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A number of manufacturers will have a second chance in court to prove that their insurers should indemnify them for the costs of cleaning up environmental pollution in the aftermath of a decision last week from the Pennsylvania Supreme Court. The high court said the insureds would be allowed to present extrinsic evidence — namely a 1970 insurance industry memorandum — to prove that the language “sudden and accidental” in a standard pollution exclusion provision in a comprehensive general liability policy means “unexpected and unintended,” even if the pollution happened over an extended period. The standard policy precludes coverage for damages caused by environmental pollution or contamination under what is commonly called the pollution exclusion clause. An exception to the exclusion of coverage for damages caused by environmental pollution usually exists if the release of pollution or chemicals is “sudden and accidental.” “We believe appellants have properly pleaded that the comprehensive general liability policies at issue do indeed provide coverage for both gradual and abrupt pollution or contamination so long as it was unexpected and unintended,” Justice John P. Flaherty wrote for the majority in Sunbeam Corp. v. Liberty Mutual Ins. Co. The high court’s decision is a huge blow to the insurance industry in light of the court’s 1999 ruling in Madison Construction Co. v. Harleysville Mutual Insurance Co. In Madison, the split high court, in a landmark ruling, decided that a pollution exclusion clause of a commercial liability insurance policy precluded coverage for injuries caused by a worker’s exposure to the fumes of a “useful product.” In rendering that decision, the high court said that its review was confined to the common usage of the terms of the policy language without regard to extrinsic evidence of the exclusion’s meaning. Justice Thomas Saylor filed a separate dissent in the Sunbeam case, referencing the high court’s ruling in Madison. Justice Ronald D. Castille joined Saylor’s dissent. Justices Russell M. Nigro and Sandra Schultz Newman did not participate in the decision. THE SUNBEAM PROPERTY Sunbeam purchased property from the bankrupt Allegheny International Inc. Prior to the purchase, Liberty Mutual Insurance Co. had issued comprehensive general liability policies to Allegheny in the 1970s and 1980s. The “occurrence” policies provided coverage for accidents happening during the policy period. They contained a pollution exclusion provision saying that Liberty Mutual would not cover damages caused by environmental pollution or contamination. The policy had an exception to the exclusion “if such discharge, dispersal, release or escape [of pollution or chemicals] is sudden and accidental.” When Sunbeam requested that Liberty Mutual cover the costs of cleanup of the Allegheny property, Liberty Mutual denied coverage on the basis that the damage was due to a gradual process rather than a “sudden and accidental” occurrence. Judge R. Stanton Wettick of the Allegheny County Court of Common Pleas sided with Liberty Mutual, ruling that the language in the insurance contract was unambiguous. The Superior Court affirmed en banc. MEMORANDUM Sunbeam asserted throughout litigation that even if the term “sudden and accidental” were unambiguous, the court should allow extrinsic evidence to show that the meaning the insurance company intended when it adopted the language in 1970 was different, therefore causing some ambiguity. Pursuant to insurance regulatory laws, the state Insurance Department in 1970 approved the pollution exclusion in comprehensive general liability insurance policies after a request was made by a national organization representing a number of insurance companies, including Liberty Mutual. Accompanying the request was a memorandum stating that the proposed pollution exclusion would simply clarify, not decrease, existing coverage for pollution damage. Before the pollution exclusion provision was included in insurance policies, policies provided coverage for environmental damages that were not “expected or intended” regardless whether they were sudden or had taken place over time. The Superior Court would not accept this “usage in the trade” reasoning, saying that it was bound by its earlier decision in Lower Paxon Twp. v. U.S. Fidelity & Guaranty Co., in which it ruled that the ordinary meaning of “sudden” included a “temporal element that joins together conceptually the immediate and the unexpected.” The Lower Paxon court determined that an insured could receive compensation for damages caused by environmental damage only if the damage was from an “abrupt event.” The trial court had also denied Sunbeam’s regulatory estoppel claim on the basis that Sunbeam could not prove that the Insurance Department relied on the memorandum when approving the pollution exclusion provisions. The Superior Court upheld the lower court’s decision on the regulatory estoppel claim as well. HIGH COURT RULING After reviewing the necessary facts, Flaherty delved into Sunbeam’s regulatory estoppel claim, ruling that the trial court and the Superior Court were wrong. “Whether or not the court regarded proof of the Insurance Department’s reliance on the insurance industry’s memorandum as likely or probable, the fact remains that reliance was properly pleaded,” Flaherty wrote. “In evaluating a preliminary objection in the nature of demurrer, properly pleaded facts are deemed to be admitted.” Therefore, Flaherty said, the trial court erred in granting summary judgment. Flaherty next turned to examining the usage in the trade argument. Sunbeam argued that the words “sudden and accidental” in the insurance industry go beyond their everyday meaning. “Appellants allege that the words ‘sudden and accidental’ have a peculiar usage in the insurance industry, whether or not the words appear to be ambiguous, that is different from the common usage of the terms,” Flaherty wrote. “Appellants claim that ‘sudden and accidental’ means ‘unexpected and unintended’ in this insurance context and that the element of abruptness and brevity which the words ordinarily connote is absent.” Flaherty said the Superior Court had clearly “misconstrued” Sunbeam’s argument. “The court apparently understood appellants’ argument to be that the insurance industry’s 1970 memorandum created the ‘custom in the industry’ rather than that the memorandum was evidence of a settled usage at the time,” Flaherty wrote. The court said one memorandum hardly creates a custom, but rather served as strong evidence that a custom exists. Flaherty pointed to one part of the memorandum in particular. It said in part, with the court’s emphasis: “Coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident except that no coverage will be provided under certain operations for injuries arising out of discharge or escape of oil into any body of water.” The high court said that on remand, the trial court would have to examine whether the highlighted portion of the memorandum means what Sunbeam asserts that it means. The court also said the Superior Court’s reliance on Lower Paxon was misplaced since the Lower Paxon court relied on the common meaning of the term “sudden and accidental.” The high court, therefore, remanded the case for further proceedings. DISSENT In his brief dissent, Saylor said he believed the majority’s decision was inconsistent with the Madison court’s ruling. “The words of an insurance policy are to be interpreted in their natural, plain, and ordinary sense, and only if the policy language is ambiguous is resort to be made to extrinsic evidence,” Saylor wrote. “While certainly reference to trade usage is available to explain material terms of certain specialized contracts, it should not be utilized to create a variance from the agreement.” Saylor said he was also troubled by the majority’s allowance of the regulatory estoppel claim, because appellate courts in the state have not previously recognized such an application of the theory. Sunbeam was represented by Mark A. Grace, Andrew M. Roman and Richard A. Ejzak of Cohen & Grigsby in Pittsburgh; and David F. Binder and Arthur G. Raynes of Raynes McCarty in Philadelphia. Liberty Mutual was represented by Thomas Brennan O’Brien, Joseph Barnett Silverstein and Joseph G. Manta of Klett Rooney in Philadelphia.

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