Lead Opinion
A successor oil-distributing corporation, through a declaratory judgment action, seeks indemnification and defense from its predecessor’s insurer for environmental liabilities stemming from the predecessor’s activities at four sites. We conclude that the district court did not abuse its discretion or reversibly err in finding coverage, granting partial summary judgment excluding one site, directing a verdict that actual injury occurred at one site, instructing the jury, ruling on evidentiary objections, or ordering indemnification and defense costs. The district court’s findings and the jury’s verdict are supported by the evidence, and we affirm.
FACTS
Gopher Oil Company (Gopher) has been found liable and is potentially liable for environmental cleanup costs under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601-9675 (1994) (CERCLA), and the Minnesota Environmental Response and Liability Act, Minn.Stat. §§ 115B.01-.241 (1996) (MER-LA), for the activities of its predecessor corporation, Gopher State Oil Company (Gopher State). Gopher State was a wholesale distributor of oil and lubricating products and, until June 1971, it re-refined used motor oil. A by-product of the re-refining process was oil sludge, which Gopher State disposed of at a number of dump sites. The four sites involved in this litigation are Arrowhead, Bellaire, Brooklyn Park, and Oak Grove.
From January 1954 through October 1973, Gopher State purchased commercial general liability (CGL) policies from American Hardware Insurance Company. In July 1972, Gopher State purchased a three-year CGL policy and a three-year commercial umbrella policy from American Hardware. American Hardware was aware that Gopher State re-refined waste oil as part of its operations. Beginning in July 1972, the CGL policy contained a pollution exclusion endorsement, the UL-21 endorsement, that limited coverage for property damage from pollution to sudden and accidental occurrences. The district court found the commercial umbrella policy also contained the UL-21 endorsement as of July 1972. The policies were renewed in July 1975 and cancelled by Gopher on January 1,1976.
Charles Romness, one of the owners of Gopher State, was also an owner of Arrowhead Refining Company from 1961 to 1976. Arrowhead Refining, insured under a policy issued by a different insurer, disposed of oil sludge from its re-refining process on its property (the Arrowhead site) in a wetland referred to as the “sludge lagoon.” The Minnesota Pollution Control Agency (MPCA) closed Arrowhead Refining at the end of 1976.
In October 1973, Bame Oil Corporation, owned by Fred Bame, purchased Gopher State. Subsequently, Bame Oil took Gopher as its corporate name. American Hardware’s policies remained in effect, unaltered, throughout this period, despite its knowledge of the change in ownership. Gopher renewed its policies with American Hardware through the end of 1975. In 1981, eight years after his purchase of Gopher State, Bame and another corporation, Gopher Rubber Cote, purchased the Arrowhead site.
Beginning in 1991, Gopher received four claims that alleged it was liable for environmental contamination due to Gopher State’s activities. The claims alleged Gopher State was a source of contaminants for, and operator of, the Arrowhead site, that Gopher State disposed of oil sludge in the 1950s and 1960s at the Bellaire and Brooklyn Park dump sites, and that Gopher was a source of contaminants disposed of at the Oak Grove dump site. American Hardware denied Gopher’s tenders of defense on all four claims.
The Environmental Protection Agency (EPA) brought an enforcement action against Gopher, alleging it was jointly and severally liable for investigation and cleanup of the Arrowhead site. The estimated clean-up cost for the site was in excess of $38 million. In April 1994, Gopher agreed to pay $1,225,000 to settle the Arrowhead claim. The settlement also covered the United States’ claims against Bame and Gopher Rubber Cote. American Hardware refused to participate in
In the Bellaire claim, the MPCA ordered Bellaire Sanitation to remove soil contaminated by oil sludge from the site. The cleanup cost was $330,421.72. Bellaire Sanitation sued Gopher, alleging Gopher State disposed of oil sludge at the site in 1966 and 1967. Gopher defended itself against the claim, and a jury found it liable for one-half of the cleanup costs.
In the Brooklyn Park claim, the EPA made a demand on Gopher to pay for cleanup costs at the site. The claim alleged Gopher State had disposed of oil sludge at the site in the 1950s and 1960s and that Gopher’s share of the cleanup cost was in excess of $1.3 million. Gopher disputed the claim, and the record does not indicate that the litigation has been concluded. The EPA also made a demand on Gopher to pay for cleanup costs at the Oak Grove site.
In October 1994, Gopher brought this declaratory action against American Hardware. The district court held that American Hardware had a duty to defend Gopher based on its predecessor’s policies. This court dismissed American Hardware’s appeals from the district court’s ruling as premature, Gopher Oil Co. v. American Hardware Mut. Ins. Co., Nos. C5-96-1658, C5-96-1689 (Minn.App. Aug. 27, 1996) (order opinion); Gopher Oil Co. v. American Hardware Mut. Ins. Co., No. C9-96-2022 (Minn.App. Oct. 29, 1996) (order opinion), and the supreme court denied review. The district court subsequently granted American Hardware’s motion for summary judgment on the Oak Grove claim. It determined that the activities at Oak Grove occurred in 1973 and later, when the policies contained the UL-21 endorsement.
The remaining factual issues were tried, and the jury determined: (1) Gopher did not expect or intend the actual injury at the Arrowhead site; (2) the disposal of oil sludge caused actual injury at the Bellaire site; (3) Gopher did not expect or intend the actual injury at the Bellaire site; (4) the disposal of oil sludge caused actual injury at the Brooklyn Park site; (5) the actual injury occurred from 1954 to 1966; and (6) Gopher did not expect or intend the actual injury at the Brooklyn Park site. The court conducted an additional three-day bench trial on nonjury issues and issued its final order on December 31,1997, amended January 28,1998. American Hardware and Gopher appeal from the pretrial, trial, and final orders, claiming a total of 18 separate grounds for reversal.
ISSUES
I. Did the district court err in holding that insurance policies purchased by a predecessor corporation provide coverage to a successor corporation?
II. Did the district court err in granting summary judgment to American Hardware on the Oak Grove claim?
III. Did the district court err in its jury instructions?
IV. Does the evidence reasonably support the jury’s findings of fact?
V. Did the district court err in its other evidentiary and procedural rulings or in its substantive findings?
VI. Did the district court err in its award, denial, or allocation of defense and indemnification costs?
ANALYSIS
I
Interpretation of an insurance policy’s coverage and the application of that determination to undisputed facts present questions of law, which are reviewed de novo. Vue v. State Farm Ins. Cos.,
American Hardware challenges the district court’s ruling that Gopher is covered under the policies issued to Gopher State because the policies included a provision that American Hardware was not bound by an assignment of interest under the policy without its consent. It is undisputed that neither Gopher State nor Gopher obtained American Hardware’s express consent to the assignment of interest under the policy. In ruling that Gopher was covered by the policy irrespective of American Hardware’s consent, the district court distinguished between the assignment of a risk, which changes the policy’s covered activities, and the assignment of a loss, which assigns a claim arising from a covered activity during the policy period. See Ocean Accident & Guar. Corp. v. Southwestern Bell Tel. Co.,
Minnesota appellate courts have not directly addressed the question of whether a no-nassignment-without-consent clause is enforceable against a successor corporation that acquires a predecessor’s assets and liabilities. Courts in other jurisdictions have refused to enforce such a clause when a successor corporation’s acquisition of a predecessor’s assets transfers the predecessor’s losses. See, e.g., Northern Ins. Co. v. Allied Mut. Ins. Co.,
The purpose of a non-assignment clause is to protect the insurer from an increase to the risk it has agreed to insure. National Am. Ins.,
An assignment of a loss does not expand the risk to cover other activities; it only allows a change in the identity of the insured to reconnect the policy’s coverage to the insured loss. Id. at 1129-30; Ocean Accident,
The great majority of courts follow this distinction between risk and loss and allow an insured to assign a loss. Couch, supra, § 35:7. The purchase agreement at issue provided that Gopher State would “assign all the assets” of Gopher State to Bame Oil. Although not assigned specifically, the court found the assignment of “all the assets” also assigned Gopher State’s losses to Bame Oil and then to Gopher. The court’s reasoning is consistent with the cases refusing to enforce nonassignment-without-consent clauses and the rationale that supports not enforcing the clauses.
In a subsidiary argument, American Hardware maintains that, because the claims against Gopher are based on CERCLA and MERLA, no loss could have occurred until these laws were enacted. See Quemetco, Inc. v. Pacific Auto. Ins. Co.,
American Hardware’s final argument on coverage is based on a policy exclusion for “all liabilities assumed by contract.” American Hardware claims this exclusion relieves it of any duty to defend or indemnify Gopher because the agreement between Gopher State and Bame Oil, transferring and assigning assets and liabilities, is a liability assumed by contract. This exclusion for assuming liabilities by contract serves the same purpose as the policy provision preventing the assignment of risk: to prevent an increase in risk to the insurer. Gopher’s purchase of Gopher State created no fundamental change in the insured entity and is not the type of liability assumption that the contract provision is intended to prohibit. Consistent with the assignment-of-loss theory, the policy’s exclusion should not be read in such a manner as to entitle an insurer to the windfall of not having to insure an occurrence that it received premiums for covering.
The district court did not err in its interpretation of the policy or in finding that Gopher State assigned its losses to Gopher and that American Hardware had a duty to defend and indemnify Gopher. Because we find the district court properly determined that American Hardware’s policies cover Gopher, we do not reach Gopher’s alternative argument that it is entitled to coverage under a de facto merger theory.
II
Summary Judgment on Oak Grove Claim
The district court granted summary judgment dismissing Gopher’s claim for defense and indemnity on the Oak Grove site because Gopher’s liabilities at that site arose from activities that started in 1973. As of July 1972, American Hardware had added to both its CGL and its commercial umbrella
Gopher’s claims of error on the summary judgment all relate to evidentiary issues, on which the district court has a considerable latitude of discretion. Benson v. Northern Gopher Enters., Inc.,
The district court also rejected Gopher’s argument that the policies did not contain the UL-21 endorsement because American Hardware defended two other enth ties for pollution-related activities during that same time period. The record does not establish that Gopher demonstrated that the entities, Ranger Chevrolet and Dean’s Oil, were insured under a commercial umbrella policy. But whether or not it was the same type of policy, American Hardware’s defense of other insureds is not relevant to its duty to defend Gopher. See Minn. R. Evid. 401 (relevancy requires probative value).
Gopher’s final objection to the UL-21 endorsement is that American Hardware did not demonstrate that the endorsement was filed with the Minnesota Commissioner of Insurance as required by Minn.Stat. § 70A.06, subd. 2 (1971). American Hardware offered an affidavit that its standard practice is to file endorsements with the commissioner. Gopher introduced no evidence demonstrating American Hardware did not file the form. Based on the uncontradicted evidence, the court did not err in finding the commercial umbrella policy contained the UL-21 endorsement. The evidence adequately supports the admissibility of the UL-21 endorsement and the district court’s ruling on it to grant summary judgment in favor of American Hardware on the Oak Grove claims.
Ill
Jury Instructions on “Expected or Intended” and “Actual Injury”
We review jury instructions to determine whether, taken as a whole, they are confusing or misleading on a material issue. Lindstrom v. Yellow Taxi Co.,
The court instructed the jury on “expected or intended” property damage with language taken from Domtar, Inc. v. Niagara Fire Insurance Co.,
American Hardware has the burden of establishing that the actual injury to property was expected or intended from the standpoint of Gopher. American Hardware must establish that Gopher expected to a high degree of certainty that the same general type of damage for which the remedial action was sought.
*766 Expected conduct may be equated with reckless conduct. This standard does not preclude the use of circumstantial evidence or proof of willful blindness * * *.
The instruction accords with the standard set forth in Domtar interpreting the meaning of “expected” damage to require a “certainty” of harm, equating this “high degree of certainty” with reckless conduct. See id. The instruction was not misleading or confusing and accurately stated the law.
American Hardware also contends that the district court’s instruction on when an “actual injury” occurs was erroneous. The court instructed the jury:
Environmental contamination of the soil is considered to be a type of actual injury to the soil. Gopher has the burden of establishing that an actual injury has occurred.
The actual injury for purposes of insurance coverage may not necessarily occur at the time that the act was committed which leads to damage, but rather at the date there is actual damage to the property.
The instruction follows the well-settled standard for when an actual injury occurs. See Fairview Hosp. & Health Care Servs. v. St. Paul Fire & Marine Ins. Co.,
IV
Adequacy of Evidence to Support Jury Verdict on Expected or Intended Injuries
A jury’s special verdict form answers can be set aside “only if no reasonable mind could find as did the jury.” Domtar,
American Hardware argues the jury erred in finding Gopher State did not expect or intend the actual injuries that occurred at the Arrowhead site from 1961 to 1976. The jury heard evidence that, during the 1960s and 1970s, the odor, the visual damage, and the danger of surface runoff were the only known dangers from disposing of the oil sludge on the property. This included a letter from the MPCA’s executive director that stated, “the site in part is saturated with oil and [is] physically unattractive” and that the problem appeared to be odors “rather than water pollution.” The jury also heard testimony that industrial practice at the time did not consider groundwater contamination in evaluating the effects of pollution. The jury could reasonably find that Gopher State did not expect or intend the actual injuries at the Arrowhead site during the years from 1961 to 1976. See Domtar,
American Hardware challenges the adequacy of the evidence to support the jury’s finding that actual injury occurred at the time Gopher State disposed of oil sludge in the dump sites. It asserts dump sites were expected to receive contaminants and thus the oil sludge did not cause injury and, alternatively, that any injury did not occur at the time of disposal but years later. Although evidence demonstrated that regulatory procedures evolved from laxer to more stringent standards, American Hardware did not demonstrate through evidence, statute,
American Hardware’s last jury-verdict challenge is to the finding that Gopher State disposed of oil sludge at the Brooklyn Park site each year between 1954 and 1966. By focusing only on the testimony of one witness, who testified Gopher State did not dispose of oil sludge until 1965 or 1966, American Hardware overlooks the other testimony indicating that Gopher State disposed of oil sludge throughout the period. The jury’s verdict on each of these issues is adequately supported by the evidence.
y
Evidentiary and Procedural Rulings and the District Court’s Findings Relating to the Arrowhead Site
American Hardware raises a cluster of issues that relate to its liability for activities at the Arrowhead site. The first issues relate to evidentiary rulings. American Hardware argues that the district court erred during the jury trial by excluding Arrowhead Refining’s separate insurance policies issued by Travelers Insurance Group. American Hardware asserts that it was prejudiced by this ruling because the other policies demonstrate that its policies should not cover any liabilities of Gopher as an “operator” of the Arrowhead site. We are not persuaded that the ruling constituted prejudicial error.
Once Gopher established a prima fa-cie case of coverage, the burden shifted to American Hardware to demonstrate that its policies excluded coverage. SCSC Corp. v. Allied Mut. Ins. Co.,
American Hardware also argues that the district court violated Minn. R. Civ. P. 49.01 by allowing the jury to review sample insurance policies from the periods at issue and Gopher exhibits setting out specific insurance policy periods. The rule provides:
The court may require a jury to return only a special verdict in the form of a special written finding upon each issue of fact. * * * Except as provided in Rule 49.01(b), neither the court nor counsel shall inform the jury of the effect of its answers on the outcome of the ease.
Minn. R. Civ. P. 49.01(a). Rule 49.01 relates to statements by the court or counsel and does not directly address what evidence is appropriate for the jury to review. The cases American Hardware relies on involve improper statements by counsel or the court. See, e.g., Hassler v. Simon,
Operation of Arrowhead Site
A district court’s findings “will not be reversed unless manifestly and palpably contrary to the evidence.” Malmin v. Grabner,
Romness, Orville Kemp, and Bill Bo-fey purchased Arrowhead Refining in 1961. Eventually Romness, Kemp, and William Heino owned the corporation. Although Romness was an owner of both Arrowhead Refining and Gopher State, the corporations were distinct entities. Heino testified he considered Romness and Gessner to be in charge of Arrowhead Refining’s operations. But he also testified that he was Arrowhead Refining’s president and that he did bookkeeping, handled inventory, and managed accounts. Moreover, a corporation may be liable as an operator of a site even if it does not own the property or maintain it under its care, custody, or control. See Musicland Group, Inc. v. Ceridian Corp.,
Directed Verdict on Actual Injury at Arrowhead Site
Reviewing a directed verdict, this court independently determines if the evidence was sufficient to present a fact question to the jury. Boone v. Martinez,
At the close of American Hardware’s case, Gopher moved for a directed verdict that an actual injury occurred at the Arrowhead site each year from 1961 to 1976. The court granted the motion based on the un-contradicted evidence. It was undisputed that Arrowhead Refining operated from 1961 to 1976. In addition, John Erdmann testified contamination occurred each time Arrowhead Refining placed oil sludge into the sludge lagoon. Norman Wenck similarly testified that an actual injury occurred each time a party disposed of oil sludge. Viewing the uneontradieted evidence in a light most favorable to American Hardware, the evidence supported the directed verdict that an actual injury occurred throughout Arrowhead Refining’s operation.
Beyond the actual injury, American Hardware disputes the sufficiency of the evidence supporting the conclusion Gopher State contributed to an actual injury each year at the Arrowhead site. The record indicates Gopher State sent Arrowhead Refining 24,000 gallons of oil. Although the parties dispute whether all of this was waste oil, Gopher settled the claim in good faith due to its potential liability for the entire amount. The evidence supports the conclusion that Gopher State supplied Arrowhead Refining with waste oil continuously from 1961 to 1973. See Domtar,
American Hardware’s Knoum-Loss Defense on Arrowhead Claim
Insurance cannot be issued for a known loss because there is no longer a risk.
VI
Defense and Indemnification Costs
An insured may recover its defense costs in a declaratory judgment action against an insurer based on a breach by the insurer of its duty to defend. Morrison v. Swenson, 274 Minn. 127, 137-38,
(1) Reasonableness of Arrowhead Settlement
American Hardware argues the district court erred by finding the $1,225,000 settlement amount for the Arrowhead claim was reasonable, but does not provide support for its argument. The undisputed testimony of the attorney who defended Gopher on the Arrowhead claim established that (1) the estimated clean-up costs of the Arrowhead site were approximately $38 million; (2) the settlement was reasonable and prudent based on Gopher’s joint and several liability for the entire amount; (3) the evidence showed Gopher employees assisted Arrowhead Refining in its operations; and (4) future defense and trial costs that would be incurred in defending the claim. The record supports the district court’s finding that the settlement amount was reasonable.
(2) Allocation of Liability for Settlement
In its challenge to the allocation of the settlement liability, American Hardware first asserts that the district court erred in allocating more than one-third of the Arrowhead settlement to Gopher because Bame and Gopher Rubber Cote were also defendants whose liability was determined in the settlement. But American Hardware did not introduce evidence demonstrating that it was reasonable to divide the $1,225,000 settlement equally. The evidence on the allocation consisted of undisputed testimony of Gopher’s defense attorney that $10,000 was a reasonable allocation of Bame’s and Gopher Rubber Cote’s combined share of the settlement. This testimony was buttressed by other evidence indicating Arrowhead Refining ceased its operations and disposal of oil sludge in 1976 and that most of the contamination was due to the disposal of oil sludge at the site. The record supports the district court’s finding.
Second, American Hardware argues the court erred by dividing the settlement liability into pro rata shares for the 13 years from 1961 to 1973 and then excluding the 1973 share because of the UL-21 endorse
American Hardware offered no evidence that Gopher sent waste oil or provided advice to Arrowhead Refining between 1973 and 1976. Gopher, however, introduced evidence that it did not ship waste oil during those years. The record supports the court’s use of 1973 as the cutoff date. Arrowhead Refining shut down its operations in 1976. Nothing in the record indicates Gopher contributed additional contamination to the site between 1976 and 1981. The record supports the district court’s use of the period from 1961 to 1973, the court’s exclusion of the years 1976 to 1981, and the exclusion of 1973 based on the UL-21 endorsement.
Finally, American Hardware argues that it is not liable for Gopher’s activities at the Arrowhead site because it acted as an operator, which was not an insured activity. We note initially that the policy does not exclude “operating” activity and that the settlement did not assign any “operator” responsibility to Gopher. But whether or not “operating” has legal significance, the district court found that the contaminated soil and groundwater at the Arrowhead site were not owned by, or in the care, custody, or control of Gopher during the years 1961 through 1976. The district court’s findings have the requisite support in the record, and we find no reversible error in the court’s allocation of the settlement liability.
(3) Arrowhead Defense Costs
American Hardware argues that the district court should have divided the defense costs equally among Gopher, Gopher Rubber Cote, and Bame. American Hardware produced no evidence that an equal division would be reasonable. The district court reasonably relied on the testimony of Gopher’s defense attorney that the amount of costs attributable to Bame and Gopher Rubber Cote was “a very very small amount” and on the court’s own review of the record that demonstrated “the facts and legal theories involved in all sites, including Oak Grove, were so closely intertwined that a segregated billing would have been extremely difficult, if not impossible, to create.” See Domtar,
(k) Defense Costs for Oak Grove and Other Dismissed Claims
The district court awarded defense costs on the Oak Grove and other dismissed claims after concluding that the costs were reasonable and were “intertwined and related to the issues of duty to defend and duty to indemnify.” We reject American Hardware’s citation of error on the court’s award for three reasons. First, a party may recover defense costs in a declaratory action on unsuccessful claims so long as it prevails at trial. Id. at 741 (affirming award of defense costs on claim not submitted to the jury). Gopher prevailed on the majority of its claims at trial. Second, Gopher’s claims, except for Oak Grove, are within the scope of the policy’s coverage. Although American Hardware relies on authority that involves claims outside the policy’s scope, it does not dispute that the other dismissed claims were covered. The claims are parallel to those litigated and come within the policy. See Meadowbrook, Inc. v. Tower Ins. Co.,
Generally an insurer is not responsible for defense costs incurred prior to the tender of a defense request, but circumstances may justify a departure from the general rule. Id. at 739. Gopher argues that the district court erred in denying pretender defense costs because American Hardware’s denial of its insurance relationship with Gopher misled Gopher and delayed its claims.
The record confirms that American Hardware chose to deny coverage until Gopher could provide evidence that American Hardware’s policies covered the claim, even though American Hardware had file copies of Gopher’s claim experience cards from 1953 to 1975. But the evidence does not demonstrate that American Hardware knew it had sold CGL policies to Gopher and, instead, shows that (1) neither party retained its copy of the policies; (2) neither party was certain Gopher State had purchased CGL policies from American Hardware; (3) American Hardware denied defense on the Oak Grove claim in good faith because the claimed events occurred when its policies contained the UL-21 endorsement; (4) any claimed reliance on the Oak Grove denial is unjustified because the other three sites were covered by policies issued before the UL-21 endorsement; and (5) American Hardware is not equitably estopped because it has not been shown that it misrepresented its knowledge about the extent or existence of unidentified policies. Gopher had the initial burden to establish coverage and, in order to recover pre-tender defense costs, the ultimate burden to demonstrate bad-faith denial. The evidence does not demonstrate bad-faith denial, and we affirm the court’s refusal to award pre-tender defense costs.
DECISION
Gopher is entitled to recover under the American Hardware insurance policies purchased by its predecessor, Gopher State. We affirm the district court on all of the other issues raised by the parties.
Affirmed.
Dissenting Opinion
(dissenting).
I respectfully dissent. First, it is undisputed American Hardware did not insure Gopher Rubber Cote and Fred Bame personally. Given this fact, the trial court incorrectly required the insurer to pay $180,031.21 in post-tender defense fees and costs related to the Arrowhead litigation.
And second, a trial court cannot retroactively create an insurance relationship. Gopher is not an “insured,” and there was no valid assignment of the policy. See Yoselowitz v. Peoples Bakery, Inc.,