Bausch & Lomb Inc. v. Utica Mutual Insurance

MURPHY, Chief Judge. This case focuses upon the meaning and application of certain provisions of a comprehensive general liability (CGL) insurance policy. The primary question presented is whether the insurer must defend or indemnify the insured ⁷⁶⁴ as a consequence of groundwater pollution discovered on its industrial site, which entailed expenses of removing soil contaminated with hazardous chemicals. The insured initiated the clean-up without legal proceedings having been formally filed against it by a third party, and without a written administrative directive by a government agency that it take such action.

I Utica Mutual (Utica) is a mutual insurance company based in the State of New York. Bausch & Lomb (B & L) is a Fortune 500 manufacturer of health care and optical products with its headquarters in Rochester, New York. The site in question is the Diecraft manufacturing facility,located in Sparks, Maryland, about 15 miles north of Baltimore City. The property consists of some 28 acres; the plant itself was built in 1958, and purchased by B & L in 1965.

B & L operated the Diecraft facility for the machining and plating of parts used in telescopes and microscopes. A. Utica sold CGL policies to B & L annually from at least 1970 to 1986. The policy was a standard form document adopted generally throughout the insurance industry, to which were attached certain endorsements or riders negotiated by the parties. The relevant standard language provided: “The company [Utica] will pay on behalf of the insured all sums, which the insured shall become legally obligated to pay as damages because of ... property damage to which this insurance applies caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such ... property damage.” The policy defined an “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in ... property damage nei ⁷⁶⁵ ther expected nor intended from the standpoint of the insured.” “Property damage”, in turn, was defined as “physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom.” The policy did not define the term “damages.” Nor did it define the word “suit” in that part of the insuring agreement that requires the insurer “to defend any suit against the insured seeking damages on account of ... property damage.” 1 The standard form policy also included 17 specific exclusions from coverage, of which two have some bearing on this case.

One provision, paragraph (Z), excluded coverage for property damage to premises alienated by the insured. The second, paragraph (k), comprised the so-called “own property” provision excluding coverage for property damage to property owned by, occupied by, rented to, used by, or in the care, custody, or control of the insured, B & L. Under a separately negotiated rider, endorsement # 18, the parties eliminated the standard exclusion in paragraph (k) and substituted “own property” coverage with a limit of $50,000 per occurrence. None of the policies for this period contained an express “pollution exclusion” of the type that is now common in liability insurance contracts. Nor did the policies contain an express endorsement providing for environmental impairment liability coverage.

The extent to which the policy reaches, or fails to reach, property damage caused by pollution thus depends on the policy’s standard language and the parties’ endorsements to it. ⁷⁶⁶ B. The Diecraft plant carried on metal plating activities from 1958 through 1975. The plating created two types of waste, each of which was disposed of on-site. More concentrated plating wastes were first routed into a series of settling tanks, and then into a holding lagoon on the plant grounds; the lagoon measured 20 feet by 60 feet by 6 feet deep. Less concentrated rinse water waste, along with polishing residues and degreasing solvents, traveled first into a holding tank, and then into a set of drywells and overflow pipes located on a downward slope leading to some woods at the facility’s western side.

Each of the three drywells measured 15 feet in diameter and was 22 feet deep. By design, the liquid waste percolated from the drywells into the surrounding soil; the overflow pipes drained any excess directly to the woods below. None of the disposal techniques departed from accepted industrial practices of the time. In 1982, B & L first surveyed the facility for pollution in response to employee concerns about these formerly used waste-disposal methods.

Tests indicated in November that certain heavy metals, notably nickel and cadmium, had contaminated the ground in the area of the old lagoon; B & L reported these findings to the federal Environmental Protection Agency in February 1983. 2 ⁷⁶⁷ In the fall of 1983, B & L engaged Fred C. Hart Associates (Hart), an environmental engineering and consulting firm, to conduct a systematic investigation of the Diecraft property, which began the next year. 3 Hart confirmed the presence of the heavy metal contamination, and concluded that there existed little risk of it migrating. Further testing in May and October 1984, however, revealed unacceptable levels of a hazardous chemical compound used as an industrial solvent, trichloroethylene (TCE), at the Diecraft site. The TCE contaminated the subsurface groundwater near the disposal drywells and piping network. The TCE also contaminated a small stream, fed by groundwater, cutting across B & L’s property and onto an adjacent parcel of land then owned by the Knott Development Corporation. 4 Hart reported these findings to B & L in November 1985.

By late 1987, Hart determined the source of the contamination to be the on-site disposal system, primarily sludge at the bottom of the drywells from where the TCE infiltrated the groundwater. Other events in 1987 merit particular mention. On June 19, 1987, after the adjacent Knott property had been sold to the Highlands Park I Limited Partnership, the new owner wrote to B & L; it claimed TCE contamination of the ground and surface water on its own property, ascribed the pollution to the Diecraft site waste-disposal activities, and threatened to sue. On June 26, 1987, B & L informed Utica of Highlands Park’s potential claim, and at the same time requested reimbursement of approximately $76,000 spent to date for testing at the Diecraft facility; this was B & L’s ⁷⁶⁸ first indication to Utica that it expected the insurer to indemnify it for its expenses related to the pollution at Diecraft.

In a letter dated July 21, 1987, Utica declined to extend coverage, pending further review of the matter. On November 5, 1987, B & L sold the Diecraft facility as part of a larger purchase and sale agreement with the Cambridge Instrument Company of Great Britain, with B & L retaining all environmental liabilities related to Diecraft; B & L further agreed to reserve and apply up to $1 million of the purchase price for environmental clean-up costs at the site. All subsequent negotiations between insurer and insured as to coverage having failed, Utica on November 20, 1987, sued for a declaratory judgment defining the rights and obligations of the parties to the insurance contract. From March 23 through April 27, 1988, i.e. after the litigation had begun, B & L carried out the pollution treatment program devised by Hart.

The contaminated sludge was excavated from the drywells and shipped off-site. The former lagoon area was excavated and then filled with clean earth. The waste holding tank and the associated network of pipes were removed. All of these measures dealt with the contaminated soil and equipment.

No direct steps, such as pumping and aeration, were taken to cleanse the site’s tainted groundwater. C. Punctuating this sequence of events were certain contacts between B & L and Maryland State agencies. Drawing on the information B & L had supplied to the federal E.P.A. in February of 1983, the State Waste Management Administration included the Diecraft facility on the master list of potentially hazardous sites, which it published on August 31, 1984 in the Maryland Register. The agency published its decision to conduct a preliminary assessment of the facility in the Maryland Register of August 2, 1985.

State officials completed their preliminary investigation in ⁷⁶⁹ December of that year. 5 On July 22, 1986, representatives of B & L and the State had their first substantive meeting, during which B & L indicated its intention to perform the necessary testing and clean-up of the Diecraft site. Thereafter, the State periodically received, reviewed, and commented on the tests and remediation plans done for B & L by the Hart engineers. Hart manager, Steven B. Gelb, testified that his engineers worked in a “cooperative arrangement” with the State: “We would recommend work. They would comment on activities.

If we didn’t agree on something, we would negotiate it and iron it out so that both parties were satisfied.” The State approved the sludge removal plan in 1988. B & L’s director of administrative services, James Goff, stated that the B & L management committee wished to cooperate with the State in cleaning up the Diecraft pollution, and, in so doing, avoid being subjected to an administrative order to perform the work. State environmental enforcement official, Frank Henderson, testified that the Waste Management Administration insisted upon approving B & L’s remediation plans, in order to assure that the source of the contamination was removed properly. Ronald ⁷⁷⁰ Nelson, the director of the Waste Management Administration, testified that once the State had listed a property as a potentially hazardous site, the property owner did not enjoy the option of doing nothing; any testing and clean-up necessary to comply with environmental laws and regulations would be done either by the owner, acting voluntarily or under an injunction, or by the appropriate government agency at the owner’s expense.

Nelson added that B & L’s posture in its response to the Diecraft pollution was one of “uncontested compliance” with State laws and regulations. At no time did the State or any neighboring landowner sue B & L for money damages or for injunctive relief. Nor did the State file administrative proceedings against B & L, ordering it to clean up its Diecraft facility. At no time did the federal Environmental Protection Agency ever send a so-called “PRP” letter to B & L designating it as a “potentially responsible party” in regard to the pollution at its Diecraft site.

II Utica began the litigation by suing B & L in the Circuit Court for Baltimore County. It sought a declaratory judgment that it had no obligation to defend or indemnify B & L for expenses incurred in connection with the groundwater contamination at the Diecraft facility. In its complaint, Utica recited that B & L suspected or determined in 1983 that it had generated and discharged liquid wastes and other contaminants at the site; that this contamination was confirmed by studies conducted between 1984 and 1985; that the State’s Department of the Environment informed B & L in 1985 that the Diecraft plant was included on a list of hazardous waste sites to be evaluated under Maryland’s pollution laws; and that B & L did not notify Utica of these facts until June 1987, over three years later, upon receipt of the threatening letter from the neighboring property owner, Highlands Park. ⁷⁷¹ Utica averred in the complaint that it had no obligation to defend or indemnify B & L for investigation and site remediation at the Diecraft property because B «fe L had failed, to Utica’s detriment, to give it prompt notice of the happening of an “occurrence,” as required by the policy. It further contended that B <fe L’s investigation and site remediation efforts did not constitute either a claim for “damages” or a claim arising from “property damage” within the policy’s contemplation; that there had been no “occurrence” as such; and that B «fe L had voluntarily incurred costs of investigation and site remediation without its consent, as required by the policy, therefore barring B <fe L from obtaining indemnification.

Utica also averred that coverage was subject to the policy’s paragraph (k), which excluded property damage to B «fe L’s own property in excess of $50,000 per occurrence during the policy period. B «fe L answered Utica’s suit and counterclaimed for breach of contract. It asserted that Utica failed to provide B «fe L with full investigation, defense, and indemnification, as required by the policy. B «fe L claimed that Utica was liable to it for all costs of investigation, defense, damages, costs, and payments (whether by judgment, settlement, or otherwise), together with the costs of the declaratory judgment action, including reasonable attorneys’ fees.

The trial lasted ten days, during which the parties adduced evidence concerning the extent of the pollution at Diecraft and its remediation. They also presented evidence of their respective understandings of the insurance policies based, in part, on their prior course of dealing in other matters and on general insurance practices. The trial court (Fader, J.), in the judgment declaring the rights of the parties, determined that Utica was required under the policy provisions “to defend claims and to pay damages because of property damage for clean-up costs for hazardous waste materials” at Diecraft. It fixed the actual clean-up costs at $231,262.53.

The court further decided that Utica had a duty to defend future actions “brought to ⁷⁷² compel removal of hazardous waste material, and to pay the cost of removing such material, if any, from the Diecraft site depending on whether potential for liability exists in the claim made and removal is required by the State of Maryland under applicable law, the extent of which will depend on future events.” The court also declared that, “Utica had, and in the future will have, no legal responsibility to defend or pay investigatory damages required by the State ... to monitor the Diecraft site before or following removal of hazardous material.” Moreover, it determined that the policy did not cover B & L’s expenses in investigating and testing the polluted site, which through the date of trial amounted to $529,897.30. The court concluded that the policy did not cover State personnel costs “for regulatory management” of the work, for which the State sought reimbursement from B & L. In so declaring the rights of the parties under the policy, the trial judge concluded in remarks from the bench (he filed no written opinion) that the State had confronted B & L with a claim that merited insurance coverage. He said: “There is no question in my mind but that the total circumstances constitute the sufficient coerciveness and advers[eness] of an administrative body ... and a degree of definiteness which indicate that this was in fact a suit, a demand for damages and money, to a certain extent, that the State had the right to require to be paid. “[OJverall the testimony shows that from the State people, that they ordered it [the clean-up], they said this is what needed to be done. They stated that the ideology of this was the [State] Superfund law.

There is no question but that they were going to require compliance and ⁷⁷³ that Bausch and Lomb did make that compliance. 4c 4e 4c $ * * “With regard to the Highlands claim, that was sufficient to show a demand and was specifically keyed for ‘my property is hurt because of hazardous waste on your property’ and that certainly constitutes sufficiency as far as a suit.” The court, in addressing the term “damages” as used in the policy, found it ambiguous in meaning, and therefore required a broad construction; it stated: “I am convinced ... that it had a wide and expansive type of meaning and what it meant was anything that a third party can make you pay for because of damage to that third party’s property. Now, I don’t think it is anything more difficult than that. I think that is what [the policy] says.” The trial court ruled that the alienated premises exclusion in the policy did not apply because the harm leading to the sludge removal costs had occurred before the November 5, 1987, sale of the property to Cambridge Instrument. Judge Fader also declined to apply the limited “own property” exclusion, holding that the State’s regulatory power in respect to groundwater constituted an interest sufficient to trigger coverage for liability to a third party, the State, beyond the title owner of the water, B & L. In addition to the actual clean-up expenditures, the court awarded B & L costs, expenses in the amount of $44,306.47, and attorneys’ fees of $534,500.

The parties cross-appealed to the Court of Special Appeals, which reversed and ordered the entry of a declaratory judgment in favor of Utica. Utica Mutual v. Bausch & Lomb, 91 Md.App. 1 , 603 A.2d 1241 (1992). The intermediate appellate court, relying on Maryland Cas. Co. v. Armco, Inc., 822 F.2d 1348 (4th Cir.1987) and Maryland Cup v. Employers Mutual, 81 Md.App. 518 , 568 A.2d 1129 (1990), held that remedial costs incurred to comply with environ ⁷⁷⁴ mental regulations were not “damages” within the insurance policy’s meaning.

Utica Mutual, supra, 91 Md.App. at 14-16 , 603 A.2d 1241 . Armco, the court pointed out, involved a CGL policy whose provisions were very similar to those in the present case. There the insurer sought a declaratory judgment concerning its liability to its insured, Armco, which arose out of a suit brought by the United States for reimbursement and injunctive relief because of the alleged threat to the environment at a hazardous waste site in Missouri. As the Court of Special Appeals observed, Armco, purporting to apply Maryland law, held that the government’s “claim seeking compliance with regulatory directives of a federal agency, which compliance takes the form of obedience to injunctions and reimbursement of remedial costs, does not constitute a claim for ‘damages’ under the insurance policy,” Id. at 14, 603 A.2d 1241 , quoting Armco, 822 F.2d at 1350.

According to Armco, the CGL policy reimbursed “only damages arising from actual, tangible injury,” and not “essentially prophylactic measures” unconnected with any harm to property of specific third parties. 822 F.2d at 1353. The intermediate appellate court further cited its own Maryland Cup opinion holding that claims seeking equitable relief in response to alleged employment discrimination did not represent “damages.” 91 Md.App. at 15-16 , 603 A.2d 1241 . Relying upon Schlosser v. INA, 325 Md. 301 , 600 A.2d 836 (1992), the Court of Special Appeals further held that B & L’s clean-up measures were not tantamount to damages for liability in that they were preventive in nature, and undertaken to avoid a lawsuit that might otherwise have materialized in the future. 91 Md.App. at 20 , 603 A.2d 1241 . Finally, the court found no merit in B & L’s argument that the groundwaters underlying the Diecraft site belonged to the State, and that by contaminating these groundwaters, it had harmed the property of a third party, thereby obligating the insurer to pay damages in the form of clean-up costs.

Id. at 16 , 603 A.2d 1241 . The court noted that while ⁷⁷⁵ the State has a proprietary interest in the nature of a quasi trusteeship for the public benefit in the navigable waters within its boundaries, the State has asserted no claim of ownership to waters beneath the surface of privately-owned land. It said: “The State, as Trustee for its citizens, does have the authority, within its police power, to preserve its natural resources and to prevent pollution to air and water. But such power and authority does not depend upon any claim of ownership of either the water below the surface of the land or the air above it. “Moreover, even if there were any merit in the argument that damage had been done to the State’s property, that would be irrelevant to this case.

The damages that were awarded by the lower court were for costs incurred in removing waste materials from B & L’s own property-materials that it itself had placed there — and for counsel fees incurred in dealing with the State and in defending Utica’s declaratory judgment action. Neither the State nor any neighboring property owner has asserted a claim for damage to its, his, or her property; no costs of defending such claims, and no award of damages for property damage sustained by the State or anyone else (other than B & L) as a result of B & L’s dumping of waste products on its property is involved in this case.” Id. at 17 , 603 A.2d 1241 . We granted the parties’ cross-petitions for certiorari. 327 Md. 557, 611 A.2d 115 . B & L asks us to decide whether the standard form CGL policy insured against the costs of cleaning up the environmental contamination at Diecraft, and related expenses, to satisfy State regulations.

To this Utica adds a series of related questions in its cross-petition, which were presented for determination at the trial: whether B & L’s uncontested assumption of the duty to clean the facility, without notice to Utica or its consent, breached the insurance contract; whether the policy insured against clean-up costs flowing from B & L’s promise to Cambridge Instrument to have the Diecraft facility comply with health ⁷⁷⁶ and safety regulations in the absence of any written allegations, demands, or directives by the State; whether the alienated premises exclusion barred insurance coverage; whether coverage was barred by B & L’s initial delay in disclosing the contamination to the insurer; whether the negotiated “own property” limitation of $50,000 applied in this case; and whether Utica appropriately and justifiably began the declaratory judgment action, thereby vitiating B & L’s claims for attorneys’ fees. Ill The trial of this dispute lasted two weeks. It resulted in a voluminous record. Counsel for the litigants and amici have called our attention to no fewer than 130 cases.

The briefs and references of the parties and amici curiae total many hundreds of pages, leading us to observe, as did the Supreme Court of New Hampshire, that, “No small forest fell to deliver their contentions to our steps.” Coakley v. Maine Bonding and Casualty Co., 136 N.H. 402 , 618 A.2d 777 (1992). Distilling the litigation to its essence, we must first interpret the standard provisions of a comprehensive general liability insurance policy. The policy-holder, B & L, insists that the notion of the policy’s comprehensiveness, reaching all unknown and undefined harms that might occur after the insurance contract takes effect, controls this case. The policy’s broad reach, says B & L, covers its costs for removing the contaminated sludge in obedience to the State’s statutory and regulatory commands protecting the water supply.

The insurer, Utica, insists that the policy insures only against harm done to a third party who demands compensation for the loss. Here, says Utica, the policy-holder in voluntarily cleaning up its own facility merely complied with one of myriad government regulations, the expense of which compliance is a cost of doing business. ⁷⁷⁷ Cases in other jurisdictions dealing with insurance coverage of environmental clean-up costs under a comprehensive general liability policy abound. In confronting the legal issues present in the instant case, the majority of state appellate courts have concluded that the standard insuring language covers environmental response costs. They have construed the term “damages” to reach both monetary compensation to government agencies or aggrieved third parties and the expense of complying with environmental injunctions.

See, e.g., AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 , 274 Cal.Rptr. 820 , 799 P.2d 1253 (1990); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill.2d 90 , 180 Ill.Dec. 691 , 607 N.E.2d 1204 (1992); A.Y. McDonald Industries v. INA, 475 N.W.2d 607 (Iowa 1991); Hazen Paper Co. v. United States Fidelity & Guar.

Co., 407 Mass. 689 , 555 N.E.2d 576 (1990); Minnesota Mining & Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175 (Minn. 1990); C.D. Spangler Constr. Co. v. Industrial Crankshaft & Eng’g Co., 326 N.C. 133 , 388 S.E.2d 557 (1990); Boeing Co. v. Aetna Cas. & Sur.

Co., 113 Wash.2d 869 , 784 P.2d 507 (1990); Compass Ins. Co. v. Cravens, Dargen & Co., 748 P.2d 724 (Wyo.1988). Contra Patrons Oxford Mut. Ins.

Co. v. Marois, 573 A.2d 16 (Me.1990) (insurance contract language providing coverage for amounts the insured is “legally obligated to pay as damages” does not cover expenses incurred in meeting state clean-up demands). See also Coakley, supra, 136 N.H. 402 , 618 A.2d 777 (remedial response costs covered, but containment plan to prevent contamination of groundwater does not qualify as damages). The federal courts divide more or less evenly on the question. Among their decisions imposing coverage for environmental remediation are Hays v. Mobil Oil Corp., 930 F.2d 96 (1st Cir.1991) (applying Massachusetts law); Avondale Indus.

Inc. v. Travelers Indem. Co., 887 F.2d 1200 (2d Cir.1989) (applying New York law); Port of Portland v. Water Quality Ins. Syndicate, 796 F.2d 1188 (9th Cir.1986) (applying Oregon law); Independent Petrochemical Corp. ⁷⁷⁸ v. Aetna Casualty & Sur. Co., 944 F.2d 940 (D.C.Cir.1991) (applying Missouri law); Chesapeake Utils.

Corp. v. American Home Assurance Co., 704 F.Supp. 551 (D.Del.1989) (interpreting Maryland law as to “damages”); Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Sur. Co., 788 F.Supp. 846 (D.N.J.1992) (applying New Jersey law); and Federal Insurance Co. v. Susquehanna Broadcasting Co., 727 F.Supp. 169 (M.D.Pa.1989), aff'd, 928 F.2d 1131 (3rd Cir.1991) (applying Pennsylvania law). By contrast, other federal courts have denied insurance coverage to CGL policy-holders who incur clean-up costs under environmental statutes and regulations. These courts hold that the term “damages” does not embrace such expenses.

In reaching this result, they offer one or more of several rationales: a) damages has an unambiguous, technical meaning in the insurance context that is distinct from equitable or restitutional remedies; b) the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, at § 107(a)(4), 42 U.S.C. § 9607 (a)(4), itself differentiates between clean-up costs and damages proper; c) an insured’s response costs exist conceptually apart from property damage to a third party; or d) if the term were given an ordinarily broad meaning, the policy’s phrase “obligated to pay as damages” would be redundant; it would require coverage for any obligation to pay money, and would improperly reduce the words “as damages” to surplusage. See, e.g., Continental Ins. v. Northeastern Pharmaceutical, 842 F.2d 977 (8th Cir.1988) (en banc) (applying Missouri law); Armco, supra, 822 F.2d 1348 (applying Maryland law); Mraz v. Canadian Universal Ins. Co., Ltd., 804 F.2d 1325 (4th Cir.1986) (as evidenced by CERCLA provisions, response costs are an economic loss, rather than property damages); U.S. Fidelity & Guaranty Co. v. Morrison Grain Co., 734 F.Supp. 437 (D.Kan.1990) (applying Kansas law); Aetna Cas. & Sur. Co. v. Gulf Resources & Chem.

Corp., 709 F.Supp. 958 (D.Idaho 1989) (applying Idaho law); Hayes v. Maryland Cas. Co., 688 F.Supp. 1513 (N.D.Fla.1988) (applying Florida law). ⁷⁷⁹ IV Under Maryland law, when deciding the issue of coverage under an insurance policy, the primary principle of construction is to apply the terms of the insurance contract itself. Mitchell v. Maryland Casualty, 324 Md. 44, 56 , 595 A.2d 469 (1991); Mut. Fire, Marine & Inland Ins. v. Vollmer, 306 Md. 243, 250 , 508 A.2d 130 (1986).

Unless there is an indication that the parties