No Coverage for Damage from Insured’s Operations That Had Not Been “Unexpected”

June 21, 2017 | Robert Tugander | Insurance Coverage

A federal district court in Alabama has ruled that commercial environmental insurance policies did not cover claims for damage caused by the insured’s business operations where the damage had not been “unexpected.”

The Case

SmarterFuel Inc. and Smarter Fuel South, LLC, bought and picked up catfish waste from catfish farms and used cooking oil from gas stations and restaurants. It extracted the fat, oil, and grease (“FOG”) and refined the FOG into fuel at property it rented from Heartland Catfish Co., Inc. The process was messy; FOG and fuel leaked or spilled on the property.

Heartland sued SmarterFuel, alleging that SmarterFuel’s actions had resulted in property damage and diminution of value caused by environmental damage.

Heartland obtained a default judgment against SmarterFuel and then went to court for a declaration that the commercial environmental insurance policies that had been issued to SmarterFuel covered its claims, that the insurer had a duty to indemnify SmarterFuel with respect to Heartland’s lawsuit, and that the insurer had breached the insurance policies it had issued to SmarterFuel.

The insurer moved for summary judgment.

The District Court’s Decision

The district court granted summary judgment in favor of the insurer.

In its decision, the district court found that the damage to Heartland’s property had not been “unexpected” from the standpoint of SmarterFuel as required for the policies to afford coverage.

The district court acknowledged that Heartland’s employees had testified that the spills had been “unintentional,” and that SmarterFuel had attempted to prevent and contain the spills. The district court pointed out, however, that SmarterFuel employees and contractors had known that the spills had been “occurring regularly” and testified that they were “unavoidable.”

The district court added that the evidence had “overwhelmingly shown” that the whole process, from unloading to when the final product was hauled away, “was very messy.” Although SmarterFuel tried to clean up the mess, the leaks and spills “were unavoidable and constant” and “much of what SmarterFuel did to address the situation simply covered up some of the mess,” the district court observed. The damage to Heartland’s property was the “natural and expected results of SmarterFuel’s actions,” the district court found.

Accordingly, the district court concluded that Heartland had not shown that the damage had been “unexpected” as required by the policies and, therefore, there was no coverage.

The case is Heartland Catfish Co., Inc. v. Navigators Specialty Ins. Co., No. 15-368-CG-M (S.D. Ala. May 15, 2017).

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