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December 31, 1986


The opinion of the court was delivered by: WEINFELD


This litigation centers about the obligation of two insurance companies under their respective policies issued to an insured and arising by reason of an action instituted against the insured by the State of New York.

In December 1984, the State of New York commenced an action in this Court against the Beaver Smelting and Refining Corp., Woodbourne Mining, Smelting and Refining Corp. and its principal stockholders and officers ("Beaver Defendants or Insureds") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, *fn1" state environmental law and the common law of public nuisance and restitution, ("the underlying" or "Superfund" action). The State complaint alleges that the Beaver defendants, who operate a business which melts down and reclaims scrap metals such as lead, copper and aluminum, in the Town of Fallsburg, New York, have from 1970 to about 1981 deposited large quantities of ash, a by-product of the smelting and refining process, at various places on the plant site and that said ash constitutes a hazardous substance. The complaint further alleges that since December 1982 the defendants knew or should have known that the ash generated by the defendants and dumped on the site contained hazardous substances and constituted hazardous waste; that the manner of disposing of these wastes has resulted in their release to the environment; and that adequate measures had not been taken to prevent such release. The State seeks to recover its response costs, damages for injury to its natural resources due to the alleged violation of state environmental law and a mandatory injunction that the Beaver defendants abate the nuisance and pay penalties of $25,000 per day for each day of statutory violation.

 The Beaver defendants had comprehensive general liability insurance coverage ("comprehensive") and umbrella excess third-party liability insurance ("umbrella") through two insurance companies: National Grange Mutual Insurance Company ("NGM") and CNA Insurance Companies ("CNA"). Various comprehensive general liability policies were in effect during the period of 1967 to 1984. The Beaver defendants asked both NGM and CNA companies to defend the insureds in the State's lawsuit; initially, both companies refused. Thereupon, in July 1985, NGM commenced the instant action against the insureds, and also named CNA as a defendant. NGM sued for a declaratory judgment that it was not obligated to provide a defense to the Beaver defendants. CNA counterclaimed against NGM and cross-claimed against the Beavers for a declaratory judgment that it was not liable to defend. The Beaver defendants counterclaimed against NGM and cross-claimed against CNA for a declaratory judgment that, indeed, both were obligated to defend and requested reimbursement for legal expenses already incurred and to be incurred in resisting the State's action. During the pendency of the partial summary judgment motions, referred to hereafter, NGM shifted its position. NGM entered into a stipulation with the Beaver defendants under which it acknowledged that it was liable to defend the Superfund action under the policies issued by it to the Beaver defendants from February 1970 to February 1976, and it further agreed to pay their legal costs already incurred and to be incurred in that defense; however, NGM adheres to its original position that it is not obligated to indemnify the insureds in the event the State prevails in its action.

 The insured and the insurers each moved for partial summary judgment to sustain their asserted positions. NGM urges that CNA is also obligated under its policies (substantially identical to those issued by NGM) to defend the Beaver defendants and asks that (1) the Court direct CNA to reimburse NGM for its pro rata share of the amount NGM has already reimbursed the Beaver defendants and (2) for a declaratory judgment that CNA pay pro rata any further fees incurred in the defense of the Beavers in the Superfund action. The Beavers' initial motion for partial summary judgment sought a declaration that NGM and CNA are jointly and severally liable to provide a defense to the State action and for legal fees and expenses incurred and to be incurred.

 Analysis starts with identification of the issue presented by the respective motions and cross-motions of the parties. The issue at this stage of the litigation is whether CNA has a duty to defend the Beavers in the underlying State action. All parties agree that in this diversity action New York law applies since the Beaver defendants are New York State residents, the property that is the subject of the State's claims is located in New York State and the policies were issued there. Under the applicable law it is crystal clear that the insurer's duty to defend is separate and distinct from the duty to indemnify. The duty to defend is contractual and one that is heavier and broader than the duty to indemnify. *fn2" The obligation to defend has been deemed "litigation insurance" as well as "liability insurance." *fn3" Thus the insurer is required to provide a defense to any action, however groundless, in which there exists any possibility that the insured might be held liable for damages where facts are alleged within the coverage of the policy. *fn4"

 The determination of the duty to defend is a question of law answered by comparing the allegations of the complaint (underlying action) to the provisions of the policy. *fn5" And as long as the claim asserted against the insured may rationally be said to fall within the policy coverage, whatever may be the limits of the insurers' responsibility to pay, it is obligated to defend. *fn6" Even if some of the allegations of the underlying complaint are clearly outside the scope of the coverage. contained in the policy, the insurer is obligated to defend unless the allegations as a whole preclude coverage. *fn7"

 Other applicable principles to be considered under New York law are that whenever the insurer wishes to exclude certain coverage from its policy obligations, it must do so "in clear and unmistakable" language. *fn8" Any such exclusions or exceptions from policy coverage "must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction." *fn9" It is a cardinal rule under New York law that where the terms of an insurance policy are ambiguous or are subject to more than one reasonable construction, the policy must be construed most favorably to the insured and against the insurer. *fn10"

 Finally, the burden is upon the insurer to prove that the exclusion from liability coverage applies; *fn11" the insurer is entitled to prevail on its motion only if it can be concluded as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify the Beavers under any provision of the policy. *fn12"

 Against that background of law we consider whether CNA, on its cross-motions for a declaratory judgment, has sustained its burden and is exonerated from its duty to defend the Beaver defendants. CNA, in addition to "comprehensive" and "umbrella" policies had also issued a third type of policy, environmental impairment liability insurance ("EIL"). Since there are differences between the comprehensive and umbrella policies on the one hand, and the EIL policy on the other hand, they are discussed separately.


 CNA's comprehensive liability insurance policies provide:

 The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . .

 B. property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such property damage, even if any of the allegations of the suit are groundless, false or fraudulent . . . . *fn13"

 The policy defines "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." *fn14"

 The exclusion from coverage is contained in both the comprehensive and the umbrella insurance ...

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