Harleysville Mutual Insurance Co. v. Sussex County

No. 94-7011 (3d Cir. December 28, 1994)

The court holds that under Delaware law, pollution exclusion clauses in comprehensive general liability insurance policies that two insurance companies issued for a county landfill bar coverage for liability arising from contamination at the landfill. The court first holds that the discharges of contaminants that invoked a notice of potential liability from the U.S. Environmental Protection Agency (EPA) and gave rise to the county's insurance claims were not unexpected and unintended for purposes of the sudden and accidental exception to the pollution exclusion clauses. The county knew that it was discharging known contaminants. That it did not know that it was discharging a hazardous substance under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is irrelevant. The court holds, therefore, that the insurance companies had no duty to indemnify the county for liability arising from the discharge of contaminants at the landfill. The court next holds that EPA's "notice" that the county was a potentially responsible party under CERCLA, and the resulting negotiation process, does not constitute a "suit" within the meaning of the insurance policies for purposes of triggering the companies' duty to defend. The court holds that EPA's notices did not initiate a proceeding that was sufficiently adversarial in nature to constitute the functional equivalent of a lawsuit. EPA had merely invited the county to participate in the formative stages of site cleanup.

[The district court's decision is published at 24 ELR 20296.]

Counsel for Petitioner
Anthony J. Zarillo Jr.
Riker, Danzig, Scherer, Hyland & Perretti
Headquarters Plaza
One Speedwell Ave., Morristown NJ 07962
(201) 538-0800

Counsel for Respondent
Gregory A. Inskip
Potter, Anderson & Corroon
350 Delaware Trust Bldg.
P.O. Box 951, Wilmington DE 19899
(302) 984-6016

[25 ELR 20485]

Memorandum Opinion

Nygaard, J.:

In this diversity action, Sussex sought a declaration to compel Harleysville Mutual Insurance Company and Home Insurance Company to reimburse it for legal costs incurred in negotiating with the Environmental Protection Agency over Sussex's potential liability under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. §§ 9601 et seq., and also to indemnify it for any liability. Sussex appeals the district court's summary judgment in favor of the insurance companies. We will affirm.

Sussex created what is now known as "Landfill No. 5" in the early 1970s. In September and November of 1979, Sussex hired Weston, a local environmental consultant, to sample groundwater at the landfill. Weston reported in February 1980 that leachate was escaping from the landfill and contaminating the groundwater. Weston also reported that some of the garbage in the landfill was below the water table, directly contaminating the groundwater with leachate.

In August 1980, the Delaware Department of Natural Resources and Environmental Control tested Landfill No. 5 and found heavy metals, such as zinc, copper, arsenic, iron, and manganese in the leachate underneath the landfill. In 1981, Weston again took samples and notified Sussex that three of five on-site monitoring wells were indicating groundwater contamination.

In 1982, Sussex purchased a comprehensive general liability policy from Home Insurance, effective from June 3, 1982, to June 3, 1985. Sussex canceled this policy as of April 30, 1984, and purchased a policy from Harleysville effective from April 30, 1984, to April 30, 1985.

In December 1984, EPA tests showed benzene and other volatile organic compounds at Landfill No. 5. The EPA placed Landfill No. 5 on the Superfund National Priorities List and sent Sussex a "General Notice" letter in April 1990 announcing that the EPA had "documented the release or threatened release of hazardous substances, pollutants, or contaminants at [Landfill No. 5]," advising Sussex that it was a potentially responsible party under CERCLA, and requesting that it perform or voluntarily finance response activities that EPA deemed necessary.

In May 1990, the EPA sent a "Special Notice" to Sussex encouraging it to voluntarily negotiate an agreement to perform or finance response activities at the landfill. The notice advised Sussex that the EPA would not engage in response activities itself for 60 days provided Sussex submitted a good-faith offer to conduct or finance a feasibility study for the site. Sussex signed an administrative order of consent with the EPA on March 29, 1991, in which it agreed to perform a Remedial Investigation/Feasibility Study for Landfill No. 5 and reimburse the EPA for investigation costs.

On March 13, 1992, Harleysville filed suit in the district court seeking a declaration that it has no obligation to defend Sussex in the EPA/CERCLA proceedings or to indemnify Sussex for sums it may become legally obligated to pay as a result. Sussex answered and asserted a counterclaim seeking a declaratory judgment that Harleysville is obligated to defend it, reimburse it for defense costs it has already incurred in complying with the EPA's requests, and indemnify it for sums it may become legally obligated to pay as a result of the CERCLA proceeding. Later, Sussex filed a declaratory judgment action against Home Insurance, seeking defense costs and indemnification for sums it may be forced to pay as a result of the actions instituted by the EPA at Landfill No. 5.

The insurers moved for summary judgment, each contending that it had no duty to defend or indemnify Sussex. The district court granted summary judgment for the insurers: (1) on the indemnification issue, concluding that pollution exclusion clauses in both policies denied insurance coverage; and (2) on the duty to defend issue, concluding that the EPA notice and negotiation process was not a "suit" as required in each policy.

II.

A. Duty to Indemnify

The pollution exclusion clause at issue, identical in both the Harleysville and Home policies, provides:

The insurance does not apply . . . to 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 the 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.

We have already predicted that the Delaware Supreme Court would deem the phrase "sudden and accidental" to mean "unexpected and unintended." See New Castle County v. Hartford Accident and Indem. Co., 933 F.2d 1162, 1198-99 [21 ELR 21153] (3d Cir. 1991) ("New Castle V"). The district court followed this interpretation, and appellant does not challenge it. The question is whether the discharge of contaminants that invoked the EPA's notice of potential liability and gave rise to Sussex's insurance claims was unexpected and unintended.

Sussex does not dispute that it knew it was contaminating Landfill No. 5 before purchasing either policy. It claims, however, the issue is whether it knew of "hazardous substances," as defined in CERCLA § 101(14), because only that knowledge, it argues, is the triggering mechanism for CERCLA § 106 ("Abatement Actions") and § 107 ("Liability"). In other words, Sussex claims that the policy exclusion is triggered only upon a finding that it knew it was releasing contaminants defined in the statute, rather than as defined in the policy language. We are not persuaded.

It is axiomatic that the terms of an insurance policy delineate the scope of coverage. These policies do not rely on the federal statutes to define what must be expected and intended. Instead, the policies set forth the general nature of activity which, if expected and intended, will not be covered under the policies. The uncontested facts show that Sussex was told on several occasions that it was discharging known contaminants. Sussex does not dispute that these substances are "irritants, contaminants, or pollutants" within the language of the respective policy exclusion clauses.

Sussex's argument is simply a variation of the so-called "known contaminant theory," which we rejected in New Castle County v. Hartford Accident and Indem. Co., 970 F.2d 1267, 1271 [22 ELR 21365] (3d Cir. 1992) ("New Castle VII"), cert. denied, 113 S. Ct. 1846 (1993). There, the insured argued that a nearly identical pollution exclusion should not preclude coverage because it did not know that the substance it was discharging was a contaminant. Id. at 1269. We held that, "[w]hen the term 'contaminants' is read in the ordinary, common sense fashion, considering it in the semantic and functional contexts of the pollution exclusion clause, it has only one reasonable interpretation: Knowledge of the nature of the substance discharged is irrelevant." Id. at 1272 (emphasis added). Thus, "unexpected and unintended" can only modify "discharge," id. at 1271, and the type of contaminant discharged need not be known — "[t]he insurance policy nowhere hints that the term 'contaminants' carries with it a scienter element." Id. Sussex's argument is even less persuasive than New Castle's because Sussex knew that it was discharging contaminants. The fact that it did not know that it was discharging a "hazardous substance" under CERCLA does not change the analysis.

We hold that the district court properly concluded that the insurance companies have no duty to indemnify Sussex for liability arising from the discharge of contaminants at Landfill No. 5.

B. Duty to Defend

The next question is whether the EPA "notice" that Sussex was a potentially responsible party under CERCLA, and the resulting negotiation process, constitute a "suit" within the meaning of the insurance policy, thus triggering each insurer's duty to defend. There is a split in the courts whether "suit" in policies includes EPA notices of potential liability. The cases fall roughly into two categories: (1) those holding that "suit" is unambiguous and its plain meaning (i.e., "lawsuit") controls without further analysis;¹ and (2) those holding that "suit" is at least ambiguous, and therefore asking further whether such notice is the "functional equivalent" of a lawsuit.²

We need not choose sides in the debate because, even if we assume without deciding that the term "suit" is ambiguous, we hold that the EPA notices do not initiate a proceeding that is sufficiently adversarial in nature to constitute the functional equivalent of a lawsuit. The "General Notice Letter" sent to Sussex on April 4, 1990, states:

EPA has documented the release or threatened release of hazardous substances, pollutants, or contaminants at [Landfill No. 5]. . . . By this letter, EPA notifies you of your potential liability with regard to this matter and encourages you to perform or finance voluntarily those response activities that EPA determines are necessary at the Site . . . to indicate your willingness to participate in future negotiations at this site.

(emphasis added). Similarly, the EPA "special notice letter" to Sussex on May 29, 1990, states, "[y]ou are also encouraged to voluntarily negotiate a settlement providing for the PRPs, including yourself, to conduct or finance the response activities required at the Site."

These letters do not contain the requisite degree of coercion to suggest that a reasonable insured in the position of Sussex would expect its insurer to provide a "defense" to what are mere invitations to play a role in site cleanup. We are aware of the substantial enforcement machinery at the EPA's disposal. The EPA, however, did not choose to use coercion. Rather, it had merely invited Sussex to participate in the formative stages of site cleanup.

Sussex argues that enactment of CERCLA § 122(e), ("Special notice procedures"), distinguishes those cases coming before its enactment because they did not have the "urgency" of a § 122 special notice, which allows the EPA "to bring matters to a head immediately." We are not persuaded. Section 122(e) merely ensures a reasonable period in which Sussex may choose to negotiate with the EPA over the remediation plan and its financing. If there is no "good-faith proposal for undertaking or financing action" within 60 days of the special notice, the EPA can then file suit or take other action pursuant to § 104(a). CERCLA § 122(e)(4) ("Failure to Propose").

Conclusion

We conclude that a straightforward contract analysis, in conjunction with our rejection of the "known contaminant theory" in New Castle VII, resolvesthe duty to indemnify issue in favor of the insurers. The policies clearly defined what type of activity (polluting in general) would not be covered in the event the insured intended and expected such activity. Furthermore, we conclude that the insurers have no duty to defend. While we do not rule out the possibility that out-of-court proceedings may in some instances be the functional equivalent of a lawsuit, we simply do not believe that these EPA notices rose to that level. Accordingly, we will affirm the district court's summary judgment on both claims.

Judgment

This cause came on to be heard on the record from the United States District Court for the District of Delaware and was argued September 26, 1994.

On consideration whereof, it is now here ordered and adjudged by this court that the order and opinion of the district court entered August 27, 1993 and the order of the district court entered December 8, 1993 be, and the same are hereby affirmed.

Costs taxed against appellant.

1. See, e.g., Ray Indus. Inc. v. Liberty Mut. Ins. Co., 974 F.2d 754, 761 [23 ELR 20145] (6th Cir. 1992); Metro Wastewater Reclamation Dist. v. Continental Casualty Co., 834 F. Supp. 1254 [24 ELR 20473] (D. Colo. 1993); State of N.Y. v. Amro Realty Corp., 697 F. Supp. 99 (N.D.N.Y. 1988); City of Edgerton v. General Casualty Co. of Wis., 517 N.W.2d 463 (Wis. 1994).

2. See, e.g., Hazen Paper v. U.S. Fidelity and Guar. Co., 555 N.E.2d 576 [20 ELR 21457] (Mass. 1990); Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 519 N.W.2d 864 (Mich. 1994); C.D. Spangler Constr. Co. v. Industrial Crankshaft & Eng'g Co., 388 S.E.2d 557, 570 (N.C. 1990).