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STATE OF N.Y. v. BLANK

September 5, 1990

THE STATE OF NEW YORK, PLAINTIFF,
v.
WALTER T. BLANK, ABALENE PEST CONTROL SERVICE, INC., AND ORKIN EXTERMINATING COMPANY, INC., DEFENDANTS. WALTER T. BLANK AND ABALENE PEST CONTROL SERVICE, INC., THIRD-PARTY PLAINTIFFS, V. NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION, NEW ENGLAND MARINE CONTRACTORS, INC., CAPITAL MUTUAL INSURANCE CO., AND NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA., THIRD-PARTY DEFENDANTS.



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

MEMORANDUM-DECISION AND ORDER

I. INTRODUCTION

In February of 1988, the State of New York initiated this action pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), as well as state statutory and common law, for the remediation of pollution at a site located in the Town of Moreau, South Glens Falls, New York. The State alleged that the site was the location from which first Abalene Pest Control Service Inc. ("Abalene"), and later Orkin Exterminating Company Inc. ("Orkin"), distributed pesticides. Walter Blank, who was allegedly Abalene's former owner and president, has been joined as a defendant in this suit along with Abalene and Orkin. The dispute presently before the court concerns third-party actions by Blank and Abalene against Capital Mutual Insurance Company ("Capital Mutual") and the National Union Insurance Company of Pittsburgh ("National Union") for defense and indemnification with respect to the first-party action.*fn1

On February, 9, 1989, this court signed an order granting third-party plaintiff Walter Blank partial summary judgment declaring and adjudging Capital Mutual liable to provide Blank with a defense to the first-party action. That order was based upon a January 24, 1989, bench decision. The January 24, 1989 bench decision, as well as this memorandum-decision and order, are largely concerned with the effect of pollution exclusion clauses, contained in the insurance policies, on the insurers' duty to supply a defense and indemnification. The February 9th order also denied, without prejudice to renew, Blank's and Abalene's motion for partial summary judgment declaring that National Union had a duty to provide a defense. The court denied that motion on the ground that the insureds' had not provided complete evidence concerning the terms and conditions of the National Union policies — preferring that discovery be permitted into the existence of full copies of the policies before undertaking the task of reviewing secondary evidence of their existence.

The court requested that Walter Blank and Capital Mutual first attempt to resolve amongst themselves the question of the amount of attorneys' fees properly due as defense costs. This failed. A dispute arose between Blank and Capital Mutual both as to the amount of defense costs and, once again, Capital Mutual's duty to provide a defense.

On October 3, 1989, a second round of motions and cross-motions were argued before this court. Third-party plaintiff Blank moved for an order directing Capital Mutual to comply with the court's February 9, 1989, order to provide Blank with a defense in the first-party action and to pay for defense costs incurred to date. Blank also moved for an order finding Capital Mutual in violation of § 349 of the New York State General Business Law entitling Blank to an award of attorneys' fees and damages. Both Blank and Abalene have also moved for summary judgment declaring and adjudging National Union liable to them for all costs, expenses and attorneys' fees incurred in defending the first-party action.

Third-party defendant Capital Mutual cross-moved pursuant to Rules 60(b)(2) and (6) of the Federal Rules of Civil Procedure for an order relieving Capital Mutual from this court's order of February 9, 1989, and for summary judgment declaring that Capital Mutual has no duty to defend or indemnify Walter Blank. Capital Mutual, in the alternative, has raised numerous objections to the amount of defense costs requested by Blank. Capital Mutual has also cross-moved for an order disqualifying the law firm of Whiteman, Osterman & Hanna from engaging in any further representation of Walter Blank in this action.

II. LEGAL BACKGROUND AND FACTUAL CONCLUSIONS

Both Capital Mutual and National Union rely on pollution exclusion clauses contained in their policies to relieve them of the duty to defend or indemnify the insureds. In the time since this court issued its February 9, 1989, order, both the New York State Court of Appeals and the Second Circuit have issued decisions clarifying the circumstances under which the pollution exclusion clause operates to relieve an insurer of its duty to defend or indemnify. See Technicon Electronics v. American Home, 74 N.Y.2d 66, 544 N.Y.S.2d 531, 542 N.E.2d 1048 (Ct.App. 1989); Powers Chemco, Inc. v. Federal Ins. Co., 74 N Y2d 910, 549 N.Y.S.2d 650, 548 N.E.2d 1301 (Ct.App. 1989); Avondale Industries, Inc. v. Travelers Indemnity Company, 887 F.2d 1200 (2nd Cir. 1989), reh'd denied, 894 F.2d 498 (2nd Cir. 1990) (per curiam), cert. denied, ___ U.S. ___, 110 S.Ct. 2588, 110 L.Ed.2d 269 (1990); EAD Metallurgical, Inc. v. Aetna Cas. & Sur. Co., 905 F.2d 8 (2nd Cir. 1990). A review of the current case law and findings by this court concerning the predicate facts of this case will assist in sharpening the precise legal issues and eliminating preliminary disputes.

A. The Duty to Defend

The well settled New York law concerning the duty of an insurer to defend was recently summarized by the Second Circuit:

    An insurer's duty to defend and indemnify are
  separate and distinct, and the former is broader
  than the latter. . . . The duty to defend rests
  solely on whether the complaint in the underlying
  action contains any allegations that arguably or
  potentially bring the action within the protection
  purchased. . . . So long as the claims alleged
  against the insured rationally may be said to fall
  within the policy coverage, the insurer must come
  forward and defend. . . .
    New York courts have held, in addition, that an
  insurer seeking to avoid its duty to defend bears
  a heavy burden. "[B]efore an insurance company is
  permitted to avoid policy coverage, it must . . .
  establish[ ] that the exclusions or exemptions
  apply in the particular case, and that they are
  subject to no other reasonable interpretation." .
  . . To avoid the duty therefore the insurer must
  demonstrate that the allegations in the underlying
  complaints are "solely and entirely" within
  specific and unambiguous exclusions from the
  policy's coverage.
    Consequently, [an insurer] can be excused from
  its duty to defend only if it can be determined as
  a matter of law that there is no possible basis in
  law or fact upon which the insurer might be held
  to indemnify [the insured].

Avondale Industries, 887 F.2d at 1204-05 (citations omitted). Or, as stated somewhat differently by the New York Court of Appeals:

  The duty to defend insureds — long recognized as
  broader than that to indemnify — 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 protection purchased, the insurer is
  obligated to defend. . . . Moreover, when an
  exclusion clause is relied upon to deny coverage,
  the insurer has the burden of demonstrating that
  the "allegations of the complaint cast that
  pleading solely and entirely within the policy
  exclusions, and, further, that the allegations, in
  toto, are subject to no other interpretation."

Technicon Electronics v. American Home, 74 N.Y.2d at 73-74, 544 N YS.2d at 533, 542 N.E.2d at 1049-50 (citation omitted) (quoting International Paper Co. v. Continental Casualty Co., 35 N.Y.2d 322, 325, 361 N.Y.S.2d 873, 875, 320 N.E.2d 619, 620-21 (Ct.App. 1974)) (emphasis in original). "This duty [to defend] includes the defense of those actions in which alternative grounds are asserted, some within and others without the protection purchased." Lionel Freedman, Inc. v. Glens Falls Ins. Co., 27 N.Y.2d 364, 368, 318 N.Y.S.2d 303, 305, 267 N.E.2d 93, 94 (Ct.App. 1971). It is also well settled that because the duty to defend is broader than the duty to indemnify, a finding by a court that there is no duty to defend automatically means that there is no duty to indemnify. EAD Metallurgical, 905 F.2d at 11.

B. The Pollution Exclusion Clause

Significantly, since this court issued its February 9, 1989, order, the highest court of New York has also found that the standard industry pollution exclusion clause is unambiguous. As stated in Powers Chemco: "the exception to the exclusion for liability arising from pollution is not operative unless the occurrence in question was both `sudden' and `accidental.'" 74 N Y2d at 911, 549 N.Y.S.2d at 651, 548 N.E.2d at 1302 (quoting Technicon, 74 N.Y.2d at 75, 544 N.Y.S.2d at 533, 542 N.E.2d at 1050) (emphasis in original). "Intentional discharges of waste, leading to the ultimate pollution of the environment . . . cannot be considered `accidental.'" Id.

It is now equally clear that New York law requires courts to focus on the type of pollution occurrence alleged as opposed to the culpability of the insured. In Powers Chemco the New York Court of Appeals addressed the argument that the pollution exclusion clause only applies to actual, as opposed to innocent, polluters. The Powers Chemco Court relieved an insurance company of the duty to indemnify by virtue of the pollution exclusion clause even though it was the insured's predecessor, as opposed to the insured itself, who was alleged to have buried, dumped, and discharged pollutants into the environment. The Court stated:

  We also reject plaintiff's contention that since
  it was not the actual polluter but merely inherited
  the problem from the prior landowner, the pollution
  exclusion clause cannot bar its present insurance
  claim. Simply put, there is nothing in the language
  of the pollution exclusion clause to suggest that
  it is not applicable when liability is premised on
  the conduct of someone other than the insured. . .
  . As we noted in Technicon, the exclusion clause is
  "unambiguously plain and operative" . . . and
  represents only a single discrete exception to the
  insurer's obligation to indemnify under the policy.

Powers Chemco, 74 N.Y.2d at 911, 549 N.Y.S.2d at 651, 548 N.E.2d at 1302 (emphasis added).

C. The Insurance Policies

Capital Mutual issued a comprehensive general liability policy, effective February 28, 1985, to January 1, 1987, to Walter Blank in his individual capacity. The Capital Mutual policy contained the standard industry pollution exclusion clause which read:

  It is agreed that the insurance does not apply to
  bodily injury or property damage arising out of
  the discharge, dispersal, release, or escape of
  smoke, vapors, soot, fumes, acids, alkalies, toxic
  chemicals, liquid or gases, waste materials or
  other irritants, contaminants or pollutants into
  or upon land, the atmosphere or any watercourse or
  body of water, but this exclusion does not apply if
  such discharge, dispersal release or escape is
  sudden and accidental.

(Emphasis added).

National Union insured Abalene under comprehensive general liability policies from September 15, 1978, to ...


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