Shortly after the sale, a neighboring property owner notified the Mississippi Department of Environmental Quality (“MDEQ”) that gasoline was leaking into a pond on his property. While investigating the leak, the MDEQ sent a letter to Pine Belt requesting an assessment of Sunrise's fuel lines. Pine Belt forwarded that letter to the Cooleys.

Upon receiving the MDEQ's letter, the Cooleys requested a defense and indemnification from Grain Dealers under their business owners' policy.

Grain Dealers responded that if the Cooleys were “ordered to take part in the actual clean up, it will not be covered.” Nonetheless, Grain Dealers concluded that its policy did provide a defense.

As a result, Grain Dealers hired an attorney to defend the Cooleys in the MDEQ proceedings. Grain Dealers did not, however, offer the Cooleys the opportunity to hire an attorney of their choice.

The MDEQ subsequently concluded that the Cooleys and Pine Belt had to remediate the spill site, but made no determination of relative fault. The order stated that if the Cooleys were “aggrieved” by that conclusion they could “request a hearing before the [MDEQ] . . . within 30 days after the date of [the order].”

Neither the Cooleys nor Grain Dealers' hired counsel did so. Nor did Grain Dealers' hired counsel inform the Cooleys of their right to request a hearing.

Years later, Pine Belt demanded indemnification from the Cooleys for the cost of compliance with the MDEQ order. The Cooleys, in turn, requested a defense and indemnification from Grain Dealers against Pine Belt's claim. Grain Dealers denied both requests, concluding that the policy excluded coverage of the Pine Belt suit under a total pollution exclusion clause.

Grain Dealers subsequently filed an action seeking a declaratory judgment that it had no duty to defend or indemnify the Cooleys.

The Cooleys counterclaimed, seeking a declaratory judgment that coverage was owed against both the MDEQ claims and the Pine Belt lawsuit. The Cooleys argued, among other things, that Grain Dealers should be estopped from denying coverage under Mississippi insurance law.

The U.S. District Court for the Southern District of Mississippi granted summary judgment in favor of Grain Dealers, holding there was no duty to defend or indemnify the Cooleys under the policy because: (1) the Cooleys could not show that Grain Dealers' failure to provide independent counsel had prejudiced the Cooleys; and (2) “gasoline” was a pollutant under the total pollution exclusion in the Grain Dealers policy.

The Cooleys appealed to the Fifth Circuit.

The Fifth Circuit's Decision

The circuit court decided that the district court had erred when it ruled that Grain Dealers was not estopped from denying coverage because the Cooleys could not show prejudice resulting from Grain Dealers' failure to provide independent counsel.

In its decision, the Fifth Circuit explained that Grain Dealers had provided the Cooleys a defense, yet simultaneously had disclaimed coverage if the Cooleys were ordered to clean the spill. In doing so, the circuit court ruled, Grain Dealers – though faced with a conflict of interest because it had disclaimed coverage – “failed to inform the Cooleys of their right to hire independent counsel.”

The circuit court pointed out that when the MDEQ ultimately found the Cooleys liable for the spill, Grain Dealers then refused to defend or indemnify the Cooleys against a resulting claim. The Fifth Circuit reasoned that, if the Cooleys could establish prejudice from Grain Dealers' failure to provide independent counsel, Grain Dealers “may not now deny coverage.”

It then decided that the Cooleys had been prejudiced. Specifically, it observed, the Cooleys had presented evidence that “Grain Dealers' attorney never informed them of their right to challenge the MDEQ decision. That right has since lapsed.” The circuit court held that the loss of the right to challenge the underlying administrative order with the benefit of non-conflicted counsel was “clearly prejudicial.”

The circuit court was “unimpressed” by Grain Dealers' argument that the Cooleys had not been prejudiced by the failure of counsel to inform them of the right to challenge the MDEQ order because they had received the MDEQ order and should have “known of the right to appeal.” This “ignores the very benefit counsel is to provide,” the circuit court concluded.

The case is Grain Dealers Mutual Ins. Co. v. Cooley, No. 17-60307 (5th Cir. May 14, 2018).