Michigan LCV Analysis

This case determines whether an insurance provider must defend a company whose employees had dumped chemicals into a lagoon. The insurance contract stated that the insurance company did not have to defend Arco Industries if the company “intended or expected” to pollute. The Court, when interpreting insurance contracts, applies a subjective standard, which means that it analyzed whether Arco itself intended or expected to pollute the lagoon, rather than whether it should have known that its actions would pollute. By requiring the insurance provider to defend and indemnify Arco, the majority made it more likely that Arco would be able to cooperate with the DEQ to clean up the site, including the construction of a multi-million dollar treatment facility.

Case Summary

Arco Industries used volatile organic compounds in manufacturing and some of those chemicals contaminated water in the area. The Department of Natural Resources sued Arco, and Arco asked its insurance companies to help defend it in the suit and pay litigation and remediation costs. The insurance companies would not have to pay costs if the release of the compounds was “intended or expected” and not an accident. The Court decided that the release of the compounds, from the subjective viewpoint of Arco, was not expected or intended, and that the insurance companies would therefore have to help pay for the suit.

What Happened

Arco Industries manufactured parts for automobiles, and its process involved the use of volatile organic compounds (VOCs). Water in the area became contaminated because the corporation built a trench drain system to capture contaminated water, which then drained into an unlined seepage lagoon behind the plant. The Michigan Department of Natural Resources (DNR) sued to get Arco to clean up the contamination and be repaid for the expenses DNR had incurred in responding to the contamination. Arco asked its insurance companies to help defend it from this lawsuit, and also to help them pay for damages and costs, including the expense of implementing a multimillion-dollar ground water and soil remediation program. The insurance companies, by their contracts, would not have to pay for the costs of the suit if the contamination was “expected or intended” by Arco, and therefore not defined as an “occurrence” covered by insurance. The insurance corporation would only have to pay Arco if the pollution was an accident.

The trial court ruled that Arco did not expect or intend to pollute the environment. However, the Court of Appeals disagreed, using an objective standard to determine that Arco employees were intentionally discharging VOCs, and that Arco either should have foreseen the intentional acts, or knew or should have known that such intentional acts would make it substantially probable that the soil and ground water would become contaminated.

Court Decision

The majority decided that the Court of Appeals had used an incorrect objective standard when it decided that the pollution was intended or expected. The Court of Appeals had looked at evidence of VOC disposal and decided that the employees and chemists should have figured out that the chemicals were going into the water. The Supreme Court instead thought that Arco could be found to have “intended or expected” to pollute only if the employees and chemists subjectively knew about the pollution and the damage to the environment. The Supreme Court looked at the facts from the viewpoint of Arco manufacturing, and from that subjective viewpoint all the contamination was accidental.

Justice Boyle wrote a concurring opinion in which she agreed that Arco’s actions should be judged by a subjective, rather than an objective, standard. However, she questioned the need for a two part test that asks both whether there was an “accident” and whether the discharge was “intended or expected.” Justice Boyle thought that it if the discharge was not intended or expected, then it was clearly an accident.

Justice Riley dissented. She agreed with the majority that Arco did not expect or intend to injure the environment between 1968 and 1972. However, unlike the majority, she believed that Arco was aware that it was dumping harmful chemicals into the lagoon between 1972 and 1974, because Arco employed a chemist during that period who would have subjectively known that VOCs were contaminating the water. Therefore, she thought that the insurance companies should not have to cover Arco for those years during which the pollution was not an accident.

Please remember that rulings in environmental cases are often based on non-environmental factors. The University of Michigan Law School did not participate in the rating process and takes no position regarding support or opposition for any judicial candidates.