Appeal from an order of the United States District Court for Northern District of New York (Cholakis, J.), granting summary judgment to appellees. The district court held that, under New York law, appellees owed the City of Johnstown no duty of defense in a suit brought against the City alleging that wastes dumped at a City landfill have polluted surrounding groundwaters. Reversed and remanded.
Feinberg and Pierce, Circuit Judges, and Motley, District Judge.*fn*
The City of Johnstown, New York (the "City") appeals from an order of the United States District Court for the Northern District of New York (Cholakis, Judge), granting summary judgment to appellees Bankers Standard Insurance Company and Pacific Employers Insurance Company. The City was originally sued by the State of New York in the federal district court under (1) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") (codified as amended in scattered sections of 26, 33, 42 & 49 U.S.C.), and (2) the state law of public nuisance and restitution, for the costs of studying and cleaning up certain wastes that are allegedly seeping from a City landfill into surrounding groundwaters. The City gave notice of the suit to appellees, their insurers. Appellees claimed that the City's comprehensive general liability policies did not cover any such liability, whereupon the City brought this action in the federal district court, seeking a declaration that the insurers should defend and indemnify the City in the suit brought by the State. The insurers successfully moved for summary judgment on the argument that, because the City had notice of the contamination, the pollution damages alleged in the State's complaint against the City were not covered by the City's insurance policies. On appeal, the City challenges the district court's grant of summary judgment. We reverse the grant of summary judgment.
For purposes of our review, the basic facts are undisputed. Since 1947, the City of Johnstown, Fulton County, New York has owned and operated a landfill. The landfill now receives only general household refuse, but until 1979 the landfill also received various industrial wastes, and from 1973-1979 sewage sludge was dumped at the site. Over the last fifteen years, evidence has emerged that indicates that certain wastes leaking from the dump may have polluted the surrounding groundwaters. As a result, in June 1987, the State of New York brought an action in the federal district court against the City and various generators and a transporter of wastes (the "CERCLA action"). The complaint in that action charged that each defendant was jointly and severally strictly liable for the costs of studying and remedying the environmental problems created by the landfill. See State of New York v. City of Johnstown, et al., No. 87-CV-636 (N.D.N.Y. filed June 5, 1987).
The City gave due notice of the CERCLA action to its insurers, including appellees. According to the district court, Bankers Standard Insurance Company had issued a comprehensive liability insurance policy to the City for the period from April 1, 1983 to April 1, 1984, and Pacific Employers Insurance Company had issued a similar policy for the period from April 1, 1984 to December 31, 1985. In addition, Pacific Employers had provided the City with excess liability coverage for at least part of that 33-month period.
The insurance companies disclaimed coverage, arguing that the potential liability at issue fell within various exclusions in the City's policies. The insurers therefore disavowed any obligation either to defend the City in the lawsuit, or to indemnify the City should there ultimately be a judgment entered against the City. The City thereafter brought this diversity action in the district court, seeking a declaration that the insurers must defend and indemnify the City in the underlying CERCLA action.
In lieu of answering, the insurers moved to dismiss or, in the alternative, for summary judgment. The insurers' oral argument on the motion was based on two different, but not unrelated, grounds. First, the insurance companies pointed out that the policies specifically excluded losses or damages "expected" or "intended" by the City. The insurers argued that, in light of the earlier warnings of contamination, the alleged environmental damage that underlay the CERCLA suit was certainly expected by the City, and thus was not covered by the insurers' policies. Second, they argued that the City knew of the contamination before the inception of the relevant policies, and that therefore the contamination was a "known risk," and that thus the policies did not cover any liability resulting from that contamination. In their memorandum in support of the motion, however, the insurers essentially conflated the two arguments, asserting that because the pollution damage alleged in the CERCLA complaint was a "known risk," it was "expected" by the City and therefore was not covered under the City's policies with appellees.
At the conclusion of argument held on November 4, 1988, Judge Cholakis granted the insurers' motion for summary judgment. The district court ruled, in pertinent part, as follows:
There has been material produced before this Court which would indicate that the City of Johnstown was aware of conditions from which it could expect the release and subsequent damage alleged in the CERCLA complaint.
The [City] has not come forward with anything to rebut the information submitted to the Court by the [insurers].
In this Court's judgment there has been an affirmative showing that the allegations contained within the CERCLA complaint occurred in such a fashion that the occurrences listed in the policy did not occur or the occurrences defined in the policy did not occur within the policy term of either the Bankers Standard Insurance Company or the Pacific Employers Insurance Company.
Therefore, the [insurers'] motion . . . is granted. It is difficult to determine from the transcript of that hearing which of the two arguments proffered by the insurers was relied upon by the district court. On appeal the insurers press their "known risk" argument and urge that the district court's decision was not based upon the "expect" or "intend" language of exclusion in the City's policies. However, as was earlier noted, in their submissions on the summary judgment motion the insurers conflated the two arguments. Thus, the district court's opinion could have been based upon either the "known risk" ...