United States District Court, Eastern District of New York
October 29, 1991
SAVOY MEDICAL SUPPLY CO., INC. AND SAVOY REALTY CORP., PLAINTIFFS,
F & H MANUFACTURING CORP., HENRY D. JACKSON AND CATHERINE S. JACKSON, DEFENDANTS/THIRD-PARTY PLAINTIFFS, V. VINCENT P. SAVIA AND MARY SAVIA, THIRD-PARTY DEFENDANTS, V. MICHIGAN MUTUAL INSURANCE COMPANY, FIREMAN'S FUND INSURANCE COMPANY, ZURICH INSURANCE COMPANY, AMERICAN MOTORISTS INSURANCE COMPANY, AMERICAN PROTECTION INSURANCE COMPANY, THIRD-PARTY DEFENDANTS.
The opinion of the court was delivered by: Wexler, District Judge.
MEMORANDUM AND ORDER
In the above-referenced action, third-party plaintiff F & H
Manufacturing ("F & H") seeks recovery of defense costs against
third-party defendants American Motorists Insurance Company
("AMICO"), American Protection Insurance Company ("AMPICO"),
Michigan Mutual Insurance Company ("Michigan Mutual"),
Fireman's Fund Insurance Company ("Fireman's
Fund"), and Zurich Insurance Company ("Zurich") (collectively,
"the third-party defendants" or "insurers"). It is to be noted
that the primary action brought against F & H, which sought
damages pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, ("CERCLA"), 42 U.S.C. § 9601
et seq., has been discontinued by the plaintiffs. During
the pendency of these actions, F & H withdrew its claims
against Zurich and Fireman's Fund. Currently before the Court
is a motion by F & H for summary judgment against all the
remaining third-party defendants; the third-party defendants
cross-move for summary judgment. For the reasons stated below,
summary judgment is granted to AMPICO; the summary judgment
motions by Michigan Mutual and AMICO are denied. Finally, F &
H's motion for summary judgment is likewise denied.
As noted above, plaintiffs Savoy Medical Supply Co. and Savoy
Realty Corp. ("Savoy") brought the underlying CERCLA action
against F & H and its owners, Harry and Catherine Jackson.
During the period from approximately 1966 to August of 1983, F
& H manufactured ground support equipment for the United States
Department of Defense. Their operations included milling,
dulling, stamping, welding, painting, packaging and shipping.
On August 18, 1983, F & H sold the subject property to
Vincent Savia and his wife, Mary Savia. At that time, F & H
discontinued insurance coverage for the site in
controversy.*fn1 Three years later, the Savias reconveyed the
property to Savoy Medical Supply Co., Inc. and Savoy Realty
Corp., corporations apparently controlled by the Savias. In
July of 1987 analysis of ground samples taken from the site by
Suffolk County authorities revealed the presence of various
contaminants. In January of 1988, subsequent to negotiations
with Suffolk County, Savoy arranged for the cleanup of the site
and the testing of the groundwater. Plaintiffs thereafter filed
the instant action against F & H and the Jacksons to recover
damages for contamination of the property under CERCLA, and for
reimbursement of the costs incurred in the investigation and
cleanup of the site. Savoy additionally sought a declaratory
judgment concerning future costs.
In the amended complaint, plaintiffs alleged in pertinent
8. Defendant [F & H] conducted heavy industrial
operations at the site during said time period.
9. The Jackson defendants were aware of, and
permitted defendant [F & H] to conduct heavy
industrial operations at the premises during said
10. Defendant [F & H] caused and allowed
contamination of the environment to occur at the
premises during said time period.
11. The Jackson defendants were aware of, and
permitted defendant [F & H] to cause and allow
contamination of the environment to occur at the
premises during the said time period.
Amended Complaint at paras. 8-11.
F & H subsequently sought defense and indemnification from
the third-party defendants, its insurers. Based on their
disclaimers of liability, F & H commenced a third-party action
against the insurers, seeking defense in the Savoy suit and
indemnification of all sums paid as damages. All third-party
defendants subsequently brought separate motions for summary
judgment, and thereafter, F & H moved for partial summary
judgment against third-party defendants. Since the filing of
these motions and cross-motions, as noted above, plaintiffs
have discontinued their underlying claims against F & H.
However, although liability claims against F & H no longer
exist, F & H continues to seek coverage
to the extent of its defense fees incurred. Thus, the Court
must determine whether the remaining insurers owed a duty to
defend F & H.
A motion for summary judgment may be granted only when it is
shown that "there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter
of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett,
477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Donahue
v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir.
1987); Winant v. Carefree Pools, 709 F. Supp. 57, 59 (E.D.N.Y.),
aff'd, 891 F.2d 278 (2d Cir. 1989). The burden rests upon the
moving party to clearly establish the absence of a genuine
issue as to any material fact. Donahue, 834 F.2d at 57.
Additionally, the Court must resolve all ambiguities and draw
all reasonable inferences in favor of the non-moving party. Id.
Furthermore, interpretation of insurance policies, similar to
other contracts, may often raise pure questions of law properly
decided by the Court. To that end, resolution by summary
judgment serves a particularly appropriate use in the reduction
of insurance contract coverage disputes. McGinniss v. Employers
Reins. Corp., 648 F. Supp. 1263, 1266 (S.D.N.Y. 1986).
Third-party defendant AMPICO argues that only AMICO issued
the general liability policy, designated as No. ZMG 130 011, to
F & H. AMPICO therefore contends that summary judgment is
appropriate in its favor, thereby releasing it from its duty to
defend. The Court agrees. Upon direct analysis of the policies
it is evident that the parties intended that AMICO cover
general liability and that AMPICO cover "Highly Protected
Risks," pursuant to property coverage. See AMICO and AMPICO's
Memo. in Support at exhibit I. Furthermore, F & H's papers fail
to reference any material issue of fact that would lead the
Court to find otherwise. Notably, F & H appears to dispute
every argument offered by the third-party defendants except the
argument that AMPICO did not offer general comprehensive
liability. Therefore, the Court grants summary judgment to
AMPICO based on the clear language of the insurance contract,
which remains uncontroverted by F & H.
AMICO and Michigan Mutual
The Court now turns to consider whether, under the policies
provided by them, AMICO and Michigan Mutual owed a duty to
defend F & H. These policies provided for comprehensive general
liability, and included the following standard exclusion:
bodily injury or property damage arising out of
the discharge, dispersal, release or escape of
smoke, vapors, soot, fumes, acids, alkalis, toxic
chemicals, liquids or gases, waste materials or
other irritants, contaminants or pollutants into
or upon land, the atmosphere or any water course
or body of water; but this exclusion does not
apply if such discharge, dispersal, release or
escape is sudden and accidental. . . .
See Michigan Mutual's Notice of Motion; AMICO and AMPICO's
Memo. in Support at exhibit I (emphasis added).
An insurer's duty to defend and to indemnify are separate and
distinct, and the former duty is broader than the latter.
Avondale Indus., Inc. v. Travelers Indem. Co., 887 F.2d 1200,
1204 (2d Cir. 1989) (citations omitted), cert. denied, ___ U.S.
___, 110 S.Ct. 2588, 110 L.Ed.2d 269 (1990); Servidone Constr.
Corp. v. Security Ins. Co., 64 N.Y.2d 419, 488 N.Y.S.2d 139,
142, 477 N.E.2d 441, 444 (1985). The duty to defend hinges on
whether the complaint in the underlying action contains
allegations that bring the action potentially within the
protection purchased. Ogden Corp. v. Travelers Indem. Co.,
924 F.2d 39, 41 (2d Cir. 1991) (citation omitted). In other words,
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." Avondale, 887 F.2d at 1204.
New York law dictates that "'[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.'" Id. (citation omitted). Thus, the insurers
herein bear the burden of proving to the Court that, as a
matter of law, there is no possible basis in law or fact upon
which the insurer might be held to defend F & H. See id. The
insurer must therefore demonstrate that the allegations in the
underlying complaint are "solely and entirely" within specific
and unambiguous exclusions from the policy's coverage.
International Paper Co. v. Continental Casualty Co., 35 N.Y.2d
322, 361 N.Y.S.2d 873, 877, 320 N.E.2d 619, 622 (1974).
Case law within the Second Circuit provides substance to
these general principles. In Ogden, the complaint alleged that
the "contamination occurred continuously during the years 1950
through 1983." See 924 F.2d at 41. The court therein held that
the "suddenness" issue was dispositive since the complaint
could not possibly be read to have alleged a sudden discharge
over such a long period, thus the insurer had no duty to
defend. Id. at 42. In EAD Metallurgical, Inc. v. Aetna Casualty
and Sur. Co., 905 F.2d 8 (2d Cir. 1990), the underlying federal
complaint alleged that:
EAD, throughout its operation from March 1977
through 1983, caused the release into the
environment . . . by disposing or arranging for
the disposal of [the substance] into portions of
the Town's sewer lines and ultimately into
portions of the Town's sewage treatment plant and
Id. at 11. Additionally, the underlying state complaint alleged
EAD . . . did wrongfully, willfully and illegally
commit waste on, and damage to, [the] premises . .
. by causing, implementing, creating, generating,
injecting and inflicting radioactive
contamination. . . .
After considering these allegations, the EAD court concluded
that there was no question that the insureds were alleged to
have continuously and intentionally polluted. See id.
Therefore, the contamination was not sudden and accidental, and
fell within the pollution exclusion from coverage. Id.
In a similar circumstance, the court in Powers Chemco., Inc.
v. Federal Ins. Co., 74 N.Y.2d 910, 549 N.Y.S.2d 650,
548 N.E.2d 1301 (1989), held that the allegations contained in the
complaint warranted a finding that the conduct fell within the
exclusion clause. In that case, the underlying complaint
alleged that the insured's predecessor buried, dumped, and
discharged pollutants into the environment. Id. 549 N.Y.S.2d at
651, 548 N.E.2d at 1302. The Court held that the pollution
damage "result[ed] from purposeful conduct," and therefore
could not be considered accidental. Id.
In contrast, the Avondale court found a duty to defend
because the allegations used in the complaint did not fall
within the exclusion. The allegations of the underlying
Avondale complaint charged the defendants with "`insufficient'
containment measures; . . . `generating' hazardous waste; . . .
`knowledge' of the presence of toxins; . . . [and] culpability
for `escape' of hazardous materials." See 887 F.2d at 1205. The
Court held that these phrases were not completely within the
exclusion, as required by law; thus, the court held that a duty
to defend existed. Id. at 1206.
The present complaint, as previously noted, used the phrases
"conducted," "were aware of," "permitted," "caused," and
"allowed" in its description of F & H's actions. Such
allegations leave open the possibility that the contamination
occurred suddenly and accidentally. Therefore, the insurers
have failed to prove to the Court that the only possible
interpretation of the allegations results in no liability due
to pollution exclusion clause. In so holding, the Court notes
that Ogden clearly differs from the instant case. The
allegations in the Ogden complaint left no doubt that the
contamination could not be sudden and accidental because it
described the conduct as "continuous" over a thirty-three year
924 F.2d at 41. Here, however, the complaint contains no
allegations of continuous behavior, and the contamination may
have occurred over a brief period of time. In other words, the
insurers have failed to show that charging F & H with the
language "caused and allowed . . . contamination . . . during
the said time period" negates the possibility of a sudden and
The insurers argue that the terms used in the present
complaint closely resemble those used in cases such as EAD
Metallurgical, 905 F.2d at 11, and Powers Chemco., 549 N.Y.S.2d
at 651, 548 N.E.2d at 1302, in which those courts found no duty
to defend. However, in the present case, both the precise words
utilized and the spirit of the complaint leave open the
possibility of the spill having occurred suddenly and
accidentally. The insurers aptly describe the case law in the
area, and raise the point that an intentional discharge cannot
be sudden or accidental. However, they fail to convince the
Court that the precise words and phrases of the complaint
herein indicated intentional behavior on the part of F & H. In
fact, the language employed by the complaint at bar more
closely resembles that of Avondale, in which the court found a
duty to defend. See 887 F.2d at 1205-06. Accordingly, the Court
finds that, as a matter of law, AMICO and Michigan Mutual
maintained a duty to defend F & H.
The policies held by F & H include various other exclusions,
which, when applicable, relieve insurers of coverage. Michigan
Mutual argues that two of these provisions, the owned property
and alienated property exclusions, apply to the case at bar,
and thus act to release them of any obligation. It is to be
noted that although the policies held with the other insurers
also contain similar exclusions, Michigan Mutual remains the
only third-party defendant to argue this line of reasoning.
However, for the reasons stated below, this Court rejects
Michigan Mutual's contentions.
A. Owned Property Exclusion
The owned property exclusion states that the policy does not
apply to "property damage to property owned or occupied by or
rented to the insured." See Michigan Mutual's Notice of Motion.
From this, Michigan Mutual urges that because the underlying
complaint alleged damage to property once owned by F & H, it
had no duty to defend. At first blush, it appears that the
exclusion is unambiguous and warrants relief for the insurer.
However, upon further analysis, it becomes apparent that
precedent supports the conclusion that the owned property
exclusion does not apply to the case at bar.
In Bankers Trust Co. v. Hartford Accident and Indem. Co.,
518 F. Supp. 371 (S.D.N.Y.), vacated on other grounds, 621 F. Supp. 685
(S.D.N.Y. 1981), the court held that work done on the
insured's property to prevent further contamination was, as a
matter of law, within the coverage of liability policies which
included the owned property exclusion. Id. at 373. The court
reasoned that, because the work was done to prevent damage to
property of third parties, the exclusion did not apply.
Furthermore, the court considered that if the preventive work
was not done the pollutants would continue, and the parties
would ultimately have to spend more money on the cleanup. Id.
The Court accepts the reasoning of Bankers' Trust. The
interests in a swift cleanup warrant creating incentive for the
insured to stop the pollution as soon as possible. F & H
persuasively argues that, if coverage is only triggered when
waste seeps onto third-party property, the incentive remains
with the insured to delay cleanup until it affects third-party
property. See generally, Barry R. Ostrager & Thomas R. Newman,
Handbook on Insurance Coverage Disputes § 8.03[b] at 250-52 (3d
ed. 1990) (discussing Bankers Trust rule) [hereinafter Ostrager
& Newman]. This decision is especially sound when considered in
light of the rule that insurance policies are generally to be
construed against the insurer. See Westchester Resco Co. v. New
England Reins. Corp.,
818 F.2d 2, 3 (2d Cir. 1987). Likewise, the insurer bears the
burden to show that an exclusionary clause applies.
Ingersoll Milling Mach. Co. v. M/V Bodena, 829 F.2d 293, 306
(2d Cir. 1987), cert. denied, 484 U.S. 1042, 108 S.Ct. 774, 98
L.Ed.2d 860 (1988). In addition, case law is unsettled as to
what constitutes potential damage to third parties, thus
mitigating against application of the owned property exclusion
herein. Boyce Thompson Inst. v. Insurance Co. of N. Am.,
751 F. Supp. 1137, 1142 & n. 7 (S.D.N.Y. 1990) (recognizing the
unsettled nature of this issue).
In Unigard Mut. Ins. Co. v. McCarty's, Inc., 756 F. Supp. 1366,
1369 (D.Idaho 1988), the court concluded that the owned
property exclusion did not bar coverage despite the lack of
evidence that contaminants had spread to adjacent lands or into
groundwater. As the court noted, "the [Environmental Protection
Agency] is not bringing this suit to restore defendants' land
for defendants' benefit. Instead the suit is brought on behalf
of a third party — the public." Id. Similarly, Suffolk County
did not force the cleanup of the contamination for the benefit
of F & H. Instead, concerns for public health and welfare
provided the initial impetus. Therefore, the Court finds that
the threat to the public due to F & H's contamination of the
sanitary system placed the damage outside the confines of the
owned property exclusion. To rule otherwise and find that no
third party damage could have occured would necessitate an
unrealistically narrow view of the extent of potential damage,
as well as the gravity of environmental pollution in general.
B. Alienated Property Exclusion
The Michigan Mutual policy also excludes coverage for:
"property damage to premises alienated by the named insured
arising out of such premises or any part thereof. . . ."
Michigan Mutual argues that, because F & H sold the property to
the Savias in 1983, the exclusion applies and coverage is thus
barred. "Once again, this exclusion only prohibits coverage for
property damage to alienated premises, not liability to third
parties." Unigard, 756 F. Supp. at 1369. Suffolk County
initiated the proceeding against the underlying plaintiffs for
the benefit of the public and the environment. Accordingly, the
alienated property exclusion does not apply, and Michigan
Mutual owed a duty to defend F & H.
Accrual of the Cause of Action
AMICO points out that the site involved herein was deleted
from its policy, and therefore argues that it was no longer
responsible for defense or indemnification of F & H subsequent
to the August 19, 1983 date of deletion.
There is no clear rule within this circuit to determine when
an "occurrence" takes place, thereby triggering coverage. If
the damage "occurs" after the dates of the policy, the insurer
is not responsible for coverage. F & H urges that neither the
underlying complaint, nor any discovery taken in this action,
has revealed when the property became contaminated. Based on
this vagueness, F & H contends, the occurrence cannot be said
to have occurred when the damage was first discovered in 1987.
By utilizing this line of reasoning, F & H implicitly rejects
the so-called "manifestation rule," by which an occurrence
takes place when the injuries first manifest themselves.
Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325, 1328 (4th
Cir. 1986). In Mraz, the Fourth Circuit noted that "determining
exactly when damage begins can be difficult, if not
impossible." Id. The Mraz court therefore judged the date of
occurrence by the time at which the leakage and damage are
first discovered, implying that environmental response costs
are "essentially a cost of doing business" which should not be
borne by liability insurers. See Ostrager & Newman, § 8.03[c]
at 259. The Mraz ruling, therefore, places the burden and costs
upon the insured.
However, in American Home Products Corp. v. Liberty Mut. Ins.
Co., 565 F. Supp. 1485, 1497 (S.D.N.Y. 1983), aff'd as modified,
748 F.2d 760 (2d Cir. 1984), the court held that the
unambiguous intention of "occurrence" language requires the
insured to establish, on a case by case basis, the date
of each claimant's "injury-in-fact" in order to trigger
occurrence liability. Id. The court also held that application
of the "injury-in-fact" rule allows for the use of hindsight to
determine if the injury occurred during the covered time
period. See id. An injury-in-fact rule would arguably result in
increased coverage by insurance companies, in that although the
insured does not maintain a policy at the time of discovery,
the insurer will nevertheless be liable for an occurrence which
took place during the period of coverage.
In the case at bar, justice warrants the application of the
injury-in-fact rule. F & H contracted with AMICO for coverage
during the policy period; construing the policy against the
insurer, damage occurring within the policy period should be
covered. It may be argued that the manifestation rule of
Mraz provides increased certainty, and thus decreased
administrative costs. Undoubtedly, to some extent, that is true
because the actual date of pollution will not necessarily have
to be discovered. However, the benefits of certainty do not
always override the interests of justice. The parties clearly
intended the policy to cover instances when damage occurred.
Under Mraz, an insured may be forced to pay costs which were
truly bargained for in a given policy, and thus reflected in
higher premiums paid to the insurer.
Moreover, the argument that placing costs directly on the
insured will provide greater incentive for safety holds little
weight in a case such as this. Premiums also reflect desired
levels of safety protection; thus, increased premiums could
just as easily provide the necessary impetus for increased
safety. If the Court were to apply the mainfestation rule, the
expectations of the insured would not necessarily be reflected
in the actual coverage. On the other hand, the injury-in-fact
rule provides a foundation to support the expectation of the
parties.*fn2 Accordingly, the injury-in-fact rule is properly
applied to the case at bar. In the Court's view, such a holding
comports with the reasoning of the Second Circuit in
American Home Products. See 748 F.2d at 765.
Upon application of the injury-in-fact rule to the case at
bar, it becomes clear that summary judgment must be denied for
all remaining parties. A material issue of fact still remains
as to the actual date of the contamination occurrence. If it
falls within the coverage period, Michigan Mutual and AMICO are
liable to F & H for its defense costs. If the damage actually
occurred subsequent to August 19, 1983, the insurers would not
appear to be liable for the costs incurred in the defense of
the primary action.
For the reasons stated above, the motions for summary
judgment by AMICO and Michigan Mutual are denied, as are the
cross motions for summary judgment by F & H against them.
Finally, AMPICO's motion for summary judgment, pursuant to Rule
56 of the Federal Rules of Civil Procedure, is granted.