Nucor Corp. v. Employers Insurance Co. of Wausau (11/23/2012)
Arizona Court of Appeals Division One Holds That (1) Diminution in Property Value Because of Stigma Associated with Contamination Is Not “Damages Because of Property Damage” Under Insurance Policy; (2) Proceedings Related to Potentially-Responsible-Party Letter from ADEQ Is a “Suit” Under Insurance Policy; (3) Insurer That Pays More Than Its Share of Defense Costs Is Entitled to Equitable Contribution from Other Insurers; (4) “Policy Limits” Apportionment of Defense Costs Among Insurers Is Not an Abuse of Discretion; and (5) Insured That Had Coverage for Entire Time Period at Issue in Suit Was Not Responsible for Share of Defense Costs Allocated to Insolvent Insurer.
This case involves disputes over insurance coverage related to Nucor Corporation’s contamination of City of Phoenix water wells with trichloroethylene (“TCE”). In 1982, the Arizona Department of Environmental Quality (“ADEQ”) began investigating the contamination, and, in 1989, ADEQ sent Nucor a letter identifying it as a potentially responsible party (“PRP”) and directing it to take remedial action. Nucor settled the ADEQ claim for $1,275,000.
Nucor was also sued in related class actions, which were consolidated. The suits involved, among other classes of plaintiffs, plaintiffs who sought damages for the diminution in property value because of the stigma of being located above groundwater containing TCE (“stigma claims”). Nucor eventually settled the consolidated cases for more than $21 million.
During the class action litigation, Nucor sued various insurers regarding coverage issues. The trial court granted partial summary judgment to Travelers and Employers Insurance Company of Wausau (“Wausau”), finding that their policies did not cover the settlement of the stigma claims. After filing its own motion for summary judgment, Nucor settled with most of the insurers, with Travelers assigning its contribution claim to Nucor and Nucor agreeing to defend Hartford Accident and Indemnity Company (“Hartford”). The court then granted Nucor’s motion for partial summary judgment, finding that Wausau had breached its duty to defend Nucor on the ADEQ claim. Wausau then filed a cross-claim against Hartford and Travelers for equitable contribution, and Nucor was allowed to intervene on the cross-claim.
After a phase of the bench trial focusing on the percentage of defense costs owed by Nucor’s primary insurers, the court concluded that Travelers and Hartford had to reimburse Wausau for prejudgment interest to the extent they had not paid their fair share of Nucor’s defense costs. The court also set the percentage that each insurer was required to equitably contribute to Nucor’s defense costs.
On appeal, Nucor and Wausau challenged the different summary judgment rulings. The Court of Appeals affirmed the ruling that the Wausau policies did not cover the stigma claims. The analysis turned on whether the stigma claims were for “damages because of property damage” under the policy. Courts around the country have reached different conclusions when addressing the issue whether pure economic damages without physical damage to property are covered under similar policies. In this case, however, the Court found it unnecessary to decide the question because the stigma claims were “too unrelated to property damage to require indemnity under Wausau’s policies.” Specifically, the portion of the settlement for the stigma claims covered claims by plaintiffs, some of whom did not own property or live above the contamination, who believed their property values may be diminished because of the contamination. There was no damage to their properties.
The Court also affirmed the ruling that Wausau had the duty to defend Nucor in the ADEQ proceeding. This decision turned on the meaning of “suit” under the policies. The Court first concluded that the term “suit” in the policies was ambiguous and then turned to the statutory provisions authorizing ADEQ’s actions. The Court rejected Wausau’s attempt to characterize the PRP letter as a “claim” rather than a “suit,” saying that the “distinction is difficult to discern” in this context. Based on the burdens and potential liabilities triggered by the PRP letter, the Court concluded that the letter is the functional equivalent of a civil complaint. The Court also noted that Wausau had not defined “suit” in the policies to exclude actions like the ADEQ proceeding.
The Court then addressed three issues arising from the bench trial. First, the Court affirmed the finding that Wausau, the only insurer to defend Nucor in the class-action litigation, was entitled to equitable contribution from the other insurers for defense costs. If policies from different insurers cover the same parties, the same interest, in the same property, and against the same casualty, an insurer is required to contribute to another insurer’s payment of a claim. The test was met in this case, and there were no further conditions required for Wausau to receive contribution. The Court rejected Nucor’s arguments that Wausau should not be entitled to contribution because it did not pay indemnity costs before seeking contribution and because it did not pay all defense costs for the ADEQ proceedings. “[A]n insurer seeking equitable contribution need only have paid more than its fair share.” The Court also rejected Nucor’s argument that Wausau should not get contribution because the other insurers settled with Nucor – these settlements did not extinguish Wausau’s contribution rights.
The Court also affirmed the trial court’s allocation of defense costs among the insurers. The trial court ruled that each insurer’s pro rata share would be determined by dividing its policy limits by the total amount of coverage and then used a denominator of 23 years. The “policy limits” apportionment was within the trial court’s discretion. The Court rejected Nucor’s argument that Wausau should have been bound by an interim-defense agreement under which Wausau would have been required to pay more, noting that Nucor successfully argued earlier in the litigation that the interim agreement was not binding.
Finally, the Court reversed and remanded to the trial court for further proceedings on its ruling that Nucor was responsible for the share of defense costs allocated to an insolvent primary insurer. Arizona law requires every insurer to provide a complete defense even when the insurer did not cover the loss for the entire period alleged in a complaint. The insured may have to bear costs if it went uninsured for a period of time, but Nucor was insured for the entire period at issue. It would not be equitable to require Nucor to contribute to defense costs in these circumstances.
Judge Portley authored the opinion; Judges Winthrop and Timmer concurred.