No Coverage for Defense of a Criminal Accusation and Conviction

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A Criminal Conviction is not a Loss Compensable by a Liability Policy

Waste Management, Incorporated (“WMI”) and Waste Management Hawaii, Incorporated (“WMHI”) (collectively “Waste”) entered into an insurance contract with AIG Specialty Insurance Company (“ASIC”). Following two environmental contamination events, the DOJ commenced a grand jury investigation into Waste’s actions. The investigation led to an indictment that was resolved through a plea agreement in 2015.

In Waste Management, Incorporated; Waste Management Hawaii, Incorporated v. AIG Specialty Insurance Company, formerly known as Chartis Specialty Insurance Company, No. 19-20674, United States Court of Appeals for the Fifth Circuit (September 4, 2020) the Fifth Circuit was faced with an appeal of an order approving ASIC’s denial of Waste’s claim.

FACTS

Waste filed suit in Texas state court against ASIC. The district court then determined, after a hearing, that ASIC had no duty to defend Waste against the criminal allegations and granted summary judgment in favor of ASIC.

Waste operated the Waimanalo Gulch Sanitary Landfill (“WGSL”) under a contract with the city of Honolulu, Hawaii. In late 2010 and early 2011, heavy storms flooded a section of the WGSL. On both occasions, contaminated water was discharged into the Pacific Ocean through an open manhole. The contamination included medical waste such as syringes, blood vials, and catheters, which washed up on nearby beaches.

The Environmental Protection Agency (“EPA”) investigated, and on January 25, 2011, it issued an Administrative Order on Consent (“AOC”). Among other things, the AOC required Waste to engage in response work to clean up the discharge. The AOC also explicitly reserved the federal government’s right to pursue Waste for other criminal and civil penalties. Waste complied with the AOC, and on August 24, 2011, the EPA informed Waste that the response work had been completed to its satisfaction.

On April 30, 2014, WMHI and two of its employees were indicted for knowing discharge of pollutants into a water of the United States, in violation of the “Criminal Penalties” provision of the Clean Water Act. Pursuant to a plea agreement, which explicitly provided that it was separate from any potential civil claims against Waste, the defendants ultimately pleaded guilty to negligent discharge of pollutants, also in violation of the “Criminal Penalties” provision of the Clean Water Act. On October 26, 2015, the federal district court in Hawaii imposed a sentence of a $400,000 fine, $200,000 in restitution to neighboring businesses, and a $250 assessment against WMHI.

Waste sought coverage from ASIC for, inter alia, costs associated with defending the criminal proceedings detailed above. According to Waste, these costs were covered by its “Pollution Legal Liability” insurance policy, effective January 2011 through January 2014. That insurance policy, which provided Waste with $50 million dollars of coverage per incident with a $5 million deductible, contained the following relevant provisions.

In “COVERAGE D,” ASIC agreed the policy did not apply to Claims or Loss due to any criminal fines, criminal penalties or criminal assessments. The policy defined “Claim” as “a written demand received by the Insured alleging liability or responsibility and seeking a remedy on the part of the Insured for Loss under Coverage D.

Waste and ASIC filed cross-motions for summary judgment on whether ASIC had a duty to defend Waste against the criminal allegations. The district court granted summary judgment in favor of ASIC, finding no duty to defend against the criminal allegations.

Waste challenges the district court’s summary judgment determination that ASIC had no duty to defend Waste against the criminal allegations.

ANALYSIS

When determining whether an insurer has a duty to defend under Texas law, courts follow the eight corners rule by looking at the four corners of the complaint for alleged facts that could possibly come within the scope of coverage in the four corners of the insurance policy. In case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in insured’s favor.

Waste argues that the AOC constitutes a claim for clean-up costs that triggered ASIC’s duty to defend against the criminal allegations. On its face, however, the AOC was independent from the criminal proceedings. The AOC issued months before the DOJ began its grand jury investigation and explicitly reserved the federal government’s right to pursue Waste for criminal penalties. Moreover, the EPA informed Waste that the response work required by the AOC was complete almost three years before the grand jury indicted WMHI and two of its employees.

Despite this independence, Waste argued that federal enforcement guidance documents establish that all of the proceedings arising out of these pollution incidents are part of a single, coordinated enforcement process. Therefore, according to Waste, the existence of a demand for clean-up costs in the AOC triggered ASIC’s duty to defend, which continued through the conclusion of all proceedings based on the same factual allegations.

When there is a claim for clean-up costs, ASIC has a duty to defend against “such claim.” This language provided a common-sense limit on ASIC’s duty to defend: When there is a written demand for clean-up costs covered by the policy, ASIC must defend against that written demand. Were the court to agree with Waste that the AOC triggered a duty for ASIC to defend in all criminal or civil proceedings arising from the same pollution incidents, the court would effectively be reading this bargained-for restriction out of the contract.

An appellate court may neither rewrite the parties’ contract nor add to its language. The goal in interpreting the contractual duty to defend — as when interpreting any contract language — is to ascertain the true intentions of the parties as expressed in the writing itself. While ambiguity about whether the complaint states a cause of action within the coverage of the insurance policy should be resolved in the insured’s favor and the court will not look outside the pleadings, or imagine factual scenarios which might trigger coverage; under the plain language of the contract, ASIC only has a duty to defend against written demands seeking a remedy from Waste for a covered loss.

The indictment does not seek a remedy, so it did not trigger the duty to defend.

ZALMA OPINION

Crimes are different than torts. Crimes, are by definition, intentional and criminal activities – if proven – and are not, and can never be, fortuitous. In this case, since the criminal indictment seeks no remedy – no indemnity and no loss – there can never be a duty to defend or indemnify. Insurance for criminal acts should be anathema to the public policy of every state since crimes could be perpetrated with impunity and all financial punishments would be paid by an insurer.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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