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First Circuit Clarifies Application of “Reasonable Diligence” Coverage Trigger in Duty to Defend Context

Insurance Coverage Case Advisory, Issue 5
July 13, 2012

In Travelers Casualty & Surety Co. v. Providence Washington Insurance Co., No. 11-2193, 2012 WL 2821898 (1st Cir. July 11, 2012), the United States Court of Appeals for the First Circuit, applying Rhode Island law in a declaratory judgment action between two commercial general liability insurers, reversed the federal district court’s summary judgment order holding that the defendant insurer did not have a duty to defend a contribution action involving clean-up costs for the Rhode Island Centredale Manor Superfund Site.

 In 2000, the EPA ordered the policyholder, New England Container Company, Inc., and several other companies to remove hazardous substances disposed of by the companies at the Superfund Site.  Six years later, one of the companies, Emhart Industries, Inc. (“Emhart”), filed federal and state court actions against the policyholder and its two insurers, alleging that the policyholder was liable for at least part of the response costs paid by Emhart and that coverage existed under the insurers’ policies for the costs.  The Emhart complaint alleged that the policyholder had engaged in various polluting activities throughout the period during which the policyholder allegedly conducted business operations at the Superfund Site--from approximately 1952 until the early 1970s.  The plaintiff insurer’s general commercial liability policies issued to the policyholder spanned from 1969 to 1982, and the defendant insurer’s policies spanned from 1982 to 1985. 

The First Circuit began by noting that Rhode Island applies the “pleadings test,” under which an insurer’s duty to defend arises when the underlying complaint alleges facts and circumstances bringing the case “‘potentially within’” the coverage afforded by the policy.”  Id. at *2 (quoting Flori v. Allstate Ins. Co., 388 A.2d 25, 26 (R.I. 1978) (emphasis in original)).  The court also explained that coverage under a general liability policy is triggered by an occurrence that takes place when property damage “‘manifests itself or is discovered or in the exercise of reasonable diligence is discoverable.’”  Id. at * 4 (quoting CPC Int’l, Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d 647, 649 (R.I. 1995), clarification denied, 673 A.2d 71 (R.I. 1996)).  Applying this trigger test, the court reversed the district court’s grant of summary judgment to the defendant insurer, ruling that the underlying complaint, fairly construed, alleged that property damage was potentially discoverable in the exercise of reasonable diligence between 1982 and 1985.  Id. at *8-10.  In so holding, the court rejected the district court’s conclusion that an insurer’s defense obligations cannot be triggered when the policy period does not overlap with the policyholder’s allegedly polluting activities.             

This case indicates that Rhode Island’s “reasonable diligence” coverage trigger may not require a temporal overlap between an insurer’s policy period and a policyholder’s pollution operations.  Although the court noted that parties may have difficulty unearthing evidence that proves for indemnity purposes that the reasonable diligence coverage trigger applies during a time frame “when the insured has long ceased its business operations that coincided with the pollution activity,” it recognized that, for duty to defend purposes, there is a “vast array” of scenarios in the latent environmental damage context that could lead to the conclusion that property damage is reasonably discoverable after a company’s polluting activities have ceased but prior to manifestation.  Id. at *7.  Moreover, the court reiterated that neutral or ambiguous allegations regarding when property damage is discoverable do not foreclose an insurer’s duty to defend.  Id. at *9.  Although a defense may be owed, this decision recognizes that the actual facts may establish that no duty to indemnify exists for the time period prior to manifestation of the pollution damage but after the cessation of the policyholder’s polluting activities.