Ore. SC interprets insurance contracts in pollution case

Jessica M. Karmasek Nov. 2, 2010, 12:20pm


SALEM, Ore. (Legal Newsline) - The Oregon Supreme Court last month remanded a case involving insureds who were in the business of dismantling decommissioned ships on the Willamette River near Portland to the state's Court of Appeals.

The insureds or plaintiffs, collectively referred to as Zidell in the Court's Oct. 14 opinion, are a group of related companies that began acquiring and dismantling decommissioned Navy and merchant marine ships after World War II.

The dismantling process resulted in the release of some pollutants found in, among other things, the ships' paint, batteries, motors and fuel tanks, directly into the river and onto land, which further led to pollutants leaching into the groundwater and the river.

The pollutants included polychlorinated biphenyls, petroleum products in the form of fuel, lubricating and hydraulic oils; and a variety of metals, such as arsenic, cadmium, chromium, lead, mercury and zinc.

From 1956-1983, Zidell purchased three types of insurance policies that are at issue in this case: comprehensive general liability policies, marine excess coverage policies, and marine protection and indemnity policies.

Only two insurers, Certain Underwriters at Lloyd's of London and Certain London Market Insurance Companies, remain part of the litigation; the others have settled.

In 1994, the Oregon Department of Environmental Quality, or DEQ, notified Zidell that they were potentially responsible for cleaning up environmental contamination at the site.

In response, Zidell sought defense and indemnity from the insurer from whom they had bought insurance policies. The insurer declined coverage, and Zidell brought action for breach of contract and declaratory relief.

In the Court's opinion, the parties involved raised primarily two issues.

The first is whether plaintiffs or defendants had the burden to prove that environmental damages resulting from the operation of plaintiffs' business were neither expected nor intended.

On that issue, the appeals court held that when the insurance policies that defendants issued expressly granted coverage only for unexpected and unintended damages, plaintiffs had the burden of proving that their loss came within that coverage.

The court also held that when the insurance policies granted broad coverage subject to an implied limitation for expected or intended damages, the implied limitation functioned as an exclusion that defendants had the burden to prove.

The second issue that the parties raised involves protection and indemnity policies in which defendants agreed to indemnify plaintiffs for liability they incurred for "damages to any harbor, dock, buoy, telegraph cable or other fixed or moveable thing whatsoever."

The appeals court held that the promise to indemnify plaintiffs for "damages to any... other fixed or moveable thing whatsoever" did not include a promise to indemnify plaintiffs for damages to the riverbed. Rather, according to the appeals court, defendants agreed to indemnify plaintiffs only for damage to artificial structures.

The Court, in its opinion, affirmed the state's Court of Appeals decision allocating the burden of proof but reversed its decision regarding coverage for damage to the riverbed.

Justice Rives Kistler, who authored the Court's opinion, noted that Oregon authorities allocate the burden of production and persuasion based upon whether a policy grants limited coverage or broad coverage subject to an exclusion.

"We must classify the limitation one way or another, and we conclude that respecting the parties' choice is the more appropriate method," the justice wrote.

"Not only does it permit the parties to structure their agreements in a way that allocates the burden of proof, but it also avoids putting courts in the difficult position of divining the 'essence' of contractual provisions that logically may serve either as a grant of limited coverage or an exclusion from a broad grant of coverage.

"Accordingly, we hold that, for the express fortuity policies, Zidell had the burden to prove that the damages were neither expected nor intended."

The Court also concluded that the trial court and the appeals court correctly held that, for the implied fortuity policies, London had the burden of proving that Zidell either expected or intended the environmental damages resulting from its business operations.

On the second issue, the Court determined that because the parties' differing interpretations of the insurance provision were each plausible and because examination of the remainder of the policy did not remove ambiguity in the meaning of the provision, the phrase "any... other fixed or moveable thing whatsoever" should be interpreted broadly in favor of the insureds to include damage to the sediment in the river within the scope of coverage.

The Court, in its opinion, also concluded that the appeals court erred in reversing and vacating the fee award.

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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