Overton v. Consolidated Insurance

Sanders, J. This proceeding arises out of two comprehensive general liability policies purchased on behalf of an electrical transformer manufacturing and repair business. After suit was commenced by the current owners of the site for contribution of cleanup costs under the Model Toxics Control Act, chapter 70.105D RCW, the insureds tendered defense to their insurers. When both insurers rejected the tender, the insureds sued, claiming breach of contract, bad faith denial of coverage, and violation of the Consumer Protection Act, chapter 19.86 RCW. The ultimate question is whether an existing contamination of the insured’s property known by the insured prior to purchasing an insurance policy, but which results in liability to a third party subsequent to the purchase, is an “occurrence” triggering coverage. We conclude it is not. I This proceeding has a long and colorful history, involving, among other things, toxic chemicals and politicians. Beginning in 1961, the Spokane Transformer Company operated an electrical transformer manufacturing and repair facility located in Spokane, Washington. Spokane Transformer used various hazardous materials in its operations, including polychlorinated biphenyls (PCB). The initial owner of this business was Richard Boyce, who sold it to Jerry Overton in 1972. Overton continued operating the electrical transformer business for another couple of years, leasing the underlying property from Boyce. — 422 — In 1976, Environmental Protection Agency (EPA) inspectors took two soil samples from the Spokane Transformer site. Test results revealed elevated levels of PCB contamination in one of those samples. When Department of Ecology (DOE) regulators informed Overton of the test results, he acknowledged oil-filled transformers were made on the site, but denied the use of any fluids containing PCB. According to a DOE report on the visit, Overton’s position was that there was no problem and that, even if the soil were contaminated, it was not his responsibility to clean it up. Although the EPA recommended the Spokane Transformer site be inspected further to determine the extent of PCB contamination, no further action was taken. The following year, 1977, Spokane Transformer purchased a comprehensive general liability (CGL) policy from Industrial Indemnity Insurance Company of the Northwest. The policy named Spokane Transformer, Overton, and Boyce as insureds. Two years later in 1979, Spokane Transformer purchased another CGL policy from Consolidated Insurance Company with the same insureds. (Since these policies both originate out of Spokane Transformer and have the same named insureds, we refer to the insureds collectively as Spokane Transformer.) The Industrial policy expired in 1980, while the Consolidated policy ran until 1982. Meanwhile, Spokane Transformer ceased operations and was liquidated in 1979. There is no evidence Spokane Transformer informed either Industrial or Consolidated about the EPA test results when the policies were purchased. The property upon which the Spokane Transformer facility had been located was eventually purchased by Paul and Mary Ann Gisselberg in 1981. Some years after the purchase, they conducted their own environmental audit of the property as part of a refinancing arrangement and discovered the preexisting PCB contamination. The Gisselbergs initiated remedial measures to clean up the property, and sent Overton, now a member of the Arizona House of Representatives, a demand letter notify — 423 — ing him they would seek contribution from him as a “potentially liable person” under the Model Toxics Control Act, chapter 70.105D RCW. Overton forwarded the demand letter to Consolidated and Industrial, which proceeded to investigate the claim. Meanwhile, the Gisselbergs filed their suit against Overton and Boyce for contribution toward the cleanup cost. When Overton and Boyce tendered defense of the action to Industrial and Consolidated, both insurers rejected the tender asserting: (1) the claim was a known loss; (2) previously known and existing damage could not be a covered “occurrence”; (3) the pollution exclusion applied because release of the pollutants was expected; and (4) the owned-property exclusion applied. The underlying Gisselbergs suit eventually spawned the coverage litigation before us. These proceedings began in 1998 when Spokane Transformer sued Consolidated and Industrial for breach of contract, bad faith, and violation of the Consumer Protection Act. The insurers moved for summary judgment and the trial court ultimately granted the motion dismissing all claims. In so doing the court ruled there was neither a covered “occurrence” under the policy nor evidence of bad faith or violation of the Consumer Protection Act.1 Upon the insureds’ appeal, the Court of Appeals reversed on the coverage issue, holding a question of fact remained as to whether a covered “occurrence” had taken place. Overton v. Consol. Ins. Co., 101 Wn. App. 651, 659, 6 P.3d 1178 (2000). But the court affirmed the holdings that Consolidated and Industrial did not act in bad faith or otherwise violate the Consumer Protection Act by rejecting the tender. Id. at 661. Both sides appealed the Court of Appeals’ decision. Consolidated seeks review of the reinstatement of the coverage claim. Spokane Transformer seeks review of the bad faith and Consumer Protection Act claims. Industrial has not joined Consolidated’s petition, but opposed review of Spo — 424 — kane Transformer’s claims. We granted review. 143 Wn.2d 1008, 21 P.3d 291 (2001). The questions we must decide are (1) whether Spokane Transformer’s knowledge of PCB contamination prior to the purchase of the insurance policies precludes coverage; and (2) whether the insurers acted in bad faith or in violation of the Consumer Protection Act when they rejected Spokane Transformer’s tender. II The outcome of this case depends on a proper interpretation of the insurance policies issued by Consolidated and Industrial. Interpretation of insurance policies is a question of law, in which the policy is construed as a whole and each clause is given force and effect. Pub. Util. Dist. No. 1 v. Int’l Ins. Co., 124 Wn.2d 789, 797, 881 P.2d 1020 (1994). The terms of a policy should be given a “fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.” Sears v. Grange Ins. Ass’n, 111 Wn.2d 636, 638, 762 P.2d 1141 (1988) (citing E-Z Loader Boat Trailers, Inc. v. Travelers Indem. Co., 106 Wn.2d 901, 907, 726 P.2d 439 (1986)). A For coverage under the type of CGL policy at issue here, an insured must show some form of harm caused by an “occurrence.” Queen City Farms, Inc. v. Cent. Nat’l Ins. Co. of Omaha, 126 Wn.2d 50, 70-71, 882 P.2d 703, 891 P.2d 718 (1994). The Consolidated CGL insurance policy provides: The company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of Coverage A. bodily injury, or Coverage B. property damage to which this insurance applies, caused by an occurrence .... Clerk’s Papers (CP) at 295. The critical terms for our consideration are “occurrence,” “property damage,” and “damages.” The two former are defined in the policy: — 425 — “occurrence” means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured; “property damage” means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period!.] CP at 296. Thus, the plain language of the policy covers only (i) accidents which, (ii) during the policy period, (iii) result in property damage (iv) that is neither expected nor intended (v) from the standpoint of the insured. To be an “occurrence,” a harmful event must be “neither expected nor intended from the standpoint of the insured.” CP at 296. The Court of Appeals properly recognized this clause describes “the subjective state of mind of the insured with respect to the property damage.” Overton, 101 Wn. App. at 658. In other words, property damage that is expected or intended by the insured does not warrant coverage. Queen City Farms, Inc., 126 Wn.2d at 70-71. In Time Oil Co. v. Cigna Property & Casualty Insurance Co., the court, applying Washington law, held the risk of liability was no longer unknown when the insured received notice indicating a “substantial probability” the loss would occur. 743 F. Supp. 1400, 1414-15 (W.D. Wash. 1990). The Court of Appeals distinguished Time Oil based on an official EPA notice to the insured of its status as a potentially responsible party. Overton, 101 Wn. App. at 659 (citing Time Oil Co., 743 F. Supp. at 1419-20). Undeniably, there was no such official notification of liability here. The Court of Appeals went on to state that such an official notification is a prerequisite for statutory strict liability under the Model — 426 — Toxics Control Act as a potential responsible party. Overton, 101 Wn. App. at 659 (citing RCW 70.105D.050(1)). Be that as it may, whether Overton was a potential responsible party is not the issue here; the issue is whether Spokane Transformer knew of the loss prior to purchasing the insurance. Time Oil holds, for purposes of determining whether the property damage is expected by the insured, the insured merely must be put on notice. See City of Okanogan v. Cities Ins. Ass’n, 72 Wn. App. 697, 703, 865 P.2d 576 (1994). “[I]f an event causing loss is not contingent or unknown prior to the effective date of the policy, there is no coverage.” Id. at 701. The dispositive issue is not how the insured was notified of property damage, but whether the insured had such notice prior to purchasing the policy. Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 8.02[c] (10th ed. 1999) (citing numerous cases, including Time Oil)', see also Town of Tieton v. Gen. Ins. Co. of Am., 61 Wn.2d 716, 724, 380 P.2d 127 (1963). To support their claim of coverage Spokane Transformer seeks refuge in Gruol Construction Co. v. Insurance Co. of North America, 11 Wn. App. 632, 524 P.2d 427 (1974). However, the case before us is not a situation involving the continuing process of unexpected, unintended damage, as was the case in Gruol. The damage at issue in Gruol was dry rot caused by earth being pushed against exposed wood during a construction project. Id. at 633. Due to construction the insured had no knowledge of the defective condition. Id. at 635. Gruol recognized this damage was not foreseeable from the insured’s standpoint because under those circumstances dry rot is an invisible, slow process. Id. at 633. As such, the harm was an occurrence covered by the liability insurance. Id. Gruol stands for the proposition that excusable ignorance of a preexisting property damage does not necessarily preclude coverage. Under some circumstances PCB contamination may very well be the kind of invisible, slow process that leads to an unexpected and unintended damage. But here the facts are — 427 — different. In this situation the insureds knew of the contamination, and the process was not invisible from their standpoint. Had Spokane Transformer not been made aware of the presence of PCB, perhaps there would have been excusable ignorance under Gruol. But since the record shows Spokane Transformer had notice of the defective condition, i.e., the PCB contamination, before purchasing the insurance policy, Gruol offers no relief. The parties disagree on what must be unexpected for coverage to be triggered. Consolidated argues coverage is specifically limited to “property damage,” defined as physical injury to tangible property. To trigger coverage a physical injury must have been unexpected from the standpoint of Spokane Transformer. As the argument goes, the physical property damage here stemmed from the PCB contamination of which Spokane Transformer was aware since at least 1976. This property damage was therefore not unexpected, taking this claim outside the “occurrence” definition. Spokane Transformer argues the unexpected harmful event that is covered by the policy is the third party property damages, i.e., the costs of cleanup resulting from the Gisselbergs’ suit for contribution. Pointing out the policy is one protecting against third party liability, Spokane Transformer maintains the harm insured against is not the occurrence of a harmful event itself, but the insured’s legal obligation to pay for damages arising from that event. But this argument directly contradicts the plain language of the insurance contract. The Court of Appeals’ decision on the coverage issue is also the result of an unexplained departure from the plain language of the policy. Both Spokane Transformer and the Court of Appeals fail to recognize the policy defines “property damage” as “physical injury to or destruction of tangible property.” CP at 296. Courts interpreting insurance policies should be bound by definitions provided therein. Kitsap County v. Allstate Ins. Co., 136 Wn.2d 567, 576, 964 P.2d 1173 (1998). Here, however, the Court of Appeals — 428 — provided its own definition of “property damage” as being “the cost of cleaning up the property of third parties.” Overton, 101 Wn. App. at 658. The meaning of “property damage” is critical to determine whether there was an “occurrence” here. Simply put, because the Court of Appeals phrased this question incorrectly, it arrived at the wrong conclusion. Under the language of the policy, the proper question is whether Spokane Transformer expected the property damage that eventually resulted in the cost of cleaning up the Gisselbergs’ property. Instead, the Court of Appeals asked whether Spokane Transformer expected or intended the cost itself. The Court of Appeals seemingly confused the concept of “property damage” with that of “damages.” The difference may seem miniscule, but the impact on the outcome of this case cannot be overstated. Although the policy provides the insurer must pay out the amount “the insured shall become legally obligated to pay as damages,” it does not define “damages.” Undefined terms in an insurance contract are given “plain, ordinary, and popular meaning” as set forth in standard English language dictionaries. Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 877, 784 P.2d 507 (1990). In Boeing, for example, we explained the term “damages” in an insuring agreement refers to the cost of compensating a claimant for damage done to the property. Id. (citing Webster’s Third New International Dictionary 517 (1971)). This is vastly different from “property damage,” which is defined by the policy as “physical injury to or destruction of tangible property.” CP at 296. It follows that “damage” must be distinguished from “damages.” See Am. Stevedores, Inc. v. Porello, 330 U.S. 446, 450 n.6, 67 S. Ct. 847, 91 L. Ed. 1011 (1947). “Damage” means the actual loss, injury, or deterioration of the property itself. Id. “Damages,” on the other hand, means compensating loss or damage. Id. — 429 — B The question remains whether the trial court erred in granting summary judgment on the coverage issue. The starting point is whether there was an “occurrence.” This is in turn determined by whether Spokane Transformer expected or intended the “property damage” that eventually resulted in damages in the form of cleanup costs to the Gisselbergs. The controlling definition of “property damage” is the one provided by the insurance policy: “physical injury to or destruction of tangible property.” CP at 296; Kitsap County, 136 Wn.2d at 576. Summary judgment orders are reviewed de novo and affirmed “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the áffidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” CR 56(c); Wilson v. Steinbach, 98 Wn.2d 434, 437, 656 P.2d 1030 (1982). A motion for summary judgment will be granted only if, after considering the evidence in the light most favorable to the nonmoving party, “reasonable persons could reach but one conclusion.” Reynolds v. Hicks, 134 Wn.2d 491, 495, 951 P.2d 761 (1998) (citing Wilson, 98 Wn.2d at 437). The EPA claims it notified Overton of the presence of PCB in the property in 1976, and authenticated reports support this. Overton knew Consolidated denied his claim based on the information in the EPA documents. In addition, he was repeatedly invited to submit information that might change Consolidated’s decision. Yet, Overton did not dispute the EPA’s claim—at least not initially. His initial testimony was that he did not remember the EPA visit, not that it did not occur. At his deposition and in the proceeding on Consolidated’s first summary judgment motion, Overton stated he had no recollection of the visit. Then, in response to Consolidated’s renewed motion for summary judgment, he offered a conclusory statement that he has no recollection of the visits and, therefore, they must not have occurred. — 430 — Overton’s prior deposition testimony states: Q: Is it your testimony that on April 15, 1976 Mr. Tangerone [the EPA inspector who visited the site and conferred with Overton] did not visit Spokane Transformer or is it your testimony that you do not recall that visit? A: No. My testimony is that I don’t recall that visit. CP at 842 n.9. This contradiction, however, does not create a genuine issue of material fact. “When a party has given clear answers to unambiguous [deposition] questions which negate the existence of any genuine issue of material fact, that party cannot thereafter create such an issue with an affidavit that merely contradicts, without explanation, previously given clear testimony.” Marshall v. AC&S, Inc., 56 Wn. App. 181, 185, 782 P.2d 1107 (1989) (quoting Van T. Junkins & Assocs. v. U.S. Indus., Inc., 736 F.2d 656, 657 (11th Cir. 1984)). Since Overton initially stated he did not recall the EPA visit, he was incompetent for lack of personal knowledge to testify as to whether EPA notified him of the presence of PCB during that visit. See ER 602. Thus the only admissible evidence before the court on the issue of when Spokane Transformer was given notice was the authenticated EPA reports. Moreover, Overton’s conclusory statement the visits did not take place because he did not recall them is not properly considered on summary judgment in any event. CR 56(e) provides: When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. “The ‘facts’ required by CR 56(e) to defeat a summary judgment motion are evidentiary in nature. Ultimate facts or conclusions of fact are insufficient. Likewise, conclusory statements of fact will not suffice.” Grimwood v. Univ. of — 431 — Puget Sound, Inc., 110 Wn.2d 355, 359-60, 753 P.2d 517 (1988) (citation omitted). Lack of recall is not sufficient to controvert clear opposing evidence on a summary judgment motion. See Marshall, 56 Wn. App. at 184. From this point on, the chips fall in the insurers’ favor. There was no genuine issue of material fact as to when the EPA notified Spokane Transformer of the presence of PCB. For purposes of the insurers’ summary judgment motions, Spokane Transformer knew of the PCB since at least 1976. The PCB contamination constitutes property damage as defined in the policy. Spokane Transformer’s knowledge predated its purchase of the policies. Thus, regardless of when Spokane Transformer became liable to the Gisselbergs for contribution to the cleanup cost, the property damage was not unexpected from Spokane Transformer’s standpoint. Therefore, there was no “occurrence” triggering coverage, and alternative grounds to deny coverage need not be considered.2 C The Court of Appeals also erred when it imported a third party requirement into its “occurrence” analysis. Overton, 101 Wn. App. at 658. But the CGL policies do not contain such a requirement for purposes of determining initial coverage. Neither the definition of “occurrence” nor the definition of “property damage” specifies the damaged property must be that of a third party. Determining whether coverage exists under a CGL policy is a two-step process. McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 731, 837 P.2d 1000 (1992). The burden first falls on the insured to show its loss is within the scope of the policy’s insured losses. Id. If such a showing has been made, the insurer can nevertheless avoid liability by showing the loss is excluded by specific policy — 432 — language. Id. The question of ownership of damaged property applies only to policy exclusions. The determination of an “occurrence” takes place without consideration of whether the damage was to the insured’s own property or to that of a third party. Spokane Transformer claims the Court of Appeals’ third party distinction is supported by Boeing Co., 113 Wn.2d 869, and Olds-Olympic, Inc. v. Commercial Union Insurance Co., 129 Wn.2d 464, 918 P.2d 923 (1996). To the contrary, Boeing merely demonstrates the “occurrence” determination is made without regard to property ownership. The Boeing court’s finding of property damage was based on the definition “discharge of hazardous waste into the water.” Boeing Co., 113 Wn.2d at 886. This definition makes no mention of property ownership; its focus is on the event causing physical injury to or destruction of property. As for Olds-Olympic, that case actually clarifies the coverage/ exclusion distinction by explaining CGL policies require coverage when there is property damage caused by an occurrence, but “[t}he exclusionary language in the policies makes clear the property damage must be to the property interest of another rather than to the property owned by the insured itself.” Olds-Olympic, 129 Wn.2d at 474 (emphasis added); see also Diamaco, Inc. v. Aetna Cas. & Sur. Co., 97 Wn. App. 335, 338, 983 P.2d 707 (1999) (“The policy language, fairly read, does not support [the insurer’s] contention that the term ‘property damage’ is limited to ‘property of another.’ ”), review denied, 140 Wn.2d 1013, 5 P.3d 8 (2000).3 For purposes of establishing coverage under the “occurrence” analysis, the proper inquiry is whether Spokane Transformer expected the physical injury to tangible property without regard to ownership of that property. As — 433 — set forth above, because Spokane Transformer knew of the PCB contamination before purchasing the policies, coverage was properly denied on the ground there was no “occurrence.” In addition, coverage was properly denied under the known-loss principle. The Court of Appeals decision on the coverage issue is reversed, and the trial court’s order granting summary judgment reinstated. Ill Spokane Transformer argues Consolidated and Industrial denied coverage for the Gisselbergs suit in bad faith and in violation of the Consumer Protection Act. The Court of Appeals found these claims to be unwarranted, affirming the trial court’s dismissal on these points. Overton, 101 Wn. App. at 660-61. The tort of bad faith is based in the recognition that “the business of insurance affects the public interest and that an insurer has a duty to act in good faith.” Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 560, 951 P.2d 1124 (1998) (citing RCW 48.01.030). Claims of bad faith are not easy to establish and an insured has a heavy burden to meet. Ellwein v. Hartford Accident & Indent. Co., 142 Wn.2d 766, 775, 15 P.3d 640 (2001). To succeed, the insured must show the insurer’s breach of the insurance contract was “unreasonable, frivolous, or unfounded.” Kirk, 134 Wn.2d at 560. If the insurer’s denial of coverage is based on a reasonable interpretation of the insurance policy, there is no action for bad faith. Id. Here, the insurers’ denial of coverage was based on a reasonable interpretation of the CGL policies. These cover only property damage that is unexpected from the standpoint of the insurer. Since the insurers’ investigation revealed Spokane Transformer knew of the PCB contamination before buying the policies, their interpretation and conclusion there was no coverage was reasonable. Viewing the record in the light most favorable to Spokane Trans — 434 — former, there is nothing to indicate bad faith on the part of the insurers. As for the Consumer Protection Act claim, Spokane Transformer must show the insurers engaged in an unfair or deceptive act or practice occurring in trade or commerce that impacted the public interest and caused them injury in their business or property. See RCW 19.86.020; Indus. Indent. Co. of the N.W., Inc. v. Kallevig, 114 Wn.2d 907, 920-21, 792 P.2d 520 (1990). A denial of coverage does not constitute an unfair or deceptive act or practice as long as it is based on reasonable conduct of the insurer. Villella v. Pub. Employees Mut. Ins. Co., 106 Wn.2d 806, 821, 725 P.2d 957 (1986). This is so even if the denial ultimately is proved incorrect. Id. As the insurers point out, investigation of a third party liability claim differs greatly from a fact-intensive first party claim in which the insurer itself must determine the validity of the claim. In a third party liability claim, however, the universe of relevant facts is largely contained in the complaint against the insured. Any additional facts within the insured’s knowledge can be easily submitted to the insurer. The record demonstrates both Consolidated and Industrial made adequate and timely investigation of Spokane Transformer’s claim. Their denial of coverage was therefore supported by substantial justification. See id. While reversing on the coverage issue, the Court of Appeals agreed with the trial court that no bad faith or Consumer Protection Act claims existed. Overton, 101 Wn. App. at 661. The court held the coverage questions raised by the insurers were reasonable given the EPA’s 1976 notice to Spokane Transformer. Id. We agree the insurers reasonably believed Spokane Transformer was excluded due to the 1976 notice of the presence of PCB. The trial court and the Court of Appeals are accordingly affirmed on the bad faith and Consumer Protection Act issues. — 435 — CONCLUSION Spokane Transformer knew of the PCB contamination prior to purchasing the CGL policies from Consolidated and Industrial. The property damage stemming from that contamination could therefore not constitute an “occurrence,” which is required to trigger coverage. The trial court’s order granting summary judgment of dismissal on these issues is reinstated and the Court of Appeals is reversed. The Court of Appeals decision on the bad faith and Consumer Protection Act issues is affirmed. Consolidated and Industrial shall recover their costs on appeal. Alexander, C.J., and Smith, Madsen, and Owens, JJ., concur. Footnotes [1] The court did not rule with regard to the owned-property exclusion. See Clerk’s Papers (CP) at 1181. [2] We also find Spokane Transformer’s argument the pollution exclusion does not apply because the PCB discharge was not onto the property of a third party to be without merit. See Queen City Farms, 126 Wn.2d at 90 (imposing no requirement the discharge affect a third party for the pollution exclusion to apply). [3] The exclusions section of the policies contain a standard owned-property exclusion, which says the policy will not cover property damage to property owned, occupied by, or rented to the insured. However, the applicability of this provision is not challenged on appeal by either party. Even if it were, the owned-property exclusion would not factor into the initial “occurrence” determination. Olds-Olympic, 129 Wn.2d at 473-74.