Church Mutual Insurance Company v. Clay Center Christian Church

United States Court of Appeals
For the Eighth Circuit
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No. 13-1613
___________________________
Church Mutual Insurance Company
lllllllllllllllllllll Plaintiff - Appellee
v.
Clay Center Christian Church
lllllllllllllllllllll Defendant
Cheryl S. Green; Cheryl S. Green as Personal Representative of the Estate of John
R. Green
lllllllllllllllllllll Defendants - Appellants
____________
Appeal from United States District Court
for the District of Nebraska - Omaha
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Submitted: November 19, 2013
Filed: March 25, 2014
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Before WOLLMAN, COLLOTON, and GRUENDER, Circuit Judges.
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WOLLMAN, Circuit Judge.

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Cheryl Green and the Estate of John Green (the Greens) appeal from the district
court’s grant of summary judgment in favor of Church Mutual Insurance Company1
(Church Mutual). The district court concluded that coverage for the injuries the
Greens suffered because of their exposure to carbon monoxide was precluded by
pollution exclusions contained in the relevant policies. The district court also held
that Church Mutual was not estopped from denying coverage based on those
exclusions. We affirm.
I. Background
John Green was the pastor of Clay Center Christian Church (the Church). He
and his wife, Cheryl, resided at the Church’s parsonage. On November 19, 2009, the
parsonage’s heating system malfunctioned and released carbon monoxide throughout
the residence. John died as a result of his exposure to the carbon monoxide. Cheryl
suffered bodily injuries.
The Church had two policies issued by Church Mutual that are relevant to this
appeal: a multi-peril policy and an umbrella policy. The multi-peril policy contained
a pollution exclusion that excluded coverage for:
g. (1) “Bodily injury” or “property damage” arising out of the
actual, alleged or threatened discharge, dispersal, seepage,
migration, release, or escape of pollutants:
(a) At or from any premises, site, or location which is or
was at any time owned or occupied by, or rented or
loaned to, any insured[.]
The Honorable Joseph F. Bataillon, United States District Judge for the1
District of Nebraska.
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The umbrella policy included identical language. “Pollutants” are defined under both
policies as “any solid, liquid, gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes
materials to be recycled, reconditioned, or reclaimed.”
Church Mutual was notified of John’s death and Cheryl’s injuries on November
20, 2009. That same day, Church Mutual retained attorney Jerald Rauterkus. The
parties dispute the purpose for which Rauterkus was hired. Church Mutual contends
that Rauterkus’s role was limited to conducting a cause-and-origin investigation of
the carbon monoxide leak and assisting the Church in matters of communication
during the course of the investigation. The Greens assert that Rauterkus was hired
to defend the Church against liability claims.
The parsonage’s heating system was inspected and tested on three separate
occasions from November 2009 to April 2010. The results of the inspections were
inconclusive. Although it was evident that the carbon monoxide had been emitted
from the parsonage’s heating system, the exact source and cause of the carbon
monoxide leak were not clear. There was minimal communication between the
parties following the third inspection.
In March 2011, the parties resumed communicating when Rauterkus received
requests for additional information from attorney Peter Wegman, who had been hired
by the Greens to assist in their representation. After exchanging correspondence,2
Wegman sent Rauterkus a demand letter on August 19, 2011, seeking policy limits
for John’s death and Cheryl’s bodily injuries. In response, Church Mutual filed a
declaratory judgment action on September 7, 2011, seeking a determination that the
policies’ pollution exclusions precluded any duty on its part to defend or indemnify
Wegman served as co-counsel with Scott Grafton, the attorney the Greens had2
retained in December 2009 or January 2010.
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the Church with respect to the Greens’ claims. Church Mutual also sent the Church
a reservation of rights letter denying coverage on the basis of those exclusions.
In February 2012, the Church and the Greens entered into a consent agreement
in which the Greens agreed not to “pursue or collect on any of [the Church’s] assets
or assets of any members of the Church, except for any rights to indemnity under any
insurance policies[.]” In exchange, the Church assigned to the Greens all rights it had
under its insurance policies.
As the declaratory judgment action progressed in the district court, the Greens
disclosed their intent to have a chemist testify as an expert witness regarding whether
carbon monoxide is an “irritant” or “contaminant.” Church Mutual moved in limine
to exclude the chemist’s testimony and then later moved for summary judgment. The
district court granted both motions, having concluded that the pollution exclusions
were unambiguous, that carbon monoxide was a “pollutant” as defined by the
policies, and that the Greens’ claims thus were not covered under the plain terms of
the policies. Additionally, the district court rejected the Greens’ contention that
Church Mutual was estopped from denying coverage because of its delay in reserving
its rights.
II. Discussion
“We review de novo a district court’s interpretation of an insurance policy and
its grant of summary judgment.” Eichholz v. Secura Supreme Ins. Co., 735 F.3d 822,
825 (8th Cir. 2013). Summary judgment is proper if “the record, when viewed in the
light most favorable to the non-moving party, shows no genuine issue of material fact
and that the moving party is entitled to judgment as a matter of law.” Langley v.
Allstate Ins. Co., 995 F.2d 841, 844 (8th Cir. 1993). “[W]hen federal courts are
exercising diversity jurisdiction, the rules for construing insurance policies are
controlled by state law.” Id. The parties agree that Nebraska law controls in this
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case. “In interpreting state law, ‘we are bound by the decisions of the state’s highest
court.’” Minn. Supply Co. v. Raymond Corp., 472 F.3d 524, 534 (8th Cir. 2006)
(quoting Eichenwald v. Small, 321 F.3d 733, 736 (8th Cir. 2003)). “When a state’s
highest court has not decided an issue, it is up to this court to predict how the state’s
highest court would resolve that issue.” Cont’l Cas. Co. v. Advance Terrazzo & Tile
Co., Inc., 462 F.3d 1002, 1007 (8th Cir. 2006).
A. Pollution Exclusions
The Greens contend that the district court erred in concluding that the pollution
exclusions were unambiguous and barred coverage of the Greens’ claims. “The
interpretation of an insurance policy is a question of law.” Countryside Coop. v.
Harry A. Koch Co., 790 N.W.2d 873, 881 (Neb. 2010). “Under Nebraska law, a court
interpreting a contract, such as an insurance policy, must first determine, as a matter
of law, whether the contract is ambiguous.” Reisig v. Allstate Ins. Co., 645 N.W.2d
544, 550 (Neb. 2002). “A contract is ambiguous when a word, phrase, or provision
in the contract has, or is susceptible of, at least two reasonable but conflicting
interpretations or meanings.” Id. If an insurance policy is ambiguous, it “will be
construed in favor of the insured.” Id. In contrast, “[w]hen the terms of an insurance
contract are clear, the court may not resort to rules of construction, and the terms are
to be accorded their plain and ordinary meaning as an ordinary or reasonable person
would understand them.” Lovette v. Stonebridge Life Ins. Co., 716 N.W.2d 743, 747
(Neb. 2006).
The Greens argue that the terms “irritant” and “contaminant,” as used in the
policies’ definition of “pollutants,” are ambiguous. Although the Nebraska Supreme
Court has not addressed whether these specific terms create ambiguity in a pollution
exclusion, its decision in Cincinnati Insurance Co. v. Becker Warehouse, Inc., 635
N.W.2d 112 (Neb. 2001), points to the conclusion that it would likely reach if the
issue were presented to it.
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In Cincinnati Insurance Co., the owners of food products stored in a warehouse
sued the owner of the warehouse, alleging that their food products had been
contaminated by xylene fumes from a floor sealant that had been applied to the
warehouse’s concrete floor. The warehouse owner filed claims with its insurer,
seeking indemnity and defense against these claims. The insurer denied coverage on
the basis of a pollution exclusion nearly identical to the pollution exclusions at issue
in this case, but additionally including “[p]ollutants include but are not limited to
substances which are generally recognized in industry or government to be harmful
or toxic to persons, property or the environment.” See id. at 116. In response to the
insurer’s declaratory judgment action, the warehouse owner argued that the pollution
exclusion was ambiguous and that it applied only to traditional environmental
pollution claims.
The Nebraska Supreme Court concluded that although the pollution exclusion
was “quite broad,” it was unambiguous and was not limited to traditional
environmental damage. Id. at 120. In rejecting the warehouse owner’s arguments,
the court recognized that the “majority of state and federal jurisdictions have held that
absolute pollution exclusions are unambiguous as a matter of law and, thus, exclude
coverage for all claims alleging damage caused by pollutants.” Id. at 118.
Continuing, the court stated:
The broad nature of the pollution exclusion may cause a commercial
client to question the value of portions of its commercial general
liability policy, but, as an appellate court reviewing terms of an
insurance contract, we cannot say that the language of the pollution
exclusion is ambiguous in any way. The language in the instant
pollution exclusion is clear and susceptible of only one possible
interpretation.
Id. at 120.
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The Greens seek to distinguish Cincinnati Insurance Co. on the ground that the
ambiguity alleged in that case was not based on the terms “irritant” or “contaminant.”
Nevertheless, the decision in Cincinnati Insurance Co. suggests that, given its
conclusion that the entirety of the exclusion was broad and unambiguous, the
Nebraska Supreme Court would reject the Greens’ contention that the terms “irritant”
and “contaminant” as used within Church Mutual’s policies are ambiguous. We note3
that in State Farm Fire & Casualty Co. v. Dantzler, 842 N.W.2d 117, 120-21 (Neb.
Ct. App. 2013), the Nebraska Court of Appeals recently concluded that the holding
in Cincinnati Insurance Co. applied with equal force to the interpretation of the
pollution exclusion provision in the case before it.
We turn, then, to the question whether the Nebraska Supreme Court would
conclude that carbon monoxide constitutes a “pollutant” under the policies. We hold4
that it would so conclude. The policies define “pollutants” as “any solid, liquid,
gaseous or thermal irritant or contaminant . . . .” As previously discussed, the
pollution exclusions, including the terms “irritant” and “contaminant,” are
Citing Sargent Construction Co., Inc. v. State Auto Insurance Co., 23 F.3d3
1324 (8th Cir. 1994), and First Realty, Ltd. v. Frontier Insurance Co., 378 F.3d 729
(8th Cir. 2004), the Greens argue that the Eighth Circuit has found the phrase “irritant
or contaminant” as used within a pollution exclusion to be ambiguous. Because these
cases were decided under Missouri law and Iowa law, they have no bearing on our
resolution of this issue. Moreover, subsequent to First Realty, the Iowa Supreme
Court concluded that pollution exclusions that included the same definitions of
“pollutants” were unambiguous. Bituminous Cas. Corp. v. Sand Livestock Sys., Inc.,
728 N.W.2d 216 (Iowa 2007).
Church Mutual argues that in Harleysville Insurance Group v. Omaha Gas4
Appliance Co., 772 N.W.2d 88 (Neb. 2009), the Nebraska Supreme Court held that
carbon monoxide constituted a “pollutant” under a pollution exclusion that included
an identical definition of “pollutants.” The parties in Harleysville did not dispute
whether carbon monoxide was a pollutant, however, and thus the court was not
required to, and did not, render a holding on that issue.
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unambiguous. These terms thus should be accorded their plain and ordinary
meanings. “Contaminant” is defined as “something that contaminates.” Webster’s
Third New International Dictionary 491 (2002). In turn, “contaminate” is defined as
“to render unfit for use by the introduction of unwholesome or undesirable elements.”
Id. Because carbon monoxide is a gas that can render air “unfit for use” if introduced
at high levels, it constitutes a “pollutant” as defined by the policies.
In contesting whether carbon monoxide constitutes a “pollutant,” the Greens
assert that the district court erred in granting Church Mutual’s motion in limine to
exclude the testimony of their expert witness regarding whether carbon monoxide is
an “irritant” or “contaminant.” “We review the district court’s decision concerning
the admission of expert opinions for an abuse of discretion.” Khoury v. Philips Med.
Sys., 614 F.3d 888, 892 (8th Cir. 2010) (quoting Fireman’s Fund Ins. Co. v. Canon
U.S.A., Inc., 394 F.3d 1054, 1057 (8th Cir. 2005)). As noted above, the interpretation
of an insurance policy is a question of law for the court, not a question of fact. See
R.W. v. Schrein, 652 N.W.2d 574, 579 (Neb. 2002) (per curiam) (concluding that the
meaning of a word in a contract “is a question of law, on which expert testimony has
no bearing”). The district court thus did not abuse its discretion in excluding the
testimony of the Greens’ expert.5
B. Estoppel
The Greens argue that even if the pollution exclusions apply, Church Mutual
is nonetheless estopped from denying their claims. Under Nebraska law, “the
doctrine of estoppel [generally] may not be used to bring within the coverage of a
policy risks not covered by its terms, or risks expressly excluded therefrom.” First
In Dantzler, a chemical toxicologist offered unrefuted testimony that exposure5
to lead has adverse effects on humans and that lead is defined as a pollutant by the
Environmental Protection Agency. 842 N.W.2d at 122. Whether the court could
consider the expert’s testimony, however, was not at issue. Id.
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United Bank of Bellevue v. First Am. Title Ins. Co., 496 N.W.2d 474, 480 (Neb.
1993) (hereinafter Bank of Bellevue). An exception to this general rule “applies
when an insured is able to show (1) that the insurer had sufficient knowledge of facts
or circumstances indicating non-coverage, (2) that the insurer assumed or continued
defense of the insured without obtaining an effective reservation of rights agreement,
and (3) that the insured suffered some type of harm or prejudice.” Id. If the
exception applies, the insurer “may be estopped from subsequently raising the
defense of non-coverage.” Id. These elements must be proved by clear and
convincing evidence. See Double K, Inc. v. Scottsdale Ins. Co., 515 N.W.2d 416,
422 (Neb. 1994).
The Greens argue that there are genuine issues of material fact as to each
element of the exception, and thus they assert that the district court erred in granting
summary judgment in favor of Church Mutual. Although Church Mutual concedes
that “it was apparent from the outset that the incident involved exposure to carbon
monoxide” and that there “has never been any question regarding the pollution
exclusions being included in the [multi-peril and umbrella] policies,” it nonetheless
asserts that the Greens cannot establish the first element of the exception. Church
Mutual argues that until it received the demand letter in August 2011, it did not know
whether the Greens would bring a claim against the Church, and, if they did, whether
the claim would be for liability or for workers’ compensation. Given Church6
Mutual’s concessions, we will assume that a genuine issue of material fact exists with
respect to the first element.
Next, the Greens argue that they have set forth sufficient evidence for a
reasonable jury to find by clear and convincing evidence that Church Mutual assumed
the defense of the Church without obtaining a reservation of rights agreement. They
Church Mutual had also insured the Church under a workers’ compensation6
policy, which did not contain a pollution exclusion.
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contend that Rauterkus began defending the Church as soon as he was retained by
Church Mutual in November 2009. They point to various facts in support of this
contention, including portions of Rauterkus’s billing records that refer to “coverage
questions” that he fielded, his statements to Church elders regarding settlements in
similar situations, and his advice to Church elders to not discuss the events of
November 19, 2009, with Cheryl Green. The Greens contend that, taken together,
this evidence is sufficient to create a jury issue on the second element of the
exception.
The record contains evidence that Rauterkus was hired for a limited purpose
and that the Church understood Rauterkus’s limited role. During his deposition,
Church elder Kenneth Spray, the Church’s primary contact in the matter, testified:
“[Rauterkus] was always very strict on one point. . . . [H]e had nothing to do with the
policy. He couldn’t interpret the policy, hadn’t even seen the policy. As I recall, he
just could not respond to any policy, what’s in the policy, how does it look type
questions.” Spray further explained that Rauterkus made it clear that he was hired to
investigate the carbon-monoxide incident and that when asked about insurance
coverage at a meeting with the Church’s Board of Elders, Rauterkus always gave the
same line: “[t]hat’s not my role in this thing.” Finally, Spray testified that
Rauterkus’s role never changed, stating “[a]ll the way through, he—I never saw him
in any other role than managing the investigation.”
Rauterkus himself explained the purpose of his retention during his own
deposition, testifying that he previously had not done any coverage work for Church
Mutual. He also stated that he “hate[d] coverage work” and that he had done
coverage work in only three or four cases over the course of his career. When asked
what he was hired to do, Rauterkus responded that Church Mutual “[t]old me to do
a cause-and-origin investigation.” Additionally, when asked in correspondence from
the Greens’ attorney in March 2011 about coverage under the policies, Rauterkus
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replied: “Coverage limits: I have not been retained to provide a coverage opinion on
this matter, so I am unable to confirm your coverage interpretation of the policy.”
In light of the foregoing testimony, it is hard to say that the Greens have
pointed to clear and convincing evidence in support of the second element of the
exception. Again, for the purposes of this case we will assume, without deciding, that
a triable issue of fact exists with regard to that element.
We turn, then, to the third element, whether the Church was prejudiced by
Church Mutual’s delayed reservation of rights. The Greens argue that it was, but they
neither explain how the Church was prejudiced, nor do they point to any specific
examples of harm suffered by the Church. Instead, they argue that Nebraska law does
not always require that actual prejudice be shown. They assert that prejudice is
presumed under Nebraska law when an insurer, without first reserving its rights,
assumes complete control for more than twelve months over a possible claim that
calls for cooperation by the insured.
In support of this contention, the Greens first cite National Union Fire
Insurance Co. v. Bruecks, 139 N.W.2d 821, 824 (Neb. 1966), in which the driver of
a vehicle sustained injuries after a passenger accidentally discharged a firearm while
riding in the vehicle. The passenger’s father notified his comprehensive liability
insurer of the accident immediately after it occurred and was led to believe that he
had coverage under the policy and thus left the matter in the insurer’s control. Id.
When the driver brought suit against the passenger approximately seventeen months
later, the insurer denied coverage and then filed suit, seeking a declaration that it had
no duty to defend or indemnify the passenger under the terms of the policy. Id. at
823-25. The trial court held, inter alia, that the insurer was estopped from denying
coverage. Id. at 825.
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On appeal, the Nebraska Supreme Court pointed to the insurer’s conduct vis-a-
vis the insureds: “Various assurances were given by [the insurer’s] representatives
to the [insureds]. They were told early in the investigation that the matter was in the
hands of the insurance company and they should not worry about it.” Id. at 828. It
then held that that conduct “was sufficient to constitute a representation, and is a most
persuasive argument for the operation of the doctrine of equitable estoppel.” Id. In
rejecting the insurer’s argument that it should not be estopped from denying coverage
because there was no evidence that the passenger suffered prejudice, the court
concluded that “the [insurer’s] assumption of complete control of the matter for a
period of 17 months, with the consequent need of cooperation with [the insurer] under
the terms of the policy, in itself constitutes a sufficient showing of prejudice.” Id. at
829.
The Greens next cite Bank of Bellevue, in which a bank filed a claim with its
title insurer after a creditor not listed in the title insurance policy filed a foreclosure
action on the insured property, claiming that it had a lien that was superior to all
others. 496 N.W.2d at 478. The title insurer accepted the bank’s tender of defense
without entering into a reservation of rights agreement with the bank. Id. Some
twelve months later, the title insurer sent the bank a letter denying the bank’s claim.
Id. at 479. The bank then sued the title insurer, arguing that the title insurer was
equitably estopped from denying coverage. Id.
On appeal, the Nebraska Supreme Court analyzed each of the earlier-described
elements of the exception to the general estoppel rule and concluded that each had
been satisfied. Id. at 480-82. In addressing the prejudice element of the exception,
the court discussed Bruecks and similarly held that “[the title insurer]’s assumption
of complete control of a matter involving a possible claim for over 12 months, with
the consequent need of cooperation under the terms of the policy, and without a
reservation of rights agreement, constitutes a sufficient showing of prejudice as a
basis for urging estoppel.” Id. at 482. Continuing, the court wrote, “[W]ith
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knowledge, actual or presumed, of facts which would have permitted it to deny
coverage, [the insurer] may be estopped from subsequently raising the defense of
non-coverage.” Id. The court concluded that the bank had suffered actual prejudice
because it had been deprived of its opportunity to protect its interests by entering into
negotiations with a separate bank that held liens on the property.
The Greens argue that Bruecks and Bank of Bellevue stand for the proposition
that proof of actual prejudice is not necessary in the circumstances of this case. They
contend that Church Mutual’s retention of Rauterkus and Rauterkus’s involvement
in the case establish that Church Mutual assumed complete control over the case,
control that it exercised for a period of approximately twenty-one months before
reserving its rights. These facts, the Greens argue, constitute a sufficient showing of
prejudice under Nebraska law.
We conclude that the Greens have read Bruecks and Bank of Bellevue too
broadly. In addressing prejudice in Bank of Bellevue, the Nebraska Supreme Court
specifically found that the bank suffered actual prejudice as a result of the title
insurer’s conduct. In Bruecks, the insureds had been given assurances, and there was
no evidence to rebut a finding of prejudice. In this case, by contrast, Church Mutual
has established that the Church suffered no actual prejudice or harm as a result of
Church Mutual’s delay in reserving its rights. Specifically, the Church was relieved
of any legal exposure stemming from the Greens’ claims when it entered into the
consent agreement with the Greens. Because the Greens can only assert claims that
the Church might have had against Church Mutual and because the Church faced no
liability for the Greens’ claims after the parties entered into the consent agreement,
there were no claims that the Greens could assert on behalf of the Church. In cases
such as this one, where it is clear that the insured suffered no actual prejudice, we do
not believe that the Nebraska Supreme Court would hold that Church Mutual should
be estopped from asserting its defense of non-coverage under the pollution
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exclusions. Accordingly, the district court did not err in rejecting the Greens’
estoppel claim.
III. Conclusion
The judgment is affirmed.
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