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Sunflower Redevelopment, LLC v. Illinois Union Insurance Co.

United States District Court, W.D. Missouri, Western Division

March 16, 2018




         This case arises out of an insurance coverage dispute. After insurer Defendant Illinois Union Insurance Co. (“ILU”) refused to indemnify Plaintiff Sunflower Redevelopment, LLC (“Sunflower”), Sunflower sued for declaratory judgment and breach of contract.

         At the parties' request, the Court agreed to separate the litigation of this case into two phases (Doc. 29). The issue in Phase I was whether certain pollution conditions within particular areas of the Plant were excluded from coverage under a Premise Pollution Liability (“PPL”) insurance policy. The Court found none of the endorsements to the PPL policy excluded coverage for these particular costs. See (Doc. 65). Phase II concerns all other issues to determine whether ILU has a duty to defend and indemnify Sunflower under the PPL policy.

         Now before the Court are the parties' cross-motions for summary judgment (Docs. 120 and 121). For the reasons set forth below, the Court GRANTS IN PART Plaintiff's motion (Doc. 120), and DENIES Defendant's motion (Doc. 121).

         Undisputed Material Facts[1]

         At the heart of this dispute is the former Sunflower Army Ammunition Plant (“Plant”). Sunflower is a limited liability company formed under the laws of Kansas. Its members are other businesses, one whose address is in Colorado. Sunflower maintains a registered agent office in the state of Kansas and its mailing address is Kansas City, Missouri. Sunflower has an office in Kansas City, Missouri where one of its two employees works. The other employee works at the Plant. IRG Environmental, LLC (“IRG”) was Sunflower's insurance broker.

         At the time ILU issued the insurance policies at issue, it was owned by one of the insurance companies with the ACE Group of Companies. Relevant to this dispute, ILU's claims personnel, who reviewed and evaluated Sunflower's claims for coverage, were located in New York.

         The Plant consists of approximately 9, 035 acres in Johnson County, Kansas. The Army manufactured power and propellant munitions, and nitric and sulfuric acids at the Plant. During its operation, spills and releases of propellant, heavy metals, nitrate compounds, and other pollutants contaminated various parts of the Plant property. Due to these activities, numerous areas of the property were determined to be heavily polluted. In 1998, the Army determined it no longer needed the Plant. Sunflower sought to purchase the property with a vision to clean up the pollutants and develop the land.

         On August 3, 2005, Sunflower entered into an agreement with the Army to purchase the Plant. The conveyance was made subject to the pollution conditions. On the same day, Sunflower entered into a Remediation Services Agreement (“RSA”) with the United States, which obligated Sunflower to purchase environmental insurance, secure the worksite, and perform certain remediation work. In exchange, the Army would pay Sunflower for the outlined remediation work. The Army and Sunflower codified the specific remediation work covered by the RSA into the “Remediation Plan.” Also on August 3, 2005, the Kansas Department of Health and Environment (“KDHE”) issued a Consent Order obligating Sunflower to remediate certain pollution conditions at the Plant before Sunflower could develop the property. The Consent Order also addressed financing the pollution remediation, which consisted of money from the Army and a requirement to purchase PPL and Remediation Cost Containment (“RCC”) insurance.

         With the money the Consent Order obligated the Army to pay to Sunflower, the Consent Order required Sunflower and the Army to establish three trust accounts to hold the Army's payments to Sunflower: (1) an Installation Action Plan (“IAP”) account; (2) a Munitions & Explosives of Concern (“MEC”) account; and (3) a Developer account to hold the Army's payments to Sunflower. The trust agreements for the IAP and Developer accounts both state they are established by the Army, Sunflower, and the trustee, for the benefit of KDHE. For both accounts, the agreement states that the funds within the trust accounts would be used to pay for various expenses related to the remediation project. Additionally, payments from the account can only be made if mutually approved by Sunflower, KDHE, and the Army. Finally, the agreements state that at the termination of the project any money remaining in the IAP account shall be deposited into the Developer account, and money remaining in the Developer account shall be delivered to Sunflower.

         As to the insurance requirement of the Consent Order, ILU[2] issued Sunflower two custom polices, that were the result of negotiations between the parties. The PPL insurance policy provides coverage for unknown, and certain known, pre-existing pollution conditions at the Plant. The policy was effective from March 2, 2008 to August 4, 2015.[3] Excluded from coverage of the PPL policy are claims made prior to the policy inception date and known conditions. As defined by the policy, known conditions are pollution conditions that existed prior to the policy period. However, known conditions do not include conditions listed in Endorsement 008.

         Other relevant endorsements to the PPL policy are Endorsements 001 and 018. Endorsement 001 excludes coverage for “‘remediation costs' . . . with respect to those ‘pollution conditions' . . . related to the implementation and management of the ‘remediation plan' identified within [the] Remediation Plan Schedule endorsement of the [RCC policy].” PPL policy (Doc. 122-2 at 258). Endorsement 018 of the PPL policy excludes coverage for, among other things, “remediation costs” associated with the Remediation Plan.

         The RCC policy affords coverage for costs that exceed the Remediation Plan. The RCC Policy's Endorsement 002 limits coverage of the RCC Policy to the Remediation Plan, which is identified within the RSA and further delineated by the items listed in the endorsement.

         On December 19, 2008, KDHE sent a letter to Sunflower requesting that Sunflower submit a work plan “to investigate pesticide, lead based paint (LBP) contaminated soils, or other contaminants for buildings” located within certain areas of the Plant. KDHE December Letter (Doc. 122-2 at 322). The letter further states “KDHE [had previously] requested that [Sunflower] perform an intrusive investigation for [lead based paint] soil contamination and visually inspect for pesticide application holes and other apparent contamination for buildings in and around SWMU 63.” Id.

         Sunflower construed this letter as a third-party claim against it, and on February 13, 2009, submitted the KDHE December Letter, a letter KDHE sent in February following-up on the December letter, and an Environmental Risk Loss Notification Form to ILU. The loss notification form listed the insured as Sunflower and the broker/agent as IRG. In a letter attached to this submission, Sunflower requested that ILU confirm coverage for this claim, provide advice, and exercise all rights and duties provided for by the insurance policies.

         On April 9, 2009, ILU responded to Sunflower's letter and asked Sunflower to clarify whether it was making a claim against the PPL policy, the RCC policy, or both. However, ILU then responded as if Sunflower was seeking a claim under the RCC Policy.

         Sunflower's counsel responded in a letter dated May 12, 2009, stating it was Sunflower's position that KDHE's claim falls within the coverage of the PPL policy and that ILU did not respond as to the PPL policy.

         Counsel for ILU quickly responded and explained its position was that the PPL policy can only triggered when Sunflower discovers a pollution condition. Rather, ILU believed that KDHE's letter requested Sunflower to “investigate for additional areas of potential contamination . . . to determine if there is a ‘pollution condition.'” Id. ILU further stated,

[t]he cost for investigating a potential “pollution condition, ” however, is not a cost covered under the PPL Policy. While the PPL Policy's definition of “remediation costs” includes costs associated with investigating a “pollution condition, ” that is not the same as investigating to determine if there is a “pollution condition.”

Id. The letter concludes by stating Sunflower had not reported a matter that is covered by the PPL policy, but that if Sunflower reports a pollution condition that requires remediation costs, ILU will then determine if that pollution condition qualifies for coverage under the PPL policy.

         The next communication before the Court is a letter dated August 24, 2009, that counsel for ILU sent to counsel for Sunflower. Referring to the May letter, ILU explained “we stated that because [Sunflower] had not advised of an actual and existing ‘pollution condition' at the [Plant], [ILU] was under no present obligation to address coverage under the PPL policy.” August 24, 2009, Letter (Doc. 122-11 at 1). ILU reiterated that it did not view this matter as one that triggered the PPL policy.

         On December 10, 2009, ILU sent a letter to IRG stating that it understood Sunflower's position to be that it was seeking coverage for investigative work under the PPL policy. ILU reiterated its position that “until [Sunflower] advises of an existing actual ‘pollution condition' at the [Plant], then [ILU's] obligations under the referenced PPL Policy, if any, are not triggered” and “coverage cannot be considered under the PPL Policy in absence of a confirmed ‘pollution condition.'” December 10, 2009, Letter (Doc. 122-13 at 1). ILU also responded to the additional documentation Sunflower provided in support of its claim under the PPL policy stating “[t]hese materials do not indicate the presence of an additional ‘pollution condition', and “[b]ecause these new documents do not indicate the presence of a new ‘pollution condition, ' ACE reiterates its prior interim coverage position.” Id. at 2.

         Sunflower filed a two-count lawsuit seeking declaratory judgment that the pollution conditions at issue are covered by the PPL policy and for damages for breach of contract.

         Because of the complexity of the policies and the issues presented, at the parties' request, the Court agreed to separate the litigation of this case into two phases (Doc. 29). The issue in Phase I was whether certain pollution conditions at particular locations within the Plant property were excluded from coverage under the PPL policy. The Court found none of the endorsements to the PPL Policy excluded coverage for those conditions. Phase II concerns all other issues to determine Sunflower's claims again ILU.

         Summary Judgment Standard

         A moving party is entitled to summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed R. Civ. P. 56(a). A party who moves for summary judgment bears the burden of showing there is no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). A court must view the facts in light most favorable to the nonmoving party and allow the nonmoving party to benefit from all reasonable inferences to be drawn from the evidence. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588-89 (1986).

         Applicable Law

         The Court previously decided Kansas law applies in this case. See Order Den. Remand and Transfer (Doc. 22). Additionally, endorsements attached to both the PPL and the RCC policies dictate Kansas law applies to questions relating to the interpretation of the policies. See (Doc. 122-2 at 264, 310). The parties do not dispute Kansas law applies.


         The essence of this case is ILU's refusal to provide coverage for certain pollution conditions Sunflower believes fall within the scope of the PPL policy. Sunflower maintains the PPL policy covers the pollution conditions and moves for partial summary judgment as to a subset of those conditions. ILU maintains Sunflower has not demonstrated an actual pollution condition exists and also refuses coverage under several other theories, each addressed below.

         Under Kansas law, an insurance policy constitutes a contract and the interpretation of a contract is a question of law. AMCO Ins. Co. v. Beck, 929 P.2d 162, 165 (Kan. 1996). If the relevant facts are admitted, the court may decide whether they come within the terms of the contract. Goforth v. Franklin Life Ins. Co., 449 P.2d 477, 481 (Kan. 1969).

         The parties agree the insurance policies at issue are unambiguous (Doc. 51) and the Court concluded the same in its Order on Phase I summary judgment (Doc. 65). When an insurance contract is unambiguous, a court may not rewrite the contract for the parties; “[i]ts function is to enforce the contract as made.” Catholic Diocese of Dodge City v. Raymer, 840 P.2d 456, 459 (Kan. 1992). The court must take unambiguous language in its plain and ordinary sense. Warner v. Stover, 153 P.3d 1245, 1247 (Kan. 2007). Thus, “[i]f the terms of the contract are clear, there is no room for rules of construction, and the intent of the parties is determined from the contract itself.” Liggatt v. Emp'rs Mut. Cas. Co., 46 P.3d 1120, 1125 (Kan. 2002). That is, the court must enforce an unambiguous contract according to its terms. Am. Media, Inc. v. Home Indem. Co., 658 P.2d 1015, 1019 (Kan. 1983).

         I. Sunflower's motion for summary judgment ...

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