In the Iowa District Court for Polk County

FILED 04/13/2011 11:11AM CLERK DISTRICT COURT POLK COUNTY IOWA

IN THE IOWA DISTRICT COURT FOR POLK COUNTY

MIDAMERICAN ENERGY CASE NO. CL 107142 COMPANY,

Plaintiff, RULING ON MOTION FOR vs. ENLARGEMENT AND AMENDMENT OF RULING CERTAIN UNDERWRITERS AT LLOYD’S LONDON, et al.,

Defendants.

A contested hearing on the plaintiff‟s motion for enlargement and amendment of ruling was held before the undersigned on March 25, 2011 as previously scheduled.

Upon consideration of the arguments made at the hearing, and having reviewed the materials submitted in support of and against the motion, the court rules as follows:

The plaintiff seeks to amend or enlarge the court‟s prior ruling on the defendants‟ motion for partial summary judgment on the issue of allocation of insurance coverage in three areas: 1) revisiting the court‟s decision that a “pro rata” approach to allocation should be ordered rather than an “all sums” approach; 2) if a pro rata approach remains as ordered, that periods of allocation be excluded to correspond to periods when insurance was not generally available; and 3) if a pro rata approach remains, revisiting the court‟s treatment of the plaintiff‟s self-insured retentions (SIRs) when allocating coverage on that basis. Since the last two areas are dependent on the court‟s treatment of allocation in general, it will address the new arguments posited by the plaintiff on its “all sums” theory, and then if necessary address the issues of insurance coverage and SIRs. The plaintiff urges the court to adopt the “all sums” theory of allocation it proposes for a reason not addressed by the court in its initial allocation ruling; namely, that such an approach is consistent with its joint and several liability under the

Comprehensive Environmental Response, Compensation and Liability Act of 1980

(CERCLA) and Iowa‟s environmental statutes. In making this argument, the plaintiff offers no rational reason as to why the extent of the defendants‟ contractual liability under the various policies of insurance at issue should somehow correspond to its potential statutory liability for the environmental damage created on its watch.

As this court concluded in its initial allocation ruling, the defendants‟ eventual responsibility in this case is to be measured by the language contained within those policies of insurance as applied to the facts found by the jury. Those policies require an

“accident” or “occurrence” which in turn resulted in property damage during the applicable policy periods. The fact that the plaintiff may be held jointly and severally liable with any number of as-of-yet unidentified entities does not enter into the picture.

Requiring an “all sums” method of allocation merely because of the potential for joint and several liability is as logically strained as the plaintiff‟s focus on that phrase to the exclusion of the other policy language noted by the court in its initial allocation ruling.

This conclusion is supported by the only reported decision brought to the court‟s attention that has addressed plaintiff‟s argument and found it lacking:

Additionally, we note that OMC's joint and several liability argument must be rejected. OMC cites no authority for its novel proposition that, because its liability under CERCLA is joint and several, the liability of the excess insurers cannot be apportioned on a pro rata basis. OMC ignores the principle that insurance coverage disputes are governed by contract law. We can find no rationale to support the

imposition of joint and several liability upon the insurers simply because OMC‟s liability arose under CERCLA.

Outboard Marine Corp. v. Liberty Mut. Ins. Co., 283 Ill.App.3d 630, 644, 670 N.E.2d

740, 750, 219 Ill.Dec. 62, 72 (1996) (citation omitted). This court continues to believe that a pro rata allocation of coverage is the appropriate manner in which to treat damage which occurs in such a way that a precise starting point cannot be determined and which stretches over successive policy periods. As to plaintiff‟s request for an “all sums” method of allocation, the motion for enlargement or amendment is denied.

As this court held in its initial allocation ruling, the plaintiff and the defendants will be treated the same regarding the manner in which responsibility is allocated over the period of time that property damage1 is found to have occurred. The plaintiff argues that in this allocation their financial interests as represented by their SIRs should be prorated as well rather than requiring satisfaction of a full SIR for a given policy period before any policy proceeds could be accessed. In addition, the plaintiff argues that the period of allocation should not include any years when insurance coverage was not generally available. It seeks clarification of the court‟s prior allocation ruling to address these two issues.

On the issue of the plaintiff‟s SIRs over the years, this court remains convinced that a proper application of a pro rata allocation requires that the plaintiff satisfy the full amount of its SIR for a given policy period. The issue of proration is undertaken only to accommodate the “scientific uncertainties” inherent in progressive environmental injury claims. Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 179 N.J. 87, 98, 843 A.2d

1 It cannot be stated enough that neither the court‟s prior ruling on allocation nor the present ruling attempts to make any determination on what event would trigger coverage under any of the policies of insurance in question. All either of these rulings have done is to establish a mechanism for allocation assuming that one of more of those coverages have been triggered under the facts found by the jury.

1094, 1101 (2004). It allows that which cannot be scientifically discerned to be dealt with in the context of insurance coverages defined in terms of tangible occurrences and finite policy periods. Once that allocation has been determined, however, there is no need to prorate further in terms of the plaintiff‟s interest for a given policy period:

What is critical is that once the loss during a triggered policy period is determined, Owens-Illinois2 has served its purpose. At that point, the limits of each policy are available and the basic insurance policy provisions apply so long as they are not inconsistent with Owens-Illinois. Put another way, once the amount of loss allocable to the policy period is determined, it is to be treated exactly as any actual loss during that period would be treated in accordance with the policy provisions, including limits and exclusions.

Important as well in assessing Benjamin Moore's allocation of deductibles proposal is that Owens-Illinois does not affect the insurance limits in any year of coverage. Those limits remain as contracted for and are fully available to the insured. If the limits of coverage were affected by Owens- Illinois, Benjamin Moore's argument would make slightly more sense because of the direct relationship between limits and deductibles. When, as here, the limits of coverage remain untouched, the only effect of the proration of deductibles would be to upset the balance of risk agreed upon between the insurer and the insured. In effect, Benjamin Moore mixes the proverbial apples and oranges by suggesting that a loss determination formula should somehow alter the contractual relationship between an insured and an insurer.

2 The Owen-Illinois case adopted a method of pro rata allocation which takes into account not only the number of years a policy is on the risk, but also that policy‟s limits of liability. Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 479, 650 A.2d 974, 995 (1994); see also EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd‟s, 156 N.H. 333, 341, 934 A. 2d 517, 523 (2007). This is not the methodology this court had in mind when it ruled that a pro rata method of allocation was called for under the pertinent policy language. To the contrary, this court specified what is often referred to as a “time on the risk” approach to a pro rata allocation, wherein “each triggered policy bears a share of the total damages [up to its policy limit] proportionate to the number of years it was on the risk [the numerator], relative to the total number of years of triggered coverage [the denominator].” Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 367, 910 N.E.2d 290, 313 (2009) (quoting 23 E.M. Holmes, Appleman on Insurance §145.4[A][2][b], at 24 (2d ed. 2003)). The reference to Owens-Illinois in the quotation above is only to highlight that there is no need to prorate the plaintiff‟s SIRs in a pro rata method of allocation, not as an indication as to what that method of allocation should be.

Id. at 105, 843 A.2d at 1105 (emphasis added). The plaintiff will still need to satisfy the full SIR for a given policy before that policy‟s limits become exposed. There is no reason to revisit this aspect of the court‟s prior allocation ruling; this part of the plaintiff‟s motion for enlargement and amendment will also be denied.

The final argument urged by the plaintiff relates to an issue that was not addressed by the court in its first ruling; i.e., whether the allocation to the plaintiff should include those years in which insurance coverage was not generally available. For the reasons noted in this ruling, this court concludes that the availability of coverage is not to be a factor in allocating damage; the plaintiff will be responsible for those years in which damage has found to have occurred in which there is no insurance coverage, regardless of the reason that no coverage was obtained or available.

This conclusion is consistent with the pro rata approach crafted by the court in its prior ruling. That approach assumes (in the absence of factual proof) that property damage occurs equally over a period of time that will be quantified by the jury. That amount of damage will be prorated equally over the period so found to exist. Assuming for purposes of this ruling that a given policy or policies are triggered by the damage found to have occurred at one or more of the sites in question, that coverage will be available to indemnify the plaintiff from the amount of damage for that policy period, up to its limits of liability. Any periods when there is no insurance (or as discussed earlier, where there is an SIR before coverage can be accessed) are the responsibility of the plaintiff insured.

The court believes that this approach is most consistent with the contractual genesis for the allocation theory adopted herein. That method is based on the consistent

5 requirement found in the defendants‟ policies that property damage (in the form of a covered “accident” or “occurrence”) take place during the policy period for a given insurance policy. Just as the adoption of the plaintiff‟s “all sums” approach to allocation would disproportionately allocate coverage to a single year of coverage when allocation assumes damage over an extended period of time, so too does an “unavailability” exception disproportionately allocate damage to insurers for periods of time when no coverage was agreed to or bargained for. Allowing for proration of coverage based solely on each party‟s time on the risk leaves intact the expectations created when the parties entered into the contracts of insurance at issue.

This concept has been addressed by a number of courts that have adopted a time on the risk method for allocating coverage. For instance, the court in Boston Gas stated as follows when it required the insured to be responsible for periods of no insurance regardless of availability:

Where the policyholder is self-insured for any period of time on the risk, many courts have concluded that it is equally fair and reasonable to hold the policyholder responsible for that portion of the total defense and indemnity costs over which he or she chose to assume the risk. That is, for triggered periods in which there is either no coverage, insufficient coverage, or coverage that was issued with an applicable exclusion, these courts require the policyholder to bear the financial burden for those periods of no insurance, self-insurance, or insufficient insurance. Some courts have limited the policyholder's obligation to participate in the allocation to periods during which insurance was commercially „available.‟ These courts have generally held that losses should not be allocated to a policyholder for periods during which the policyholder was unable to obtain coverage in the market place for a particular risk and with respect to losses resulting from activities or products placed into commerce before such time as coverage became „unavailable‟ due to pollution and asbestos exclusions. We decline to adopt such an

unavailability exception because to do so would contravene the limitation of coverage in the Century policies to liability attributable to property damage during the policy periods. As Century argues in its brief, the unavailability exception „effectively provides insurance where insurers made the calculated decision not to assume risk and not to accept premiums. In effect, because the policyholder could not buy insurance, it is treated as though it did by passing those uninsurable losses to insured periods.‟

454 Mass. at 370-71, 910 N.E.2d at 315 (internal quotation marks and citations omitted)

(emphasis added). The Seventh Circuit came essentially to the same conclusion eight years earlier in its decision in Sybron Transition Corp. v. Security Ins. of Hartford, 258

F.3d 595, 600 (7th Cir. 2001) when it addressed the issue of whether periods of self- insurance should be included in a time on the risk allocation:

Sybron „paid‟ (to itself) a „premium‟ for coverage that was less than the one commercial insurers sought to charge, and it then bore the ensuing risks. But instead of asking whether Sybron had some kind of insurance, we prefer to ask why it should matter whether Sybron was insured. Suppose it had not set up any casualty reserves for 1986-88 (the equivalent of the coverage „purchased‟ with the internal „premium‟ that Sybron saved and released to other uses). Why would this affect the legal obligations of a firm whose last policy expired in 1971? The whole idea of a time-on-the-risk calculation is that any given insurer's share reflects the ratio of its coverage (and thus the premiums it collected) to the total risk. The full risk is not affected by whether insurance is available later. (emphasis added).

Both Boston Gas and Sybron dealt with the issue of unavailability of coverage beginning in the 1970‟s as a result of environmental litigation, most notably in the area of asbestos exposure. The logic those courts employed is equally applicable in rejecting the plaintiff‟s argument that periods of time in which liability insurance was not available as a product at the beginning of the period during which damage is assumed or found to

7 have occurred. To hold otherwise would in essence require the defendants to indemnify the plaintiff for damage that occurred outside the policy periods for such coverage. AAA

Disposal Systems, Inc. v. Aetna Cas. and Sur. Co., 355 Ill.App.3d 275, 287, 821 N.E.2d

1278, 1290, 290 Ill.Dec. 704, 716 (2005). As a result, if insurance coverage was not available to the plaintiff, either because the insurance industry had not yet fashioned such a product, or because of market pressures brought on by environmental litigation, or simply due to the decision of the plaintiff to forego coverage, is not part of the calculus that will be used to allocate any triggered coverage for the property damage found by the jury. If “time on the risk” means anything, it means the entire time on that risk; each party will be treated identically based on the presence or absence of coverage for the time period over which damage is determined to have occurred.3 To the degree this was not part of the court‟s initial allocation ruling, the plaintiff‟s motion for enlargement and amendment of ruling is granted.

The court has in both its initial allocation ruling and the present ruling attempted to fashion a unified theory of allocation that takes into account the fact that the defendants‟ responsibility is a byproduct of the contractual language contained within the policies at stake. Those policies create a responsibility to indemnify where a covered event has created property damage during the policy periods in question. Where, as here, that damage cannot be independently determined, it will be allocated equally over the period of time the jury finds that it has occurred. For those periods in which a policy or

3 To the degree this time period would include periods prior to the plaintiff‟s (or its historical predecessors‟) acquisition of the sites in question will be dealt with in the same manner. In other words, if those acquisitions or transfers resulted in an assumption of liability or responsibility for the environmental damage created earlier, the plaintiff would be allocated those pre-acquisition periods of property damage. See Pancratz v. Monsanto Co., 547 N.W.2d 198, 200 (Iowa 1996) (general rule regarding successor liability under Iowa law); see also U.S. v. Bestfoods, 524 U.S. 51, 63, 118 S.Ct. 1876, 1885, 141 L.Ed.2d 43 (1998) (federal environmental statutes like CERCLA do not usurp “the entire corpus of state corporate law” merely because of their passage in a form that does not speak to issues like successor liability).

8 policies exist and have been triggered, that coverage is available (up to its limits) once the plaintiff‟s SIR has been met. For those years in which no coverage exists, the plaintiff will be responsible for such gaps. While the application of this method may not be advantageous to the plaintiff, it accurately reflects the bargains made over the years to transfer the sort of risk represented by the damages claimed, as well as the proof problems faced by the plaintiff that would make it otherwise impossible for it to pinpoint the beginning of any potentially covered damage.

IT IS THEREFORE ORDERED that the plaintiff‟s motion for enlargement and amendment of ruling is granted in part and denied in part, as more specifically set forth in this ruling.

Dated this 13th day of April, 2011.

______Michael D. Huppert Judge, Fifth Judicial District of Iowa

Copies (by email) to:

Mark McCormick [email protected]

Rush Nigut [email protected]

Jeffrey Boehlert [email protected]

(The attorneys listed above shall send a copy of this order to all other counsel of record, as well as the Special Discovery Master.)