Headwaters Resources, Inc. v. Illinois Union Insurance
770 F.3d 885
10th Cir.2014Background
- Headwaters Resources, Inc. (insured) was sued in Virginia (two related complaints) by over 400 residents alleging that use and disposal of 1.5 million tons of fly ash during golf-course construction contaminated air and water, causing property damage and bodily injury.
- Headwaters had seven Commercial General Liability (CGL) policies (2003–2008) issued by Illinois Union and ACE American (ACE) that covered defense/allocated loss adjustment expenses for alleged bodily injury/property damage, but each policy contained pollution exclusions with varying wording and definitions of “pollution” and “pollutant.”
- ACE denied coverage for defense costs, concluding the Virginia complaints alleged pollution excluded by the policies; Headwaters sued ACE in Utah federal court for breach of contract and bad faith.
- The district court granted ACE summary judgment: (1) the pollution exclusions in the 2003 and 2006 policies unambiguously barred coverage; (2) for the remaining policies, the court found the complaints alleged traditional environmental pollution and thus fell within the exclusions.
- On appeal under Utah law and the eight‑corners rule (compare complaint to policy), the Tenth Circuit affirmed, holding the exclusions unambiguous as written and as applied to the Chesapeake complaints, so ACE had no duty to reimburse defense costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the pollution exclusions are ambiguous under Utah law | Exclusions are overly broad and thus ambiguous; extrinsic evidence and insured’s business context create ambiguity warranting trial | Exclusions are clear on their face and must be applied as written; extrinsic evidence is irrelevant under eight‑corners rule | Held: Exclusions are unambiguous; no extrinsic evidence considered; summary judgment affirmed |
| Whether the Chesapeake complaints trigger the pollution exclusions (duty to defend) | Allegations concern use of a product/regular business activity, not necessarily pollution that exclusions were meant to bar | Complaints plainly allege dispersal of fly ash and contaminants (air/water/groundwater); that fits policy definitions of pollutant/pollution | Held: Complaints allege traditional environmental pollution and thus fall within the exclusions; ACE had no duty to reimburse defense costs |
| Whether ACE breached duty of good faith in denying coverage | ACE should have more thoroughly investigated/considered insured’s operations before denying | Under Utah law insurer need only compare complaint to policy when duty is defined by complaint; ACE did so and timely informed insured | Held: No bad‑faith liability; ACE fulfilled good‑faith obligation |
| Whether district court abused discretion in denying Rule 59(e) motion (new state‑court developments) | District court relied on claims later dismissed in Virginia; that change could alter coverage analysis | Argument was untimely and, substantively, the dismissed leachate claims did not change that widespread alleged pollution triggered exclusions | Held: No abuse of discretion; Rule 59(e) untimely and outcome unchanged even excluding leachate claims |
Key Cases Cited
- Houston Gen. Ins. Co. v. Am. Fence Co., 115 F.3d 805 (10th Cir. 1997) (choice‑of‑law and general rule that interpretation of insurance contracts governed by state law)
- Basic Research, LLC v. Admiral Ins. Co., 297 P.3d 578 (Utah 2013) (describing and applying the eight‑corners rule)
- Equine Assisted Growth & Learning Ass'n v. Carolina Cas. Ins. Co., 266 P.3d 733 (Utah 2011) (insurer’s duty to defend triggered when complaint alleges risk within policy; eight‑corners discussion)
- Fire Ins. Exch. v. Therkelsen, 27 P.3d 555 (Utah 2001) (limitations on extrinsic evidence when contract language is unambiguous)
- Alf v. State Farm Fire & Cas. Co., 850 P.2d 1272 (Utah 1993) (insurer must use clear and unmistakable language to limit coverage)
- U.S. Fid. & Guar. Co. v. Sandt, 854 P.2d 519 (Utah 1993) (ambiguities in insurance contracts construed in favor of coverage)
- Emp'rs Mut. Cas. Co. v. Bartile Roofs, Inc., 618 F.3d 1153 (10th Cir. 2010) (collecting Utah‑law principles limiting extrinsic evidence in duty‑to‑defend cases)