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The Kansas City Southern Railway Co. v. The Wood Energy Group, Inc.

Court of Appeals of Louisiana, Second Circuit

January 15, 2020

THE KANSAS CITY SOUTHERN RAILWAY COMPANY AND UNION PACIFIC RAILROAD COMPANY Plaintiff-Respondent
v.
THE WOOD ENERGY GROUP, INC. AND CHARTIS SPECIALTY INSURANCE COMPANY Defendant-Applicant

          On Application for Writs from the Second Judicial District Court for the Parish of Bienville, Louisiana Trial Court No. 44216, Honorable Charles Glenn Fallin, Judge.

          DURRETT LAW OFFICES, LLC By: John Andrew Durrett, Michael R. Smith, Counsel for Appellant, AIG Specialty Insurance Company, (formerly Known as Chartis Specialty Insurance Company)

          AKERMAN, LLP By: Brent Connley Wyatt Matthew Schroeder Elliot Strader, Counsel for Appellant, AIG Specialty Insurance Company, (formerly Known as Chartis Specialty Insurance Company).

          PHELPS DUNBAR, LLC By: Patrick A. Talley, Jr. Jeremy Thomas Grabill, Counsel for Appellee, The Kansas City Southern Railway Company and Union Pacific Railroad Company.

          NEWELL & NEWELL By: Daniel W. Newell Counsel for Appellee, The Kansas City Southern Railway Company and Union Pacific Railroad Company.

          Before MOORE, STEPHENS, and McCALLUM, JJ.

          McCALLUM, J.

         In this environmental contamination case, Chartis Specialty Insurance Company, now known as AIG Specialty Insurance Company ("AIG"), and Kansas City Southern Railway Company and Union Pacific Railroad Company (collectively "the Railroads") have sought supervisory review with this Court following the trial court's denial of AIG's motion for summary judgment and the Railroads' motion for partial summary judgment. At issue in these motions was whether a primary insurance policy and an excess insurance policy issued by AIG to the Wood Energy Group, Inc. ("Wood"), provided coverage for losses allegedly exceeding $1 million that were incurred by the Railroads when remediating a site where Wood had processed railroad crossties under a contract with the Railroads.

         Concluding that the subject policies did not provide coverage for the Railroads' losses, we affirm the trial court's denial of the Railroads' motion for partial summary judgment, but reverse the denial of AIG's motion for summary judgment.

         FACTS

         In 2009, Wood entered into an agreement with Union Pacific Railroad Company ("Union Pacific") for the recycling of creosote-treated wooden rail crossties. Kansas City Southern Railway Company ("KCS") entered into a similar agreement with Wood the following year. Wood agreed to provide supervision, labor, equipment, materials, transportation, and permits to remove and dispose of the Railroads' used crossties. The resulting materials would be processed as fuel. Wood's operations were to take place on property ("site") owned by Louisiana & North West Railroad Company ("LNW") in Gibsland, Louisiana, that was leased by Wood.

         Under the terms of the agreements with the Railroads, Wood agreed to procure and maintain commercial general liability insurance and pollution liability insurance during the life of the agreement.

         AIG issued a primary policy with Wood as the named insured that afforded commercial general liability and pollution legal liability coverage. The policy period was from June 30, 2012, to June 30, 2013. AIG also issued a commercial excess policy with Wood as the named insured. The excess policy period was the same as for the primary policy. Coverage under the excess policy would be triggered by coverage under the underlying policy, which was the primary policy.

         On February 6, 2012, the Environmental Protection Agency gave notice to LNW of an administrative order for violation of the Clean Water Act at the site. The alleged violations included the failure to obtain the necessary permit, the failure to install adequate storm water controls, and the discharge of a pollutant into the waters of the United States.

         On July 10, 2012, the Louisiana Department of Environmental Quality ("LDEQ") gave Wood notice of a potential penalty regarding violations at the site. Wood was accused of: (1) processing regulated solid waste without a permit or authorization; (2) transporting regulated solid waste to an unauthorized, nonpermitted facility; (3) failing to obtain an air permit; and (4) failing to obtain a permit for water discharges.

         In January of 2013, Wood filed for Chapter 11 bankruptcy. The next month, Wood converted its bankruptcy to a Chapter 7 bankruptcy. Wood left a literal mess for others to rectify.

         On April 1, 2013, the LDEQ sent Wood a consolidated compliance order and notice of potential penalty. The LDEQ asserted that Wood had lacked a permit or other authority to dispose of and/or process solid waste at the site. The LDEQ had conducted a site inspection there on February 19, 2013, and had found large volumes of accumulated creosote-treated crossties, which were considered solid waste, as well as several areas of stained soils and areas of pooled water with an oily sheen. The LDEQ noted that processing of solid waste at the site had stopped.

         The LDEQ stated in the April 1 order and notice that it had found that Wood had violated regulations by depositing and processing regulated solid waste at the site without permit or authorization. Wood was ordered to remove all deposited regulated solid waste to an authorized facility, excavate areas of visibly contaminated soil, take any and all measures necessary to meet and maintain compliance with the solid waste regulations, and submit a written report detailing the actions to be taken to comply with the order.

         On August 28, 2013, Commercial Insurance Associates wrote to AIG that it had been instructed by Maggie Smith, the trustee of Wood's bankruptcy estate, to forward notice of a claim to AIG. The letter further stated that it had received a "direct action" from LNW regarding pollution at the site as well as notice from the LDEQ regarding Wood's noncompliance with Louisiana's waste disposal regulations.

         By letter to AIG dated August 28, 2013, LNW gave notice of a claim against Wood under the primary and excess policies. The letter further stated that LNW was providing notice to AIG for itself as an additional insured under the policies as well.

         On May 28, 2014, the LDEQ sent demand letters to KCS and Union Pacific regarding site remediation. The LDEQ demanded the removal and proper disposal of solid wastes at the site, the design and implementation of a remedial site investigation, and the design and implementation of any corrective actions necessary to address potential contamination of soil and/or groundwater at the facility. The letters informed the Railroads that soil and groundwater samples collected and tested by LNW revealed concentration of known hazardous substances in several soil samples that exceeded the LDEQ's standards for arsenic and various semivolatile organic compounds including benzo(a)anthracene, benzo(a)fluoranthene, and benzo(a)pyrene.

         The Railroads, along with LNW, cooperated with the LDEQ's demands to clean up the site. On March 31, 2016, KCS, in its capacity as an additional insured and/or insured under the policies, made demand on AIG to defend and indemnify it in connection with the site remediation. KCS also stated it was making demand on AIG as Wood's insurer. KCS's letter listed Wood as the insured, KCS as an additional insured, and the LDEQ as a claimant.

         On December 29, 2016, the Railroads filed this lawsuit against Wood and AIG. The Railroads alleged that Wood was liable to them for the costs of remediating the site, and they were entitled to recover from AIG for any liability of Wood. They also alleged that Wood and AIG were required to defend and indemnify them in connection with the LDEQ's demands because the Railroads were insureds and/or additional insureds under the primary and excess policies issued by AIG. Finally, the Railroads alleged that AIG had acted in bad faith by denying coverage.

         KCS and Union Pacific prayed for a judgment: (i) finding Wood liable for environmental cost recovery, tort indemnity/contribution, and/or contractual liability/indemnity; (ii) finding AIG liable for Wood's damages; (iii) declaring and finding that KCS and Union Pacific are insureds and/or additional insureds under the AIG policies; and (iv) awarding damages for AIG's bad faith failure to fulfill its defense and indemnity obligations.

         In December of 2018, the LDEQ provided notice that it had reviewed a site investigation report and determined that no further action was necessary at the site.

         In March of 2019, the Railroads filed a motion for partial summary judgment in which they argued they are entitled to summary judgment on the issue of coverage under the AIG policies for their losses in connection with responding to the LDEQ's demands. AIG filed its own motion for summary judgment asserting there was no coverage under its policies for the Railroads' losses.

         Finding that genuine issues of material fact remained, the trial court denied the motions for summary judgment and partial summary judgment. AIG and the Railroads then applied for writs with this Court seeking supervisory review of the judgment. AIG and the Railroads agreed that there were no material facts in dispute, with the only issue being how the insurance policies applied to those undisputed facts. This Court consolidated the writs and granted them to docket.

         DISCUSSION

         When determining whether or not a policy affords coverage for an incident, it is the burden of the insured to prove the incident falls within the policy's terms. Doerr v. Mobil Oil Corp., 00-0947 (La. 12/19/00), 774 So.2d 119. The insurer bears the burden of proving the applicability of an exclusionary clause within a policy. Id.

         Regarding the interpretation of insurance contracts, the Louisiana Supreme Court has stated:

An insurance policy is a contract between the parties and should be construed employing the general rules of interpretation of contracts set forth in the Louisiana Civil Code. The parties' intent, as reflected by the words of the policy, determine the extent of coverage. La.Civ.Code art. 2045[.] Words and phrases used in a policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning. La.Civ.Code art. 2047.2. An insurance policy should not be interpreted in an unreasonable or a strained manner so as to enlarge or to restrict its provisions beyond what is reasonably contemplated by its terms or so as to achieve an absurd conclusion. Where the language in the policy is clear, unambiguous, and expressive of the intent of the parties, the ...

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