The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.
Employers Insurance of Wausau ("Wausau") brought this declaratory judgment action to determine insurance coverage of claims arising from contamination of the "Turpentine Run Aquifer" (the "Aquifer") feeding numerous water wells in the Tutu Region of St. Thomas, United States Virgin Islands, and of additional pollution in Wellsville, New York. Wausau, Continental Casualty Company, Hartford Accident and Indemnity Company, and National Union Fire Insurance Company of Pittsburgh, PA (collectively the "Moving Insurers" or the "Insurers") presently move under Fed. R. Civ. P. 56(c), for a declaration that they are not required to defend or indemnify defendants Duplan Corporation ("Duplan"), Laga Industries, Ltd. ("Laga"), Panex Industries, Inc. ("Panex Industries"), Panex Company ("Panex Co."), Andreas Gal and Paul Lazare (collectively "the Duplan Defendants"), for claims asserted against them arising from the Aquifer's contamination. For their part, the Duplan Defendants cross-move for a declaration that the Moving Insurers are obligated to pay the costs of defending claims arising from the Virgin Islands pollution. Another insurer, Federal Insurance Company ("Federal"), moves to dismiss the Duplan Defendants' cross-claim against it which seeks payment of defense costs and indemnification under Director and Officer liability policies ("D & O policies") it issued to Panex Industries and/or the Panex Industries, Inc. Stockholders' Liquidating Trust (the "Panex Trust") from 1981 through 1993.
The motions were elaborately briefed and the Court heard oral argument. I have not considered any written submissions made after oral argument.
For the reasons explained below, I hold that because there is a reasonable possibility that the claims against them will give rise to a covered risk, the Moving Insurers are required to pay the costs of the Duplan Defendants' defense in claims arising from the Virgin Islands contamination. I further hold that the Duplan Defendants' cross-claim for coverage under the D & O liability policies issued by Federal must be dismissed because the third-party claims asserted against the Duplan Defendants are not covered under those policies.
The undisputed facts are as follows.
From 1970 through 1979, Laga, a wholly-owned subsidiary of Duplan, owned and operated a textile manufacturing plant in the Tutu Wells section of St. Thomas, United States Virgin Islands (the "Laga site"). The Laga site is situated approximately 250 feet west of a tributary of the Turpentine Run Aquifer. In its manufacturing process, Laga used the chemical perchloroethylene ("PCE") to dry-clean fabrics. Defendant Laga was dissolved in 1981. In 1981, Duplan was reorganized under the bankruptcy laws and emerged from Chapter 11 bankruptcy as Panex Industries. Panex Industries was subsequently liquidated by a vote of its stockholders and the Panex Trust was formed on September 12, 1985 for the purpose of holding certain assets in order to satisfy the liabilities of Panex Industries. Andreas Gal and Paul Lazare were directors and officers of Duplan, Laga and Panex Industries. Gal and Lazare are presently the general partners of Panex Co., a New York state partnership which purchased the Laga site in late 1979 or early 1980 and sold it in 1982. The manufacturing plant was not operated during those years.
In 1987, the United States Environmental Protection Agency ("USEPA") discovered that a number of water wells fed by the Aquifer in the Tutu region of St. Thomas were contaminated by PCE, among other hazardous substances. In the wake of this discovery, the USEPA ordered the closure of numerous wells the Aquifer fed.
Four Winds Plaza Partnership ("Four Winds"), is the owner of a shopping center whose water wells were supplied by the Aquifer and contaminated by the hazardous substances which pervaded it. A number of individuals comprising collectively the "Harthman family" own just over 25 acres of land in the Tutu section of St. Thomas on which numerous of the contaminated water wells are located. P.I.D., Inc. Water Services, Limited, ("P.I.D.") and Tutu Services, Limited leased the lands and the water rights from the Harthman family. The Four Winds and Harthman/P.I.D. wells were all embraced by the USEPA's order of closure.
Inevitably, the contamination has not gone without attempted reparation by the aggrieved parties. In 1989, P.I.D. and Four Winds filed two separate, later consolidated, actions
in the federal district court of the District of the Virgin Islands (the "Virgin Islands action") alleging claims of nuisance, trespass, negligence, and strict liability against an assortment of defendants.
In 1990, P.I.D. amended its complaint to add seven members of the Harthman family as plaintiffs. In 1992, the P.I.D./Harthman plaintiffs filed their Fourth Amended Complaint and Four Winds filed its First Amended Complaint, both adding as defendants the Duplan Defendants. The Virgin Islands plaintiffs allege that the Aquifer was contaminated, inter alia, by PCE discharged from the Laga plant. In June of 1993, the USEPA issued a "Notice of Potential Responsibility" to Gal and Lazare for the costs of investigation and remediation of the contamination pursuant to CERCLA.
In April of 1994, Wausau commenced this action against the Duplan Defendants and a number of insurance companies which, along with Wausau, allegedly provided primary or excess liability insurance policies to all or some of the Duplan Defendants during the period from 1954 to the present.
The present motions followed.
A. Cross-Motions for Summary Judgment
Before turning to the substantive insurance coverage issues, I must first decide which forum provides the governing law. The Insurers pray for the application of New York law, while the Duplan Defendants contend that the law of the United States Virgin Islands applies. Because subject matter jurisdiction is supplied by diversity of citizenship, this Court must apply the choice of law rules of the forum state, New York. See Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941).
Under New York choice of law rules, the governing law is the law of the state which has the most significant contacts with the dispute. With respect to insurance coverage disputes in particular, "New York generally gives controlling effect to the law of the jurisdiction which has the greatest interest in the matter. Important factors in making this determination are, for example, location of the insured risk, residence of the parties, and where the contract was issued and negotiated." Munzer v. St. Paul Fire and Marine Ins. Co., 145 A.D.2d 193, 538 N.Y.S.2d 633, 637 (2d Dep't 1989) (citations omitted); see also Avondale Industries, Inc. v. Travelers Indemnity Co., 774 F. Supp. 1416, 1422-23 (S.D.N.Y. 1991) (under New York choice of law principles, where insured interests were located "in a wide geographic range," court applied law of state where policies were executed, issued and brokered, and where insureds had their principal place of business); Olin Corp. v. Insurance Co. of North America, 743 F. Supp. 1044, 1049 (S.D.N.Y. 1990) (New York law applied to insurance coverage dispute where insured had principal place of business in New York and policies which covered risks nationwide were issued and delivered there, even though claim at issue involved pollution in Virginia), aff'd, 929 F.2d 62 (2d Cir. 1991); McGinniss v. Employers Reinsurance Corp., 648 F. Supp. 1263, 1267 (S.D.N.Y. 1986) (in insurance coverage dispute, the residence of the insured and issuance of the policy in New York were sufficiently significant contacts to warrant choice of New York law).
In this case, the Moving Insurers contend the following with respect to the subject policies: (1) the principal place of business of the policyholder, Duplan and/or Panex Industries, was New York; (2) the insurance was purchased through brokers in New York; and (3) the policies were executed and delivered in New York.
In short, the Insurers have come forward with evidence showing that the negotiation, execution and delivery of the insurance policies took place in New York, that the policies were issued to a corporation whose principal place of business was New York, and that the policies cover risks nationwide. The Duplan Defendants have failed to refute any of these propositions by admissible evidence. The Duplan Defendants' conjecture concerning the possible use of a Virgin Islands broker by a company covered under the policies but not the named policyholder, is simply insufficient to demonstrate a triable issue of material fact concerning the situs of the negotiation and execution of the policies. Applying New York choice of law principles to the facts at bar, I conclude that New York furnishes the governing law in this insurance coverage dispute. I would not alter this conclusion even if the Duplan Defendants were able to show that a Virgin Islands broker was occasionally used. Under New York choice of law principles, that single fact would not be dispositive of the choice of law.
The Duplan Defendants contend, however, that having suffered the environmental consequences of the pollution, the Virgin Islands have the greatest interest in resolving this dispute and should therefore supply the governing law. This argument does not withstand scrutiny. While the location of the allegedly tortious or damaging conduct giving rise to liability may be a factor in the choice of law calculus, it is not dispositive, particularly where the insurance policies such as these cover risks in multiple states and territories. See Monarch Insurance v. Insurance Corp. of Ireland Ltd., 835 F.2d 32, 35-36 (2d Cir. 1987) (under New York choice of law rules New York law applied to dispute concerning breach of reinsurance contracts where two insurers did business in New York, one insurer's principal place of business was New York, and one insurance contract was executed in New York, despite fact that damage occurred in Ireland and tortious conduct occurred in New Jersey); Olin Corp., 743 F. Supp. at 1049 (where risks covered were located in several states, fact that dispute involved only coverage at site in Virginia did not control choice of law); U.S. Aviation Underwriters, Inc. v. United Coconut Chemical, Inc., 1992 U.S. Dist. LEXIS 7625, 87 Civ. 5684 (MJL), 1992 WL 122787 *2 (S.D.N.Y. May 22, 1992) (fact that location of the risks may have been outside New York did not require foreign law to be applied; where policies were issued and delivered in New York, broker was located in New York and insured's principal place of business was in New York, New York law applied); Maryland Casualty Co. v. W.R. Grace & Co., 1992 U.S. Dist. LEXIS 8378, 88 Civ. 4337 (JSM), 1992 WL 142038, *2 (S.D.N.Y. June 9, 1992) (noting that it would be unusual and inconsistent to have the law of many different states apply to a single insurance contract based upon the situs of the underlying injury giving rise to liability) (citing cases); cf. Borg-Warner Corp. v. INA, 174 A.D.2d 24, 577 N.Y.S.2d 953, 956 (3d Dep't 1992) (New York law governed insurance coverage dispute where contracts covered number of sites, New York has a unique policy-based interest in pollution exclusion clause at issue, insured chose New York as forum for action, and Illinois law was unsettled).
Even if I were to accept the Duplan Defendants' contention that New York does not have the most significant contacts with the dispute, I would nonetheless hold that New York law governs this action because there is no conflict between New York law and the law of the Virgin Islands concerning the operation of the pollution exclusion clause on which the present dispute focuses. The choice between the law of New York and that of another state is a consideration only where a conflict exists between New York and foreign law. See Zurich Insurance v. Shearson Lehman Hutton, 84 N.Y.2d 309, 315, 618 N.Y.S.2d 609, 611, 642 N.E.2d 1065 (1994) (where no conflict exists between the law of New York and that of another state concerning particular issue, no choice of law problem arises); Olin Corp. v. Insurance Co. of North America, 762 F. Supp. 548, 558 (S.D.N.Y. 1991) (choice of law question did not arise because laws of New York and Connecticut were not in conflict on dispositive issue of interpretation of pollution exclusion clause), aff'd 966 F.2d 718 (2d Cir. 1992); In re Wedtech Corp. v. Nofziger, 88 Bankr. 619, 623 n. 5 (Bankr. S.D.N.Y. 1988) (noting that because no conflict existed between the law of Washington, D.C. and the law of New York on a dispositive issue, choice of law problem did not arise).
This Court has discovered only one reported case applying Virgin Islands law interpreting a pollution exclusion clause containing a "sudden and accidental" exception which, as we shall see, is of primary concern in this case. As discussed below, that case is not in conflict with New York law on the subject. Since no conflict exists, New York law would govern in any event.
The Duplan Defendants submit that C.H. Heist Caribe Corp. v. American Home Assurance Co., 640 F.2d 479, 483 (3d Cir. 1981) conflicts with New York law because it affords a broad interpretation to the "sudden and accidental exception" in a pollution exclusion clause, assertedly in contrast to New York law. This contention is not borne out by an analysis of the case. In Heist, the court held an insurer obligated to defend a claim arising from personal injuries suffered by an individual while cleaning a tank containing toxic substances. The insurer argued that it had no duty to defend the insured because the claim fell within the policy's pollution exclusion. The Third Circuit disagreed. It held that the allegations in the complaint did not trigger operation of the pollution exclusion because the complaint did not allege that any pollutants had been discharged or released onto land, atmosphere or a body of water, as the pollution exclusion required. Moreover, the court held that because the allegations did not describe the occurrence of a non-accidental event, the complaint did not negate the possibility that the claim fell within the "sudden and accidental" exception to the pollution exclusion.
There can be no serious dispute that faced with those same allegations, New York courts would reach a similar result. As set forth infra, under New York law if the third-party complaint's allegations give rise to the possibility of a sudden and accidental discharge of pollution, the insurer is bound to defend. Heist is in accord with that principle. The broadly-worded complaint alleged no non-"sudden and accidental" event, thereby failing to negate the possibility of a covered occurrence.
To the extent the Duplan Defendants maintain that Heist narrowly interprets the pollution exclusion by limiting its application to only non-accidental events, that contention is unfounded. The Heist court's recognition that the allegations demonstrated the possibility of non-accidental discharge, and its concomitant failure to discuss whether the allegations raised the possibility of non-sudden discharge, is of no consequence. The court of appeals expressly declined to "decide whether the district court was correct when it held that [the pollution exclusion] excluded coverage only for nonaccidental [sic] environmental pollution." Id. at 483 n.2.
Moreover, even if I were to hold that under choice of law principles the law of the Virgin Islands applies to this case, because the law of the Virgin Islands is unsettled with respect to the interpretation of the "sudden and accidental" exception, I would be compelled to apply the law of New York and other leading jurisdictions in interpreting that exception. See Rogers v. Grimaldi, 875 F.2d 994, 1003 (2d Cir. 1989); Lenz v. Associated Inns & Restaurants Co. of Am., 833 F. Supp. 362, 378 n. 16 (S.D.N.Y. 1993). As previously noted, the Court has discovered, and the Duplan Defendants have identified, only one case applying Virgin Islands law to a pollution exclusion clause similar to the one involved in the present action. Because there is no developed body of law on the subject, the law of the Virgin Islands is well short of settled. Accordingly, this Court would apply New York law interpreting the sudden and accidental exception which is in accord with the national trend, see Technicon Electronics v. American Home Assurance, 141 A.D.2d 124, 533 N.Y.S.2d 91, 99 (2d Dep't 1988), aff'd, 74 N.Y.2d 66, 544 N.Y.S.2d 531, 542 N.E.2d 1048 (1989); Olin Corp., 762 F. Supp. at 558, even if New York did not have the most significant contacts with the dispute.
For all these reasons, New York supplies the governing law in this case.
Under New York law, an insurer's contractual duty to defend is broader than its duty to indemnify. See Curtis v. Nutmeg Ins. Co., 204 A.D.2d 833, 612 N.Y.S.2d 256, 258 (3d Dep't 1994). An insurer's duty to defend arises when a complaint against the insured alleges facts, no matter how false or groundless, which give rise to any potential liability covered by the terms of the policy provided by the insurer. See Technicon Electronics v. American Home Assurance, 74 N.Y.2d 66, 73, 544 N.Y.S.2d 531, 533, 542 N.E.2d 1048 (1989). "If there is a doubt as to whether the claim comes within the insurer's duty to indemnify, the insurer is generally required to furnish a defense, leaving the ...