National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The distinction between clean up costs and “permanent” property damage,” which so far as the author is aware is unique to Massachusetts jurisprudence, dates back a decade to Utica Mutual Insurance Company v. Hall Equipment, Inc., 73 F.Supp.2d 83 (D. Mass. 1999), aff’d, sub nom, 292 F.3d 77 (1st Cir. 2002), a case in which the insured negligently repaired a pumping mechanism on the plaintiff’s property, causing a spill of fuel oil. In 1999, Judge Lasker had ruled that the absolute pollution exclusion applied to the cost of cleaning up pollution but did not eliminate coverage for permanent damage to the plaintiff’s property in the form of diminution in the fair market value of the property, loss of rental income and the like were separate and distinct from environmental response costs that were meant to be excluded.

On appeal, the First Circuit conceded that the language in Utica’s exclusion was sufficiently broad that it could reasonably be argued that these non-remediation damages nonetheless constituted a "loss, cost or expense arising out of a[ ] ... demand ... that [Hall] ... in any way respond to ... the effects of pollutants," since such non-remediation damages arose from the Weathermark lawsuit and would not have been incurred but for the oil spill. Nevertheless, the court declared that a reasonable businessman could also have interpreted this language in the manner that the District Court did and that it was, therefore, ambiguous and must be construed in favor of coverage. Further, the court found that the District Court’s interpretation was consistent with terms in the exclusion, which suggested an intention to restrict this section of the exclusion to actual clean up measures and other “response costs” and remediation damages.

This distinction between remedial and non-remedial damages was also explored in Nascimento v. Preferred Mut. Ins. Co., 513 F.3d 273 (1st Cir. 2008). However, whereas the U.S. District Court had relied on the fact that the plaintiff’s claim was solely for remedial damages, the First Circuit affirmed on the alternative basis that the leaking tank in question had been used by the insured during the period in question and was therefore “occupied” by the insured so as to fall within Section 1(a) of the exclusion.

Most recently, the Appeals Court has ruled in Clean Harbors Environmental Services, Inc. v. Boston Basement Technologies, No. 08-P-576 (Mass. App. Ct. November 9, 2009) that an exception to Section 2 of the total pollution exclusion for “liability for damages because of property damage that the insured” would have had in the absence of a governmental cleanup directive provided coverage for damage to the property of an individual where Clean Harbors was installing a waterproofing system.

In the course of the insured’s work, a heating oil line was broken, causing approximately 150 gallons of heating oil to leak into the plaintiff’s basement. Boston Basement Technologies hired Clean Harbors to clean up the work at a cost of $12,638. After Boston Basement Technologies failed to pay Clean Harbor’s bill, Clean Harbor sued Basement Technologies, which filed a third-party complaint against its liability insurer (Admiral).

Although the Superior Court granted summary judgment to Admiral, holding that the costs in question were subject to the total pollution exclusion in its liability policy, the Appeals Court ruled on November 9, 2009 that questions of fact precluded summary judgment with respect to the scope of the exclusion. The court held that even absent the DEP’s issuance of a Notice of Responsibility to Basement Technologies, the insured would still have had common law liability for the cost of cleaning up the oil spill. The court declined to accept Admiral’s proposed distinction between cleanup costs (which would be excluded) and long-term damage to the property itself, such as diminution in the value as the result of the oil spill.

The Appeals Court declared that diminution in property value resulting from an oil spill clearly fell within the exception to this exclusion for statutory cleanup costs. However, the court ruled that diminution in value is not the sole measure of damages for harm negligently caused to property. Rather, the court noted the traditional distinction between temporary damage, where the cost of repairs is the appropriate measure of damage, and permanent injury where diminution in value is the measure of damage. In cases involving common law recovery for damage caused to property by pollution, the court concluded that the cost of restoring the property may be the more appropriate measure of damages since remediation essentially results in the restoration of the property to its pre-damaged value. As such, it held that cleanup costs might form a traditional common law value of “property damage” subject to this exception.

The Appeals Court distinguished the federal court’s analysis in Hall Equipment, in which the court had distinguished between damage to the property and cleanup costs, noting that in this case, the policy lacked an exception to the exclusion for property damage for which the insured would be liable at common law and thus eliminated the “remediation v. non-remediation distinction” that the Hall Equipment court had relied on. Further, the court found that this analysis was consistent with the intent of the underwriters since an insurer was able to assess risk when considering common law liabilities in a manner that might not exist with respect to statutory claims that could far exceed the diminution in value of the contaminated property. The court concluded, therefore, that it could discern no rationale in the policy language or case precedents “for excluding common law restoration costs from coverage when their recovery is a more appropriate remedy than recovery for diminution in property value.” However, the court found that questions of fact remained with respect to the costs involved and, in particular, with respect to a potential overlap between claims for costs of restoration and diminution in value.

The Appeals Court therefore directed the court below to determine whether Admiral’s indemnification for Clean Harbors’ cleanup work would be duplicative of amounts paid to the property owner and damages for diminution in value. The court declared that coverage also depends on the portion of Clean Harbors’ services that constituted appropriate or reasonable restoration costs under principles of common law recovery whereas tasks performed solely to meet statutory requirements over and above what was necessary for common law property restoration, would not be covered.
 

At the outset of oral argument, Justice Margot Botsford asked counsel for Century Indemnity (Guy Cellucci) where in the record there was any evidence that the pollution had commenced in 1908. She noted that the instruction to the jury and the jury’s finding had only concerned pollution during the Century Indemnity policy period (1951 and 1969). Cellucci responded that there was expert testimony for both parties that pollution had begun contemporaneously with the operation of the site.

Justice Botsford, who took an unusually active role in the argument, inquired whether the policy language that the Appeals Court had considered in Chicago Bridge had involved a different form (London Market) and different policy wordings. Cellucci agreed and stated that, in fact, the wording in the INA policies at issue here correspondence to the line of Illinois insurance cases where courts had applied allocation as opposed to the Chicago Bridge-type wordings that had found for “all sums.”

Indeed, Cellucci noted that the words “all sums” did not appear in the INA policy. Justice Robert Cordy archly observed that he hoped that the insurer’s argument did not hinge solely on that consideration. Cellucci responded that it was only a “minor point” but that it did bear observing that a policyholder could hardly have a reasonable expectation of coverage in the absence of policy wordings to support such an expectation.

Cellucci contended that Massachusetts jurisprudence requires that policy wordings be read together as a whole and not to the exclusion of one term or another. In this case, he argued that the “during the policy period” language clearly limited any insurer’s obligations to those damages attributable to loss during the stated policy period. Judge Botsford observed, on the other hand, that the policy wording was not necessarily all that clear.

Chief Justice Margaret Marshall inquired whether, given the $17 million limit in its 1966-69 policy, only Century Indemnity was on the hook for the insurance cleanup costs. Cellucci stated that this was the case and that the effect of this was to require Century Indemnity to sue other insurers for contribution. Botsford observed that in this event, the other insurers would surely argue that the claims against them were barred in light of settlements.

Justice Spina spoke up for the first time at that point noting that because “all sums” was based in part on the theory of joint and several liability, such claims might be barred by the Massachusetts statute governing claims against tortfeasors. Cellucci appeared to be confused on this point indicating that the issue was not tort law but the meaning of the insurance policies. Spina observed however that, “Any such construction of ‘all sums’ would become ‘muddied up’ by the introduction of joint tortfeasor concepts.”

Returning to his theme, Cellucci argued that the SJC should follow the approach of Massachusetts’ sister states in adopting pro rata allocation. He also emphasized that the issue had not been fully developed in Rubenstein or Chicago Bridge and, indeed, had barely been addressed by the trial court in Rubenstein (at this point, Justice Botsford, who was the trial judge of Rubenstein, appeared to nod her head vigorously).

Justice Spina asked what effect pro rata allocation would have on periods where there was no insurance. Cellucci responded that the policyholder would bear responsibility for periods of self-insurance as it had chosen not to buy insurance.

Justice Cordy wondered how allocation would spread loss and, in particular, whether the insured would be forced to pay a full retention for each triggered year. This led to a discussion of what the “occurrence” was. Justice Spina expressed the view that the reasonable expectation of the parties probably required payment of a separate retention per year. Cordy suggested that there might be other ways of assigning risk so that the insured only paid one full SIR.

Cordy commented that at some level there was a “fictional element” in all of the proposals and the only question was “how much fiction and which fiction we elect to adopt.”

Arguing for Boston Gas, David Elkind urged the Court to simply apply the wording of the policies. Justice Marshall archly responded that he could get at least six votes for this proposition but that the problem was somewhat more complicated than this simple statement. Elkind argued that Century Indemnity was conflating the concepts of “trigger” and “scope” and that the question with respect to “during the policy period” was not whether the policy responded but how much would be paid.

Botsford asked Elkind how he dealt with the “to which this policy applies” language in the policy. Elkind responded that this language dealt with other aspects of the policy and took note of the fact that the Century Indemnity policy contained provisions allocating defense costs but not indemnity. He also argued that since these were liability policies, coverage should track the nature of the insured’s liability.

Justice Cordy inquired whether the language in question was similar to the Century Indemnity policy that the New Hampshire Supreme Court had examined in its pro-insurer analysis in EnergyNorth v. Century Indemnity. Elkind was forced to concede this but suggested that most other states that had considered similar language had adopted an “all sums” approach. Justice Cordy took issue with him on this point and appeared to reject any suggestion that decisions such as Consolidated Edison involved principles of law differing from those applying to Massachusetts.

Justice Marshall took note of the fact that the policies in question were issued in the 1950s and 1960s and pre-dated the long-tail liabilities that have since emerged as the result of asbestos litigation and the adoption of statutes such as CERCLA. She wondered whether, outside of the long-tail claim situation, any business would have expected to obtain coverage in the manner proposed by Boston Gas.

A colloquy ensued with respect to the effect of “occurrence” language. Botsford asked whether the occurrence could take place during the policy period. Elkind responded that the “occurrence” was the causative event and not necessarily the continuing property damage. Botsford wondered whether separate wells that leaked on the site might still be one “occurrence.” Elkind agreed, noting the “conditions” language in the policy.

Botsford next raised a question with respect to the scope of the contra proferentum doctrine and asked whether the policies were manuscripted. Elkind responded that although these were not standard wordings there was no evidence of joint negotiation and it appeared that any manuscripted wording had solely been presented by INA.

Justice Spina broke in wondering “what the point” was since any resolution on the terms proposed by Boston Gas would merely necessitate a second round of complex and lengthy litigation between its insurers to resolve the issues of allocation. Elkind responded that it was not appropriate for the Court to worry about the equities of the situation and that it should solely interpret the wording of the policy.

Botsford also wondered what remedy was available to Century Indemnity. Elkind responded that it had substantial reinsurance for the amounts that it paid that might well entirely take care of its loss and that otherwise it was entitled to pursue claims for contribution and would in any event receive a set-off for settlements with the other insurers. Justice Cowin, who had been entirely silent up to that point, wondered whether Century Indemnity agreed that it had these rights. Justice Botsford noted that there would in any event be a fight about allocation in any subsequent ensuing contribution proceedings.

Wrapping up, Elkind argued that pro rata allocation should not be adopted and that in any event the extreme version proposed by Century Indemnity had only to date been followed by one state (Minnesota) and need not be followed here. Additionally, he argued that at most Boston Gas should be responsible for a single self-insured retention for the entire period of coverage.

Justice Ireland asked no questions throughout the argument. Justice Gants did not participate in the oral argument as his nomination to the SJC has not been approved by the Governor’s Council. He may yet participate in the decision, however, if his nomination is approved in January, as expected.

Based on the justices' questioning, the court does not seem satisfied with the insured's theories of "all sums" or "joint and several" liability.  On the other hand, they also do not feel that the policy wordings at issue are necessarily clear as applied to such claims.  It remains to be seen whether the SJC will follow the lead of  the New Jersey Supreme Court in developing extra-contractual rules for allocating long-tail losses or will find ambiguity due to the lack of clear policy wordings.  It is also unclear whether the court will adopt a broad standard for resolving future disputes or will simply deal with the crucial threshold question of whether allocation should be permitted to uninsured periods, leaving issues such as "collapsing bathtubs" and the like for future cases.

A decision is expected by April or May. 

At issue in Boston Gas Co. v. Century Indemnity Co., No. 07-1452 (1st Cir. June 10, 2008) was a jury’s award of $6 million to a gas utility for the cost of cleaning up a former production facility in Everett, Massachusetts. Despite the fact that the site was operated from 1908 to 1969, the District Court instructed the jury that Boston Gas could assign its entire loss to an individual policy issued by Century Indemnity’s predecessor and need only pay a single $100,000 SIR.. Additionally, Judge Zobel issued a declaration that Century was liable for all future cleanup costs.

On appeal, the First Circuit expressed perplexity with respect to whether Massachussets law allows such “all sums” recoveries or would require some sort of allocation. The court was not persuaded that the Appeals Court’s 1998 opinion in Rubenstein, which the District Court had relied on, was particularly persuasive, describing the Appeals Court’s analysis as “cursory.”
As a result, the First Circuit has certified three allocation questions to the Supreme Judicial Court:

1. Should long tail losses be pro rated in some manner among all insurers “on the risk” so that the sued carrier is only liable for its fractional share?

2. If some sort of pro rata liability is called for in such circumstances, what allocation method or formula should be sued?

3. If a single insurer in such circumstances is subject to liability under more than one policy and each policy has a separate deductible or self-insured retention, how many self-insured retentions must be applied?

It will be interesting to see how these issues are briefed to the SJC and, in particular, whether the court will be asked to hold that allocation should be done on a “pure time on the risk” basis (back to 1908) or merely, as the First Circuit suggests, among the period of available insurance policies. The distinction may not matter much to Century Indemnity, given the fact that, as in Con Ed many years ago, the insured had SIRs in all of the applicable policies, but it will surely have major implications in other cases in the future.