Utica Mutual Insurance v. Bausch & Lomb Inc.

BLOOM, Judge. These cross-appeals by Utica Mutual Insurance Company (Utica) and Bausch & Lomb, Inc. (B & L) are from a judgment of the Circuit Court for Baltimore County in a declaratory judgment action brought by Utica, in which B & ⁴ L had filed a counterclaim for damages for breach of contract. Utica’s action sought a judicial determination and declaration of the parties’ respective rights and obligations under a comprehensive general liability (CGL) insurance policy issued by Utica to B & L. Specifically, Utica sought a determination as to whether it was responsible and liable, under its policy, for costs and expenses incurred by B & L in removing hazardous waste materials from its property in Sparks, Maryland, on which it operated its Diecraft manufacturing plant. B & L’s counterclaim asserted claims for bad faith as well as for breach of contract, but the court struck out the bad faith count as legally insufficient, while allowing the breach of contract count as a corollary to the declaratory judgment action.

After a two week trial and an all-day hearing, the court announced several rulings from the bench. Several weeks later, the court conducted another day long hearing concerning B & L’s claim for counsel fees, and, on 19 March 1991, the court issued the following judgment: DECLARATORY JUDGMENT For the reasons stated on the record in open court on December 19, 1990 and February 13, 1991, this court makes the following declaration: 1. That Utica Mutual Insurance Co. (Utica) did have a duty to defend claims and to pay damages because of property damage for cleanup costs for hazardous waste materials at the Bausch & Lomb Incorporated (Bausch & Lomb) site known as Diecraft as a result of applicable insurance coverage afforded by Utica. The cleanup costs compensable at this time are in the amount of $231,-262.53. 2.

That Utica had, and in the future will have no legal responsibility to defend or pay investigatory damages required by the State of Maryland to monitor the Diecraft site before or following removal of hazardous material. ⁵ The investigatory or preparation fees and costs expended by Bausch & Lomb to ascertain the extent of contamination at the site through the date of trial in the amount of $529,897.30, and such fees and costs which may be expended in the future, are not payable or responsible to be defended under the insurance coverage afforded. 3. That Utica had no legal responsibility to reimburse B & L for $9,372.76 in State of Maryland personnel costs for regulatory management relating to the Diecraft Site, and will have no obligation for such costs in the future. 4. That under the applicable insurance coverage, Utica will be required in the future to defend actions brought to 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. 5. That for its breach of its duty to defend after notice of a potential claim and for the cost of this Declaratory Judgment action and the failure to pay cleanup costs, Utica is required to pay Bausch & Lomb the following sums: Attorneys’ Fees: $534,500 1.

Anderson, Kill, Olick & Oshinsky, P.C.: $426,500 2. Gordon, Feinblatt, Rothman, Hoffberger & Hollander: $108,000 Expenses: $44,306.47 1. First Risk Management (Silver): $39,456.47 2. Other Expenses (primary) Transcript costs: $4850 6.

Judgment is entered in favor of Bausch & Lomb Incorporated against Utica Mutual Insurance Company in the amount of $231,262.53 plus attorneys fees of $534,500 and expenses of $44,306.47 plus court costs. Utica’s appeal challenges the declarations in paragraphs 1, 4, and 5 and the money judgment awarded in paragraph ⁶ 6. B & L’s appeal asserts error with respect to paragraphs 2 and 3 of the declaratory judgment. We shall reverse the judgment of the circuit court.

Facts Utica is a New York mutual insurance company headquartered in New Hartford, New York. B & L is a Fortune 500 corporation also headquartered in New York. Utica sold comprehensive general liability insurance to B & L for some forty years, with the last policy being issued in 1986. All the policies issued by Utica to B & L from 1970 to 1986 provided, as a condition of coverage, that B & L (a) shall give written notification to Utica “as soon as practicable” in the event of an occurrence, and (b) shall forward to Utica “immediately” every demand or notice of a claim.

The basic coverage provision of all the policies stated, in pertinent part: The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... property damage ... caused by an occurrence____ The standard language defines “occurrence” as: [A]n accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. “Property damage” is in turn defined as: [P]hysical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom____ Each policy Utica issued to B & L expressly provided that B & L “shall not, except at [its] own cost, voluntarily make any payment, assume any obligation or incur any expense other than for first aid to others at the time of accident.” The standard policy language included seventeen lettered paragraphs of exclusions from coverage. Of these, Paragraphs K and L have some pertinence to this case. By ⁷ virtue of paragraph K, the coverage of the policy did not apply to property damage to property owned by the insured, or to property occupied by, rented to, used by, or in the care, custody, or control of the insured. An endorsement to the policy eliminated Paragraph K as an exclusion but limited the coverage for any damage that would otherwise have been excluded under that paragraph to $50,000.00.

Under Paragraph L, coverage of the policy did not apply to property damage “to premises alienated by the Named insured arising out of such premises or any part thereof.” 1 In 1965, B & L purchased the Diecraft manufacturing plant and 30 acres of associated property located in Sparks, Maryland. The plant machined and plated parts used in telescopes and microscopes. From 1958 through 1975, waste plating bath liquids, solvents, and wastewaters were disposed of on-site into a waste disposal system. That system was composed of a series of concrete settling tanks, an unlined earthen lagoon, a holding tank, three large drywells, and a network of associated piping.

Overflow pipes were added to the drywells when the volume of waste that was piped into the drywells exceeded the absorption capacity of the soils and bedrock that underlie the drywells. Overflow pipes ran downhill in a westerly direction into an undeveloped wooden area behind the plant. B & L first discovered that its property was contaminated in November of 1982, when analysis of soil samples from behind the plant revealed high levels of a potentially hazardous substance, cadmium, in excess of federal regulations. On 4 February 1983, B & L notified the United States Environmental Protection Agency of the contamination.

In October or November of 1988, B & L hired an environmental consulting ⁸ firm, Fred C. Hart <fe Associates (Hart), to investigate the contamination and make remedial suggestions. By February of 1984, B «fe L was interested in selling the Diecraft property. In mid-1984 Hart personnel discovered that, in addition to heavy metals, the Diecraft property was contaminated by the organic solvent trichloroethylene (TCE). Hart continued its investigation of both heavy metal and TCE contamination and, on 15 November 1985, issued a 90-page “Report of Field Investigation Phases I, II and III.” B «fe L met with representatives from the Maryland Waste Management Administration in October of 1985.

In December of that year, the Administration issued a “Preliminary Assessment Report,” which stated that “recommendations and conclusions regarding any corrective measures that may be necessary at this [Diecraft property] will be evaluated after the consultant’s [Hart’s] survey and sampling of the site has been completed.” Additional meetings were held in November and December of 1986, and B «fe L indicated it would comply with the State’s directives. On or about 19 June 1987, B «fe L received a letter from counsel for the neighboring landowner, Highlands Park I Limited Partnership, alleging damage to the groundwater on the Highlands property and threatening litigation. As a result of the Highlands letter, B «fe L notified Utica of the “potential claim” by a letter dated 26 June 1987. This was the first notification Utica received concerning the contamination of the Diecraft property.

The June 26 letter suggested that B <& L would look to Utica to reimburse some $76,000.00 spent for testing and assessing the contamination on the Diecraft property. B & L also transmitted 600 pages of material concerning the environmental claims of the State. Utica responded to B & L’s letter on 21 July 1987. It asked B «fe L to provide copies of records concerning the Diecraft property so that Utica could make a specific coverage determination.

On 27 August B «fe L again requested that Utica honor its obligation to provide coverage for cleanup costs and for damages to adjacent property. On 5 ⁹ November 1987, B & L consummated a sale of the property, with the purchaser acquiring the assets and business of B & L’s Optical Systems Division, including the Diecraft Facility, while B & L retained the environmental liabilities. Further negotiations between the parties proved fruitless, and on 20 November 1987 Utica filed the declaratory judgment action in the Circuit Court for Baltimore County. Discussion Utica contends: 1.

B & L’s admitted assumption of cleanup liability, without notice to or consent by Utica, defeats coverage as a matter of law. 2. B & L’s costs to clean up its own property pursuant to a contract of sale are not sums which B & L was “legally obligated to pay” within the meaning of the Utica policy. 3. B & L’s cleanup of its own Diecraft property does not constitute “damages” because of “property damages.” 4. B & L’s failure to give timely notice to Utica bars coverage. 5.

The trial court erred in awarding B & L its attorney’s fees and expenses for this declaratory judgment action. With respect to Utica’s appeals, B & L contends: 1. Utica waived the right to contest payment of cleanup costs made after Utica refused to provide coverage and after it filed this declaratory judgment action. 2. The trial court’s findings that B & L acted under compulsion from the State were not clearly erroneous. 3.

Because there was unrebutted evidence that the standard form CGL policy was intended to provide coverage for cleanup costs, the circuit court correctly determined that Utica was obligated to pay those costs. ¹⁰ 4. The trial court’s findings that there was timely notice and that Utica failed to prove prejudice were not clearly erroneous. 5. B & L is entitled to recover attorney’s fees incurred in defending Utica’s declaratory judgment action. And, with respect to its counterclaim, B & L contends: 6.

In view of the circuit court’s determination that Utica breached its contractual duty to investigate and defend the claims of the State, B & L is entitled to the money it spent to investigate and defend the claim. 7. Given the undisputed facts of continuous damage to groundwater, B & L is entitled to coverage under all policies in effect during the entire period of damage. We agree with Utica’s contention that the costs incurred by B & L for investigation cleanup, i.e., removal from its own property of contaminating waste materials it had deposited thereon, are not “damages” within the coverage clause of the standard CGL policies issued by Utica. We hold, therefore, that Utica is not liable under any of the policies it issued to B & L either for the cleanup costs, the expenses of investigating and defending the State’s “claims,” or the costs of defending Utica’s declaratory judgment action.

Accordingly, we shall reverse the judgment of the circuit court. It will not be necessary for us to address the other issues raised by both parties other than to touch briefly on B & L’s third contention. I B & L has not directed us to any portion of the record that supports its contention that there was unrebutted evidence that the standard CGL policy was intended to provide coverage for cleanup costs. What it did refer us to was some testimony by an employee of B & L, its “risk manager,” James T. Caffrey, to the effect that he believed the policy covered cleanup costs and that a separate policy that would specifically cover such costs was not necessary. ¹¹ We were not referred to any evidence that would constitute an objective basis for that belief.

There was some evidence to the effect that the insurance industry recognized gradual environmental pollution from hazardous waste or contaminants as an occurrence within the meaning of CGL policies, but such policies do not require the insurer to pay merely because there is an occurrence. The policy requires the insurer to pay such sums as the insured is legally obligated to pay as damages because of personal injuries or property damage resulting from an occurrence. This case is far from unique. There is a considerable body of case law in federal as well as in state courts on the question as to whether cleanup costs are damages covered by a CGL policy.

B & L relies heavily on the fact that a majority of such cases hold that cleanup costs are covered. Among the cases to the contrary, clearly espousing the minority rule, is Maryland Cas. Co. v. Armco, Inc., 822 F.2d 1348 (4th Cir.1987), cert. denied, 484 U.S. 1008 , 108 S.Ct. 703 , 98 L.Ed.2d 654 (1988). In that case the Fourth Circuit, applying its interpretation of Maryland law, flatly held that cleanup costs were not covered by a standard CGL policy containing coverage language similar to that found in Utica’s policy.

Naturally, Utica relies very heavily on Armco. There is an excellent discussion of the subject in the recent case of A.Y. McDonald Industries v. INA, 475 N.W.2d 607 (Iowa 1991). As the Supreme Court of Iowa noted, in responding to certified questions from the United States District Court from the Northern District of Iowa, the coverage question centers on the language in CGL policies: “all sums which the insured shall become legally obligated to pay as damages because oi ... property damage,” the issue being whether that language covers response or cleanup costs incurred under environmental pro ¹² tection statutes. Id. at 618 .

The Court noted that nearly all of the state appellate courts that have considered the issue have concluded that such costs are covered, whereas federal courts, purporting to apply state law in resolving the issue, are sharply divided. Some of the cases imposing liability on the insurer involved suits by the government or third parties for reimbursement of their costs in remedying and mitigating environmental damages. Those cases are factually distinguishable from the case at bar, and liability is imposed on the carrier either on the theory that such costs are plainly damages that the insured is legally obligated to pay as compensation for “property damage” or on the theory that the terms “damages” and “legally obligated” are ambiguous and thus must be resolved in favor of coverage. With respect to the more troublesome question concerning compliance with environmental injunctions, most state courts have held that the costs of compliance are covered as fitting the ordinary meaning of “damages.” Other courts have concluded that a contrary holding would unreasonably make coverage depend on the “mere fortuity” of which alternative — injunction reimbursement, or damages to natural resources — the government agency chooses in enforcing the environmental protection law.

Still other courts base a finding of coverage on the theory that such costs are damages within the reasonable expectations of the parties. 475 N.W.2d at 615-16 . The Iowa Supreme Court also noted the different bases for the conflicting results in the federal courts, dealing with action taken by the Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980) (CERCLA), 42 U.S.C. § 9601 , et seq. Some federal courts, like most of the state courts, see both forms of relief sought by the EPA under CERCLA, recovery of cleanup costs and costs of compliance with environmental injunctions, as constituting “damages” under the CGL policies. Some courts, on the other hand, draw a distinction between damages to natural ¹³