Insurer Liable For Pollution Settlement After Denial Of Defense Based On Extrinsic Evidence In Clean Water Act Suit

The United States District Court for the Western District of Washington, applying Washington state law, has held that an environmental liability insurer breached its duty to defend in bad faith by relying on extrinsic evidence to deny coverage for a pollution lawsuit. KAG West LLC v. Fireman's Fund Indem. Corp., 2025 WL 3526070 (W.D. Wash. Dec. 9, 2025). The court ruled that because the underlying complaint alleged facts conceivably covered by the policy, the insurer was obligated to defend and could not rely on its own external investigation into the insured's compliance history to deny the defense.

The dispute arose after an environmental protection organization sued a fuel transportation and logistics provider for alleged violations of the Clean Water Act. The underlying complaint asserted that the provider's facility had discharged stormwater containing pollutants into local waterways and failed to implement necessary control procedures or submit accurate monitoring reports. The provider tendered the claim to its insurer under an environmental liability policy that covered cleanup costs "resulting from a pollution condition."

The insurer initially issued a reservation of rights letter acknowledging that there was "potentially coverage" for the loss. However, the insurer subsequently denied the claim and refused to defend, citing policy exclusions for "intentional or illegal" acts and "prior knowledge" of pollution conditions. The insurer based the denial on its own investigation, which allegedly revealed a history of intentional non-compliance and falsified reports by the facility manager. The insured filed suit, arguing that under the "eight corners" rule, the insurer had a duty to defend because the allegations in the complaint itself did not prove (nor even allege) that the conduct was intentional or known prior to the policy period.

The court granted partial summary judgment in favor of the insured, finding that the insurer had a duty to defend and breached that duty in bad faith. In its reasoning, the court emphasized that under Washington law, an insurer may use extrinsic evidence to trigger a duty to defend but may not use it to deny a duty to defend. Because the underlying complaint did not allege criminal conduct and the alleged Clean Water Act violations were not yet proven, the exclusions for illegal acts and prior knowledge did not bar potential coverage on the face of the pleadings. The court further held that the insurer acted in bad faith by conceding "potential coverage" in its initial letter yet failed to defend or seek a declaratory judgment, as required by Washington law. As a result, the insurer was estopped from denying coverage and liable for the insured's defense and reasonable settlement costs.

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