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Insurance Coverage for Environmental Claims Under Comprehensive General Liability Policies


Meyer, Hendricks, Victor, Osborn & Maledon
The Phoenix Plaza
2929 North Central Avenue
P.O. Box 33449
Phoenix, Arizona 85067-3449
(602) 640-9000


Teilborg, Sanders & Parks
3030 North Third Street
Suite 1300
Phoenix, Arizona 85012-3039
(602) 230-5693


Shane R. Swindle
Dalton Gotto Samson & Kilgard, P.L.C., Phoenix, Arizona.

David J. Damron
Teilborg, Sanders & Parks, Phoenix, Arizona.

Christopher Graver
Dalton Gotto Samson & Kilgard, P.L.C., Phoenix, Arizona.

§ 4.5.1 This Chapter's Scope. This chapter presents an overview of the major issues that arise when insureds-typically businesses and local governments-seek coverage for environmental claims under their general liability insurance policies. These policies, commonly referred to as comprehensive general liability, or CGL, policies, generally were written some time before the mid-1980s. Where pollution is alleged to have occurred over many years, it is not unusual for insureds to seek coverage under policies dating as far back as the 1940s.

This chapter does not address the availability of coverage for environmental claims under present-day, claims-made liability policies, most of which provide little or no coverage for such claims.

§ 4.5.2 Chapter Overview. This chapter focuses specifically on five issues, from the perspectives of insureds and insurers, respectively: (1) whether the claim arises from a covered accident or occurrence; (2) the appropriate "trigger" of coverage; (3) whether coverage for property damage extends to cleanup costs incurred in response to government directives; (4) whether coverage is limited or excluded by various pollution exclusions; and (5) whether coverage is limited or excluded by owned-property exclusions. With the exception of the third issue, which applies only to government-initiated directives or litigation, all of these issues commonly arise when coverage is sought for either statutory claims (e.g., Superfund cleanups) or so-called toxic tort claims.

Arizona's appellate courts have not addressed any of these issues in the context of environmental claims. Citations provided are, therefore, predominantly to those cases from other jurisdictions that present the most thorough and persuasive treatment of the issues. These issues, however, are questions of state law, and therefore can be definitively answered only by Arizona courts.

§ 4.5.3 Accident or Occurrence. Most general liability policies issued from the 1950s through the mid-1980s are slight variations of standard forms used throughout the insurance industry. Such policies typically cover "personal injury" or "bodily injury" and "property damage" caused by either an "accident" or an "occurrence." The insurance industry began substituting "occurrence" for "accident" in the early 1960s.

The older accident policies do not define "accident." "Occurrence," however, usually is a defined term. The following definition is fairly typical:

'Occurrence' means an accident, including continuous or repeated exposure to conditions, which results, during the policy period, in personal injury or property damage neither expected nor intended from the standpoint of the insured. All personal injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.

§ Accident Policies. Insurers argue that damages are "caused by accident" only if the injury-causing event (1) was caused by an unintentional act and (2) occurred suddenly, in the sense that it occurred at a specific time. See, e.g., American Casualty Co. v. Minnesota Farm Bureau Serv. Co., 270 F.2d 686, 691 (8th Cir. 1959) ("Acts which are done with knowledge and which continue over a long period of time and which continuously cause damage cannot be termed accidents"); United States Fidelity & Guar. Co. v. Briscoe, 239 P.2d 754, 758 (Okla. 1951) ("an accident is the distinctive event or determinable, unexpected happening... the date of which can be fixed with certainty"). Using this definition, insurers argue that no "accident" occurred in a typical environmental case either because the insured acted with intent to do the act (not necessarily to cause the harm) or because the injuries resulted from long-term exposure to harmful conditions.

§ Unintentional Acts or Unexpected Results. Many courts have rejected the claim that accident policies cover only damages caused by unintentional acts. Reasoning that "caused by accident" is an ambiguous phrase, courts ask whether the insured intended to cause harm, not whether the insured intended to act. Morton Int'l, Inc. v. General Accident Ins. Co., 629 A.2d 831, 876-84 (N.J. 1993) (collecting cases), cert denied, 114 S. Ct. 2764 (1994). "Only when the result as distinguished from the act is intended, may it be said that the consequences of an act were not accidental." Wolk v. Royal Indem. Co., 210 N.Y.S.2d 677, 682 (N.Y. Sup. Ct. 1961) (emphasis in original); accord White v. Smith, 440 S.W.2d 497 (Mo. Ct. App. 1969) (distinguishing between intended acts and unexpected results); Taylor v. Imperial Casualty & Indem. Co., 144 N.W.2d 856, 859 (S.D. 1966) ("Injuries are caused by accident according to the quality of the result rather than the quality of the causes"). See generally Annot., 7 A. L.R. 3d 1262 (1966). But see Millard Warehouse, Inc. v. Hartford Fire Ins. Co., 283 N.W.2d 56, 62 (Neb. 1979) (the legally foreseeable results of insured's intentional acts were not caused by "accident" even though damages may have been unexpected).

In distinguishing between intended and unintended results, actual intent is rarely required. Instead, courts focus on the amount and types of information available to the insured to distinguish between "highly expectable losses and those less expectable." R. KEETON, BASIC TEXT ON INSURANCE LAW § 5.4(c), at 299 (1971).

In White, 440 S.W.2d 497, for example, plaintiff landowners sought compensation for damages caused by the noise, odors, and ground water pollution produced by defendant's slaughterhouse. Focusing on whether the insured "expected" the damages, the court held that damages from the ground water pollution were "caused by accident," but that damages from the noise and fumes were not. The defendant knew that the slaughterhouse produced noise and fumes and, in the court's view, knew or should have known that the noise and fumes would cause harm. The ground water pollution, on the other hand, was truly "unexpected"; no damage was apparent until the slaughterhouse had been operating for more than 4 years.

Wolk, 210 N.Y.S.2d 677, further illustrates the concept of "expected results." The insured in Wolk changed the contour of his land by creating several artificial hills. The hills gradually eroded, causing damage to surrounding property owners, who sued for compensation. The court held that the damages were "caused by accident." The insured obviously did not intend or desire the erosion, and there was insufficient evidence to find that he should have expected it.

Cases interpreting "accident" to preclude coverage are consistent with the thesis that intent to cause harm will be imputed if the insured possesses sufficient information to know that its conduct creates a significant risk of harm. Thus, damages are not "caused by accident" if the insured is aware of the possibility of harm and nevertheless continues its conduct. See, e.g., Minnesota Farm Bureau, 270 F.2d 6.86 (damages to land owners from dust, vibration, and fumes caused by insured plant's use of explosives over a 6-year period were not caused by "accident" within the terms of CGL policy); Briscoe, 239 P.2d 754 (dust from dry cement unloading operation was not caused by accident; insured knew dust resulted from operations and that dust would settle on surrounding property); Tieton v. General Ins. Co., 380 P.2d 127, 132 (Wash. 1963) (no coverage for contamination of well by recently constructed sewage lagoon where the possibility of contamination "was not only foreseeable but was predicted in writing by the State Department of Health").

§ Sudden Events Occurring at a Specific Time. The case law also generally rejects the argument that "accidents" must be sudden events which occur at a specific time. Smith and Wolk, for example, hold that an "accident" can be a process if the results are sufficiently unexpected. Thus, the water pollution in Smith and the erosion in Wolk were "caused by accident" even though they were caused by gradual processes rather than by specific, unexpected events. Accord Beryllium Corp. v. American Mut. Liab. Ins. Co., 223 F.2d 71 (3d Cir. 1955) (CGL accident policy covered injuries caused by contact with Beryllium over 5- to 8-year period; policy was not restricted to injury resulting from single accidental cause); Canadian Radium & Uranium Corp. v. Indemnity Ins. Co., 104 N.E.2d 250, 255 (Ill. 1952) (collecting cases and holding that injury from long-term contact with radioactive substances was caused by accident because injury was unexpected); Taylor, 144 N.W.2d 856 (explosion caused by long-term seepage of gasoline from insured's underground tank was covered by accident policy).

The Ninth Circuit has held that the phrase "sudden and accidental," in the context of a pollution exclusion, must be given a temporal meaning. Smith v. Hughes Aircraft Co., 10 F.3d 1448 (9th Cir. 1993), amended, reh'g denied, 22 F.3d 1432 (9th Cir. 1993). The reasoning of Smith, which rejected evidence of the drafting history of the exclusion, was called into doubt under Arizona law by Ohio Casualty Insurance Co. v. Henderson, 189 Ariz. 184, 939 P.2d 1337 (1997), discussed infra. Nevertheless, carriers may be able to argue that this concept should be applied to define "accident" in accident-based policies.

§ Occurrence Policies. The insurance industry belatedly accepted the courts' broad interpretation of "accident" when it moved to "occurrence" policies in the mid 1960s. See Massachusetts Turnpike Auth. v. Perini Corp., 208 N.E.2d 807, 813 n.6 (Mass. 1965) ("occurrence" is broader than "accident," but the distinction only matters in those states that have interpreted "accident" narrowly). See generally R. KEETON, supra § 5.4(c), at 300 (change from "accident" to "occurrence" was designed to "avoid the implication that there was no coverage for a continuing condition as distinguished from a sudden event"). Most insurers no longer argue, as they did under "accident" policies, that coverage is limited to damages caused by sudden, unintended acts. By definition, "Occurrence' means an accident, including continuous or repeated exposure to conditions, which results... in personal injury or property damage neither expected nor intended from the standpoint of the insured."

§ Expected or Intended Losses. Today, the focus of litigation under both accident and occurrence policies is whether the damage for which coverage is sought was "expected or intended." Courts generally resolve this question using the same standards and evidence whether they are dealing with accident policies, occurrence policies, or some combination of both. See, e.g., United States v. Conservation Chem. Co., 653 F. Supp. 152, 198 (W.D. Mo. 1986) (treating accident and occurrence policies together); Coordinated Asbestos Ins. Coverage Cases, J. C. C. P. No. 1072, slip op., 71 (Superior Ct., San Francisco, May 29, 1987) (unnecessary to distinguish between similar definitions of "occurrence"). But see Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d 815 (Cal. Ct. App. 1993) (coverage for unintended consequences of intentional acts turns on policies' different occurrence definitions).

§ Measuring the Insured's Expectations. There is no uniform standard for determining whether an insured expected or intended to cause harm. Insurers tend to argue that a result is expected or intended for purposes of insurance coverage if it is "foreseeable" under tort law. Insureds, on the other hand, argue that a result is intended if and only if the insured specifically intended to cause harm. Although there is some authority for these positions, most courts have rejected both extremes. Compare, e.g., Millard Warehouse, 283 N.W.2d 56 (apparently applying tort standard of foreseeable consequences) with United States Fidelity & Guar. Co. v. Armstrong, 479 So. 2d 1164, 1167 (Ala. 1985) (requiring specific intent). See Ohio Casualty Insurance Co. v. Henderson, 189 Ariz. 184, 191, 939 P.2d 1337, 1344 (1997), adopting both subjective and objective elements in construing an "expected or intended" exclusion in a homeowner's insurance policy. See also generally Annot., 31 A.L.R.4th 957 (1984).

Although courts disagree about whether an insureds' expectations should be measured by an objective or subjective standard, in many cases there may be little practical difference between the two tests. Courts employing an objective standard often require such a high showing of certainty ("substantial probability") that they are likely to have reached the same result under a subjective standard. Moreover, even under a subjective standard, there is a level of evidence which will cause the court to conclude that the insured did expect or intend the damage notwithstanding the insured's testimony to the contrary. See Coordinated Asbestos Cases, slip op. at 74-75 ("An insurer... may show that reason mandates that by the very nature of the act undertaken, coupled with the knowledge actually in possession of the insured, harm must have been intended"); Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255, 1264-65 (N.J. 1992) (proper inquiry is into actor's subjective intent to cause injury unless "the actions are particularly reprehensible [such that] the intent to injure can be presumed from the act"). At bottom, most courts focus on the amounts and type of information available to the insured to distinguish between "highly expectable losses and those less expectable." R. KEETON, supra, § 5.4(c), at 299.

An often cited explanation of how courts decide whether an insured "expected or intended" a particular result is City of Carter Lake v. Aetna Casualty & Sur. Co., 604 F.2d 1052 (8th Cir. 1979). In that case, negligent acts by city employees resulted in equipment failures, which in turn caused sewage to back up into residential homes. This sequence of events caused damages on several occasions, for which the city sought coverage under its CGL policy. The question before the court was whether the various backups were "expected or intended."

We reject the argument that a result is expected... simply because it was reasonably foreseeable. The reasonable expectation of an insured in securing a comprehensive general liability policy is that it will cover some negligent acts. It does not follow, however, that because the policy covers some negligent acts it must cover all negligent acts. An insured need not know to a virtual certainty that a result will follow, its acts or omissions for the result to be expected.... 'Expected' denotes that the actor knew or should have known that there was a substantial probability that certain consequences will result from his actions. If the insured knew or should have known that there was a substantial probability that certain results would follow his acts or omissions then there has not been an occurrence or accident as defined in this type of policy when such results actually come to pass. The results cease to be expected and coverage is present as the probability that the consequences will follow decreases and becomes less than a substantial probability.

604 F.2d at 1058-59 (citations omitted; footnotes omitted). The court defined "substantial probability" as circumstances sufficient to forewarn a reasonably prudent person that certain "results are highly likely to occur." 604 F.2d at 1059 n.4.

Applying this standard, the court held that the damages from the first backup were unexpected because the city had no information alerting it to the possibility of a backup. However, after the first backup, the city knew that other, similar occurrences, were possible if it did not install an alarm system or replace certain faulty equipment. Consequently, damages from the subsequent backups were not "caused by an occurrence." "Once the City was alerted to the problem, its cause, and likelihood of reoccurrence, it could not ignore the problem and then look to Aetna to reimburse it for the liability incurred by reason of such inaction." 604 F.2d at 1059.

Although the explanation of the appropriate standard and the emphasis on either "intent" or "expectations" varies from case to case, the results reached in most cases are consistent with Carter Lake's "substantial probability" standard. Most courts decide whether the insured expected or intended a given result by examining the probability of that result in light of the information reasonably available to the insured. See, e.g., Shell Oil Co., 15 Cal. Rptr. 2d at 835 ("'Expect' connotes subjective knowledge of or belief in an event's probability. We see no material difference if the degree of that probability is expressed as substantially certain, practically certain, highly likely, or highly probable; the terms are minor shadings of the same idea"); Town of Huntington v. Hartford Ins. Group, 415 N.Y.S.2d 904, 905 (N.Y. Sup. Ct. 1979) (town's willful, allegedly negligent diversion of storm water which flooded plaintiff's land was a covered "occurrence" because, at least initially, flooding was unexpected). Thus, most decisions excluding coverage for pollution claims under the definition of "occurrence" can be traced to a finding that the insured continued, its business activities with knowledge (actual or implied on the basis of substantial evidence) that pollution and related damages were a likely consequence of such activities. See, e.g., Morton lnt'l, 629 A.2d at 876-84 (dumping into stream over many decades not a covered occurrence where State Health Department repeatedly had warned company of environmental dangers); Ashland Oil, Inc. v. Miller Oil Purchasing Co., 678 F.2d 1293, 1315-17 (5th Cir. 1982) (insured knew that toxic wastes deposited in oil pipeline could cause harm and were unlikely to be detected); American Mut. Liab. Ins. Co. v. Neville Chem. Co., 650 F. Supp. 929, 932 (W.D. Pa. 1987) (insured received complaints of ground water pollution from surrounding property. owners and state agencies beginning in 1971).

Not all courts focus on the damages caused by the insured's acts. Some employ a strict, objective standard of foreseeability to deny "occurrence" coverage for damages caused by intentional business conduct. In American States Ins. Co. v. Maryland Casualty Co., 587 F. Supp. 1549 (E.D. Mich. 1984), for example, the court refused to find coverage on the grounds that the insured produced and dumped toxic wastes in the ordinary course of its business. Significantly, the court reached this conclusion without even inquiring whether the insured expected or intended the damages caused by its admittedly intentional acts. It was, sufficient, in the court's view, that the insured intended the act which caused the damage. 587 F. Supp. at 1552-53.

The court reached a similar result in Fischer & Porter Co. v. Liberty Mut. Ins. Co., 656 F. Supp. 132 (E.D. Pa. 1987). Fischer & Porter used TCE to clean tools and other metals. It was sued by the United States (presumably under CERCLA) and subsequently entered into a consent decree requiring it to purify certain wells and ground water supplies. After entering into the consent decree, Fischer & Porter sued its insurer, Liberty Mutual, for indemnification. In support of its argument that there had been an "occurrence," Fischer & Porter produced evidence that it had not intended to cause damages and that it had no knowledge of any deliberate dumping of TCE.

The court held that Fischer & Porter had failed to establish a covered "occurrence," and entered summary judgment for Liberty Mutual. Reasoning that the contamination had been caused by Fischer & Porter's "sloppy housekeeping," and was, therefore, the "predictable result of regular business activities," the court held that the damages were neither "accidental" nor unexpected from the standpoint of the insured. 656 F. Supp. at 135. See also Great Lakes Container Corp. v. National Union Fire Ins. Co., 727 F.2d 30 (1st Cir. 1984) (no "occurrence" where insured intentionally dumped wastes as part of barrel reconditioning business; court found some evidence that insured knew of potential harm, but primarily relied on insured's intent to dump wastes); Riehi v. Travelers Ins. Co., 772 F.2d 19, 25 (3d Cir. 1985) (summary judgment for insured inappropriate because fact finder could infer that damages were expected from evidence that insured knew wastes were being dumped).

§ Burden of Proof. Although the "expected or intended" language is part of the "occurrence" definition, there is a dispute whether, because it limits coverage, it is in effect an exclusion to be proved by the insurer rather than disproved by the insured. Insureds frequently argue that its placement in the definition does not change its operation as an exclusion (cf. Gordinier v. Aetna Casualty & Surety Co., 154 Ariz. 266, 742 P.2d 277 (1987) (exclusions can be found in any section of an insurance policy)). Courts have held both ways. Compare FMC Corporation v. Plaisted and Companies, 61 Cal.App.4th 1132, 1159, 72 Cal.Rptr.2d 467, 483 (Cal.App. 1998) (recognizing split among California courts and holding insured has burden because "unexpectedly and unintentionally' is an integral part of the 'occurrence' definition") with Clemco Industries v. Commercial Union Insurance Company, 665 F.Supp. 816, 820-821 (N.D.Cal. 1987), aff'd, 848 F.2d 1242 (9th Cir. 1988) (placing burden of proof on insurer and citing history of the clause).

§ Arizona Application. There are no Arizona decisions interpreting CGL policies in the context of pollution-related claims. There are, however, a series of decisions examining when a result is "expected or intended" under homeowner policies.

In Vanguard Ins. Co. v. Cantrell, 18 Ariz. App. 486, 503 P.2d 962 (1972), the court affirmed a judgment for a liquor store clerk against a robber's insurer. The store clerk had been injured when the robber fired his gun into the store as he was attempting to escape. The robber's homeowner's policy excluded bodily injury either expected or intended by the insured, but the trial court had found that although the robber intended to fire the injury-causing shot, he had intended only to frighten, rather than injure, the clerk.

The court defined "expected" as a "high degree of certainty" and conceded that an intent to injure could be inferred from acts certain to cause harm. In the court's view, however, evidence that the robber intentionally shot into the store was insufficient to establish the required degree of certainty. 18 Ariz. App. at 488-89, 503 P.2d at 964-65.

Cantrell was called into question by Clark v. Allstate Ins. Co., 22 Ariz. App. 601, 529 P.2d 1195 (1975), and Steinmetz v. National Am. Ins. Co., 121 Ariz. 268, 589 P.2d 911 (Ct. App. 1978), and has recently been disapproved to the extent it conflicts with Ohio Casualty Insurance Co. v. Henderson, 189 Ariz. 184, 939 P.2d 1337 (1997).

The insureds in both Clark and Steinmetz were seeking coverage for injuries suffered by third parties whom the insureds had intentionally punched in the face. Each insured contended that the intentional act exclusions in their homeowner's policies were inapplicable because they had not subjectively intended to cause injury.

Both courts rejected the insureds' arguments, holding that the act of punching someone in the face is so certain to cause harm that intent to injure must be inferred as a matter of law. Addressing itself to the apparent conflict between Clark and Cantrell, the Steinmetz court went on to hold that

The [expected or intended] exclusion here is unambiguous. By its language it excludes from coverage the intentional acts of the insured which result in injury. It follows that if the injury results from the natural and probable consequences of the intentional act, the subjective intent of the actor is simply immaterial-the exclusion applies.

121 Ariz. at 271, 589 P.2d at 914.

In 1983 the supreme court reaffirmed Cantrell and distinguished what it terms the "Steinmetz-Clark exception" in Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983), Trans-America Ins. Group v. Meere, 143 Ariz. 351, 694 P.2d 181 (1984), and Fire Ins. Exch. v. Berray, 143 Ariz. 361, 694 P.2d 191 (1984).

In Vagnozzi, the insured intentionally threw an elbow during a "heated" basketball game. The insured testified that he had not intended to cause injury and had thrown the elbow to knock Vagnozzi out of the way and pursue the ball. The insured's homeowner's policy covered bodily injury caused by "accident," which it defined as "a sudden event. neither expected nor intended by the insured."

On these facts, the supreme court reversed the trial court's summary judgment for Farmers in a declaratory judgment action. In reaching this conclusion, the court classified Steinmetz and Clark as unusual cases involving intentional acts "so certain to cause a particular injury that the intent to cause the harm is inferred as a matter of law...." 138 Ariz. at 449, 675 P.2d at 709. In such cases, "the subjective intent of the [insured] is immaterial." Id. In most cases, however, the "expected or intended" exclusion is applicable only if the insurer demonstrates that the insured intended the resulting injury:

The presumption that a person intends the ordinary consequences of his voluntary actions, used in determining responsibility for the consequences of voluntary acts, has no application to the interpretation of terms used in insurance Contracts.... The policy definition of 'accident' as an event resulting in injury either expected or intended by the insured makes the subjective intent of the insured a question of fact to be determined after listening to the testimony.

Id. (emphasis added).

Ohio Casualty v. Henderson involved the insured's participation in the commission of a robbery during which a clerk was shot to death; the insured argued for coverage on the ground that he had not committed the murder and had no intent to kill. The Supreme Court rejected this argument, holding that

if the act was intentional and there was either a subjective desire to cause some specific harm (intent) or substantial certainty (expectation) some significant harm would occur, then the insured will not be heard to say that the exclusion does not apply because the injury was more severe or different from what was intended.

Ohio Casualty, 189 Ariz. at 191, 939 P.2d at 1344.

Meere and Berray involved acts of self-defense-punching and shooting at the insureds' alleged assailants-which, as in Steinmetz and Clark, were virtually certain to cause injury. Ohio Casualty involved the use of weapons in the commission of a crime. In Meere and Berray the court refused to hold, without first allowing a factual inquiry into the insureds' subjective intent, that the resulting injuries were either expected or intended by the insured. In Ohio Casualty, the court also examined the insured's intent, but did not require the insured to expect the exact injury which occurred. Reading the cases together, damages caused by an insured's intentional act are expected or intended for insurance purposes only if the act is (1) "wrongful" and (2) certain to cause some significant injury, whether or not it is the specific injury expected or intended. Ohio Casually, 189 Ariz. at 190-191, 939 P.2d at 1343-1344; Meere, 143 Ariz. at 358-59, 694 P.2d at 188-89; Berray, 143 Ariz. at 363, 694 P.2d at 193; Phoenix Control Sys., Inc. v. Insurance Co. of N. Am., 165 Ariz. 31, 34-35, 796 P.2d 463, 466-67 (1990). This is a subjective standard that will be difficult for an insurer to meet in pollution cases. Smith v. Hughes Aircraft Co. Corp., 783 F. Supp. 1222, 1236-37 (D. Ariz. 1991) (noting Arizona's subjective standard and denying summary judgment even though Hughes had used and disposed of chemicals for decades), aff'd in part, rev'd in part, 10 F.3d 1448 (9th Cir. 1993), amended and superseded on denial of rehearing, 22 F.3d 1422 (9th Cir. 1993).

§ 4.5.4 Coverage Triggers. Arizona appellate courts have not addressed the question of when coverage is triggered under general liability policies in the context of environmental claims or similar claims involving latent injuries either to property or person. Other jurisdictions addressing such claims have adopted one of at least five different theories:

  1. Manifestation - The injury is deemed to occur and coverage begins when the injury is discovered, e.g., Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325, 1328 (4th Cir. 1986) (the occurrence is judged by the time the leakage and damage was first discovered).
  2. Exposure - Injury occurs upon initial exposure to the injury-causing agent such as asbestos, e.g., Continental Ins. Co. v. Northeastern Pharmaceutical & Chem. Co., 811 F.2d 1180 (8th Cir. 1987), cert. denied, 488 U.S. 821 (1988); Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 685 F. Supp. 621 (E.D. Mich. 1987).
  3. Injury-in-Fact - Coverage is triggered when the injury or damage actually occurs, which may be after exposure and before manifestation, e.g., Independent Petrochemical Corp. v. Aetna Casualty & Sur. Co., 654 F. Supp. 1334, 1358 (D.C. Cir. 1986), aff'd in part, rev'd in part, 944 F.2d 940 (D.C. Cir. 1991), cert. denied, 112 S. Ct. 1777 (1992); Industrial Steel Containers Corp. v. Fireman's Fund Ins. Co., 399 N.W.2d 156 (Minn. Ct. App. 1987).
  4. Double Trigger - Injury occurs at the time of exposure and at the time of manifestation, e.g., Trans-America Ins. Co. v. Bellfonte Ins. Co., 490 F. Supp. 935 (E.D. Pa. 1980).
  5. Triple or Continuous Trigger - Injury occurs at the time of exposure and continues through manifestation or even filing of the lawsuit, e.g., Keene v. Insurance Co. of N. Am., 667 F.2d 1034 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007 (1982).

There are compelling arguments to support each of these theories, a detailed analysis of which is beyond the scope of this chapter. Needless to say, the theories insurers and insureds choose to advance in a particular case likely will be determined by which theory will minimize or maximize coverage in that case. See Lac D 'Amiante du Quebec, Ltee. v. American Home Assurance Co., 613 F. Supp. 1549, 1551 (D.N.J. 1985); Note, Developments in the Law - Toxic Waste Litigation, 99 HARV. L. REV. 1458, 1578-82 (1986).

§ Arizona Application. As noted, Arizona courts have not considered the trigger of coverage issue for environmental claims. There is some precedent, in other contexts for both the manifestation and injury-in-fact theories. See, e.g., Outdoor World v. Continental Casualty Co., 122 Ariz. 292, 594 P.2d 546 (Ct. App. 1979) ("accident" occurred when "the complaining party was actually damaged"); Aetna Casualty & Sur. Co. v. PPG Indus. Inc., 554 F. Supp. 290, 294 (D. Ariz. 1983) (coverage is determined as of the time damage is discovered); State v. Glenn Falls Ins. Co., 125 Ariz. 328, 609 P.2d 558 (Ct. App. 1980). (coverage for injury based on thrift's insolvency determined as of date federal receivership order was issued); University Mechanical Contractors of Arizona, Inc. v. Puritan Ins. Co., 150 Ariz. 299, 723 P.2d 648 (1986) (installation of faulty couplings triggered coverage, even though couplings did not cause damage until after policy expired). These cases are sufficiently different, however, from environmental claims that one cannot say Arizona courts are bound to any particular trigger theory just yet.

§ 4.5.5 Coverage for Property Damage. Tort lawsuits alleging claims for property damage do not raise any significant coverage issues with respect to either the definition of "property damage" or insurers' obligations to defend against claims asserting such damages. Plaintiffs' claims (diminution of property value, loss of use) obviously fall within the policy definition of "property damage" (injury to tangible property, including loss of use) and just as obviously trigger the insurers' duties to defend and indemnify.

However, the designation of a policyholder as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or similar state laws, and the potential costs and liability that such a designation entails, raise several coverage issues. Insurers dispute coverage for investigation, cleanup, and other response costs incurred in response to government directives on at least three independent grounds: (1) there is no duty to defend because designation as a PRP is not a "suit" for damages sufficient to trigger that duty; (2) pollution represents an uncovered "economic loss" rather than "property damage"; and (3) government directives seek "equitable" remedies which are outside the insurers' agreements to pay for "damages."

The insurers' arguments are based on the definition of "property damage" and the standard coverage clause contained in every form CGL policy. "Property damage" typically is defined, if at all, as "injury or destruction of tangible property, including loss of use thereof, which occurs during the policy period...." The coverage clause in the typical CGL policy obligates the insurer to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of... property damage... and the [insurer] shall have the right and duty to defend any suit against the insured seeking damages on account of such... property damage."

§ Claims Prior to Suit. The insurers' first argument-that PRP letters do not trigger the duty to defend-turns on the distinction between a "claim" and a "suit." In brief, the argument is that PRP letters at most constitute a claim, and that no suit exists until the government either seeks an injunction enforcing an administrative order or cleans up the site itself and then brings a suit to recover its costs.

§ Competing Interpretations. In Detrex Chem. Indus., Inc. v. Employers Ins, of Wausau, 681 F. Supp. 438, 442-43 (N.D. Ohio 1988), for example, the court held that the policy distinguished between claims and suits, and obligated the carrier to defend only suits. The court therefore held that a PRP letter from the EPA did not trigger the carrier's duty to defend. Other courts have reached similar results. See Foster-Gardner, Inc., v. National Union Fire Insurance Company of Pittsburgh, P.A., 77 Cal.Rptr.2d 107, 959 P.2d 265(1998) ("Suit" is narrower than "claim" and does not include a PRP letter even if it was the substantive equivalent of a suit); Patrons Oxford Mut. ins. Co. v. Marois, 573 A.2d 16, 20 (Me. 1990) (holding that administrative proceeding brought by State Department of Environmental Quality is not a covered "suit"); Ray Indus., Inc. v. Liberty Mut. Ins. Co., 974 F.2d 754 (6th Cir. 1992) (PRP notice letter did not trigger insurer's duty to defend).

Many other courts have rejected the technical distinction between a "claim" and "suit" and have held that notice letters trigger the duty to defend. These courts have reasoned that the duty to defend is broader than the duty to indemnify, that insurance policies are purchased to protect insureds from threatened as well as actual use of legal process, and that, "unlike the garden variety demand letter, which only exposes one to a potential threat of litigation, a PRP notice carries with it immediate and severe implications." Aetna Casualty & Sur. Co., v. Pintlar Corp., 948 F.2d 1507, 1516-17 (9th Cir. 1991) (the continued viability of this decision has now been called into question by Foster-Gardner, 77 Cal.Rptr.2d 107, 959 P.2d 265). See also Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 662 F. Supp. 71, 75 (E.D. Mich. 1987) (duty to defend, under policy language identical to that at issue in Detrex, triggered by PRP letter); Coakley v. Maine Bonding & Casualty Co., 618 A.2d 777, 785 (N.H. 1992) (EPA notice letters constitute a "suit," triggering duty to defend); New Castle County v. Hartford Accident & Indem. Co., 673 F. Supp. 1359, 1366 (D. Del. 1987) (duty to defend triggered by functional equivalent of PR? letter issued by State environmental agency), modified, 933 F.2d 1162 (3d Cir. 1991); Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 496 N.W.2d 373 (Mich. Ct. App. 1992) (PR? letter constitutes "suit" triggering duty to defend), aff'd, 519 N.W.2d 846 (Mich. 1994).

§ Arizona Application. There is Arizona authority for the proposition that an insurer's duty to defend does not arise until the insurer is presented with a complaint. Manny v. Anderson's Estate, 117 Ariz. 548, 574 P.2d 36 (Ct. App. 1977); Pesqueria v. Factory Mut. Liab. Ins. Co. of Am., 16 Ariz. App. 407, 493 P.2d 1212 (1972). However, as most other jurisdictions have noted, PRP letters carry unique, and uniquely harsh, consequences, which demand action by insureds and arguably make the letters the functional equivalent of a suit. Moreover, Arizona courts have gone further than most courts in their attempts to allow insureds "to protect themselves from the sharp thrust of personal liability." United Servs. Automobile Ass'n v. Morris, 154 Ariz. 113, 118, 741 P.2d 246, 251(1987) (insured may enter into reasonable settlement agreement without breaching its duty to cooperate if insurer defends under a reservation of rights). The ultimate resolution of this issue in Arizona remains open.

§ Property Damage or Economic Loss. The insurers' second argument is that cleanup actions under CERCLA or similar state laws are not actions for "property damage"-either because governments lack the proprietary interest necessary to state a claim for "property damage," or because cleanup costs are not the equivalent of, and not a proper measurement for, property damage under CERCLA. See, e.g., Bausch & Lomb Inc. v. Utica Mut. Ins. Co., 625 A.2d 1021 (Md. Ct. App. 1993) (no damages under policy because government did not have proprietary interest in allegedly polluted water); Travelers Ins. Co. v. Ross Elec. of Washington, Inc., 685 F. Supp. 742, 74345 (W.D. Wash. 1988) (because CERCLA distinguishes between response costs and "damages" to natural resources, only the latter may be covered).

§ Competing Interpretations. The first significant decision to fully adopt the insurers' arguments was Mraz, 804 F.2d 1325, a declaratory judgment action seeking coverage for claims by the Environmental Protection Agency (EPA) and the State of Maryland for response costs at an area known as the Leslie site. The court held that the alleged damage to the site was "merely a factual predicate of the cost reimbursement claim.... There are no allegations that [the governments] sustained any property damage or that they even have the requisite interest in the Leslie site." Id. at 1328-29. The court also agreed that "response costs are not themselves property damages. One cannot equate response costs with 'injury to or destruction of tangible property,' this policy's definition of property damage." Id. at 1329 (citing the distinction between response costs and damages under CERCLA).

Other courts have rejected the argument that government lacks the proprietary interest necessary to seek "property damage" for one or more of three reasons. First, many courts hold that liability policies do not require the government to allege that it suffered property damage. Rather, the policy language requires each insurer to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages... because of... property damage...." Under this language, if there is some property damage, then the cleanup costs flowing from that damage are recoverable. If cleanup costs are incurred because of property damage, the government's interest in the property is irrelevant. See, e.g., New Castle County, 673 F. Supp. at 1366; Independent Petrochemical, 654 F. Supp. at 1359.

Second, at least one court has held that a reasonable insured would understand the definition of property damage to include environmental damage to land, water, trees, or other tangible property. Nothing in the policies "limits coverage to privately owned property, and nothing excludes public property or the public interest in the use and safety of privately owned property." Kipin Indus. v. American Universal Ins. Co., 535 N.E.2d 334, 337 (Ohio Ct. App. 1987). Thus, claims by the government to clean up polluted private property arguably fall within the standard definition of "property damage."

Third, many courts have held that governments have a quasi-sovereign interest in all natural resources sufficient to give rise to a claim for property damage. As the court stated in Kipin:

'Property' includes the interests of the federal and the state governments in the tangible environment and its safety. Thus, when the environment has been adversely affected by pollution to the extent of requiring governmental action or expenditure or both for the safety of the public, there is 'property damage' whether or not the pollution affects any tangible property owned or possessed exclusively by the government.

Id.; accord Pintlar Corp., 948 F.2d at 1514 (rejecting Mraz); Intel Corp. v. Hartford Accident & Indem. Co., 692 F. Supp. 1171, 1187 (N.D. Cal. 1988) (same), aff'd in part and rev'd in part, 952 F.2d 1551 (9th Cir. 1991); Port of Portland v. Water Quality Ins. Syndicate, 796 F.2d 1188, 1194 (9th Cir. 1986) ("discharge of pollution into water causes damage to tangible property and hence cleanup costs are recoverable under a property damage liability clause"); Pepper's Steel & Alloys, Inc. v. United States Fidelity & Guar. Co., 668 F. Supp. 1541, 1550 (S.D. Fla. 1987) ("this Court holds that where the property damage alleged constitutes damage to the environment, in this case the Biscayne Aquifer and the underlying waters which are the very source of the drinking waters for much of south Florida, that such property in truth belongs not to Plaintiffs, but rather to the State and the citizens thereof, and simply is not capable of being privately owned"); New Castle County, 673 F. Supp. at 1366 (suit to recover costs of cleaning up ground water "clearly state claim for remedial action to remedy property damage"); Conservation Chem. Co., 653 F. Supp. at 187-92 (state and federal governments have sufficient proprietary interest to allege claim for cleanup costs under property damage clause of CGL policies); Lansco, Inc. v. Department of Envtl. Protection, 350 A.2d 520, 524 (N.J. Super. 1975) ("it has long been established that the sovereign's interest in the preservation of public resources and the environment enables it to maintain an action to prevent injury thereto"; collecting cases), aff'd, 368 A.2d 363 (N.J. 1976); Kutsher's Country Club Corp. v. Lincoln Ins. Co., 465 N.Y.S.2d 136, 139 (1983) (rejecting as "preposterous" insurer's claim that discharge of oil into public waters did not result in injury to tangible property); cf. Georgia v. Tennessee Copper Co., 206 U.S. 230, 237 (1907) (states have "interest independent of and behind the titles of its citizens, in all the earth and air within [their] domain"); United States v. Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 312 U.S. 592, 596 (1941) (watersheds are "public property of the nation"); California v. S.S. Bournemouth, 307 F. Supp. 922, 929, (state suffers property damage when its waters are damaged by oil spill), clarified, 318 F. Supp. 839 (C.D. Cal. 1969); A.R.S. § 49-201(32) (defining "waters of the state" to include virtually all surface and ground water in Arizona).

Many courts also have rejected the argument that response costs are not the equivalent of "property damage." Although CERCLA Section 107(a)(4)(C) directly provides for recovery for damage to natural resources, courts have concluded that the response costs authorized by subsections (A) and (B) are also measures of the damages which governments may recoup for damage to natural resources. Port of Portland, 796 F.2d at 1194 (cost of cleaning up oil spill is recoverable "property damage" under CGL policy); Gloucester v. Maryland Casualty Co., 668 F. Supp. 394, 396 (D.N.J. 1987) (cleanup costs constitute property damage); Ex-Cell-O, 662 F. Supp. at 75 ("damages' include money spent to clean up environmental contamination"); Conservation Chem., 653 F. Supp. at 193 ("actions seeking recovery of cleanup costs.. are equivalent to actions seeking recovery of damages to natural resources"); Independent Petrochemical, 654 F. Supp. at 1359 ("'cleanup' costs constitute damages for purposes of liability insurance coverage"); Riehl v. Travelers Ins. Co., 22 ERC 1544, 1546 (W.D. Pa. 1984) (measure of damages to ground water and streams "is not precisely calculable but includes abatement costs relative to preventing further pollution"), rev'd on other grounds, 772 F.2d 19 (3d Cir. 1985); Chemical Applications Co. v. Home Indem. Co., 425 F. Supp. 777, 778 (D. Mass. 1977) (damages measured by cleanup and removal costs); United States Aviex Co. v. Travelers Ins. Co., 336 N.W.2d 838, 843 (Mich. Ct. App. 1983) ("The damage to the natural resources is simply measured in the cost to restore the water to its original state"); Broadwell Realty Servs. v. Fidelity & Cas. Co., 528 A.2d 76, 81 (N.J. Super. 1987), overruled on other grounds by Morton International, Inc., v. General Acc. Ins. Co. of America, 134 N.J. 1, 629 A.2d 831 (1993); Lansco, Inc., 350 A.2d at 525 (damages measured by "the cost of eliminating the harmful substance from the waters of the state"); Waste Management of Carolinas, Inc. v. Peerless Ins. Co., 323 S. E.2d 726, 735 (N.C. Ct. App. 1984) ("cleanup costs are essentially compensatory damages for injury to common property, the Flemington ground water"), rev'd on other grounds, 340 S.E.2d 374 (N.C. 1986).

§ Arizona Application. As noted above, this issue is one of many in this area that has yet to be addressed by Arizona's appellate courts.

§ Equitable vs. Legal Remedies. The insurers' final, and strongest, argument against coverage for cleanup costs is based on the distinction between "equitable relief' and legal "damages." Cleanup actions seek equitable relief-either an injunction requiring cleanup or a suit requiring the reimbursement of the cleanup costs incurred by the government. Cleanup costs are not covered by standard form CGL policies, insurers argue, because an insurers' only obligation is to "pay all sums which the insured shall become legally obligated to pay as damages." In this context, the insurers argue, "Damages,' as distinguished from claims for injunctive or restitutionary relief, include 'only payments to third persons when those persons have a legal claim for damages...." Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348, 1352 (4th Cir. 1987) (quoting Aetna Casualty & Sur. Co. v. Hanna, 224 F.2d 499, 503 (5th Cir. 1955)), cert. denied, 484 U.S. 1008 (1988).

§ Pro-Insurer Authorities. Many courts have accepted 'the insurers' argument on this point and, on that basis, have excluded coverage for cleanup claims. See, e.g., Continental Ins. Cos. v. Northeastern Pharmaceutical & Chem. Co., 842 F.2d977 (8th Cir. 1988) (en banc), cert. denied, 488 U.S. 821 (1988) ("NPCC")(called into doubt by Farmland Industries, Inc., v. Republic Insurance Co., 941 SW2d 505 (Mo. 1997)); A. Johnson & Co., v. Aetna Casualty & Sur. Co., 933 F.2d 66 (1st Cir. 1991); Cincinnati Ins. Co. v. Milliken & Co., 857 F.2d 979, 981(4th Cir. 1988); United States Fidelity & Guar. Co. v. Morrison Grain Co., 734 F. Supp. 437, 449 (D. Kan. 1990), aff'd, 999 F.2d 489 (10th Cir. 1993); Verlan, Ltd. v. John L. Armitage & Co., 695 F. Supp. 950, 953 (N.D. Ill. 1988); Ross Elec. of Washington, 685 F. Supp. at 744-45. Armco and NPCC are the leading cases supporting the position advanced by insurers.

Armco and NPCC both concede that, outside the insurance context, the term "damages" is ambiguous. In the insurance context, however, both courts found the term unambiguous:

The obligation of the insurer to pay is limited to 'damages,' a word which has an accepted technical meaning in the law. Although not defined in the CGL policies, "the word 'damages' is not ambiguous in the insurance context. Black letter insurance law holds that claims for equitable relief are not claims for 'damages' under liability insurance contracts."... "Traditionally, courts have found no insurance coverage for the costs of complying with an injunction even in cases where the suits could have been brought for damages."

NPCC, 842 F.2d at 985-86 (quoting Hanna and Annco).

Both courts also found support for their definition of damages in the policy language. "Damages," the courts reasoned, is a limitation on the insurer's obligation to "pay all sums." "If the term 'damages' is given the broad, boundless connotations sought by appellant,... [it] would become mere surplusage, because any obligation to pay would be covered. The limitation implied by employment of the phrase 'to pay as damages' would be obliterated." Armco, 822 F.2d at 1352; accord NPCC, 842 F.2d at 985.

§ Pro-Insured Authorities. Some courts have rejected Armco's narrow definition of "damages." In New Castle County, 673 F. Supp. at 1365, for example, the court found the term ambiguous and construed it against the insurer, reasoning that "an ordinary definition of the word 'damages' makes no distinction between actions at law and actions in equity."

Many courts, however, have simply ignored the distinction between legal and equitable forms of relief These courts reason that once "property damage" is established, it is merely fortuitous that the government is seeking cleanup costs through an equitable action. As the court explained in United States Aviex Co., 336 N.W.2d at 843:

In our opinion, [the insurer's] reasoning interprets 'damages' too narrowly.... [The insurer] agrees that the contamination of subterranean and percolating water as a result of the fire is 'physical injury to tangible property' within the terms of the insurance policy. If the state were to sue in court to recover traditional 'damages,' including the state's costs incurred in cleaning up the contamination, for the injury to the ground water, defendant's obligation to defend against the lawsuit and to pay damages would be clear. It is merely fortuitous from the standpoint of either [the insured or the insurer] that the state has chosen to have plaintiff remedy the contamination problem, rather than choosing to incur the costs of clean-up itself and then suing plaintiff to recover those costs. The damage to the natural resources is simply measured in the cost to restore the water to its original state.

336 N.W.2d at 843 (emphasis added); accord, e.g., Independent Petrochemical Corp. v. Aetna Casualty & Sur. Co., 944 F.2d 940, 947 (D.C. Cir. 1991) (under Missouri law, the term "damages" as used in insurance policies includes response costs), cert. denied, 112 S. Ct. 1777 (1992); New Castle County v. Hartford Accident & Indem. Co., 933 F.2d 1162, 1188 (3d Cir. 1991) (under Delaware law, "damages'... in the context of a standard CGL policy, should be interpreted... to encompass response costs... cert. denied, 113 S. Ct. 1846 (1993); Avondale Indus., Inc. v. Travelers' Indem. Co., 887 F.2d 1200, 1207 (2d Cir. 1989) (under New York law, cleanup costs come within CGL coverage as "damages"), cert. denied, 496 U.S. 906 (1990); Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551 (9th Cir; 1991) (under California law response costs are covered "damages"); Pintlar Corp., 948 F.2d at 1512 (under Idaho law response costs are covered damages); AIU Ins. Co. v. Superior Court, 799 P.2d 1253, 1275-78 (Cal. 1990) (under California law insurers are obligated to provide coverage for cleanup and other "response costs" under CERCLA); Boeing Co. v. Aetna Casualty & Sur. Co., 784 P.2d 507, 516 (Wash. 1990) (en banc) (holding that response costs are "damages" under the CGL clause at issue).

§ Rejoinders-Pro and Con. Armco and NPCC take issue with Aviex and similar cases on two grounds. First, and most significantly, they argue that the amount of money at stake may vary considerably depending on whether the government sues for damages or cleanup costs:

Damages is a form of substitutional redress which seeks to replace the loss in value with a sum of money. Restitution, conversely, is designed to reimburse a party for restoring the status quo. It might very well cost far more to restore a contaminated marsh than it would to pay damages for its loss.

Armco, 822 F.2d at 1353. Thus, "the distinction between recovery of cleanup costs and recovery of damages is not 'merely fortuitous' to either the insured as a CERCLA and RCRA defendant or to the insurer." NPCC, 842 F.2d at 893.

This argument is logical and has persuaded a number of courts, as noted above.

Insureds have responded, also with substantial success, that cleanup costs are the substantial equivalent of compensatory damages for at least three reasons. First, CERCLA does not calculate "damages" to natural resources, 42 U.S.C. § 9607(a)(4)(C), solely as the difference between the resource's original (clean) value and the resource's value in its polluted state. Instead, CERCLA implicitly uses cleanup costs to measure a portion of the total loss by limiting recovery for "damages" to natural resources to the difference between the resources' original and remediated (after cleanup) value. Second, at least in Arizona, "if the land may be restored to its original condition, the cost of restoration may be used as the measure of damages if it does not exceed the diminution in the market value of the land." Blanton & Co. v. Trans-America Title Ins. Co., 24 Ariz. App. 185, 188, 536 P.2d 1077, 1080 (1975) (emphasis added). Third, pollution damages do not lend themselves to calculation under a simple "market value" analysis. One may be able to say that Blackacre with ten trees is worth $5 more than Blackacre with nine trees. The marketable value of a Superfund site, however, necessarily depends on how much it will cost to clean up the site.

These arguments have persuaded a number of courts, including, significantly, the Missouri Supreme Court. Farmland Industries, Inc., v. Republic Insurance Co., 941 SW2d 505 (Mo. 1997). That court effectively overruled the eighth Circuit's decision in NPCC, which was purportedly based on Missouri law. Id.

Armco's and NPCC's second response to the Aviex line of cases is that, from an insurer's perspective, "investigative and remedial action taken by the government respecting potential environmental hazards constitutes a prophylactic measure." Armco, 822 F.2d at 1353. Liability policies should not be construed to cover prophylactic measures because "should policies be construed to cover some forms of harm-avoidance measures, courts would be faced with the very difficult problem of separating needed prophylactic measures from unnecessary or inefficient ones." Id.

Again, this argument has a logical premise and has proven persuasive to some courts. However, it should not, insureds argue, be dispositive. Although cleanup will prevent future harm, it also is designed to eradicate existing damage. Consequently, the parameters of necessary (as opposed to purely "prophylactic") cleanup measures are relatively easy to determine. Insureds have no incentive to "overutilize safety measures," at their insurers' expense. See, e.g., Coakley, 618 A.2d at 78 1-85 (gathering cases).

§ Arizona Application. Arizona appellate courts have yet to address any of the arguments advanced by insurers to defeat coverage for government-directed cleanup costs. However, Arizona courts traditionally have shied away from technical definitions of policy terms and have interpreted undefined terms according to their "common sense," everyday meaning. See, e.g., United Am. Life Ins. Co. v. Beadel, 13 Ariz. App. 196, 475 P.2d 288 (1970); CUNA Mut. Ins. Soc'y v. Dominguez, 9 Ariz. App. 172, 450 P.2d 413 (1969); Maryland Casualty Co. v. Clements, 15 Ariz. App. 216, 487 P.2d 437 (1971). Other courts taking this same approach tend to resolve these issues in favor of insureds. See, e.g., Morton Int'l, Inc., 629 A.2d at 843-47. Whether Arizona courts follow this same route remains to be seen.

§ 4.5.6 Remedial Investigations. Defense Cost or Liability Damages? Another important question is whether the costs of remedial investigations, which are often ordered or even directed by the government, are defense costs or ultimate liability (i.e., indemnity) damages. Insurers are obligated to pay defense costs even as they litigate coverage. Liability damages, in contrast, need only be paid if and when coverage is established.

No Arizona appellate courts have addressed this issue. Many other courts, however, have accepted policyholder arguments that CERCLA-mandated investigations are properly characterized as defense costs because such work is necessary to limit or eliminate a defendant's liability to the government or others. E.g., Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal.4th 669 (1997); Endicott Johnson Corp. v. Liberty Mut. Ins. Co., 928 F. Supp. 176 (N.D.N.Y. 1996). These courts draw a sharp distinction between remedial investigation costs and costs for feasibility studies and actual remediation, classifying the former as defense costs and the later as damages.

Other courts have rejected this distinction as too simplistic and have adopted the insurers' arguments that remedial investigation costs are an inseparable part of site remediation and therefore must be characterized as liability damages, unless the insured can prove that the work in question would have been undertaken in its defense even absent an order from the EPA or its state equivalent. E.g., General Accident Ins. Co. v. Dept. of Environmental Protection, 672 A.2d 1154 (N.J. 1996). See generally E. Eglin and S. Strauss, Classifying RI/FS Costs Under A Policy of Comprehensive General Liability Insurance: Indemnity or Defense?, 5 Fordham Envtl. L.J. 385 (1994).

§ 4.5.7 Pollution Exclusions. Beginning in the early. 1970s, the insurance industry began adding a "pollution exclusion" to standard form CGL policies. Initially, this exclusion was added on an endorsement basis, but by 1973 it was included in the standard form. The 1973 version of this exclusion reads as follows:

This insurance does not apply:... to bodily injury and property damage arising out of the discharge, disbursal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; but this exclusion does apply if such discharge, disbursal, release or escape is sudden and accidental.

Note that the exclusion itself contains an exception to the exclusion for contamination which is "sudden and accidental."

By the early- to mid-1980s, the insurance industry abandoned the 1973 exclusion in favor of the broader, so-called "absolute" pollution exclusion.

§ The 1973 Exclusion. At least in pollution cases, no policy provision has been litigated more often than the meaning of "sudden and accidental" in the 1973 pollution exclusion.

§ Pro-Insurer Authority. Insurers have argued, with considerable success, that "sudden and accidental" is unambiguous, and that to fall within the exception, pollution causing events must be both abrupt or instantaneous and unexpected. See, e.g., United States Fidelity & Guar. v. Star Fire Coals, Inc., 856 F.2d 31, 34 (6th Cir. 1988) ("this 'language is clear and plain, something only a lawyer's ingenuity could make ambiguous") quoting General Host Corp., 667 F. Supp. 1423; Diamond Shamrock Chems. Co. v. Aetna Casualty & Sur. Co., No. C-3939-84 (N.J. Super. Ct., April 12, 1989) ("To take the temporal element of instantaneous (or almost instantaneous) swiftness of happenings out of 'sudden' is to squeeze the life out of the word. It is an intellectually unacceptable distortion of the fair meaning of the word"); Liberty Mut. Ins. Co. v. SCA Servs., Inc., 588 N.E.2d 1346 (Mass. 1992).

This interpretation effectively eliminates coverage for gradual pollution (e.g., slowly leaking underground storage tanks) and for pollution resulting from intentional conduct (e.g., routine business use and disposal of chemicals), even if the contamination itself was completely unexpected by the insured. See, e.g., Upjohn Co. v. New Hampshire ins. Co., 476 N.W.2d 392 (Mich. 1991) (leak from underground storage tank neither sudden nor unexpected); Sylvester Bros. Dev. v. Great Cent. Ins. Co., 480 N.W.2d 368, 374-76 (Minn. Ct. App. 1992) (no coverage for intentional discharges to landfill, even if damage was unexpected).

The Ninth Circuit, interpreting Arizona and California law, agreed with this interpretation in Smith v. Hughes, 10 F.3d 1448, holding that "sudden" has a temporal meaning and excluding coverage for contamination resulting from long-term, routine business practices. The continued viability of Smith v. Hughes in Arizona is uncertain, however, since the Smith court refused to consider drafting history (see §, infra) in construing "sudden," and that evidence would likely have been admitted under the principles of insurance contract interpretation subsequently enunciated in Ohio Casualty Insurance Company v. Henderson, 189 Ariz. 184, 939 P.2d 1337 (1997). By contrast, California has recently reaffirmed its refusal to consider drafting history and continues to equate "sudden" with "abrupt." FMC Corp. v. Plaisted and Cos., 72 Cal Rptr.2d 467, 61 Cal.App.4th 1132 (1998).

§ Pro-Insured Authority. Policyholders have responded, with equal success, that the 1973 exclusion is an essentially meaningless restatement of the definition of occurrence, and that it therefore excludes only those damages that were "expected or intended" by the insured. Courts should reach this conclusion, insureds argue, for at least three reasons.

First, when the insurance industry introduced the exclusion in 1973, insureds argue, it portrayed the exclusion (to industry and state Insurance Commissioners) as nothing more than an elaboration of the definition of occurrence that would not further restrict coverage. This argument, and the historical evidence on which it is based, is examined in detail in Morton Int'l, 629 A.2d at 847-76. Finding that the insurance industry had misrepresented the effect of the 1973 exclusion, the New Jersey Supreme Court held in Morton that carriers are stopped even from asserting the exclusion except in cases of intentional, knowing pollution. Id. The Morton court relied in part on the Arizona Supreme Court's decision in Darner Motors for the proposition that estoppel was an appropriate remedy for the industry's misrepresentations.

Morton's so-called "regulatory estoppel" theory has not been adopted in any other jurisdiction. Nevertheless, the evidence of the drafting history and the insurance industry's representations which Morton brought to light have had a significant effect. In Alabama Plating Co. v. U.S. Fidelity and Guaranty Co., 690 So.2d 331 (Ala. 1996), the Alabama Supreme Court withdrew an opinion ruling against coverage and, this time considering the drafting history, decided in favor of the insured. Other courts have also concluded that, having promulgated the exclusion in one way, insurers should not be allowed to change their position about its meaning. See, e.g., (Claussen v. Aetna Casualty & Sur. Co., 380 S.E.2d 686 (Ga. 1989) (pollution exclusion must therefore be construed in insured's favor to mean "unexpected and unintended"); Joy Technologies, Inc. v. Liberty Mut. Ins. Co., 421 S. E.2d 493 (W. Va. 1992) (the insurance industry represented when it sold the "pollution exclusion" that coverage was not being cut back by the exclusion); Broadwell Realty, 528 A.2d at 84; Just v. Land Reclamation, Ltd., 456 N.W.2d 570, modified on denial of reconsideration, 461 N.W.2d 447 (Wis. 1990); United Pac. Ins. Co. v. Van's Westlake Union, Inc., 664 P.2d 1262 (Wash. Ct. App. 1983), rev, denied, 100 Wash. 2d 1018 (1983); United States Fidelity & Guar. Co. v. Specialty Coatings Co., 535 N.E.2d 1071 (Ill. Ct. App. 1989), cert. denied, 545 N.E.2d 133 (Ill. 1989). See generally Sayler & Zolensky, Pollution Coverage and the Intent of the CGL Drafters, MEALEY'S LIT. REPS. (INSURANCE) (1987) at 4,425; Note, The Pollution-Exclusion Conspiracy: A Newly Recognized Basis for Recovery, 13 PACE ENVTL. L. REV. 1103 (1996).

Second, historically and in common usage, "sudden" does not necessarily mean "abrupt" or "instantaneous." For example, several dictionaries define sudden to mean "happening or coming unexpectedly," "accidental," or "occurring unexpectedly or by chance." At a minimum, therefore, courts should construe "sudden" in favor of policyholders and hold that gradual as well as instantaneous events are covered. See, e.g., New Castle County, 933 F.2d at 1194-99 (the word "sudden" does not necessarily have a temporal element; there may be coverage even where the discharge from a landfill occurs gradually). See also Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204 (Ill. 1992); Just, 456 N.W.2d 570; Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083 (Cola. 1991); CPC Int'l, Inc. v. Northbrook Excess & Surplus Ins. Co., 962 F.2d 77 (1st Cir. 1992); Allstate Ins. Co. v. Kiock Oil Co., 426 N.Y.S.2d 603 (1980); Avondale Indus., 887 F.2d 1200.

Third, "accidental," in an insurance context, must mean that the damage, not the damage-causing event, was neither expected nor intended by the insured. The insurer's contrary argument-that coverage is excluded if the insured's conduct is intentional- defeats the purpose of liability insurance and is contrary to abundant precedent interpreting old, accident-based CGL policies. See, e.g., Specialty Coatings, 535 N.E.2d 1071 ("accidental" means "neither expected nor intended" by the insured); Queen City Farms, Inc. v. Central Nat'l Ins. Co., 827 P.2d 1024, 1050 (Wash. Ct. App. 1992) ("the phrase 'sudden and accidental'... mean[s] that there is coverage for [the insured] unless it expected and intended the pollution to occur.").

§ Toward a Middle Ground. Not all courts faced with the task of interpreting the 1973 exclusion can be neatly classified as falling in the pro-insurer or pro-insured camps. Several courts, for example, have concluded that "sudden" must have a temporal meaning (as insurers argue), but have gone on to hold that gradual pollution nevertheless may fall within the "sudden" exception if it commenced abruptly. See, e.g., Gridley Assocs., Ltd. v. Trans-America Ins. Co., 828 P.2d 524 (Utah Ct. App. 1992) (pollution caused by slow leak over several months may fall within "sudden" exception if the initial cause of the leak was an abrupt "clean break"); Goodman v. Aetna Casualty & Sur. Co., 593 N.E.2d 233 (Mass. 1992) (gradual discharge from underground storage tank may be "sudden" in the temporal sense if the commencement of the discharge was abrupt).

§ Burden of Proof. The applicability of the pollution exclusion, since it is an exclusion, must be established by the insurer. A number of courts have held, however, that the "sudden and accidental" phrase is not an element of the exclusion, but an exception to the exclusion for which the insured bears the burden of proof. E.g., Aydin Corporation v. First State Insurance Company, 77 Cal.Rptr.2d 537, 959 P.2d 1213 (1998). Aydin was a 4-3 decision and contains two lengthy dissents outlining the contrary arguments, primarily that the insured's burden in a coverage dispute is simply to establish coverage in the first place; according to the dissents, what the majority considers an exception is in reality simply an element of the exclusion which requires the insurer to negate certain possibilities. See Bebbington v. Cal Western etc. Ins. Co., 30 Cal.2d 157 (1947) (insurer required to negate exception in all-risk policy); EDI Corp v. Newark Ins. Co., 878 F.Supp. 366 (D.Conn. 1995) (predicting Connecticut would place burden on insurer).

§ Arizona Application. No Arizona court has addressed the 1973 exclusion. However, United States District Court Judge Browning, interpreting California and Arizona law, has held that "'sudden' unmistakably connotes a temporal quality," and that business "operations involving continual pollution for a lengthy period of time" are not accidental. Smith v. Hughes, 783 F. Supp. at 1230, 1232. Hughes apparently had used and disposed of TCE and other chemicals for decades in the operation of its business. Id.

Whether Arizona courts will agree with Judge Browning is in some doubt. One way insureds may seek to change the outcome is through presentation of the historical documents upon which the New Jersey court relied in Morton Int'l. Judge Browning held that such extrinsic evidence was ambiguous and, in any event, irrelevant absent proof that the insured relied on such evidence in purchasing its policies. 783 F. Supp. at 1230. The Arizona Supreme Court's opinion in Ohio Casualty, however, rests on just the kind of evidence Judge Browning rejected. 189 Ariz. at 187-189, 939 P.2d at 1340-1342.

At a minimum though, Smith v. Hughes confirms that courts will find coverage for pollution resulting from long-term, routine business practices only with great reluctance. Accord Lumbermen's Mut. Casualty Co. v. Belleville Indus., Inc., 938 F.2d 1423, 1429 (1st Cir. 1991) (insurers willing to cover only "a possible but unlikely event resulting in the release of pollutants"; pollution resulting from continual use of PCBs in manufacturing operations not covered), cert. denied, 112 S. Ct. 969 (1992). Continual use of potential contaminants in one's business puts one on notice that contamination is possible, even likely. In these circumstances, courts often find that the requisite element of fortuity is lacking.

§ The Absolute Pollution Exclusion. In response to litigation spawned by the sudden and accidental exception to the 1973 pollution exclusion, the insurance industry began using a so-called "absolute pollution exclusion" in the early- to mid-1980s. Generally, that exclusion mirrors the 1973 exclusion, without the sudden and accidental exception.

To date, absolute exclusions have not been the subject of many appellate opinions. Those courts that have directly addressed absolute exclusions generally have held that they are unambiguous and bar pollution claims. See, e.g., Alcolac, Inc. v. St. Paul Fire & Marine Ins. Co., 716 F. Supp. 1541 (D. Md. 1989); Guilford Indus., Inc. v. Liberty Mut. Ins. Co., 688 F. Supp. 792 (D. Me. 1988), aff'd, 879 F.2d 853 (1st Cir. 1989); Ascon Properties, Inc. v. Illinois Union ins. Co., 908 F.2d 976 (9th Cir. 1990).

However, policyholders have begun to piece together several promising arguments against broad application of even the absolute pollution exclusion. See generally Pasich, Breadth of insurance Coverage for Environmental Claims, 52 OHIO ST. L. J. 1131, 1156-75 (1991); Zangwill & Casey, Is the Insurance Companies' "Absolute" Pollution Exclusion Absolute?, INSURANCE LITIGATION REP. 3 (Jan. 1992). Some of these theories are being accepted by the courts.

For example, several courts have held that pollution exclusions do not apply to acts by policyholders that comprise a necessary component of that policyholders' business operations, even though operations may include the use of chemicals and waste disposal or discharge. Because a policyholder purchases coverage protection for liabilities resulting from its business operations, these courts reason that insurers know what they are insuring and may not escape coverage under pollution exclusions. See, e.g., Continental Casualty Co. v. Rapid-American Corp., 610 N.E.2d 382 (1992) (exposure to asbestos products manufactured by defendants in the normal course of its business are not excluded); In re Hub Recycling, Inc., 106 Bankr. 372 (D.N.J. 1989) (holding that normal business operations do not fall within the definition of discharge or disbursal and therefore do not fall within pollution exclusions).

Similarly, some courts have held that pollution exclusions, whether "sudden and accidental" or "absolute," should not apply to policyholders who are not "active" polluters. As the Illinois Court of Appeals explained in Specialty Coatings, 535 N.E.2d at 1076:

It is not clear from the circumstances of this case, and from the underwriting history of the exclusionary clause... that the parties intended the exclusionary clause to apply whether the insured was an active polluter or not. Certainly, those engaged in manufacturing processes would be expected to have sought other or additional insurance had they known that the mere act of engaging an independent agency such as a waste disposer in the ordinary course of having industrial wastes removed from their property would result in a denial of insurance coverage. There is nothing in the record to show whether such additional insurance was even available when defendants purchased their... policy. This ambiguity must be resolved against [the insurance carrier].

Accord, e.g., Vans Westlake Union, 664 P.2d at 1264 ("in construing the pollution exclusion clause, we conclude that it was intended to deprive active polluters from coverage, and not to apply where, as here, the damage caused was neither expected nor intended"); Niagara County v. Utica Mut. ins. Co., 439 N.Y.S.2d 538 (1981) (exclusion is limited to "acts by the insured"); Covington Township v. Pacific Employer's Ins. Co., 639 F. Supp. 793, 800 (M.D. Pa. 1986) ("the court finds that the... exclusion does not relieve defendant of its duty to defend claims based on the discharge, etc., of waste material by those other than the named insured").

Additional arguments suggested in the literature and just now being raised in court to challenge the absolute pollution exclusion include seeking coverage under "personal injury" policy provisions not affected by pollution exclusions. See Titan Holdings Syndicate, Inc. v. City of Keene, 898 F.2d 265 (1st Cir. 1990) (holding that personal injury coverage provision applies to environmental claims framed under nuisance, trespass, or similar theories); Hub Recycling, 106 Bankr. 372, arguing that damage-causing substances are not "contaminants" or "irritants" under the terms of the exclusion; Rapid-American, 610 N.E.2d 382, arguing that the duty to defend even baseless claims trumps the exclusion in cases where policyholders have a plausible defense to pollution-related claims. Whether any of these theories ultimately proves successful for policyholders remains to be seen.

§ 4.5.8 Owned-Property Exclusions. CGL policies include an exclusion for damage to "property owned or occupied by or rented to the insured," or "property in the care, custody or control of the insured." This exclusion was intended to prevent general liability policies from serving as first-party insurance.

§ Competing Interpretations. Insurance companies routinely argue that this exclusion voids coverage for discharges or spill of pollutants, since abatement measures are often necessary on the insured's own property in order to forestall further discharges or spills.

In CPS Chem. Co. v. Continental Ins. Co., 536 A.2d 311, 317 (1988), for example, the court held that prophylactic improvements to avoid potential future contamination are not property damages; rather, they are business expenses. Similar, on-site remedial efforts to clean up contamination not subject to off-site migration have been held subject to the owned property exclusion. See Conservation Chem. Co., 653 F. Supp. 152; Intel Corp., 952 F.2d 1551 (holding that fact issue existed as to what expenses were incurred to remedy damage to property owned by others and what expenses were incurred to remedy damages to property controlled by insured, within meaning of policy exclusion).

Several courts have avoided the exclusion and found coverage where cleanup was necessary to prevent pollution from spreading either to adjacent property or to ground water beneath the insureds' property. See, e.g., Broadwell Realty, 528 A.2d 76; United States Aviex, 336 N.W.2d 838; Intel Corp., 692 F. Supp. 1171.

§ Arizona Application. In Arizona, it is well established that a person has a duty to mitigate damages, and that ground water resources generally belong to the public. See A.R.S. § 45-145(A); Town of Chino Valley v. City of Prescott, 131 Ariz. 78, 630 P.2d 1324 (1981). Thus, Arizona courts may accept either the vertical or horizontal analysis employed by other courts to avoid the owned-property exclusion. Obviously, however, application of this exclusion is fact-sensitive.

§ 4.5.9. Arizona's Approach to the Interpretation of Insurance Contracts. Although Arizona's appellate courts have not grappled with the questions raised above in the context of pollution cases, there is a significant body of case law on the interpretation of insurance contracts in Arizona. A brief summary of that case law follows.

Insurers tend to achieve more favorable results when their form insurance contracts are construed without reference to extrinsic evidence. E.g., compare Alabama Plating Company v. United States Fidelity and Guaranty Company, 1996 Ala. LEXIS 465 (8/30/96), with Alabama Plating Company v. United States Fidelity and Guaranty Company, 690 So.2d 331 (Ala. 1996) (opinion withdrawn on reconsideration and reissued in insured's favor after consideration of previously disregarded extrinsic evidence). Insurers frequently argue for a strict application of the "parol evidence rule," that is, "a contract as written cannot be modified or changed by parol evidence" unless some exception applies. Black's Law Dictionary (5th Ed. 1979) (citation omitted). Under this approach, an insured has the usually substantial burden of convincing the court that the language of the contract is ambiguous before the court can consider any extrinsic evidence as to what the contract might mean. See Darner Motor Sales v. Universal Underwriters, 140 Ariz. 383, 387, 682 P.2d 388, 392 (1984).

A party's ability to exclude extrinsic evidence of contract terms is severely limited in Arizona, as the Arizona Supreme Court has specifically rejected the threshold requirement of an ambiguity. In Darner, supra, while the insured claimed he had an oral agreement for increased limits of insurance coverage, the standard form language of the written insurance contract unambiguously limited insurance coverage to a minimum amount. The Court reasoned that the point of contract interpretation was to give effect to the reasonable expectations of the parties, and that the writing was not the agreement itself but rather evidence of the agreement. Darner, 140 Ariz. at 390-391. The Court, adopting the Restatement (Second) of Contracts §211 and the Corbin approach to contract interpretation, concluded that

...In Arizona, therefore, the interpretation of a negotiated agreement is not limited to the words set forth in the document. Evidence on surrounding circumstances, including negotiation, prior understandings, subsequent conduct and the like is taken to determine, the parties' intent with regard to integration of the agreement; once the court is able to decide what constitutes the "agreement," the evidence may be used to interpret the meaning of the provisions contained in the agreement.

Darner, 140 Ariz. at 393, 682 P.2d at 398. The Court went on to state that this approach applied equally to negotiated and standard form language, since otherwise parties, regardless of their expectations, could be "bound by provisions that were never discussed, examined, read or understood." Id.

The Court explained more fully the procedure to be followed in applying the new rule in Taylor v. State Farm Mutual Automobile Insurance Company, 175 Ariz. 148, 854 P.2d 1134 (1993). There, in construing the scope of a release, the Court cautioned against a judge giving in to the "often irresistible temptation to automatically interpret contract language as [the judge] would understand the words," id., 175 Ariz. at 153, 854 P.2d at 1139, since "the meaning that appears plain and unambiguous on the first reading of a document may not appear nearly so plain once the judge considers the evidence," id., 175 Ariz. at 154, 854 P.2d at 1140. To avoid this danger, the Court instructed that a contract analysis should proceed this way:

...the judge first considers the offered evidence and, if he or she finds that the contract language is "reasonably susceptible" to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties....

Id. The Court pointed out in dicta that, if the judge cannot immediately rule on a parol evidence objection, such evidence can be admitted conditionally or, in a jury case, considered outside of the jury's presence. Id.

The scope of evidence which the trial court is to consider in construing standard form insurance contract language appears to be very broad in Arizona. It includes the history. of the drafting of the language being construed (Ohio Casualty Insurance Company v. Henderson, 189 Ariz. 184, 939 P.2d 1337 (1997)); the purpose of the language in question, public policy considerations, and the transaction as a whole (Trans-America Insurance Group v. Meere, 143 Ariz. 351, 355, 694 P.2d 181, 185 (1984); and the reasonable expectations of the average consumer (Averett v. Farmers insurance Co. of Arizona, 177 Ariz. 531, 532-33, 869 P.2d 505, 506-507 (1994).

A corollary to this approach appears to be that, since the inquiry no longer focuses on identifying an ambiguity in the contract, the time-worn rule of identifying ambiguity and then construing it against the drafter can no longer be automatically considered applicable. Ohio Casualty, 189 Ariz. at 186, 939 P.2d at 1339. The Court has not addressed a situation where an ambiguity exists even after consideration of all the evidence, but presumably in such a circumstance, all other things being equal, the ambiguous term would still be construed in favor of coverage as a matter of public policy. See, e.g., Thomas v. Liberty Mutual Insurance Company, 173 Ariz. 322, 325, 847 P.2d 1335, 1338 (App. 1993).

It is also worth noting the roles of the trial court and the jury in contract interpretation. The discussion in Darner, with citations to the Restatement (Second) of Contracts, suggests that standard form provisions should be interpreted by the court, so that all parties similarly situated are treated alike. Darner, 140 Ariz. at 392-394, 682 P.2d at 397-399. On the other hand, if there is a real factual dispute over "what occurred and what inferences to draw from events," that determination should be the province of the finder of fact. See Taylor, 175 Ariz. at 159, 854 P.2d at 1145.

In sum, the steps of the analysis appear to be:

  1. The trial court must always consider any proffered interpretation of a contract term and the evidence which supports it. Darner, 149 Ariz. at 393, 682 P.2d at 398; Taylor, 175 Ariz. at 154, 854 P.2d at 1140.
  2. The trial court must use its discretion to determine whether an asserted interpretation is reasonable or the offered evidence is persuasive; the more improbable the interpretation, the more persuasive the evidence must be. Taylor, 175 Ariz. at 155, 854 P.2d at 1141.
  3. If the 'contract language appears reasonably susceptible to the proffered interpretation, the trial court must admit the evidence for the purpose of determining the meaning of the contract language. Id.
  4. If the contract language appears not to be reasonably susceptible to the proffered interpretation, the trial court in its discretion can stop hearing evidence and rule that, because the evidence contradicts the agreement between the parties, it is barred by the parol evidence rule. Id.
  5. In a jury case, if the evidence requires a factual determination, the court refers the specific factual dispute to the jury. Taylor, 175 Ariz. at 159, 854 P.2d at 1145
  6. If the court admits the evidence but is still unable to determine the meaning of the, contract from the evidence presented, as a matter of public policy it should construe the insurance contract in favor of providing coverage. Ohio Casualty, 189 Ariz. at 186, 939 P.2d at 1339; Thomas, 173 Ariz. at 325, 847 P.2d at 1338.

This analysis can be summarized graphically as follows:


The Court considers all the evidence offered and determines whether the contract language is "reasonably susceptible' to the interpretation asserted by its proponent.
Principal source: Taylor v. State Farm Mut. Auto Ins. Co., 175 Ariz. 148, 153-55 (1993).
At this step, the parol evidence rule applies only if "the asserted meaning of the contract language is so unreasonable or extraordinary that it is improbable that the parties actually subscribed to the interpretation" - e.g., "white is black." The court, however, is cautioned not to "automatically interpret contract language as he or she would understand the words," because "the meaning that appears plain and unambiguous on the first reading of a document may not appear nearly so plain once the judge considers the evidence."
If so,
The evidence is admissible to "illuminate the meaning of the contract language, or demonstrate the parties' intent"
If not,
Parol evidence rule bars admission of the evidence and the Court resolves interpretation issue against proponent without further analysis.

The Court determines whether the extrinsic evidence establishes a factual dispute with respect to specific negotiations between the parties -- i.e., "controversy over what occurred and what inferences to draw from the events."
Principal sources: Taylor v. State Farm Mut. Auto Ins. Co., 175 Ariz. 148, 159 (1993); Darner Motor Sales, Inc. v. Universal Underwriters lens. Co., 140 Ariz. 383, 391 (1984); Restatement (Second) of Contracts §211 (quoted in Darner)
Darner and the Restatement explain that standardized provisions are "interpreted wherever reasonable as treating alike all those similarly situated." because (1) the law... recognizes the efficiency associated with standardized agreements and seeks to encourage' them; and (2) "one who assents to standard. contract terms normally assumes that others are doing likewise and that all who do so are on an equal footing."
If so,
The issue of what the parties specifically intended is submitted to the jury.
If not,
The Court must decide what the form language means as a matter of law so that interpretation of standardized contract language is uniform from case to case.

The Court attempts to determine the meaning of the form language based on:
  1. the extrinsic evidence of the drafter's intent, including drafting history;
  2. the purpose of the language in question and the transaction as a whole;
  3. any public policy considerations involved; and
  4. the reasonable expectations of an average consumer.
Principal sources: Ohio Casualty Ins. Co. v. Henderson, 189 Ariz. 184, 939 P.2d 1337 (1997) (consideration of drafting history to determine meaning); Averett v. Farmers Ins. Co. of Ariz., 177 Ariz. 531, 532-33 (1994) (reasonable expectations); Trans-America Ins. Group v. Meere, 143 Ariz. 351', 355 (1984) (examining "the purpose of the exclusion in question, the public policy considerations involved and the transaction as a whole").
If Court concludes that language is still susceptible of more than one reasonable interpretation,

Court resolves the issue by resort to the legal principle that contract language is to be construed against the drafter.
If the Court decides that the meaning is now clear,
Court so rules.
Principal sources: Thomas v. Liberty Mut. Ins. Co., 173 Ariz. 322, 325 (App. 1993); Darner, 140 Ariz. at 391; Restatement (Second) of Contracts 211 cmt. b & 206 (quoted in Darner)

Arizona courts presumably will follow this same analysis in determining whether and to what extent CGL policies cover pollution claims.