## Facts

- A.Y. McDonald Industries, Inc. operated a brass foundry in Dubuque, Iowa.
- From 1949 to 1983, it disposed of used foundry sand containing microscopic brass particulate and small amounts of lead at a nearby fill site.
- In 1984, the EPA learned of the deposits and pursued remedial action under CERCLA and RCRA.
- In August 1987, McDonald entered an EPA consent order requiring construction of a clay cap on part of the site and development of a 30-year monitoring plan.
- McDonald sought coverage under multiple comprehensive general liability (CGL) policies issued by Insurance Company of North America and other insurers for remediation costs and an asserted civil penalty.
- McDonald sued in federal court; the federal district court certified questions to the Iowa Supreme Court on Iowa insurance-law issues relevant to coverage.

## Issues

1. Whether EPA-mandated response/remediation costs constitute “sums which the insured shall become legally obligated to pay as damages because of … property damage” under standard CGL policies.
2. Whether civil penalties connected to CERCLA/RCRA enforcement can qualify as covered “damages because of … property damage,” depending on policy language and exclusions.
3. How the CGL pollution exclusion and its “sudden and accidental” exception apply to long-term, routine disposal of lead-bearing foundry sand.
4. How the court’s coverage interpretations affect insurers’ duties to defend and potentially indemnify in the underlying environmental enforcement matter.

## Decision

- The Iowa Supreme Court answered the certified questions by interpreting Iowa law governing CGL coverage for environmental liabilities.
- The court construed “damages” broadly enough to include government-mandated environmental response and cleanup costs arising from property damage.
- The court rejected a categorical argument that CERCLA/RCRA compliance costs are merely equitable relief outside the term “damages.”
- The court treated coverage for civil penalties as potentially available in principle, subject to the particular policy language and applicable exclusions.
- On the pollution exclusion, the court construed the “sudden and accidental” exception in favor of the insured where the discharge is unintended or unexpected, and treated the phrase as at least ambiguous rather than strictly limited to temporally abrupt releases.
- The court applied Iowa duty-to-defend principles: if the asserted liability is even potentially within coverage, the insurer must defend; ultimate indemnity depends on exclusions and fact-specific application (including whether discharges were accidental and how long-tail losses are allocated).

## Legal Principles

- Insurance terms are given their ordinary meaning as a reasonable insured would understand them; ambiguities are construed in favor of coverage, and exclusions are construed narrowly against the insurer.
- Government-compelled environmental response and cleanup costs can be “damages” under CGL language when the obligation arises because of physical injury to property.
- Liability “because of … property damage” may include remedial obligations imposed to address contamination of soil and groundwater.
- The pollution exclusion’s “sudden and accidental” exception is construed against the insurer when the wording is ambiguous; the inquiry focuses on whether the discharge was unexpected and unintended from the insured’s standpoint, not solely on temporal abruptness.
- The duty to defend is triggered when claims, as alleged, potentially fall within policy coverage; indemnity may turn on factual development and application of exclusions.

## Conclusion

The Iowa Supreme Court interpreted CGL coverage to treat EPA-mandated environmental response costs as “damages because of … property damage” and construed the pollution exclusion’s “sudden and accidental” exception in a manner favorable to insureds, while leaving fact-dependent application and ultimate indemnity questions for resolution in the underlying coverage litigation.


A.Y. McDonald Indus., Inc. v. Ins. Co. of N. Am., 475 N.W.2d 607 (Iowa 1991)