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Pacific Hide & Fur Depot v. Great American Ins. Co.

United States District Court, D. Montana, Butte Division

May 23, 2014

PACIFIC HIDE & FUR DEPOT, a Montana corporation, n/k/a Pacific Steel & Recyling, Plaintiff,

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For Pacific Hide & Fur Depot a Montana corporation other Pacific Steel & Recycling, Plaintiff: Kyle A. Gray, Michelle Millhollin Sullivan, HOLLAND & HART Billings, MT; HOLLAND & HART, Billings, MT.

For Great American Insurance Company a Delaware corporation, Defendant: Michael P. Hooks, FORSBERG & UMLAUF, PS, Seattle, WA; Robert M. Carlson, CORETTE POHLMAN & KEBE, Butte, MT.

For Century Indemnity Company a Pennsylvania corporation, Defendant: Brian C. Coffey, PRO HAC VICE, COHN BAUGHMAN & MARTIN, Chicago, IL; Steve Reida, LANDOE BROWN PLANALP BRAAKSMA & REIDA, Bozeman, MT.

For Central National Insurance Company of Omaha a Nebraska corporation, Defendant: Brian C. Coffey, PRO HAC VICE, COHN BAUGHMAN & MARTIN, Chicago, IL; Steve Reida, ATTORNEY TO BE NOTICED, LANDOE BROWN PLANALP BRAAKSMA & REIDA, Bozeman, MT.

For Resolute Management Inc., a Delaware corporation, Defendant: Mark A. Rabinowitz, LEAD ATTORNEY, PRO HAC VICE, Daniel R. Johnson, PRO HAC VICE, COZEN O'CONNOR, Chicago, IL; Allan H. Baris, MOORE, O'CONNELL & REFLING, PC, Bozeman, MT.

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Dana L. Christensen, Chief United States District Judge.

This order resolves three motions currently pending in this case: (1) Defendant Great American Insurance Company's (" Great American" ) motion for summary judgment; (2) Plaintiff Pacific Hide & Fur Depot's (" Pacific" ) motion for summary judgment regarding the duty to defend; and (3) Pacific's motion for summary judgment on Great American's remaining defenses.

For the reasons detailed herein, Great American breached its duty to defend, and the Court will grant summary judgment in favor of Pacific on that claim.

This is not the first case to come before the Court where an insurer has taken the high risk approach of denying a defense in the face of facts mandating one. Considering the long-established and judicially approved alternative approach, which is to defend the insured and file a declaratory

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judgment action to determine coverage, it is mystifying that an insurer would continue to deny a defense to its insured in the face of a coverage question, particularly where the consequences are clear under Montana law, and can result in a judgment many times greater than the modest cost of the usual defense. This case presents, again, a clear example of the risk associated with this approach.

I. Facts

From approximately 1956 to 1988, Pacific Hide leased a property in Bozeman, Montana that was part of what later became known as the CMC Bozeman Asbestos Site (" Site" ). During that time, Pacific purchased numerous liability policies from Great American, which are the subject of this litigation.

In a letter dated January 2, 1996, the Montana Department of Environmental Quality (" MDEQ" ) notified Pacific that it had been identified as a potentially liable party (" PLP" ) under Montana's Comprehensive Environmental Cleanup and Responsibility Act (" CECRA" ), Mont. Code Ann. § 75-10-705, et seq., based on releases or threatened releases of hazardous or deleterious substances at the Site.

In a letter dated September 23, 2003, MDEQ offered Pacific and the other entities that it had identified as PLPs the opportunity to conduct either an interim or permanent remediation at the Site. The letter stated, inter alia, that if Pacific chose not to conduct one of the remedial actions outlined therein, " DEQ may conduct the actions itself and recover its costs or it may issue an order or initiate a civil action requiring [Pacific] to perform the actions." (Doc. 63-5.) Pacific exchanged several letters with MDEQ regarding its CECRA liability between September 23, and December 2, 2003, but did not conduct either remedial action.

In a letter dated March 25, 2004, counsel for Pacific notified Great American that Pacific had been identified as a PLP at the Site, and that the City of Bozeman may assert a cost contribution claim against it. Pacific attached a schedule of fourteen policies it allegedly purchased from Great American, and requested that Great American defend and indemnify it from all claims arising from the Site.

Over a year later, in a letter dated April 27, 2005, Great American denied Pacific's request for defense and indemnity. On August 7, 2007, Pacific executed a stipulated consent judgment under which it agreed to a 15% allocation of liability for the Site, to be paid to the City of Bozeman as the party that undertook the MDEQ-mandated site cleanup. On July 13, 2010, Pacific executed an " Agreement and Release" with the City and tendered a check for $650,000, the amount that Pacific and the City agreed constituted Pacific's 15% allocation.

Pacific filed a complaint against Great American and the other Defendants in the Montana Eighteenth Judicial District Court on May 2, 2012, alleging breach of contract and bad faith claims handling practices. Century and Central National filed a notice of removal on June 8, 2012; Great American joined the notice on the same day. Following the preliminary pretrial conference on September 11, 2012, the Court bifurcated this litigation, with Phase I to deal with Counts I-VI, the breach of contract and declaratory judgment claims, and Phase II to deal with the remaining Counts. On October 15, 2013, the Court granted summary judgment in favor of Pacific on the issue of Great American's statute of limitations defense.

The Court now resolves the issue raised in Phase I: Whether Great American breached its duty to defend Pacific in the CECRA proceedings.

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II. Summary Judgment Standard

Summary judgment is appropriate " if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The movant bears the initial burden of informing the Court of the basis for its motion and identifying those portions of " the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal quotation marks omitted). The movant's burden is satisfied when the documentary evidence produced by the parties permits only one conclusion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Where the moving party has met its initial burden, the party opposing the motion " may not rest upon the mere allegations or denials of his pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Id. at 248 (internal quotation marks omitted).

III. The Duty to Defend and Applicable Law

This case presents two novel and interrelated questions of state law concerning the duty to defend that the Montana Supreme Court has yet to directly address, and that this Court must resolve before it can decide these motions on the merits. A federal court sitting in diversity applies the substantive law of the forum state to state law claims. Mason and Dixon Intermodal, Inc. v. Lapmaster Intern. LLC, 632 F.3d 1056, 1060 (9th Cir. 2011). When an issue of state law arises and " the state's highest court has not adjudicated the issue, a federal court must make a reasonable determination of the result the highest state court would reach if it were deciding the case." Med. Laboratory Mgmt. Consultants v. Am. Broad. Cos., Inc., 306 F.3d 806, 812 (9th Cir. 2002) (citations omitted). In doing so, the court must " look to existing state law without predicting potential changes in that law." Ticknor v. Choice Hotels Intl, Inc., 265 F.3d 931, 939 (9th Cir. 2001) (citation omitted). The court should also rely on persuasive authorities, including treatises and decisions from other jurisdictions, as guidance. Strother v. S. Cal. Permanente Med. Group, 79 F.3d 859, 865 (9th Cir. 1996).

" The duty to defend is independent from and broader than the duty to indemnify created by the same contract." Farmers Union Mut. Ins. Co. v. Staples, 2004 MT 108, 321 Mont. 99, 90 P.3d 381, 385 (Mont. 2004) (citing St. Paul Fire & Marine Ins. Co. v. Thompson, 150 Mont. 182, 433 P.2d 795, 799 (1967)); Grindheim v. Safeco Ins. Co., 908 F.Supp. 794, 800 (D. Mont. 1995). " The duty to defend arises when a complaint against an insured alleges facts, which if proven, would result in coverage." Staples, 90 P.3d at 385. " Where a complaint alleges facts which represent a risk outside the coverage of the policy but also avers facts which, if proved, represent a risk covered, the insurer is under a duty to defend." Id. (quoting Atcheson v. Safeco Ins. Co., 165 Mont. 239, 527 P.2d 549, 552 (Mont. 1974)). " When a court compares allegations of liability advanced in a complaint with policy language to determine whether the insurer's obligation to defend was 'triggered,' a court must liberally construe allegations in a complaint so that all doubts about the meaning of the allegations are resolved in favor of finding that the obligation to defend was activated." Id. at 385 (citing Portal Pipe v. Stonewall, 256 Mont. 211, 845 P.2d 746, 749 (Mont. 1993)); Grindheim, 908 F.Supp. at 805. " Unless there exists

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an unequivocal demonstration that the claim against an insured does not fall within the insurance policy's coverage, an insurer has a duty to defend." Staples, 90 P.3d at 385 (citing Insured Titles, Inc. v. McDonald, 275 Mont. 111, 911 P.2d 209, 212 (Mont. 1996)). " [I]f there is any dispute as to the facts relevant to coverage, those factual disputes must be resolved in favor of coverage." Id. (citing Insured Titles, Inc., 911 P.2d at 212). When an insurer, instead of tendering a defense under a reservation of rights, unilaterally decides coverage issues in its own favor and refuses to defend, " the insurer proceeds at its own risk." Id. at 386. When an insurer unjustifiably breaches its duty to defend, the insurer becomes liable for defense costs and judgments. Id. (citing Lee v. USAA Cas. Ins. Co., 2004 MT 54, 320 Mont. 174, 86 P.3d 562, 565 (Mont. 2004)).

IV. Questions of Law

A. PLP Notices Issued Pursuant to CECRA are " Suits" Under the Great American Policies

Under Montana law, " [i]n the interpretation of a contract of indemnity, the rules prescribed in [Montana Code Annotated sections] 28-11-314 through 28-11-317 are to be applied unless a contrary intention appears." Mont. Code Ann. § 28-11-313. Montana Code Annotated § 28-11-316 states that with respect to the " [d]uty of person indemnifying to defend," the,

person indemnifying is bound, on request of the person indemnified, to defend against actions or proceedings brought against the person indemnified in respect to the matters embraced by the indemnity . . . . If, after request, the person indemnifying neglects to defend the person indemnified, a recovery against the person indemnified suffered by the person indemnified in good faith is conclusive in favor of the person indemnified against the person indemnifying.

There are numerous policies allegedly issued to Pacific by Great American, with coverage spanning from November 1963 through December 1977. For the purposes of these motions, and to avoid an issue of dispute between the parties, the Court will limit its discussion and analysis to five policies whose existence and contents the parties have agreed upon (the " proven policies" ).[1] The proven policies cover the period from December 20, 1966, through December 20, 1971.They are identical in many respects, including the provision governing Great American's duty to defend, which reads:

With respect to such insurance as is afforded by this policy, the company shall . . . have the right and duty to defend any suit against the insured seeking damages on account of . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient . . . .

(Docs. 119-4 at 4; 119-5 at 7; 119-6 at 6; 119-7 at 5; 119-8 at 7.)

Great American argues that because no " suit" or " complaint" was filed, it had no duty to defend at the time of Pacific's March 25, 2004 claim letter, which was based only on a series of letters from the MDEQ and a potential cost recovery action by Bozeman. While the parties raise numerous issues in the multiple briefs now before the Court, Pacific's claim for breach hinges on whether, in the absence of a " suit," notice that the insured

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has been identified as a PLP under CECRA and requested to take further action is sufficient to trigger the duty to defend under Montana law and the insurance contracts at issue here.

While the Montana Supreme Court has not addressed whether MDEQ notice to an insured that it has been identified as PLP triggers the insurer's duty to defend, the Ninth Circuit addressed a similar question under Idaho law in the seminal case of Aetna Casualty and Surety Company, Inc. v. Pintlar Corporation, which was whether EPA notice that a party has been identified as a Potentially Responsible Party (" PRP" ) under the Federal Comprehensive Environmental Response, Compensation, and Liability Act (" CERCLA" )[2] triggered an insurer's duty to defend " any suit against the insured" under CGL policies, absent an underlying complaint. 948 F.2d 1507, 1516 (9th Cir. 1991). In October of 1984, the EPA notified Gulf Resources & Chemical Corporation and its subsidiary Pintlar Corporation (collectively, " Gulf" ) that it was deemed to be a PRP in connection with the contamination of a plot of land in Idaho known as the Bunker Hill Site. Id. at 1509. The EPA did not immediately file a civil action against Gulf, choosing instead to pursue administrative remedies available under CERCLA. In August of 1986, EPA and Gulf entered negotiations regarding Gulf's participation in the remedial investigation and feasibility study of the Bunker Hill Site. At that point, if Gulf had refused to ...

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