On September 25, 2012, Tunnell Hill notified its insurance carrier, Endurance American Specialty Insurance Company, of the Baker litigation. Endurance responded that it would not defend or indemnify Tunnell Hill for the claims in that case.

After the Baker plaintiffs voluntarily dismissed some of their claims, the case proceeded to trial on the sole remaining claim for qualified private nuisance, and the jury returned a verdict in the plaintiffs' favor on the question of Tunnell Hill's negligence.

The issue of damages owed to the Baker plaintiffs was pending before the state trial court when Tunnell Hill sued Endurance for bad faith, breach of contract, and unjust enrichment, as well as for a declaratory judgment that Endurance had a duty to defend and indemnify Tunnell Hill in the Baker litigation.

Endurance moved for judgment on the pleadings, arguing that it was entitled to judgment because Tunnell Hill had discovered the pollution condition prior to the inception date of the policy but had failed to report it to Endurance before the policy had gone into effect or to obtain a “known condition” endorsement.

According to Endurance, the trial testimony of Tunnell Hill's chief executive officer, William Gay, and its general manager, Rodney Deeds, in the Baker litigation established that Tunnell Hill had discovered the hydrogen sulfide odor problem in December 2011, before the policy period had commenced, and there was no dispute that it did not report the problem to Endurance before the start of the policy period.

For its part, Tunnell Hill did not deny that it had discovered an odor problem in December 2011, but it argued that this odor emission was a sporadic event, distinct from the later odor problems identified by the Baker plaintiffs, and that Mr. Deeds had characterized the December 2011 odor problem as such during the Baker trial. In support of this position, Tunnell Hill pointed out that the landfill had been inspected numerous times by the Ohio Environmental Protection Agency (“OEPA”) and the Perry County Health Department (“PCHD”) and on many occasions had received no notices of violation. Accordingly, Tunnell Hill suggested that the noxious odors emitted after the policy period had commenced ought to be considered distinct pollution conditions that were subject to coverage under the policy.

The Endurance Policy

The claims-based environmental impairment liability (“EIL”) portion of the policy provided:

The Company shall pay, up to the Limits of Liability and in excess of the Self-Insured Retention, on behalf of the Insured all:

• Cleanup Costs of the Insured

• Liabilities for Property Damage to a Third Party (including Cleanup Costs)

• Liabilities for Bodily Injury to a Third Party; and

• Defense Expenses

resulting from Pollution Conditions at, upon, within, under or migrating from a Scheduled Location which commenced during the Policy Period or after the Retroactive Date, if any and were Discovered and reported to the Company during the Policy Period, the Automatic Extended Reporting Period or the Optional Extended Reporting Period, if any. A Claim under this coverage must be reported to the Company in accordance with Section VII. Conditions.

The policy defined the following terms:

The term Discovered means the point in time at which any officer, director, executive or employee responsible for environmental compliance of an Insured becomes aware of the existence of a Pollution Condition.

The term Pollutant(s) means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, toxic chemicals, liquids or gases, other irritants or contaminants or any discarded materials of any kind….

The term Pollution Condition(s) means the gradual or sudden unintended discharge, dispersal, release or escape of Pollutants at, upon, within, under or migrating from a Scheduled Location which the Insured had not Discovered at the time of inception of this Policy, unless such previously Discovered Pollution Condition has been listed by endorsement, is first reported to the Company during the Policy Period, and commenced during the Policy Period or after the Retroactive Date, if any. 

The policy contained an exclusion that stated that the policy:

does not cover any Claims arising out of, based upon, resulting from or with respect to … Known Conditions,

defined as:

Any Pollution Conditions Discovered prior to the inception of this Policy. This exclusion does not apply to Pollution Conditions disclosed to the Company prior to the inception of this Policy and specifically listed by endorsement.

The policy did not list any pollution condition by endorsement.

The policy also provided that Endurance:

has the right and the duty to defend the Insured against any Claim resulting from a Pollution Condition

and that:

The Company's duty to defend the Insured shall terminate when the Company establishes (i) the absence of coverage under the terms of conditions of this Policy; or (ii) the Limits of Liability have been exhausted.

The district court denied Endurance's motion.

In its decision, the court observed that the parties disputed whether the term “pollution conditions” in the Endurance policy was intended to include odor events such as those at issue in the Baker litigation, and it found that both had “reasonable arguments in light of the language of the contract and the history of inspections regarding odor events at the landfill.”

It then declared that, to the extent that the parties offered “plausible interpretations of the agreement drawn from the contractual language itself,” it demonstrated that the provision was “ambiguous.”

Accordingly the district court decided that it was not appropriate for resolution on a motion for judgment on the pleadings.

The district court also rejected Endurance's assertion that the “known loss” or “loss-in-progress” doctrine required judgment in its favor because insurance coverage could not be purchased “for a loss already known to be in progress.”

The district court explained that the known loss doctrine had “not been adopted by Ohio courts.”

The case is Tunnell Hill Reclamation, LLC v. Endurance American Specialty Ins. Co., No. 2:15-CV-2720 (S.D. Ohio July 12, 2016).