According to the city, the backup of hydrogen sulfide gas was a result of contaminated sewage that had been discharged from Big Ox's facility. The city filed a claim with its insurer, Philadelphia Indemnity Insurance Company, seeking indemnification under the "non-owned location" endorsement to its environmental liability insurance policy.

Philadelphia denied the city's claim, and the city sued the insurer for breach of contract.

Philadelphia moved to dismiss. It argued that the "non-owned location" endorsement only provided coverage for materials generated at the city's insured location (that is, City Hall), and that the city failed to allege facts tracing the contamination to waste generated at City Hall. Philadelphia also contended that even if the "non-owned location" definition included waste not linked to the "insured location," the city's complaint still failed to state a claim for relief because the city owned its sewage system and it was not a "non-owned location."

The Philadelphia Insurance Policy

The Philadelphia insurance policy provided that Philadelphia would indemnify the city for losses:

arising out of contamination on, under or migrating from [the] insured location 

, which the policy specifically defined as 1615 1st Ave, South Sioux City, Nebraska (that is, the address of City Hall).

The policy also contained a "non-owned location" endorsement that provided additional coverage for damages:

arising out of contamination on, under or migrating from a non-owned location. 

The endorsement defined a "non-owned location" as:

a facility used for the recycling, treatment, storage or disposal of the insured's waste or materials generated at [the] insured location, but only if at the time the facility accepts the insured's waste

the facility was not owned or operated by the city, was properly permitted, was not subject to environmental regulatory enforcement, and was not insolvent or bankrupt.

The District Court's Decision

The court denied the motion.

In its decision, the court first rejected Philadelphia's contention that a waste disposal facility qualified as a "non-owned location" when it treated, stored, or recycled the insured's waste only if those materials were generated at the "insured location." The court explained that, according to Philadelphia, the only materials insured by the agreement were materials that were (1) generated at City Hall, and (2) generated at a location not "owned, managed, operated or leased" by the city. The court said it could not imagine circumstances in which City Hall would not be owned, managed, operated, or leased by the city, meaning that Philadelphia's proposed construction of the insurance policy would read the "non-owned location" endorsement entirely out of the policy.

The court then ruled that, to state a plausible breach of contract claim under the policy, the city had to allege that contamination migrated from a non-owned facility that either treated the city's waste or treated material generated at the city's insured location, and it decided that the city's complaint did "exactly that." As the court noted, the city alleged that after Big Ox treated the city's sewage, it discharged contaminated waste back into the city's sewage system and that contamination then allegedly migrated through the city's sewage pipes and into the residents' homes, where the ultimate injury occurred.

The court also rejected Philadelphia's argument that the contamination did not "migrate" from a non-owned location (that is, Big Ox) to the residents' homes, triggering coverage under the endorsement, concluding that it was a factual dispute that could not be decided on a motion to dismiss.

The case is South Sioux City v. Charter Oak Fire Ins. Co., No. 4:17-CV-3108 (D. Neb. March 27, 2018).