Tetra Tech has lost its appeal seeking insurance coverage for the defence of three lawsuits tied to remediation work at San Francisco's former Hunters Point Naval Shipyard, after the Ninth Circuit concluded that references to negligence could not overcome factual allegations describing intentional handling of contaminated soil.
The US Court of Appeals for the Ninth Circuit affirmed summary judgment for AIG Specialty Insurance Company on September 24, leaving the insurer without a duty to defend Tetra Tech EC and Tetra Tech Inc against the underlying litigation. The decision turns on a distinction that shaped this particular coverage dispute: describing a cause of action as negligence did not itself establish the possibility of accidental or otherwise covered conduct when the factual allegations supporting the claims pointed in the opposite direction.
The policies covered claims for damages caused by “Pollution Conditions” resulting from covered operations, but required those pollution conditions to be unexpected and unintended from the insured's standpoint. The Ninth Circuit accepted that Tetra Tech faced potential liability for damages caused by pollution conditions arising from its activities at Hunters Point, but found that it had not established potential liability for pollution conditions satisfying that additional coverage requirement.
California's duty-to-defend standard was important because an insurer can have a defence obligation where an underlying complaint alleges liability for damages potentially covered by the policy, or where the complaint might be amended to create covered liability. Tetra Tech therefore did not need to establish that coverage ultimately existed, but it did have the initial burden of showing the required potential for covered liability.
The difficulty was the factual basis of the three underlying lawsuits. According to the Ninth Circuit's description of those allegations, the lawsuits alleged a fraudulent scheme in which Tetra Tech employees intentionally mislabeled and certified radioactive soil as clean and then processed and disposed of soil while circumventing procedures applicable to contaminated material.
Against that background, Tetra Tech argued that allegations concerning improper remediation could permit liability without a finding that it intended or expected the resulting pollution conditions. The panel rejected that reading because the underlying complaints did not allege that soil was accidentally mislabeled or mishandled. Instead, the court said the pertinent factual allegations described Tetra Tech as knowing that the work was improper.
That distinction also defeated Tetra Tech's reliance on references to negligence. The Ninth Circuit reasoned that the scope of the duty to defend depends on the alleged facts or known extrinsic facts revealing a possibility of coverage rather than the labels attached to causes of action.
In this case, the negligence claims were based on factual allegations of nonaccidental conduct and foreseeable harm. The result is therefore narrower than a proposition that negligence claims cannot generate insurance coverage: the panel's reasoning depended on what these underlying complaints actually alleged Tetra Tech did.
The distinction between negligence and accident is central to understanding why Tetra Tech's coverage argument failed. A complaint can use negligence terminology while grounding that claim in deliberate conduct, so the cause-of-action label could not be considered separately from the factual allegations supporting it.
The Ninth Circuit relied on California authority stating that “negligent” and “accidental” are not synonymous. Applied here, that meant the negligence counts did not independently establish that the resulting pollution conditions might have been unexpected and unintended from Tetra Tech's standpoint.
For this coverage dispute, the analysis therefore turned on the factual theory supporting the claims rather than their formal titles. That explains why the existence of negligence counts did not by itself satisfy Tetra Tech's initial burden even under California's broad duty-to-defend standard.
Tetra Tech separately argued that its denial that the pollution conditions were expected should establish the possibility of coverage. The Ninth Circuit rejected that argument as well, finding that an insured cannot create the necessary dispute simply by asserting, without evidentiary support, that a particular consequence was not expected.
That issue matters because California coverage analysis can extend beyond the factual allegations in a complaint. Extrinsic evidence can establish the possibility of coverage, but the court said such evidence must have been known to the insurer when the third-party lawsuit began.
The panel distinguished authority in which an insured had given the insurer information establishing a potentially covered factual scenario. It found that Tetra Tech had produced no evidence showing AIG was aware of facts capable of establishing potential coverage for unexpected pollution conditions.
Tetra Tech's suggestion that it might ultimately disprove the underlying allegations at trial therefore did not change the result. The Ninth Circuit characterised that position as unsupported speculation rather than extrinsic evidence capable of establishing potential coverage.
The possibility that the underlying complaints could later be amended also failed to establish potential coverage. Although California law recognises a defence obligation where a complaint might be amended to create covered liability, the Ninth Circuit said that principle is limited to amendments adding causes of action clearly supported by facts already pleaded.
Tetra Tech proposed a scenario in which a jury could find it liable for improper remediation even if it believed soil used as fill was clean. Such a scenario could alter the coverage analysis because it would introduce an accidental creation of the pollution conditions.
The problem was that the panel found that scenario unsupported by the factual allegations actually contained in the lawsuits. Imagining additional facts that could produce coverage was therefore insufficient to establish the required potential liability.
The way the Ninth Circuit resolved the dispute is important to the scope of the decision. Once the panel concluded that Tetra Tech had failed to establish potential liability for unexpectedly created pollution conditions, it did not consider the district court's alternative grounds based on exclusions contained in the insurance policies.
The appellate result should therefore not be read as a Ninth Circuit determination of those alternative exclusion issues. The coverage dispute was resolved earlier in the analysis because Tetra Tech had not shown that the underlying allegations potentially fell within the relevant pollution coverage in the first place.
The reach of the ruling is further limited by its status. The Ninth Circuit designated the seven-page memorandum “not for publication” and stated that it is not precedent except as provided by Ninth Circuit Rule 36-3.
For AIG and Tetra Tech, however, the immediate appellate result is clear. The summary judgment in AIG's favour stands, and the negligence terminology in the underlying lawsuits was insufficient to establish a duty to defend where the factual allegations supporting those claims described expected rather than accidental pollution conditions.
