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STATE OF NEW YORK v. AMRO REALTY CORP.

September 5, 1990

THE STATE OF NEW YORK, PLAINTIFF,
v.
AMRO REALTY CORP., HARRY MOSKOWITZ, AND DAVID MOSKOWITZ, DEFENDANTS AND THIRD-PARTY PLAINTIFFS, V. ZURICH INSURANCE COMPANY; ATLANTIC MUTUAL INSURANCE COMPANY; UNIGARD SECURITY INSURANCE COMPANY; LUMBERMENS MUTUAL CASUALTY COMPANY; GRAPHIC ARTS MUTUAL INSURANCE COMPANY; FEDERAL INSURANCE COMPANY; FIRST STATE INSURANCE COMPANY AND HOME INSURANCE COMPANY, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: McCURN, Chief Judge.

MEMORANDUM-DECISION & ORDER

I. Introduction

In March of 1986 the State of New York notified the current defendants, namely AMRO, Harry Moskowitz, and David Moskowitz, of the State's intention to again bring suit. On December 2, 1986, the State of New York filed a complaint against the defendants pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and New York State common law. The plaintiff seeks to hold the defendants jointly and severally liable for all damages and response costs incurred by the State. The defendants then filed numerous third-party complaints against their primary and excess insurance carriers. The third-party actions sought both defense and indemnification from the insurance carriers as well as a declaration that the defendants/third-party plaintiffs are entitled to counsel of their choice.*fn1

On October 11, 1988, this court issued a decision which granted the summary judgment motion of third-party defendants Unigard Security Insurance Company ("Unigard") and Lumbermens Mutual Casualty Company ("Lumbermens") and dismissed the third-party complaint as against them. State of N.Y. v. Amro Realty Corp., 697 F. Supp. 99, 110 (N.D.N.Y. 1988).*fn2 In so doing, this court denied the insureds motion for an order requiring Unigard and Lumbermens to provide a defense to the underlying State action. Unigard and Lumbermens were entitled to summary judgment, the court determined, due to the insureds failure to provide timely notice to Unigard and Lumbermens of an "occurrence" — the 1981 discovery of pollution by the State — as required by the applicable insurance policies. Id. at 105-06. The court further held that the "pollution exclusion" clause contained in the Unigard policy operated as an alternative ground upon which summary judgment could be granted in favor of Unigard. Id. at 106-10.*fn3

The insureds have presently moved for reconsideration of this court's order of October 11, 1988. In the alternative, the insureds request an order, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, entering final judgment denying the insureds motion for partial summary judgment and granting the summary judgment motions of Lumbermens and Unigard and dismissing the third-party complaint. Also before the court is a motion by third-party defendant First State Insurance Co. ("First State") for a summary judgment order declaring that it has no obligation to indemnify or defend the insureds and dismissing the third-party complaint. Another third-party defendant, Atlantic Mutual Insurance Co. ("Atlantic"), has moved for an order granting partial summary judgment declaring that it has no obligation to indemnify the insureds.*fn4 Atlantic also seeks to have any order certified for interlocutory review pursuant to 28 U.S.C. § 1292(b). The summary judgment motions of First State and Atlantic are largely based on this court's prior decision with respect to the application of the pollution exclusion clause to relieve Unigard of its duty to provide a defense or indemnification.

II. Timeliness of Notice to Insurers and Waiver

The court previously determined that the insureds had failed to comply with the notice-of-occurrence provision contained in the Unigard and Lumbermens insurance policies. On this basis, the court held that Unigard and Lumbermens were entitled to summary judgment relieving them of the obligation of providing a defense or indemnification. The court further held that Lumbermens had not waived its right to raise the late notice defense when it did not raise that defense prior to the initiation of the CERCLA action. See Amro Realty, 697 F. Supp. at 102-06.

The insureds have moved for reconsideration of the court's determination that David and Harry Moskowitz failed to comply with the notice-of-occurrence provision. The Moskowitzes assert that they had no reason to believe that they would be subject to individual liability as a result of the State's discovery of pollution at the American Thermostat facility in 1981 because CERCLA does not, in any obvious manner, provide for officer and director liability. On this basis they claim that their failure to provide notice of the pollution occurrence until 1985 was not unreasonable.

The court rejects the Moskowitzes motion for reconsideration on this point for the reasons stated in the October 11, 1988, order and adds the following comments. The notice-of-occurrence provision generally contained in insurance policies serves important purposes. As stated by the Second Circuit:

  They enable insurers to make a timely
  investigation of relevant events and exercise
  early control over a claim. Early control may lead
  to a settlement before litigation and enable
  insurers to take steps to eliminate the risk of
  similar occurrences in future. When insurers have
  timely notice of relevant occurrences, they can
  establish more accurate renewal premiums and
  maintain adequate reserves.

Commercial Union Insurance Co., v. International Flavors & Fragrances, Inc., 822 F.2d 267, 271 (2nd Cir. 1987). Thus, an insured's failure to comply with the notice-of-claim provision will often result in prejudice to the interests of the insurer. An insured's compliance with the requirements of a notice-of-occurrence provision serves as a condition precedent to any finding of liability on the part of the insurer. Id. "The test for determining whether the notice provision has been triggered is whether the circumstances known to the insured at that time would have suggested to a reasonable person the possibility of a claim." Id. at 272 (emphasis added).

As major owners and corporate officers of the AT facility the Moskowitzes may properly be charged with knowledge of the discovery of pollution by the State of New York in 1981. They may also be charged, under the reasonable person standard, with the knowledge that such a discovery would likely lead to legal action for damages against them individually. The definition of "owner" and "operator" contained in CERCLA at 42 U.S.C. § 9601(20)(A) is broadly worded and does not make reasonable the Moskowitzes belief that it was not possible for them to be held liable individually for AT's pollution. Moreover, the initiation of a state law claim against them individually was also clearly a "possibility." See State of New York v. Shore Realty Corp., 759 F.2d 1032, 1052-53 (2nd Cir. 1985). Therefore, the four year delay in providing notice to Lumbermens and Unigard was unreasonable as a matter of law.

The insureds motion, for reconsideration of this court's determination that Lumbermens did not waive its right to raise the late notice defense, is also denied largely for the reasons stated in the prior order. See Amro Realty, 697 F. Supp. at 105-06. The insureds again claim that Lumbermens waived its right to raise a late notice defense because it did not raise that defense until after the initiation of the CERCLA action by the State of New York. Lumbermens had been given notice in March of 1986 that the State had served a "potentially responsible person" letter upon the insureds which indicated the State's intent to initiate an action pursuant to CERCLA. Lumbermens declined coverage at that time for a number of stated reasons which did not include the late notice defense. However, after the CERCLA action was filed by the State in December of 1986, and a copy of the complaint sent to Lumbermens, it again declined coverage by letter of January 23, 1987 — for the first time raising the late notice defense.

On reconsideration, the parties focus on the definition of the word "suit" and whether the service by the State of New York of a potentially responsible person letter triggers an insurer's duty to defend. This appears to be an unsettled question of New York law; contrast the discussion in Avondale Industries, Inc. v. Travelers Indem. Co., 887 F.2d 1200, 1206 (2nd Cir. 1989), with that contained in Technicon Electronics v. American Home Assurance Co., 141 A.D.2d 124, 533 N YS.2d 91, 104-05 (A.D. 2 Dept. 1988). This court, however, need not decide that issue.

First, the insureds here are seeking to have Lumbermens provide a defense and indemnification for the claims asserted in the CERCLA action which is being prosecuted in this federal court. There is no request in the third-party complaint for the provision of a defense and indemnification for damages which might have been incurred in some state administrative proceeding. Thus, the issue of whether the State's pre-complaint letter was the initiation of a "suit" does not appear to be relevant to a determination of the precise claims raised by the insureds in their third-party complaints. Secondly, as has been stated repeatedly by the New York Court of Appeals:

  The duty to defend the insureds . . . is derived
  from the allegations of the complaint and the terms
  of the policy. If the complaint contains any facts
  or allegations which bring the claim even
  potentially within the ...

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