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A Fortuitous Result? Duke Energy Defeats Summary Judgment Motion in Coverage Dispute Alleging that Duke “Intentionally” Contaminated Groundwater

3/31/21

By: Isis Miranda

“If you take a rock and throw it through a window, then you don’t get coverage for [the] costs of fixing it.” An attorney representing one of the nearly 30 insurance companies being sued by Duke Energy in North Carolina reportedly made this statement in characterizing Duke’s attempt to seek reimbursement for cleanup costs incurred after it constructed unlined coal ash basins that allowed contaminants to seep into the nearby groundwater. (Duke Energy Carolinas, LLC v. AG Insurance SA/NV, et al., No. 17CVS5594 (N.C. Sup. Ct. 2017).)

Under pressure from regulators and environmental groups, Duke ultimately agreed to excavate approximately 124 million tons of coal ash and permanently close all of its coal ash basins, including 31 in North Carolina, at an estimated cost of over $5 billion.  In the current coverage action, Duke is attempting to recoup approximately $600 million for environmental damage at 15 of its plants that purportedly occurred from 1971 to 1986 before it became self-insured.

Despite at least 27 sessions with a mediator, according to court filings, the large coverage action does not appear to have settled. The parties continue to file summary judgment motions on a variety of issues and debate whether the trial, which is expected to last between two and eight months, should be broken up into several mini-trials.

In one of the summary judgment motions, some of the insurers argued that coverage is not afforded for the losses because Duke “intended” to contaminate the groundwater, thus triggering an exclusion in one of the policies excluding from coverage “property damage caused intentionally” by or at the direction of the insured. The insurers alleged that Duke’s predecessor company knew before it constructed the unlined ash ponds that they would cause water contamination, citing as evidence letters and reports from various agencies and consultants, including letters from the U.S. Environmental Protection Agency in 1978 and 1981, advising that the use of an unlined ash pond could be “expected” to result in groundwater contamination.

In response, Duke contended that it believed that any contaminants released would be “negligible” and would, therefore, not pose any health risks or, alternatively, would be sufficiently diluted by the groundwater, bringing them to acceptable levels. Duke also noted that North Carolina regulators allowed it to design its ash ponds without a liner and the most recent standards had not been enacted until 2014, after the ponds were constructed.

Judge Louis A. Bledsoe, III, in denying the insurers’ motion on June 5, 2020, noted that even if he agreed that the insurers’ evidence established that Duke expected that some amount of contamination of the groundwater would occur, this would be insufficient to win the motion for two reasons.

First, according to Judge Bledsoe, the insurers’ evidence indicating that Duke “expected,” “anticipated,” “planned,” or was “substantially certain” groundwater contamination would occur, aside from being disputed by Duke, was insufficient to trigger the policy exclusion, which was “singularly focused instead on Duke’s intent and whether Duke intentionally caused covered property damage.” Judge Bledsoe found that the cases cited by the insurers had “limited persuasive force” since they addressed whether a loss was “expected,” which he distinguished from “intended.”

Second, Judge Bledsoe determined that there was a dispute over the definition of “property damage” such that he was unable to determine whether Duke intended to cause it. According to Judge Bledsoe, the insurers contended that “any detectable amount of groundwater contamination constitutes property damage,” whereas Duke argued that property damage has been suffered only if groundwater contamination has occurred “in the form and to the degree for which it faces liability” under the law, or, alternatively, where either the groundwater standard or naturally occurring constituent levels in groundwater have been exceeded, whichever is higher. The relevant policies defined property damage as “physical injury to or destruction of tangible property . . . including the loss of use.” Judge Bledsoe explained, however, that the “evidence” was “insufficient” for him to conclude that Duke intended to cause property damage, as defined under the policies.

With many more summary judgment motions in the pipeline and a lengthy trial on the horizon, this case will no doubt continue to address coverage issues in interesting, unexpected ways.

For more information, please contact Isis Miranda at imiranda@fmglaw.com.