The U.S. Court of Appeals for the Eleventh Circuit reversed a lower court's order laying liability for more than $1.1 million in legal costs and fees on an insurer in the wake of litigation between a Georgia-based battery-maker and the owner of a Washington state warehouse damaged by years of chemical pollution.

A trial judge declared that coverage issued to Exide Technologies could be tapped to cover a judgment and litigation expenses for its landlord, The Wattles Co., because it had already satisfied a $2 million deductible.

But the appellate court saw it otherwise, agreeing with Ace American Insurance that Wattles had not met the $2 million deductible under the terms of the policy.

The 46-page opinion written by Judge R. Lanier Anderson also turned aside Wattles' claims that a provision in the policy allowing coverage from losses in countries governed by Napoleonic law “or other civil or commercial code” does not apply, either in Georgia or Washington. 

The dispute involves a warehouse Wattles owns in Sumner, Washington, which Exide leased for about 30 years until around 2013.

Exide used the building to fill and charge batteries, and Wattles sued the company for violating its lease by polluting the building with sulfuric acid “mist” that seeped into the floor, walls and wooden ceiling joists over the years. 

Wattles sued Exide in Pierce County, Washington, in 2013. Exide, which was facing a number of pollution related lawsuits across the country at that time, filed for bankruptcy protection in Delaware later that year. 

The bankruptcy court lifted a litigation stay in 2015 when Exide and Wattles reached an agreement that would allow the case to proceed. The court authorized Wattles to “attempt to recover any liquidated final judgment” from Exide's insurers but only after any applicable deductibles had been subtracted. 

The Washington litigation ended in 2016 with a $2.3 million judgment against Exide, including a $1.4 million jury award and more than $830,000 in attorney fees. Post-judgment interest boosted the tally to more than $2.6 million.

Exide, a multinational company, had among its insurance a $60 million per occurrence with Ace, which Wattles said it was entitled to draw on to cover the damages and fees of the litigation. 

Ace filed a declaratory judgment action in the U.S. District Court for the Northern District of Georgia, arguing that it owed no coverage because Exide's $2 million deductible had not been met. The property damage was less than that, and Wattles' attorney fees could not be recovered as defense costs because Ace had no contract with Wattles, the insurer said. 

Wattles responded that it was seeking the fees under another portion of the policy, a “Tenants and Neighbors provision,” which applied “only to liability incurred in those countries in which a Napoleonic or other civil or commercial code applies due to loss or damage by a peril as defined by such code” as covered damages.

Wattles said that, because the damages were governed by Washington commercial code laws and Georgia's civil code, the provision had been satisfied. 

Ace responded that the underlying litigation was grounded in “common law property rights in the State of Washington (where the 'common law of England was the law of decision'), and 'not out of a code, Napoleonic or otherwise, that created an exclusive right to recover for property damage,'” the opinion said. 

Ruling on summary judgment, Judge Mark Cohen said there was enough “ambiguity” in the provision to support Wattles' position and that two “equally plausible” readings were possible. Cohen found for Wattles because any ambiguity in an insurance contract must favor the insured.

Anderson, writing with the concurrence of Chief Judge Ed Carnes and Judge Julie Carnes, wrote that, although “the policy was a part of an insurance program with a worldwide geographic scope, it contained a choice of law provision providing that the law of the State of Georgia would govern the interpretation of the terms and conditions of the policy.”

The policy's language included “specific sublimits for certain losses” in a number of specific countries, Anderson wrote. “At least three of these countries—Mexico, Spain, and France—have legal systems that are based, at least in part, on the civil law legal traditions embodied in the Napoleonic Code.”

The Exide policy language “is plainly intended to extend coverage for tenants and neighbors liability only in those civil law countries, like Mexico, Spain, France, and others, where a comprehensive codification of laws modeled after Napoleon's Code applies,” he wrote. “The United States clearly is not such a country.”

Wattles argued that all civil and commercial codes, “even those that might exist in countries with legal systems that are not grounded in the Napoleonic Code or the civil law tradition,” should meet the provision's criteria, Anderson wrote. 

“Wattles provides as examples of such codes OSHA and the IBC, both of which have been adopted in the State of Washington … and the Official Code of Georgia,” he said.

“We again acknowledge that this is a possible interpretation of the Tenants and Neighbors Provision. It is not, however, a fair or reasonable interpretation.”

Given the other language specifying the policy's reach and coverage, “we hold that the Tenants and Neighbors Provision is not ambiguous and does not provide coverage for the Wattles attorneys' fees amount or the post-judgment interest amount.”

Wattles' local attorney, Slappey & Sadd partner Richard Dolder, referred queries to his co-counsel, Daniel Heffernan of the Heffernan Law Group in Kirkland, Washington. He did not respond to a request for comment.

Ace's counsel includes Michelle Sherman and Wayne Taylor of Mozley, Finlayson & Loggins, and Robert Levin and Scott Stickney of Wilson Smith Cochran Dickerson in Seattle. They also did not respond to a query on Monday.