An officer of a metal reclamation company sued the company's insurer, which refused to defend the company in a liability suit. The insurer refused to defend based on both an owned-property exclusion and a pollution exclusion contained in the company's policies. The Ninth Circuit held that the insurer had a duty to defend because the company had potential liability under a claim for groundwater contamination, which was conceded by the insurer not to be excluded under the policies' owned-property exclusions. Also, the insurer failed to show conclusively that the pollution was intentionally or negligently created, and therefore covered by the pollution exclusion.
Keystone Metal Co., a metals reclamation company, rented commercial property from John Chrisman from 1970-1985. In the course of Keystone's operation, Keystone released residual wastes into the soil and environment on Chrisman's property. Chrisman brought suit against the officers and directors of Keystone, including Robert Reese.
Travelers Insurance Co. issued four comprehensive general liability policies to Keystone, covering the years 1981-1985. These policies promised to defend Keystone and its officers and directors in their official capacities against any suit resulting in bodily injury or property damage, even if the allegations proved to be meritless. Travelers initially agreed to provide a defense in the action brought by Chrisman, but later concluded that it had no obligation to defend Keystone or its officers and withdrew its defense.
Reese filed suit in a third party complaint seeking indemnity from the claims, a declaratory judgment stating that Travelers had a duty to defend and a duty to indemnify, and a breach of an implied covenant of good faith and fair dealing. The district court granted summary judgment to Travelers, relieving it of its duty to defend, and Reese appealed.
The Ninth Circuit held that Travelers had a duty to defend Reese. In order to prevail at the summary judgment stage, Reese had to prove that there was a potential for coverage under the policies, while Travelers had to show a lack of such potential. Travelers alleged that the policy contained the following two exclusions that proved there was no potential coverage: (1) an owned-property exclusion; and (2) a pollution exclusion.
The owned-property exclusion in the policies exempted coverage of property damage that occurred on property owned or rented by Keystone. Travelers produced evidence gathered during discovery that the contamination was limited to the immediate property and that there was no threat of groundwater contamination. The Ninth Circuit pointed out that the allegations against Keystone included property damage beyond the Keystone site. The Ninth Circuit held that Travelers' duty to defend remained intact as long as the complaint contained language creating the potential of a liability. The Ninth Circuit explained that the relevant question was not whether the claims had merit, but whether the policies required Travelers to defend against such claims. Because Chrisman's complaint included the possibility of off-site liability, Travelers had a duty to defend.
The pollution exclusion contained in the policies excluded coverage for damage arising from pollution if the pollution was expected or intended by the insured party. Travelers presented evidence demonstrating that Keystone's officers were aware of the Keystone operations causing pollution. The court noted that the complaint did not specify if any of the defendants negligently or intentionally caused the pollution. California law does not presume that all pollution from the disposal of toxic wastes is nonaccidental. Because the complaint covered accidental spillage, exposure to liability outside of the pollution exemption was a possibility; therefore, Travelers had retained a duty to defend. Accordingly, the Ninth Circuit reversed the district court's grant of summary judgment for Travelers and granted summary judgment to Reese on the question of Travelers' duty to defend the underlying action.