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AMERICAN INS. CO. v. FAIRCHILD INDUS.

May 18, 1994

THE AMERICAN INSURANCE COMPANY, a Nebraska Corporation, and ASSOCIATED INDEMNITY CORPORATION, a California Corporation, Plaintiffs,
v.
FAIRCHILD INDUSTRIES, INC., Defendant.



The opinion of the court was delivered by: LEONARD D. WEXLER

 WEXLER, District Judge

 The American Insurance Company ("Fireman's Fund") brought this action seeking a declaration that it has no duty to defend or indemnify Fairchild Industries, Inc. ("Fairchild") for the investigation and potential remediation costs associated with the clean-up of a site in Farmingdale, Long Island. Fairchild, in turn, counterclaimed for a declaration that Fireman's Fund has both the duty to defend and the duty to indemnify it for these costs. On April 11, 1994, the case went to trial. After both sides presented all their evidence bearing on Fireman's Fund's obligations under the relevant policies, this Court entered judgment as a matter of law in favor of Fireman's Fund. This opinion follows.

 I. BACKGROUND

 In August 1989, the New York State Department of Environmental Conservation ("NYSDEC") officially classified two areas of Fairchild's plant as an Inactive Hazardous Waste Site, Class 2. General Stipulation ("Gen. Stip.") P 13. An Inactive Hazardous Waste Site is defined by the state as posing a "significant threat to the public health or environment - action required." Gen. Stip. at P 14. On September 15, 1989, Fairchild directed its insurance broker to notify its insurance companies, including Fireman's Fund, of the state's action. Gen. Stip. P 15. On September 29, 1989, the broker sent Fairchild's notice letter to Fireman's Fund. Gen. Stip. P 16. Subsequently, Fireman's Fund notified Fairchild that it would not defend or indemnify Fairchild for any of the costs incurred with respect to the investigation or clean-up of these two locations.

 In August 1965, Fairchild Hiller Corporation purchased the assets and ongoing business of the Republic Aviation Corporation, including an aircraft manufacturing and assembly plant located on approximately 88 acres of land in Farmingdale, New York. Fairchild is the successor corporation to Fairchild Hiller Corporation. Fairchild, as successor to Fairchild Hiller, has standing to assert claims under all insurance policies that may exist. Insurance Stipulation ("Ins. Stip.") P 1.

 In addition, the site contained 15 above-ground storage tanks and 75 underground storage tanks. These tanks held a variety of substances including fuel oil, diesel, jet fuel, gasoline, waste oil and solvents. In 1975, Fairchild began work under a contract with the Air Force which required it to use a solvent called perchloroethylene ("Perc"). Gen Stip. P 5. The Perc was stored in an underground storage tank. The tank used to store the Perc was installed new in 1971. Between 1971 and 1975, the tank was used to store a solvent called Tolusol. Gen Stip. P 7. Thereafter, Perc was stored in the tank.

 In 1988, a monitoring well set up on the site indicated that Perc had migrated into the groundwater. Subsequent testing revealed the existence of a 6,500 foot Perc plume on the site. *fn1" The plume contains approximately 4,000 gallons of Perc. The Perc tank had a 3,000 gallon capacity. Both parties agree that sometime in 1975, shortly after Perc was introduced into the site, a leak developed somewhere in the delivery system. Both parties further agree that only about a gallon of Perc escaped a day. Tr. at 229, 305. Neither party, however, has been able to pinpoint with any certainty the exact source of the leak.

 Fireman's Fund's expert testified that the most likely cause of the leak was corrosion in either the tank itself or in the piping leading to the tank. Tr. at 230. Fairchild's expert testified that he did not believe that the tank suffered from corrosion. *fn2" Rather, he opined that the source of the leak could be traced to certain underground pipe fittings. He believes that the fittings may have sprung a leak as a result of underground thermal fluctuations.

 Fireman's Fund admits that it provided comprehensive general liability insurance to Fairchild from 1965 through 1982. Additionally, for the period 1968-1982, the parties are in substantial agreement regarding the terms of the policies in effect. Although Fireman's Fund concedes that it provided coverage between 1965-1968, the policies cannot be found and the parties do not agree on the terms of the missing policies.

 The parties agree that the policies at issue contain two provisions that are especially relevant to the resolution of this case. First, the policies, including the missing policies, contain a notice of occurrence provision. *fn3" Second, both parties agree that all the policies issued after 1972 contain a pollution exclusion clause. *fn4" Fireman's Fund argues that it has no duty to defend or indemnify Fairchild for any claims arising out of the Old Recharge Basin because 1) Fairchild violated the notice of occurrence provision of the policies, and 2) the release of chrome into the sump was not "sudden and accidental" within the meaning of the policies. Additionally, Fireman's Fund claims that it has no duty to defend or indemnify Fairchild for the Perc plume because the plume was not caused by a "sudden and accidental" release as required by the policies. Because this Court agrees with Fireman's Fund it directed a verdict in its favor.

 Like most major industrial sites involved in processes that produce or use hazardous materials, Fairchild's Farmingdale facility was subject to overlapping regulatory oversight by federal, state and local agencies. As a result, over a period of years, a variety of agencies investigated the facility and corresponded with Fairchild regarding the environmental consequences of its activities.

 Beginning in 1981, various government agencies informed Fairchild that there was a potential problem with the sump. On September 16, 1981, the Suffolk County Department of Health Services ("SCDHS") sent a letter to Fairchild indicating that it had "discovered organic contamination of the above mentioned sump and of water discharged through the storm drain system on your property." Pl. Exh. 75. This letter instructed Fairchild that "the entire sump must also be scraped or dredged. Disposal of spoils depends upon the nature of any contamination found." Id. On August 3, 1982, Fairchild entered into a consent order with SCDHS. Pl. Exh. 58. Fairchild agreed, among other things, to cease discharging wastewater into the Old Recharge Basin, to identify the extent of contamination and to propose a plan for clean-up of the sump if necessary. Id. Moreover, despite the consent order, SCDHS explicitly reserved its right to take further appropriate action with respect to the sump.

 Subsequently, on December 6, 1983, NYSDEC notified Fairchild that it was potentially a responsible party under CERCLA "for the release or threatened release of hazardous substances . . . ." Pl. Exh. 137. On February 20, 1985, as a follow-up to certain Fairchild correspondence, NYSDEC confirmed that Fairchild would "evaluate the impacts of past discharges/spills which have occurred at your Farmingdale facility." Pl. Exh. 193. The letter explained that Fairchild's "investigation and remediation efforts are required because existing information suggests that hazardous wastes are present in the lagoon [i.e., the Old Recharge Basin] as the result of the past practices of Fairchild Republic Company." Id. NYSDEC further indicated that "the concentrations of heavy metals in the sludge in the lagoon strongly suggest that this waste would be classified as a D type hazardous waste." Id.

 On October 13, 1986, Thomas Webb ("Webb"), Fairchild's Chief Environmental Engineer, wrote an internal memorandum to George Assmus ("Assmus"), Fairchild's Farmingdale Facility Director, updating Assmus on all environmental projects at the facility, including the Old Recharge Basin rehabilitation. Pl. Exh. 47. In that memorandum, Webb estimated that if the state required Fairchild to remove bottom sediments from the sump, the cost would run anywhere from 11 to 15 million dollars. Webb also indicated that Fairchild would "do everything possible to avoid this requirement." Id.

 Additionally, on May 4, 1987, Geraghty & Miller ("G & M"), Fairchild's environmental consultants, submitted a proposal for preparation of a closure plan for the sump. Pl. Exh. 62. In that proposal, G & M recapped three closure options. The first option, and the one suggested by Fairchild itself, was to convince NYSDEC that the bottom sediments were not hazardous and therefor could be safely left in the sump. G & M indicated that this option was untenable because "it may be impossible to demonstrate the non-hazardous nature of the sediments." Id.

 The second option, which is the most expensive one, and the one G & M felt NYSDEC favored, was to remove the bottom sediments and transport them off-site. Id. The third option was to acknowledge that the bottom sediments were hazardous, but to show that the hazardous constituents have not and will not migrate from the site. According to G & M, if Fairchild could show that the hazardous materials have not migrated "it is not unreasonable to 'close' the facility as a hazardous materials disposal site with the 'waste' in place, recognizing the need for long-term ground water monitoring and a provision to implement a remedial program if migration is detected in the future." Id. On July 10, 1987, G & M sent a follow-up letter to Fairchild indicating, among other things, that the sump closure ...


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