Fourth Circuit Applies Hawaii Law to Invoke Duty to Defend

The Fourth Circuit Court of Appeals reversed the District Court, holding that under Hawaii law, the insurer had a duty to defend based upon deposition testimony providing facts not found in the underlying complaint. Koppers Performance Chemicals, Inc. v. Argonaut-Midwest Ins. Co., 2024 U.S. App. LEXIS 15678 (4th Cir. June 27, 2024). Our post on the District Court's decision is here.

Koppers manufactured wood preservation chemicals. In 2014, Phillip H. Riley and his wife sued Koppers and other lumber industry entities in South Carolina state court claiming that Riley worked in the fence-making industry using treated lumber manufactured by Koopers and others. Riley alleged that he developed cancer from exposure to chromatid copper arsenate, a chemical with which the lumber was treated. In deposition testimony, Rile clarified his belief that he was exposed to the chemical from 1978 to 1992, i.e., from the time of his birth until his family stopped working with the chemical in 1992. Riley grew up on property where his family ran a fence-building business in South Carolina, the same business for which he eventually worked.

Koppers tendered the complaint to Argonaut, asserting that Argonaut had a duty to defend the underlying lawsuit under four commercial general liability policies, issued decades earlier in Hawaii. The policies named as the insured Osmose Wood Preserving Company of America, Inc., but did not list Koppers. Koppers asserted it was entitled to coverage as the successor-in-interest of Osmose.

The policy periods spanned from 1979 to 1982, corresponding to the time Riley was an infant until he was almost four years old. Argonaut requested information from Koppers about the timing of the exposure alleged by Riley. Koppers provided Argonaut with Riley's deposition testimony in which Riley claimed exposure since birth.

Argonaut disclaimed any duty to defend or indemnify. Argonaut reasoned that the policies limited Osmose's status as a named insured to activities "where it . . . was doing business as Hawaii Wood Preserving Co. and/or Osmose Pacific, Inc." Because the Riley complaint did not bring claims against any entity insured under the policies, Argonaut stated that the policies did not provide coverage to Koppers in the Riley lawsuit.

A few years later, Koopers sued Argonaut in the District of South Carolina, seeking a declaratory judgment that Argonaut owed duties to defend and indemnify it in the Riley lawsuit. Both parties moved for summary judgment. Interpreting the policies under Hawaii law, the District Court granted Argonaut's motion and denied Kopper's motion. Focusing on the duty to defend, the district court found that the policies were "limited to ensuring entities and operations located in Hawaii." Because the underlying complaint did not describe Koppers' Hawaii operations, the District Court concluded that it did not allege a potential for coverage under the policies, and Argonaut had no duty to defend.

Further, the District Court reasoned that the underlying complaint did not allege bodily injury during the applicable policy periods (from around 1979 to around 1982 – Riley's infancy). The District Court explained that under Hawaii law, "the duty to defend is limited to situations where the underlying pleadings have alleged a claim for relief which falls within the terms for coverage of the insurance contract . . . and the complaint contains no such allegations." Riley's deposition testimony that alleged exposure since birth did not change its conclusion because Hawaii followed the "complaint allegation rule," precluding consideration of extrinsic evidence beyond the four corners of the complaint. Therefore, Argonaut had no duty to defend or indemnify Koppers and the court granted Argonaut's motion for summary judgment.

The Court of Appeals first addressed whether the policies limited coverage to Koppers' Hawaii operations. The policies provided that "this insurance applies only to bodily injury . . . which occurs within the policy territory." "Policy territory" was defined to include "the United States of America, its territories or possessions, or Canada." Nowhere did the policies expressly limit commercial general liability coverage to bodily injury arising out of the Hawaii locations listed in the policies. The scope of the policies' coverage was not clear. One reasonable interpretation limited coverage to the Hawaii operations of Koppers – as the successor-in-interest of Osmose – based on the listing of Hawaii locations. Another reasonable interpretation, based on the policies' express language, was that coverage applied to Koppers generally. This created an ambiguity which, under Hawaii law, was resolved in Kopper's favor. Accordingly, the policies did not limit coverage to Koppers' Hawaii operations.

Turning to the duty to defend issue, the Court of Appeals agreed with the District Court's determination that the original complaint, standing alone, did not raise a possibility of Koppers' liability for a claim covered by the policies because it did not allege any body injury occurring during the policy periods. However, Argonaut requested information concerning the dates of Riley's alleged exposure. Koppers provided Argonaut with Riley's deposition testimony alleging exposure since birth. Had Argonaut investigated, it would have learned that there was a possibility of coverage because Riley grew up on a property where his family built fences with treated lumber.

The Court of Appeals predicted that the Hawaii Supreme Court would hold that Argonaut was required to consider the extrinsic evidence it specifically requested from Koppers when assessing its duty to defend. Nothing under Hawaii case law suggested that an insurer could ignore information outside the pleadings that it requested. [This is the outcome we thought was proper in our original post here]. Riley's deposition testimony indicated that Riley was alleging exposure since birth. This was enough to trigger a duty to defend.