Source: http://www.lexology.com, July 9, 2013
By: Patrick Frye, Edwards Wildman Palmer LLP
In Certain Underwriters at Lloyd’s London v. Southern National Gas Co. (Ala. June 18, 2013), the Alabama Supreme Court upheld a jury verdict finding that the leaking of PCB from 8 different locations was one “occurrence.” Sonat (short for Southern National Gas Co.) had 38 air compressers to push natural gas through Sonat’s 14,000 miles of pipeline spanning seven southeastern states. Each compressor used a piston to build the pressure that moved the gas, and the cylinder walls therefore needed regular lubrication. The compressors’ normal operation resulted in some lubricant carrying over into the air system, where the high pressure wrung water out of the air. That water pooled at the bottom of the compressor. As a matter of practice, Sonat regularly drained each compressor, letting into the ground traces of lubricant. That lubricant contained the poisonous PCB.
Sonat was sued by the government and others and demanded coverage from its excess liability insurers in the London market. The London market rejected coverage partly because it contended that the seepage was a separate occurrence per compressor and that none of these occurrences caused enough liability to pierce the London market’s layers. Juries found a single occurrence at eight of these compressors whose costs could be aggregated into $9.7 million, which was ample to pierce the excess layers. On appeal, the Supreme Court examined whether all the contamination had a single, uninterrupted proximate cause and affirmed: from 1957 to 1972, when Sonat used this particular lubricant, PCB seepage into the ground was Sonat’s normal corporate practice; and there was no separate, intervening cause between this practice and the routine seepage.
For the insurer uncertain of the number of occurrences, it can be difficult to predict that number by considering whether there is a single, uninterrupted proximate cause. If you step far enough back in time, you should find a but-for cause shared by all instances of the loss; and parties can always debate whether this particular but-for cause is both uninterrupted and proximate. Proximate cause is widely regarded as fact-specific. Thus the facts addressed by the Alabama opinion contrast nicely with the repeated contamination from a natural-gas delivery system that an Illinois opinion considered in deciding whether there was a single, uninterrupted proximate cause for the purposes of insurance coverage.
Nicor, Inc. v. Associated Electric & Gas Insurance Services, 860 N.E.2d 280 (Ill. 2006) involved meters Nicor installed inside its customers’ homes in order to measure their consumption of natural gas. For many years, these meters’ regulators contained mercury, and from 1961 to 1978, Nicor replaced them with new regulators as its service crews found them during routine on-site maintenance or repairs. The crews sometimes spilt the mecury. Of its customers’ 200,000 homes that might have had old regulators, 1,070 were contaminated.
Nicor then settled with the government and others who sued it, which settlement its London-market excess liability insurers contended did not pierce their layers because, they argued, each contaminated home was a separate occurrence. The trial court found one occurrence and granted summary judgment in favor of Nicor, awarding $10.2 million. The appellate court found separate occurrences and reversed the judgment. The Illinois Supreme Court affirmed reversal: Nicor spilled the mercury not as a matter of corporate policy but usually because of a service crew’s carelessness; and hence each rare spill of mercury was due to a separate and intervening human act apart from the cause of every other spill.
Read together, the Sonat and Nicor opinions suggest a possible principle for determining whether to aggregate the costs of a company’s repeated environmental contamination. If the spills are a natural byproduct of a well-followed corporate practice, then they are a single occurrence. If they are not, then each spill is a separate occurrence. In the former circumstances, the similarity among all the spills over so many years and so many different locations is by design. In the latter, it is by coincidence. In the former, the spills were a function of a business operation that, when it was performed, frequently caused contamination. In the latter, the spills were accidental and therefore haphazard. This principle discerns between the witting and unwitting acts of the company.
The Sonat opinion may be found here, while the Nicor opinion may be found here.