## Facts

- The City of Carter Lake, Iowa held a comprehensive general liability policy issued by Aetna Casualty & Surety Company covering property damage caused by an “occurrence.”
- “Occurrence” was defined as an accident, including continuous or repeated exposure to conditions, resulting in damage neither expected nor intended from the insured’s standpoint.
- On February 26, 1975, homeowners William and Kesano Mecseji experienced a sewage backup into their basement when the City’s sewage pump overloaded, shut off, and sewage backed up into the lowest point in the system.
- Similar pump failures caused five additional sewage backups into the same basement, for a total of six events.
- The Mecsejis sued the City in Iowa state court for negligence and obtained a jury verdict of $11,404.14.
- Aetna undertook the City’s defense in the state suit and later informed the City it would not indemnify for damages after the first backup; after judgment, Aetna paid only what it attributed to the first event and declined to appeal.
- The City filed a federal diversity action seeking indemnity for the full state judgment and attorney’s fees, arguing the policy covered all backups or that Aetna waived/was estopped from denying coverage because it defended without an effective reservation of rights.
- The district court limited coverage to the first backup and awarded the City $1,501.78 (attributed to that event), without specifically resolving estoppel/waiver.

## Issues

1. Under the liability policy, did the repeated sewage backups fall within covered “occurrences” beyond the first incident?
2. If the policy did not cover later backups, was Aetna estopped (or had it waived noncoverage) because it defended the City without a timely and adequate reservation of rights?

## Decision

- The Eighth Circuit held that, by contract interpretation, the policy afforded coverage only for the first sewage backup.
- The court held Aetna was estopped from asserting noncoverage as to three subsequent backups that occurred before the Mecsejis filed suit.
- The judgment was affirmed in part, reversed in part, and remanded for entry of judgment requiring Aetna to pay amounts attributable to the first four backups, plus interest.

## Legal Principles

- A policy definition of “occurrence” that includes “continuous or repeated exposure to conditions” does not necessarily convert multiple, separated loss events into one covered occurrence; coverage turns on the policy language as applied to the facts and timing.
- An insurer that undertakes an insured’s defense with knowledge of facts indicating potential noncoverage, without a timely and adequate reservation of rights, may be equitably estopped from later denying coverage.
- Estoppel may extend the insurer’s payment obligation beyond strict contractual coverage, but only to the extent justified by the insurer’s conduct and resulting prejudice; it does not automatically expand coverage to all related events.

## Conclusion

The court treated the policy as covering only the first sewage backup, but required Aetna to pay for three additional pre-suit backups because Aetna defended the City without an effective reservation of rights, estopping it from denying coverage for those occurrences.


City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052 (8th Cir. 1979)