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United States Court of Appeals

Tenth Circuit

October 20, 2014

PUBLISH Elisabeth A. Shumaker

Clerk of Court




Plaintiff - Appellant,

v. No. 13-4035




Defendants - Appellees.



(D.C. NO. 2:09-CV-01079-DN) Thomas V. Alleman, Cox Smith Matthews Incorporated, Dallas, Texas, (Bruce A.

Maak, Jeffrey D. Stevens, Bryan Johansen of Parr Gee & Loveless, Salt Lake City, Utah with him on the briefs) for Appellant.

William F. Knowles, Cozen O’Connor, Seattle, Washington, (Scott M. Lilja, Van Cott, Bragley, Cornwall & McCarthy, Salt Lake City, Utah, with him on the brief) for Appellee.

Before LUCERO, TYMKOVICH, and BACHARACH, Circuit Judges.

TYMKOVICH, Circuit Judge.

Headwaters Resources, Inc. carried commercial liability insurance issued by two insurance companies, Illinois Union Insurance Company and ACE American Insurance Company. Under several applicable policies, Headwaters sought reimbursement for its litigation costs arising from a case brought by landowners in Virginia, alleging that Headwaters had caused personal injury and property damage during the construction of a nearby golf course. The complaint alleged that fly ash used in the construction process caused air and water pollution that devalued their homes and created health risks to the homeowners.

The insurance companies told Headwaters that defense costs related to Headwaters’ pollution were outside the scope of the coverage and denied the claim. As a result, Headwaters sued, and the district court eventually granted summary judgment in favor of the insurance companies, finding that the pollution exclusions in the insurance policies precluded coverage.

Since the 1970’s, the extent to which pollution exclusions apply to preclude coverage in commercial general liability (CGL) policies has been a ubiquitous feature of insurance litigation. Generally speaking, jurisdictions that have

addressed the scope of the “total pollution exclusion” fall into one of two camps:

(1) courts that apply the pollution exclusions as written because they find them clear and unmistakable; and (2) courts that narrow the exclusions to “traditional environmental pollution,” often because they find the terms of the exclusion to be ambiguous due to their broad applicability.

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district court did not pick a side on its behalf. Instead, the district court found that certain of the at-issue pollution exclusions unambiguously applied to bar coverage and that the remaining pollution exclusions, although possibly ambiguous, still applied because the complaints unquestionably alleged traditional environmental pollution. As a result, the complaints triggered the pollution exclusions in all of the policies, and the district court granted summary judgment in favor of the insurance companies.

Exercising jurisdiction under 28 U.S.C. § 1291, we find that each of the pollution exclusions is unambiguous, and AFFIRM the district court’s grant of summary judgment.

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A. Underlying Lawsuits Over 400 current and former residents of Chesapeake, Virginia, filed two separate lawsuits (together, the Chesapeake litigation) in Virginia state court, alleging property damage and bodily injury sustained due to pollution generated in connection with the development of a golf course. Headwaters Resources, Inc.

and VFL Technology Corp. (collectively, Headwaters) were named as defendants in the Chesapeake litigation.

In the complaints, plaintiffs alleged that between 2002 and 2007 the defendants used 1.5 million tons of toxic fly ash, during construction of a golf

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and personal injury resulting from discharge and dispersal of the fly ash and its byproducts, which contaminated ground water, surface water, and air. According to plaintiffs, the defendant entities systematically transported the fly ash to an open pit adjacent to residential neighborhoods. The complaints allege that chemicals from the fly ash soon leached into the ground water, damaging the private wells that the communities relied on for drinking water. In addition, the fly ash pit released airborne contaminants that wafted toward the neighborhoods and produced a strong smell of ammonia. As a result of this alleged contamination, the property values of plaintiffs’ homes depreciated and members of the community faced increased risk of serious bodily injuries caused by exposure to the fly ash and its attendant toxins.

Two complaints are at issue here—the Sears Complaint and the Fentress Complaint. Both were filed in 2009 and “although the cases [were] not formally consolidated... they [were] dealt with together concerning all pre-trial proceedings for purposes of judicial efficiency.” Fentress Families Trust v. Va.

Elec. & Power Co., 81 Va. Cir. 67, 2010 WL 7765113, at *1 (2010). The

complaints allege in general:

1 The term “fly ash” embodies a particularized subset of coal ash. Both coal ash and fly ash refer to the ash waste produced during the combustion of coal. Construction companies, including Headwaters, frequently use fly ash, often combined with binding agents or other substances, as structural fill material on large-scale construction projects.

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Beginning in 2002, Headwaters was insured under seven CGL insurance policies issued by Illinois Union Insurance Company and ACE American Insurance Company (collectively, ACE). Under each policy, ACE was required to reimburse Headwaters for expenses associated with lawsuits that occurred during the policy period. In particular, the provisions provided coverage for expenses incurred in connection with the defense of a suit in which damages due to “bodily injury” or “property damage” to which the policies apply “are alleged.” See, e.g., App. Vol. II at 295.

But the policies had exclusions for injuries caused by pollution. And within the pollution exclusions, each policy contained definitions of “pollution”

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apply to bar coverage.

Once the Chesapeake litigation commenced, Headwaters looked to ACE for reimbursement of the cost of defending the lawsuits. After its investigation, ACE concluded that the policies did not cover the claims because the events giving rise to those claims fell within the pollution exclusions. For this reason, ACE denied Headwaters’ insurance claim.

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After ACE’s denial of coverage, Headwaters filed a complaint against ACE American and Illinois Union in federal court in Utah—Headwaters’ principal place of business and the location where ACE delivered the insurance policies—alleging breach of the insurance contracts and bad faith in denying coverage for the Chesapeake litigation.

ACE moved for summary judgment, arguing that the pollution exclusions expressly precluded coverage. Headwaters responded with its own cross-motion for partial summary judgment. The district court agreed with ACE, finding that, under the 2003 and 2006 policies, the pollution exclusions unambiguously applied to bar coverage. On the remaining policies, the district court found that a determination on the ambiguity of the pollution exclusions was unnecessary because “[w]hatever else they may arguable [sic] reach, the ‘pollution’ exclusions clearly and unmistakably communicate that the [policies] do not provide coverage

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Sears Complaint alleged. Headwaters Res., Inc. v. Ill. Union Ins. Co., 913 F.

Supp. 2d 1210, 1220 (D. Utah 2012). The court later denied Headwaters’ motion to alter or amend the judgment under Rule 59 of the Federal Rules of Civil Procedure.

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Headwaters claims the district court erred in several ways. Taken as a whole, however, Headwaters’ primary contention is that the district court recognized but failed to appreciate the effect of ambiguities in each policy’s pollution exclusion and definitions. According to Headwaters, those ambiguities preclude granting summary judgment in favor of ACE. Based on our review, we disagree with Headwaters’ premise because the pollution exclusions are not ambiguous and the underlying complaints plainly allege pollution caused plaintiffs’ injuries.

A. Application of the Pollution Exclusions Headwaters first contends the pollution exclusions are ambiguous and it is entitled to a trial to determine the scope of ACE’s duty to defend and provide indemnification of any losses associated with the Chesapeake litigation.

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In this diversity action, we apply Utah law. Houston Gen. Ins. Co. v. Am.

Fence Co., 115 F.3d 805, 806 (10th Cir. 1997) (“The interpretation of an

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the law of the forum state.”). Under Utah law, the insurer has a duty to defend claims that arguably fall within the scope of the coverage provided. Equine Assisted Growth and Learning Ass’n v. Carolina Cas. Ins. Co., 266 P.3d 733, 736 (Utah 2011); see also Fire Ins. Exch. v. Therkelsen, 27 P.3d 555, 560 (Utah 2001) (“The test is whether the complaint alleges a risk within the coverage of the policy.” (internal citation omitted)).

In duty-to-defend cases, Utah applies the so-called “eight corners rule.” See, e.g., Basic Research, LLC v. Admiral Ins. Co., 297 P.3d 578, 580 (Utah 2013). Under the eight corners rule, an insurer’s coverage liability is determined by comparing the allegations within the four corners of the complaint to the language contained in the four corners of the insurance policy. Id. 2 On this basis, the duty to defend “is triggered when the allegations in the underlying complaint[,] if proved, could result in liability under the policy.” Cincinnati Ins.

Co. v. AMSCO Windows, 921 F. Supp. 2d 1226, 1236 (D. Utah 2013) (internal quotation marks omitted). But “[i]f the language found within the collective ‘eight corners’ of these documents clearly and unambiguously indicates that a duty to defend does or does not exist, the analysis is complete.” Equine Assisted 2 By contrast, under some insurance policies, it is necessary to consult the objective facts underlying the complaint to determine whether coverage is warranted. Equine Assisted Growth, 266 P.3d at 736. But where, as here, the policy defines the scope of coverage with specific reference to the allegations in the complaint, the eight corners rule controls. See id.

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that none of the allegations of the underlying claim is potentially covered (or that a policy exclusion conclusively applies to exclude all potential for such coverage).” Cincinnati Ins. Co., 921 F. Supp. 2d at 1236–37.

Examining the four corners of the insurance policy is a matter of contract interpretation because an insurance policy is “merely a contract between the insured and the insurer.” Alf v. State Farm Fire and Cas. Co., 850 P.2d 1272, 1274 (Utah 1993). Like other contracts, an insurance policy is interpreted to give effect to the intent of the parties as expressed by the plain language of the instrument itself. Id. The insurer is permitted to limit or modify its obligations to provide coverage through explicit exclusions and exclusionary language. See Pollard v. Truck Ins. Exch., 26 P.3d 868, 871 (Utah 2001). But to limit coverage in this way the insurer must set forth exclusions “using language which clearly and unmistakably communicates to the insured the specific circumstances under which the expected coverage will not be provided.” Alf, 850 P.2d at 1275 (internal quotation marks omitted).

The policies do not require a per se duty to defend. Rather, they provide for reimbursement of various expenses that Headwaters incurs in connection with the defense of lawsuits in which bodily injury or property damage within the scope of coverage “are alleged.” See, e.g., App. Vol. II at 371–77. Under this socalled “allocated loss adjustment expenses” provision, ACE could, but was not

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filed against Headwaters. If ACE chose not to defend, then it would reimburse Headwaters for all reasonable and necessary expenses in excess of a minimum retention amount. Irrespective of its classification, this duty is one to which the eight corners rule applies. Cf. Equine Assisted Growth, 266 P.3d at 735–36 (describing the circumstances under which the eight corners rule operates).

When an insurance policy, including its exclusions and limitations, is unambiguous, a court is restricted from considering extrinsic evidence to determine the parties’ intent. 3 Faulkner v. Farnsworth, 665 P.2d 1292, 1293 (Utah 1983) (“Whether an ambiguity exists is a question of law to be decided before parol evidence may be admitted.”); see also Emp’rs Mut. Cas. Co. v.

Bartile Roofs, Inc., 618 F.3d 1153, 1171–72 (10th Cir. 2010) (collecting cases under Utah law that show the prohibition on extrinsic evidence in duty-to-defend cases that are based on the allegations in the complaint). On the other hand, when a policy provision is ambiguous, extrinsic evidence is admissible to help “resolve the ambiguity.” Fire Ins. Exch. v. Oltmanns, 285 P.3d 802, 805 (Utah 2012);

Village Inn Apartments v. State Farm Fire & Cas. Co., 790 P.2d 581, 583 (Utah 3 In its reply brief, Headwaters also contends that Utah law allows extrinsic evidence to determine whether a latent ambiguity exists in the first instance. See Aplt. Reply at 21–22 (citing Watkins v. Ford, 304 P.3d 841 (Utah 2013)). But Headwaters argued in its opening brief that extrinsic evidence was only admissible to resolve the policies’ allegedly patent ambiguities, thus waiving the argument concerning a latent ambiguity that it makes on reply.

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