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September 21, 2016

CGL insurer must defend DJ action for indemnity related to underlying environmental damage suits

Pollution insurer (Federal) sued CGL insurer (Northfield) to recover 50% of defense costs when Northfield refused to defend Wagner in a suit by ExxonMobil for a declaratory judgment that Exxon was owed indemnity and defense pursuant to an assignment, bill of sale and quitclaim of oil and gas properties which contained and indemnity and defense clause in favor or Exxon. The DJ claim for indemnity and defense related to underlying suits for environmental damages by landowners against both Exxon and Wagner, when Wagner refused to defend and indemnify Exxon. Federal acknowledged it owed defense to Wagner for Exxon’s DJ suit but Northfield denied such defense to Wagner. Northfield claimed there was no coverage owed to Wagner for Exxon’s DJ suit based, in part, on a broad total pollution exclusion. Applying Texas law, the district court agreed with Northfield, but the 5th Circuit reversed and remanded. ”...ecause of the breadth and generality of the allegations in the ExxonMobil state court [DJ] petition, we cannot say that all of the claims fall clearly within the [pollution] exclusion.” The DJ suit provided very little information about the underlying lawsuits other than that they allege environmental damage and seek restoration and remediation of the land subject to mineral rights purchased by the Wagner Group from Exxon. The appellate court agreed with Federal that environmental damage may take many forms such as negligent construction of facilities causing soil to erode during rainfall, and heavy machinery damaging vegetation or wildlife habitats, neither of which would fall within the pollution exclusion. A mere allegation of environmental damage must be interpreted broadly. Summary judgment should not have been granted under the pollution exclusion.

Where Exxon’s generality of pleading in the DJ action helped Federal on the pollution exclusion, it hurt on the Underground Resources & Equipment Buyback Endorsement in the Northfield policy. Federal contended Exxon’s claims against Wagner were covered by the UREB. The court notes that Federal did not show how the underlying suits related to property damage within the UREB endorsement and thus the district court’s grant of summary judgment in favor of Northfield on that clause was proper. The court also considered the contractual liability exclusion asserted by Northfield and found that the insured contract exception applied, stating Wagner assumed Exxon’s tort liabilities to third parties under the Exxon - Wagner contract, and the timing could not be determined for when the property damage occurred because it was not pleaded by Exxon in the DJ action— conceivably, the property damage could have been after execution of the Exxon - Wagner contract (an important consideration for the insured contract exception to apply).

The case is important for how broadly it interpreted the duty to defend in a CGL policy in contrast to how broadly courts typically interpret pollution exclusions in such policies.

The case can be found at