‘Known loss’ coverage defense reinforced

By Dirk J. Muse

A policyholder’s prior knowledge of pollution of its property that renders it liable to a third party defeats insurance coverage for that liability, the Washington Supreme Court recently held.

In Overton v. Consolidated Ins. Co., no. 70562-3 (Jan. 2002), Overton bought the Spokane Transformer Company in 1972. Since 1961, hazardous materials, including harmful PCBs, had been used in industrial operations at the site. In 1976, the Environmental Protection Agency tested the soil and found high PCB levels. Overton learned of the test results.

In 1977, Overton and Spokane Transformer bought liability insurance from Industrial Indemnity. In 1979, they bought liability insurance from Consolidated. When applying for insurance, Overton did not tell either insurer about the EPA test results.

In 1981, Overton sold the property to the Gisselbergs. Years later, the Gisselbergs examined the property during a refinancing, discovered the PCB contamination, and began to clean it up. In a letter to Overton, they demanded that he contribute to the cleanup costs because he was a "potentially liable person" under the Model Toxics Control Act. The Gisselbergs later sued Overton under MTCA.

Overton tendered both the demand letter and the complaint to Industrial Indemnity and Consolidated. Both insurers denied coverage, in part because the previously known and existing damage to the property was not a covered "occurrence" under the policies. The policies defined "occurrence" as certain types of harm that the insured neither expected nor intended. Overton and Spokane Transformer sued both insurers. The trial court dismissed all coverage claims on summary judgment. The Court of Appeals reversed, finding disputes of fact. The Washington Supreme Court then accepted review.