filed this lawsuit against

Wood and AIG. The Railroads alleged that Wood was liable to them for

the costs of remediating the site, and they were entitled to recover from AIG

for any liability of Wood. They also alleged that Wood and AIG were

required to defend and indemnify them in connection with the LDEQ’s

demands because the Railroads were insureds and/or additional insureds

under the primary and excess policies issued by AIG. Finally, the Railroads

alleged that AIG had acted in bad faith by denying coverage.

KCS and Union Pacific prayed for a judgment: (i) finding Wood

liable for environmental cost recovery, tort indemnity/contribution, and/or

contractual liability/indemnity; (ii) finding AIG liable for Wood’s damages;

(iii) declaring and finding that KCS and Union Pacific are insureds and/or

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additional insureds under the AIG policies; and (iv) awarding damages for

AIG’s bad faith failure to fulfill its defense and indemnity obligations.

In December of 2018, the LDEQ provided notice that it had reviewed

a site investigation report and determined that no further action was

necessary at the site.

In March of 2019, the Railroads filed a motion for partial summary

judgment in which they argued they are entitled to summary judgment on

the issue of coverage under the AIG policies for their losses in connection

with responding to the LDEQ’s demands. AIG filed its own motion for

summary judgment asserting there was no coverage under its policies for the

Railroads’ losses.

Finding that genuine issues of material fact remained, the trial court

denied the motions for summary judgment and partial summary judgment.

AIG and the Railroads then applied for writs with this Court seeking

supervisory review of the judgment. AIG and the Railroads agreed that

there were no material facts in dispute, with the only issue being how the

insurance policies applied to those undisputed facts. This Court

consolidated the writs and granted them to docket.

DISCUSSION

When determining whether or not a policy affords coverage for an

incident, it is the burden of the insured to prove the incident falls within the

policy’s terms. Doerr v. Mobil Oil Corp., 00-0947 (La. 12/19/00), 774 So.

2d 119. The insurer bears the burden of proving the applicability of an

exclusionary clause within a policy. Id.

Regarding the interpretation of insurance contracts, the Louisiana

Supreme Court has stated:

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An insurance policy is a contract between the parties and should be construed employing the general rules of interpretation of contracts set forth in the Louisiana Civil Code. The parties’ intent, as reflected by the words of the policy, determine the extent of coverage. La.Civ.Code art. 2045[.] Words and phrases used in a policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning. La.Civ.Code art. 2047.2. An insurance policy should not be interpreted in an unreasonable or a strained manner so as to enlarge or to restrict its provisions beyond what is reasonably contemplated by its terms or so as to achieve an absurd conclusion. Where the language in the policy is clear, unambiguous, and expressive of the intent of the parties, the agreement must be enforced as written. However, if after applying the other rules of construction an ambiguity remains, the ambiguous provision is to be construed against the drafter and in favor of the insured.



The purpose of liability insurance is to afford the insured protection from damage claims. Policies therefore should be construed to effect, and not to deny, coverage. Thus, a provision which seeks to narrow the insurer’s obligation is strictly construed against the insurer, and, if the language of the exclusion is subject to two or more reasonable interpretations, the interpretation which favors coverage must be applied.



It is equally well settled, however, that subject to the above rules of interpretation, insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy.



Reynolds v. Select Properties, Ltd., 93-1480 (La. 4/11/94), 634 So. 2d 1180,

1183 (case citations omitted). See also Elliott v. Continental Cas. Co., 06

1505 (La. 02/22/07), 949 So. 2d 1247.

The fact that a policy provides general coverage, but then subjects it

to certain exclusions, does not make the policy ambiguous. McGee v.

Allstate Ins. Co., 52,299 (La. App. 2 Cir. 11/14/18), 259 So. 3d 1161, writ

denied, 18-2057 (La. 2/18/19), 265 So. 3d 773.

The interpretation of an insurance policy ordinarily involves a legal

question that can be properly resolved on motion for summary judgment. Id.

Summary judgment declaring a lack of coverage under an insurance policy

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may not be rendered unless there is no reasonable interpretation of the

policy, when applied to the undisputed material facts shown by the evidence

supporting the motion, under which coverage could be afforded. Reynolds,

supra; Elliott, supra.

Review of a grant or denial of a motion for summary judgment is de

novo. Lawrence v. Sanders, 49,966 (La. App. 2 Cir. 6/24/15) 169 So. 3d

790, writ denied, 15-1450 (La. 10/23/15), 179 So. 3d 601.

Our review shows that the primary policy does not afford coverage for

the losses sustained by the Railroads either as insureds for the demands

made by the LDEQ or as claimants against Wood.

Coverage D

Coverage D is the pollution legal liability section of the primary

policy. The Railroads argued in their motion for partial summary judgment

that they are insureds under the policies and entitled to coverage for their

losses under Coverage D as it provides coverage for “loss that the insured

becomes legally obligated to pay as a result of claims for bodily injury or

property damage resulting from pollution conditions on or under the insured

property.” Although the Railroads do not directly reference D-1.a. as the

source of their coverage, the cited language is from that particular provision.

D-1.a. states in its entirety:

COVERAGE D – POLLUTION LEGAL LIABILITY



1. Insuring Agreements



COVERAGE D-1



a. THIRD-PARTY CLAIMS FOR ON-SITE BODILY INJURY OR PROPERTY DAMAGE We will pay loss that the insured becomes legally obligated to pay as a result of claims for bodily injury or property damage resulting from pollution conditions on or under the insured

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property while the person injured or property damaged is on the insured property and such pollution conditions did not first commence before the Retroactive Date, if any, shown in the Schedule of Insured Property(ies) Endorsement, provided the claim for bodily injury or property damage is first made against the insured and reported to us in writing during the policy period or any extended reporting period if applicable.



The Railroads maintain that coverage is afforded under Coverage D

because: (1) they are insureds under the policies; (2) the processing site is an

insured property under the policies; (3) they incurred losses that they were

legally obligated to pay as a result of the LDEQ’s claims for property

damage resulting from pollution conditions on or under the insured property;

and (4) AIG received timely notice of the LDEQ’s demands. The parties

stipulated that the site is an insured property. AIG assumes for purposes of

summary judgment that the Railroads are additional insureds under the

policies.

Coverage D-1.a. states that the claim for property damage is to be

made against the insured and reported to AIG in writing during the policy

period or any extended reporting period. Thus, the AIG policy is a claims

made-and-reported policy insofar as coverage under D-1.a. is concerned.

Regarding the differences between claims-made insurance policies

and occurrence insurance policies, our Supreme Court has cited what it

considered a “seminal statement” on the subject:

With the development of a more complex society, it became more reasonable, particularly with respect to the activities of professionals, to insure against the making of claims, rather than the happening of occurrences, and “claims made” insurance developed to meet a need for professionals to insure against the making of a claim as the insured event, rather than having to struggle with traditional concepts and difficulties inherent in determining whether the “event” insured against was the commission of an act, error or omission or the date of discovery thereof or the date of injury caused thereby.



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The major distinction between the “occurrence” policy and the “claims made” policy constitutes the difference between the peril insured. In the “occurrence” policy, the peril insured is the “occurrence” itself. Once the “occurrence” takes place, coverage attaches even though the claim may not be made for some time thereafter. While in the “claims made” policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place.



Anderson v. Ichinose, 98-2157, pp. 5-6 (La. 9/8/99), 760 So. 2d 302,

305 (quoting Sol Kroll, The Professional Liability Policy “Claims

Made”, 13 Forum 842, 843 (1978)).

There are even differences between claims-made policies and

claims-made-and-reported policies. Pure claims-made policies shift to

the insured only the risk of claims incurred but not made. Anderson v.

Ichinose, supra (citing Bob Works, Excusing Nonoccurrence of

Insurance Policy Conditions in Order to Avoid Disproportionate

Forfeiture: Claims-Made Formats as a Test Case, 5 Conn. L.J. 505,

546 (1999)). Under a claims-made-and-reported policy, the risk of a

claim incurred but not made, as well as a claim made but not reported,

is shifted to the insured. Gorman v. City of Opelousas, 13-1734 (La.

7/1/14), 148 So. 3d 888. See Anderson v. Ichinose, supra. The event

and peril insured against is based on making and reporting of the

claim within the period specified by the policy. Gorman, supra.

As discussed in Gorman:

“The purpose of the reporting requirement [in a claims-made policy] is to define the scope of coverage [purchased by the insured] by providing a certain date after which an insurer knows it is no longer liable under the policy.” Once the policy period and reporting period expire, the insurer can “close its books” on that policy.



Id., 13-1734 at pp. 6-7, 148 So. 3d at 893 (citations omitted).

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In Gorman, supra, the Supreme Court concluded that provisions on

the making and reporting of claims in a claims-made-and-reported policy

were a permissible limitation on the insurer’s liability as to third parties.1

The Court reasoned that not enforcing the provisions would effectively

convert the claims-made-and-reported policy into an occurrence policy,

resulting in the judicial modification of the bargained-for exchange between

the insurer and insured. Id. See Hood v. Cotter, 08-0215 (La. 12/2/08),

5 So. 3d 819.

AIG correctly argues in opposition to the Railroads’ motion for partial

summary judgment that the Railroads did not comply with the claims-made

and-reported provisions. The policy period ended on June 20, 2013. There

was an extended reporting period of 60 days following the end of the policy

period. The LDEQ did not make claims against the Railroads until May 28,

2014. KCS did not report the claim to AIG or make a claim against Wood

until March 31, 2016, at the earliest. The Railroads sued AIG in December

of 2016. Thus, the LDEQ’s claims against the Railroads and the Railroads’

claims against Wood were made well outside the policy period and extended

reporting period.

Nevertheless, the Railroads maintain that the claims-made-and

reported provisions were complied with during the policy period and

extended reporting period. The Railroads note that the LDEQ made claims

against Wood on July 10, 2012 (notice of potential penalty) and on April 1,

2013 (consolidated compliance order and notice of potential penalty). The



1As noted in Gorman, in Livingston Parish Sch. Bd. v. Fireman’s Fund Am. Ins. Co., 282 So. 2d 478 (La. 1973), the Louisiana Supreme Court rejected a public policy attack made on a claims-made-and-reported policy in connection with an insured’s claim.

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Railroads further note that these claims were reported to AIG during the

extended reporting period because on August 28, 2013, AIG received notice

of the LDEQ’s demands from the bankruptcy trustee and from LNW.

However, those events do not constitute compliance by the Railroads with

the claims-made-and-reported provisions. Allowing those events to do so

would broaden the bargained-for coverage and convert the policy to an

occurrence policy.

Moreover, in Section IV-CONDITIONS of the policy, there is a

provision regarding the separation of insureds:

6. Separation of Insureds Except with respect to the Limits of Insurance, and any rights or duties specifically assigned to the first Named Insured, this insurance applies: a.) As if each Named Insured were the only Named Insured; and b.) Separately to each insured against whom claim is made or suit is brought. Solely with respect to Coverage D, this condition shall not apply to an insured that is a parent, subsidiary or affiliate of you.



Under this provision, the Railroads as additional insureds are treated

separately from the other insureds under the policy. The Railroads were

independently required to satisfy the claims-made-and-reported requirement.

Thus, claims made timely against Wood and/or LNW and timely reported to

AIG do not inure to the benefit of the Railroads.

The Railroads point out that during discovery, AIG produced an

internal email in which an AIG claims handler admitted there was D-1

coverage in reference to an insurance claim made by LNW. Even if the

email is taken literally, this April 16, 2014, email cannot be construed as

meaning that coverage for LNW’s claims equates to coverage for the

Railroads’ claims, especially in light of the separation of insureds provision.

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In summary, the primary policy does not provide coverage under

Coverage D to either the LDEQ’s claims against the Railroads as the insured

or the Railroads’ claims against Wood as the insured.

Coverage A

In their motion for partial summary judgment, the Railroads

maintained that while they are entitled to coverage under Coverage A, they

did not seek summary judgment on that basis because they believed they are

entitled to coverage under Coverage D. Thus, their motion focused

exclusively on Coverage D. AIG argued in its motion for summary

judgment that the primary policy did not afford coverage for the Railroads’

losses under either Coverage A or Coverage D. The Railroads counter that

AIG did not meet its burden under its motion of proving the lack of coverage

under Coverage A.

Coverage A, which provides coverage for bodily injury and property

damage liability, states, in relevant part:

COVERAGE A – BODILY INJURY AND PROPERTY DAMAGE LIABILITY



1. Insuring Agreement



a. We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages. However we will have no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which the insurance does not apply. . . .



AIG argues that there is no coverage afforded under Coverage A

because of a pair of relevant exclusions. The first is the property damage

exclusion:

2. Exclusions

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This insurance does not apply to:

. . . . .

j. Damage to Property



Property damage to:



(1) Property you own, rent, or occupy including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;



. . . . .



This exclusion expressly excludes coverage under Coverage A for

property damage to property rented or occupied by Wood. Coverage A

states that AIG will pay sums that the “insured becomes legally obligated to

pay as damages because of the . . . property damage.” However, excluded is

property damage to property “you . . . rent, or occupy[.]” The policy defines

“you” as the named insured, meaning Wood, which leased the site from

LNW.

Additionally, the exclusion states that the excluded property damage

includes “any costs or expenses incurred by you, or any other person,

organization or entity, for repair, replacement, enhancement, restoration or

maintenance of such property for any reason[.]” Again, “you” is the named

insured, Wood. Thus, the cleanup costs incurred by the Railroads in

restoring the property were “costs incurred . . . by any other . . . entity[.]”

AIG next contends that coverage is not afforded under Coverage A

because of the pollution exclusion. This exclusion states:

2. Exclusions

This insurance does not apply to:

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. . . . .

f. Pollution



(1) Bodily injury or property damage which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time.



(2) Any loss, cost, or expense arising out of any: (a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or (b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants.



. . . . .



Regarding pollution, the primary policy contains some relevant

definitions:

31. Pollutants mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. Pollutants shall include Microbial Matter and legionella pneumophilia.



32. Pollution conditions means the discharge, dispersal, release or escape of pollutants into or upon land, or any structure on land, the atmosphere or any watercourse or body of water, including groundwater, provided such conditions are not naturally present in the environment in the amounts or concentrations discovered.



Under the pollution exclusion, the primary policy does not apply to

property damage which would not have occurred but for the “discharge,

dispersal, seepage, migration, release, or escape of pollutants at any time.”

The LDEQ found accumulated crossties on the site. Those crossties were

characterized as regulated waste. Waste is included within the definition of

“pollutants.” Samples taken of the soil there also revealed the presence of

arsenic and various semivolatile organic compounds. Undoubtedly the

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property damage originated from the “discharge, dispersal, seepage,

migration, release, or escape of pollutants[.]”

These two exclusions under Coverage A are entirely unambiguous

and apply to the claims brought by the LDEQ against the Railroads as

insureds and to the claims brought by the Railroads against Wood as an

insured.

The Railroads argue that the damage to property exclusion does not

apply because contamination to groundwater would not have been damage

to property rented or occupied by Wood. They additionally argue that AIG

has not cited evidence of what property was actually remediated. In regards

to the pollution exclusion, the Railroads argue that the exclusion would not

apply to the mere presence of pollutants. They maintain that AIG has not

established there was a “discharge, dispersal, seepage, migration, release or

escape of pollutants” requiring site remediation within the scope of the

pollution exclusion. The Railroads’ arguments are inconsistent.

If the property damage exclusion is inapplicable because of

groundwater contamination, then that contamination would have necessarily

come from the discharge, dispersal, seepage, migration, release, or escape of

pollutants from Wood’s activities at the site. Moreover, in order to have

coverage under Coverage D-1.a. as alleged by the Railroads, there would

need to be “property damage resulting from pollution conditions[.]” As

defined in the policy, “pollution conditions” means “the discharge, dispersal,

release or escape of pollutants[.]” Furthermore, the Railroads also argue that

AIG has not cited evidence of what property was actually remediated, yet

the Railroads are seeking coverage for losses they incurred in remediating

the site.

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Finally, the pollution exclusion states the policy does not apply to any

loss, cost, or expense arising from any “[r]equest, demand, order or statutory

or regulatory requirement that any insured or others test for, monitor, clean

up, remove, contain, treat, detoxify or neutralize, or in any way respond to,

or assess the effects of pollutants[.]” That is the essence of what the LDEQ

demanded the Railroads do and how they incurred their losses in this matter.

In summary, regardless of whether Wood or the Railroads are

considered the insured, the primary policy did not afford coverage for the

costs incurred by the Railroads in connection with remediating the site as

demanded by the LDEQ. Since there is no coverage under the primary

policy, there is no coverage under the excess policy and the Railroads’ bad

faith claim fails as well. Accordingly, the trial court erred in denying AIG’s

motion for summary judgment.



At the Railroads’ cost, we AFFIRM that part of the judgment denying

the Railroads’ motion for partial summary judgment, but REVERSE that

part of the judgment denying AIG’s motion for summary judgment.