Very few people would request a coverage dispute involving an environmental liability policy on their Christmas list. Add in a complete coverage denial despite the insurer acknowledging there was a possibility of covered losses and a few more might get interested. Whether it was on its wish list or not, the Washington District Court recently gift wrapped these facts and likely won’t be receiving an invite to Fireman Fund’s Christmas party next year.
KAG West, LLC v. Fireman’s Fund Indemnity Corp.,
2025 WL 3526070 (WD Wash. Dec. 9, 2025)
KAG West, LLC is a fuel transportation and logistics provider headquartered in Ohio but operating a facility in Tacoma, Washington. Given the type of materials KAG West transports and stores, it purchased an environmental liability insurance policy from Fireman’s Fund with a policy period of April 2023-April 2024. The policy protected KAG West from claims involving storm water pollution and covered clean-up costs stemming from a pollution condition as well as bodily injury and property damage resulting from a pollution condition.
Like any liability policy, the Fireman’s Fund Policy contained numerous exclusions. These included exclusions for (1) Liability under any contract or agreement; (2) any intentional or illegal act or omission; (3) prior knowledge and non-disclosure of a pollution condition prior to the initial inception date and not disclosed in the application; and (4) known claims or legal actions existing before the policy period.
Underlying Action
On August 18, 2023, Puget Soundkeeper Alliance (Soundkeeper) sent KAG West a notice of intent to sue letter but inadvertently dated the letter August 18, 2022. Soundkeeper alleged that KAG West had breached its National Pollution Discharge Elimination System permit and violated the Clean Water Act.
Soundkeeper soon filed suit against KAG West and alleged KAG West’s Tacoma facility had discharged polluted stormwater into various waterways. Additionally, Soundkeeper alleged KAG West failed to implement procedures to control discharges and failed to collect and analyze stormwater discharge samples. Further, Soundkeeper plead that KAG West failed to timely submit monitoring reports and violated recordkeeping provisions of its National Pollution Discharge Elimination System permit.
KAG West tendered the defense of the lawsuit to Fireman’s Fund. A couple of months later, Fireman’s Fund sent a reservation of rights letter to KAG West and raised “serious coverage concerns” based on exclusions and relying on the misdated August letter from Soundkeeper. Based on the misdated letter, Fireman’s Fund believed the claim pre-dated the policy period. However, the letter concluded that “there was potentially coverage under the [Fireman’s Fund] policy for the loss associated with the claim.”
Despite reserving its rights and acknowledging potential coverage, Fireman’s Fund denied coverage including a defense, to KAG West for the underlying lawsuit. Fireman’s Fund chose not to pursue a declaratory judgment and failed to pay any of the attorneys’ fees KAG West incurred defending the Underlying Lawsuit.
When it became clear that Fireman’s Fund was not going to participate, KAG West and Soundkeeper negotiated a settlement of the Underlying Lawsuit. As part of the settlement, KAG West paid $350,000 for habitat restoration in the affected waterways as well as paying Soundkeeper’s attorneys’ fees.
Coverage/Bad Faith Lawsuit
KAG West promptly sued Fireman’s Fund seeking a reimbursement of the settlement amount as well as setting forth claims for Fireman Fund’s bad faith in refusing to even defend KAG West. KAG West moved for partial summary judgment on Fireman’s Fund duty to defend the Underlying Lawsuit and that Fireman’s Fund had acted in bad faith in failing to even defend KAG West. Fireman’s Fund also moved for summary judgment on all claims arguing there was no coverage and that KAG West could not show any damages.
The Court determined that Fireman’s Fund was very wrong on its coverage denial and had an obligation to defend KAG West. The Underlying Lawsuit alleged KAG West had contributed to polluting Washington’s waters-the exact conduct KAG West’s policy was intended to cover. At a minimum, Fireman’s Fund could have defended KAG West under a reservation of rights and pursued a declaratory judgment. It didn’t do so and the Court would not reward Fireman’s Fund for not promptly asserting its rights.
Surprisingly, the Court determined that Fireman’s Fund had acted in bad faith in failing to defend KAG West. In doing so, the Court noted that insurers must defend an insured if there is any potential for coverage and the obligation to defend is determined solely by comparing the allegations of the complaint with the terms of the policy. Here, Fireman’s Fund acknowledged in its first letter to KAG West that the Underlying Lawsuit was potentially covered which should have triggered a defense. Fireman’s Fund’s only explanation for not defending was that it “changed its mind” after reviewing extrinsic evidence. However, the Court advised that an insurer cannot consider extrinsic evidence when determining whether to defend. Finally, the Court again pointed out that Fireman’s Fund did nothing to promptly resolve any coverage questions. It did not file a declaratory judgment or defend under a reservation of rights. The Court determined these facts established that Fireman’s Fund had breached its duty to defend in bad faith.
Finally, the Court found that KAG West’s settlement with Soundkeeper could serve as the floor for damages on the bad faith case upon a showing that it was reasonable. Based on the rest of the Court’s decision, doing so may not be difficult for KAG West.
Christmas came early for KAG West. KAG West reiterates that refusing to even defend an insured under a reservation is risky. It becomes even more problematic when you acknowledge in writing that the lawsuit is potentially covered.
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Kirk Presley enjoys helping individuals and other lawyers with bad faith cases.
If you would like to speak with him about a bad faith case email him at [email protected] or call him at (816) 931-4611.