Tressler Win: Tenth Circuit Affirms Application Of The Owned Property Exclusion To Amounts Paid To Clean Up Contamination At Ski Resort

Tressler Win: Tenth Circuit Affirms Application Of The Owned Property Exclusion To Amounts Paid To Clean Up Contamination At Ski Resort

  • Aug 31, 2017, 11:51 AM

Tressler Wins
In Taos Ski Valley, Inc. v. Nova Casualty Company, Case No. 16-2118 (10th Cir. August 25, 2017), the U.S. Court of Appeals for the Tenth Circuit affirmed the U.S. District Court for the District of New Mexico’s order dismissing the Complaint of Taos Ski Valley, Inc. (“TSV”) against Nova Casualty Company (“Nova”) to recover the cost of cleaning up soil contamination at the ski resort under a series of commercial general liability policy issued by Nova to TSV (“Policies”). Specifically, the Court concluded that Nova properly denied coverage under an exclusion in each of the Policies barring coverage for liability for damages incurred because of “property damage” to “property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property.” (“Owned Property Exclusion”). As the courts of New Mexico had not yet addressed the application of the Owned Property Exclusion, this was a matter of first impression for the Court. However, the Court denied TSV’s request that the issue be certified for consideration by the New Mexico Supreme Court, concluding that such certification would be unnecessary under the circumstances.

In October 2013, TSV discovered that an oil-and-water separator at the ski resort, which it operates pursuant to a special use permit issued by the United States Department of Agriculture (“USDA”), had released hydrocarbon contaminants into the soil at the ski resort. TSV incurred an amount in excess of $1 million in investigating and remediating the contaminants from the soil, and sought to recover those costs from Nova under the Policy. Nova denied coverage pursuant to the Owned Property Exclusion, among other grounds that were not the subject of its motion to dismiss or the appeal. According to TSV’s Complaint, TSV incurred these amounts after its environmental contractor had determined that the contaminants in the soil presented a “real and measurable threat” of eventual contamination of the nearby Rio Hondo and the aquifer beneath the resort. TSV also alleged that it was required to incur such amounts to comply with certain New Mexico environmental statutes and regulations, and pursuant to its special use permit from the USDA.

In affirming the district court’s order granting Nova’s motion to dismiss, the Court rejected TSV’s primary argument that since it incurred investigation and clean up costs because it faced third-party liability to the State of New Mexico and the USDA, enforcement of the exclusion would “eviscerate the essence of a third-party policy.” TSV urged a construction of the Owned Property Exclusion that would render it inapplicable to costs incurred to remediate contamination of TSV’s property as long as such costs are incurred because of actual or potential liability to a third party. Citing that portion of the Owned Property Exclusion stating that it applies to costs incurred to restore the insured’s property “for any reason, including prevention of … damage to another’s property,” and reading the exclusion within the context of the Policies as whole, the Court concluded that the Owned Property Exclusion “defeats coverage for TSV’s remediation costs incurred because of soil contamination on the resort’s land, no matter that the reason for the costs was third-party liability.”

The Court also distinguished several cases cited by TSV that addressed the application of different exclusions that did not include the broad “for any reason…” language of the Owned Property Exclusion. As explained by the Court, “[w]e return to this phrase in the Policy again and again, because it decides the case.” Accordingly, the Court held that “an analysis of the most relevant factor – the language of the Policy, shows that the Owned Property Exclusion does reach the kind of environmental clean-up effort in which TSV engaged.”

The Court also found the unambiguous language of the Owned Property Exclusion to be enforceable, rejecting TSV’s public policy arguments. TSV asserted that the enforcement of the exclusion under the circumstances would create an incentive for an insured to allow environmental contamination to spread to third-party property before engaging in remediation efforts. Noting that such a delay tactic could expose an insured to the application of the Policies’ “Expected Or Intended Injury” exclusion and potentially expose the insured to further liability to governmental-enforcement proceedings, the Court concluded that TSV’s public policy arguments were not determinative.

Although the Court recognized that TSV acted commendably by responding promptly to remediate the contamination, the Court noted that such behavior “does not give it a free pass to avoid the effects of a plainly worded policy exclusion, which we determine that the New Mexico Supreme Court would find unambiguously excludes the costs of the clean-up from indemnification.” Consequently, the Court enforced the Owned Property Exclusion as written and affirmed the district court’s order of dismissal.

This matter was handled by Linda Bondi Morrison and Ryan B. Luther of Tressler LLP’s Orange County office, who can be reached at (949) 336-1234 and (949) 336-1222, respectively.