Duty to defend versus indemnify is distinct, says U.S. Fifth Circuit
The Fifth Circuit reversed and remanded on the duty to indemnify because the ruling of the district court was premature.
Liberty Mutual Corp. convinced the U.S. Court of Appeals for the Fifth Circuit it had no duty to defend an accused polluter in a South Carolina federal court case, but its duty to indemnify was conditionally reinstated.
Liberty Mutual, through its entity Liberty Mutual Fire Insurance Co., filed suit in the U.S. District Court for the Northern District of Texas after a client, Copart of Connecticut Inc., demanded the insurer cover its defense against pollution-related claims of negligence, nuisance and trespass.
Eight neighboring property owners sued Copart in 2016 over its ownership of a salvage-vehicle yard near wetlands and a creek south of Columbia, South Carolina.
Plaintiffs in the underlying case allege rainfall causes toxic petrochemicals and heavy metals to run off into the soil and water, harming “flora and fauna in and around streams and ponds on plaintiffs’ property,” the opinion notes.
Austin attorney Catherine L. Hanna of Hanna & Plaut represented Liberty Mutual.
Dallas attorneys LaDawn H. Nandrasy and Amy Elizabeth Stewart represented Copart.
The appeals court opinion, written by Circuit Judge Stephen A. Higginson, came almost nine months after the Nov. 7, 2022 oral argument, at which time the parties informed the court the underlying suit, Livingston Jr. v. Copart of Conn. Inc., was resolved by settlement during the appeal.
In the Texas trial court, Liberty Mutual obtained summary judgment on its pleadings that it had no duty to defend or indemnify Copart, because the policies had pollution exclusions.
Hanna, in arguing at the Fifth Circuit, stated, “There is no potential for coverage of the claims alleged against Copart in the complaint which plainly alleges pollution-related damage within the terms of the unambiguous pollution exclusions in the Policies.”
To get around the exclusion, the Fifth Court panel said, “Copart must identify allegations of harm by non-pollutants alone.”
Copart tried to do this by alleging any damage to plaintiffs was caused by “various naturally occurring materials … in the stormwater” that are not pollutants under commercial general liability policies, the court said.
The Fifth Circuit panel called this argument “meritless” because “it exceeds the bounds of plausibility to interpret the complaint as alleging ‘independent’ harm by the non-pollutant substances. The narrative thrust of the complaint is that rainfall carries pollutant-laden stormwater from Copart’s properties to the plaintiffs’ properties.”
Copart also argued Liberty Mutual has a separate duty to defend under the umbrella policies. Again, the Fifth Circuit affirmed the district court.
The Fifth Circuit reversed and remanded, however, on the duty to indemnify. The panel took this stance, not because it found the insurer must compensate Copart should damages be awarded, but because the ruling of the district court was premature.
“The district court granted summary judgment for Liberty on its duty to indemnify while the underlying suit remained pending,” the opinion states.
Also, in Texas, an insurer’s duties to defend and indemnify its insured are distinct and separate duties and the district court treated the two as ipso facto.
Arguing for Liberty Mutual, Hanna cited a 1997 Texas Supreme Court case, Farmers Texas County Mutual Ins. Co. v. Griffin, for the proposition that the duty to indemnify may be decided before the insured’s liability is determined.
The Fifth Circuit said Griffin did not apply here because evidence arising from the underlying suit may reveal non-pollutants caused the plaintiffs’ damage.
“It is here that Copart’s theories regarding the factual cause of the Livingston Plaintiffs’ injuries—not germane to the duty-to-defend question—come to hold water,” the court said.
“If, for example, relevant evidence shows that the plaintiffs’ “cloudy water” was caused only by sand and sediment, then the pollution exclusion may not apply,” the court said. “If this were so, Liberty may be obligated to indemnify Copart.”