In L.A. Terminals, Inc., et al. v. United Nat'l Ins. Co., the Ninth Circuit, applying California law, affirmed in part the trial court's grant of a policyholder's motion for summary judgment on the duty to defend and obligation to provide independent counsel under a pollution exclusion. L.A. Terminals, Inc., et al. v. United Nat'l Ins. Co., No. 23-55483, 2025 WL 1024392, at *2 (9th Cir. Apr. 7, 2025).
Factual and Procedural Background
The insureds were sued for alleged environmental contamination from the operation of a marine terminal and chemical storage facility. The claimants alleged that hazardous materials leaked from storage tanks over a fifty-year period, and the insureds were negligent in storing the hazardous substances. The underlying complaint alleged that the contamination occurred “suddenly and accidentally, and over long periods of time.”
The policyholders sought to access their CGL policies from 1982 through 1985, and the insurer issued a reservation of rights under Qualified Pollution Exclusions. The pollution exclusions included a sudden and accidental exception. The insured retained its preferred counsel to defend the underlying lawsuit, and the insurer refused to pay for the insureds' choice of counsel. Instead, the insurer offered to appoint defense counsel.
The policyholders then sued their insurer for declaratory relief on duty to defend and independent counsel and breach of duty to defend. The court granted the insureds' motion for summary judgment, and the insurer appealed.
Legal Issues
The Ninth Circuit's opinion focuses on two major issues. First, as a threshold matter, whether the insurer had a duty to defend under the pollution exclusion. The court reasoned that the insured bore the burden to prove that the sudden and accidental exception to the pollution exclusion applied. The court noted that in California, “sudden refers to the pollution's commencement and does not require that the polluting event terminate quickly or have only a brief duration[.]” Id. at *1. The court found that the alleged contamination, which occurred over 50 years ago, could have been ”sudden" within the sudden and accidental exception to the pollution exclusion.
The burden then shifted to the insurer to show that no argument could bring the claim within coverage. The court found that the insurer did not carry its burden because the underlying complaint did not state whether there was one or more sudden discharges of the pollutants.
Second, the court examined whether the pollution exclusion created a conflict of interest that required independent counsel for the insured. The court noted that “[a]lthough an insurer does not necessarily create a conflict merely by defending two parties seeking damages from each other in the same lawsuit, a conflict does exist where the insurer may be subject to substantial temptation to shape its defense to place the risk of loss entirely upon the insured, and independent counsel is necessary in those instances to protect the insured's interests.” Id. at *2. The court found a conflict of interest that necessitated independent counsel because “[t]he reservation of rights gave [the insurer] both the motive and opportunity to defend more vigorously against a liability theory based on sudden as opposed to gradual pollution.” Id.
Policyholder Takeaways
- The sudden and accidental exception is common to pollution exclusions. Policyholders should be familiar with the law applicable to their insurance policy and the arguments they can raise. Every state is different and requires a different analysis.
- Policyholders often want to choose their own counsel, but insurers can be resistant to pay. Unsurprisingly, the policyholder's choice of counsel is normally more expensive than the carrier's choice. The creation of a conflict of interest through a reservation of rights is the first place to start when arguing that an insurer should pay for independent counsel. The arguments that the insurer should pay the full rate should focus more on the skill of the policyholder's choice of defense counsel and desire to protect the insured's tower. It can also be helpful to combine multiple insurers who are obligated to provide a defense to “add up” to the rate of the policyholder's choice of counsel.
