A District Court Judge for the District of Massachusetts recently ruled that Ace Property and Casualty Insurance Co. breached its duty to defend its insured in a lawsuit brought by Plaistow Project, LLC, after a family owned laundromat leaked chemicals onto Plaistow Project’s property. Plaistow Project, LLC v. ACE Prop. & Cas. Ins. Co., No. 16-CV-11385-IT, 2018 WL 4357480, (D. Mass. Sept. 13, 2018). Plaistow Project sued State Line Laundry Services in state court, and ACE denied coverage under the pollution exclusion in State Line Laundry’s insurance policy. Plaistow Project then settled with State Line Laundry. Under the settlement terms, Plaistow Project was assigned State Line Laundry’s rights against ACE.
In the subsequent coverage litigation, Plaistow Project alleged that ACE had breached its duty to defend State Line Laundry under its insurance policy. ACE argued that (1) the burden was on the policyholder to demonstrate that the policy’s “sudden and accidental” exception applied to the policy’s pollution exclusion; and (2) the policyholder could not show the “sudden and accidental” exception applied based on the complaint.
In rejecting ACE’s argument, the Massachusetts District Court found that, in assessing the duty to defend, the burden is on the insurer to demonstrate that a pollution release does not fit within the “sudden and accidental” exception to the policy’s pollution exclusion. The court noted that, in the indemnity context, a policyholder may have the burden to prove an exception to pollution exclusion. However, in assessing an insurer’s duty to defend, “shifting of the burden to the insurer … is necessary to protect the insured because a failure to defend might make it more difficult for the insured to prove that the underlying claim falls within coverage.” After concluding that ACE bore the burden of showing that the release was not “sudden and accidental,” the court determined ACE had failed to satisfy this burden. In reaching that conclusion, the court found that a liquid release from the dry cleaning machines was “sudden” and that five or six spills over 12 years did not make the spills frequent enough occurrences to no longer constitute “accidental” spills. Thus, the court concluded that ACE owed its insured a defense.
This decision highlights the importance of burden shifting in duty to defend situations. Although traditionally the burden to prove an exception to an otherwise applicable insurance exclusion is on the policyholder, as this case illustrates, that is not necessarily the situation in assessing an insurer’s duty to defend.