INSIDE THIS ISSUE
U.K. Arbitrators Construe Hand-Written Settlement Agreement
Who Says Being A "Creep" Is An "Inherent Vice"? A Judge In New York
Quackenbush
Is An Arbitration Panel A "Tribunal"?
New York Federal Judge Holds Multiple Deductibles Applies To Pollution Spills
Too Little, Too Late
INSERT 1 - - Kissing Cousins Or Distant Relations?
INSERT 2 - - Almost a Juror
U.K. ARBITRATORS CONSTRUE HAND-WRITTEN SETTLEMENT AGREEMENT
Mark S. Katz
Intermittently over the past four years, an arbitration panel in London has been the forum for a complex insurance coverage dispute arising out of a disastrous explosion at a manufacturing plant in Louisiana. The plant was owned by a Louisiana corporation, but was operated and managed by a Texas corporation.
The Texas corporation, as the plant's operator, was named as a defendant in several law suits following the explosion. These suits included one commenced by the plant's owner for the near total destruction of the plant itself. Naturally, the Texas corporation turned to its various insurers for defense and indemnity. One of those insurers was a Bermuda company that had issued a high level excess insurance policy. That policy contained an arbitration provision that designated London as the forum but New York law as the governing legal authority. Thus, as strange as it may seem, the arbitration in London was governed by New York law and involved a dispute between a Texas insured and its Bermuda insurer that arose out of an explosion in Louisiana. [How this state of affairs came to be can only be the subject of speculation. Perhaps the Bermuda insurer felt more comfortable procedurally with the U.K. Arbitration Act, but recognized that the policy would be difficult to market in the U.S. if U.K. substantive law were to apply as well. Presumably New York was selected because it is considered a "conservative" jurisdiction, i.e., less reflexively hostile to insurers.]
Because the London arbitration was necessarily being handled by British solicitors and barristers, each side also retained New York counsel to present the substantive legal positions. MCW was retained as the "expert" on New York insurance law by the solicitors representing the Texas insured.
The Beginnings
Following the explosion, but before commencement of the arbitration, attorneys for both parties met in Texas in an effort to settle coverage disputes that were developing. At the time of that meeting, a lawsuit was pending against the insured that had been commenced by the owner of the facility for property damage to the facility. Although there was some indication that there might be personal injury claims and off-site property damage claims, they were considered to be of little consequence at that time. This assumption, however, proved to be erroneous. Two multi-million dollar personal injury class-action lawsuits were subsequently brought and numerous off-site property damage claims were filed. These actions dramatically increased the potential liability faced by the insured and threatened to drive it into bankruptcy if sufficient insurance funds were not available.
For various reasons, both sides were anxious to reach some resolution. When an outright settlement seemed doubtful, a "high/low" agreement was drafted and proposed by counsel for the Bermuda insurer. That agreement took the form of a hastily hand-written "Offer of Settlement" that was subsequently signed by representatives of both parties.
This hurriedly scrawled agreement was spurred by the need for both parties to work quickly to minimize their potential losses. The insured was facing an impending trial of the property damage lawsuit, and the insurer was in the course of preparing a stock offering that would be adversely affected by a potentially substantial indemnity obligation of an unknown sum.
The policy in question covered the layer of $100 million in excess of $102 million. The high-low feature of the hand-written agreement stipulated that the insurer would make a non-refundable $15 million payment to the insured, the coverage disputes would be submitted to arbitration as set forth in the policy, the insurer would have a credit of $15 million against any amount awarded to the insured in arbitration, and the insurer would "in no event be required to pay more than $80,000,000" to the insured. The agreement also provided that the insured would release the insurer "from any and all liability, which release shall be in form and substance acceptable" to the insurer.
The Dispute
Although the arbitration was initially instituted to resolve the insurance coverage issues, interpretation of the hand-written high/low agreement actually consumed most of the parties' and the panel's efforts. Although it had signed the hand-written agreement and made the $15 million payment called for by it, the insurer sought to have the agreement declared unenforceable because certain alleged conditions precedent were not satisfied. After several hearings, the panel ruled that under New York law the written agreement was binding and enforceable despite the absence of fully detailed terms and the reference to the execution of "definitive written agreements."
Once that issue was laid to rest, the panel was asked to consider two issues that would effectively determine the insurer's defense and indemnity obligations, namely: the extent of the release given to the insurer; and whether the $80 million high/low limit was exclusive of costs and interest. These were issues that required the panel to construe the hand-written agreement in accordance with New York rules of contract interpretation.
Scope of Release
The insurer argued that the extent and effect of the "release" contained in the high/low agreement was to absolve it from all liability of any kind arising out of the explosion, not just the facility owner's property damage claims. In essence, the insurer argued that it had been released from any liability for the personal injury class-action lawsuits and off-site property damage claims. The insured sought a declaration from the tribunal that it was entitled to be indemnified for the personal injury and property damage claims irrespective of the nature of the claims, and the release was with respect to the insurer's liabilities under the policy in excess of the "high" of $80 million.
The panel first determined that New York law governed the construction of the language of the high/low agreement. Both parties made extensive written and oral submissions on New York law. New York principles of contract construction dictated that the panel, in an effort to ascertain the mutual intent of the parties, consider discussions and negotiations that took place before the agreement was executed as well as the subsequent conduct of the parties, including draft "definitive written agreements" that were never finalized.
Although the Texas attorney who negotiated the agreement for the insured testified that he believed at the time that the entire $80 million would be consumed by the owner's property damage claim, he also testified that he never agreed to release all other claims. Logically, the insured would not release such other potential claims against it because the insurer's grounds to decline those other claims were much more tenuous (if not nonexistent) than the ones pertaining to coverage for damage to the facility. The insured would not release claims whose coverage was not questionable in exchange for an agreement to arbitrate the questionable claim.
Witnesses for the insurer testified to their recollection that the high/low agreement was designed to bring certainty and finality to any disputes regarding their coverage, and that the insurer was to have no further liability in respect of any claims, subject only to arbitration of the coverage issues relating to the owner's property damage claims. The panel ultimately concluded that the high/low agreement did not limit the insurer's potential liability under the policy to the property damage claims of the facility owner that were being arbitrated. The release merely limited the insurer's liability to the extent that any and all claims arising out of the explosion exceeded $80 million.
The panel was motivated in part by the age-old doctrine of contra proferentem. This cornerstone of contract construction dictates, of course, that any ambiguity in a written agreement is to be construed against the drafter. Because the panel found the "release" provision as drafted by the insurer's attorneys to be ambiguous and subject to competing reasonable interpretations, it was construed in favor of the insured.
INTEREST AND COSTS
The panel was next asked to consider whether the $80 million limit was exclusive of interest and costs. The insured contended that the tribunal could award interest and costs as it saw fit above and beyond the $80 million cap. The insurer, naturally, contended that the $80 million was the absolute maximum whether that sum was comprised of damages, interest, costs, or otherwise. Relying on sections 18 and 19 of the English Arbitration Act of 1950, the panel ruled that it had the statutory power to award interest and costs exclusive of any policy limit or other agreement, and that absent clear wording in the high/low agreement that limited the panel's power, its statutory power was unaffected. The panel accordingly ruled that any interest and costs awarded by it would not be taken as going toward the $80 million limit.
WHO SAYS BEING A "CREEP" IS AN "INHERENT VICE"? A JUDGE IN NEW YORK.
-Frank J. DeAngelis
Recently, in ABI Asset Corp. v. Twin City Fire Ins. Co., No. 96 CIV. 2067 (S.D.N.Y. Nov. 18, 1997), the court granted the insurer's motion for summary judgment because the causes of the loss, which included creep, were specifically excluded by the terms of the all-risk policy at issue.
The plaintiffs owned an apartment building at 142 West 140th Street in New York. Twin City Fire Insurance Company issued an all-risk policy to ABI covering the apartment building. On March 21, 1995, the southeast corner of the apartment building collapsed. ABI filed a timely claim with Twin City. Twin City subsequently denied the claim on two grounds: that the loss was not caused by an external peril and that the loss resulted from "design defect, deterioration, latent defect, inherent vice, wear and tear, and gradual deterioration."
ABI instituted an action in the United States District Court for the Southern District of New York. Twin City filed a motion for summary judgment on the ground that the causes of ABI's loss were specifically excluded from coverage by the terms of the policy.
The Twin City policy contained two important clauses. The first was an exclusion contained in Section 5 (l) of the policy, which provided that there was no coverage for loss resulting from: (l) loss of use, delay, loss of market, bankruptcy foreclosure, deterioration, latent defect, inherent vice, moth, vermin, termites or other insects, wear, tear or gradual deterioration, rust, wet or dry rot, mold, smog, contamination.
The second important clause, also found in Section 5, was the anti-concurrent cause clause. In New York, the courts have interpreted similar clauses to mean that if a loss results from a multitude of contributing causes and the insurer can prove that one of those causes is specifically excluded by the policy, then there is no coverage.
ABI's engineering expert examined the damage and determined that the loss resulted from creep that caused the wall and foundation system to buckle, which in turn caused the building to collapse. He defined creep as "time-dependent deformation due to a sustained load." He further explained that in cementicious materials such as mortar and concrete, creep is inherent and predictable. Twin City denied ABI's claim on the basis of the expert's report, claiming that creep was encompassed within the inherent vice exclusion.
In deciding the motion, the court had to determine the proper definition of inherent vice. The court noted that other courts have interpreted "inherent vice" as "a natural defect in a material which causes a failure to occur." In Standard Structural Steel v. Bethlehem Steel Corp., 597 F.Supp. 164, 197 (D.Conn. 1984), the court defined inherent vice as "an exclusion which applies to losses from natural decay, ordinary wear and tear and inevitable depreciation." Relying on this definition of inherent vice and the report by ABI's expert defining creep, the court found that ABI's loss was excluded by the specific terms of the policy, and granted Twin City's motion for summary judgment.
ABI relied on Essex House v. St. Paul Fire & Marine Ins. Co., 404 F.Supp. 978 (S.D. Ohio 1975), for the proposition that creep is not an inherent vice. In Essex House, the insured's building was damaged when bricks began to pull away from the building. An expert determined that creep was one of some eleven contributing causes of the loss. The court found that the primary causes of the brick failure were negligent workmanship and faulty design, and ruled that there was coverage under the policy. Unlike the Twin City's policy, however, the policy in Essex House did not contain an anti-concurrent cause clause and did not exclude coverage for negligent workmanship and faulty design. The ABI court therefore found that Essex House was inapplicable.
As a result of the decision in ABI, it should be clear to both insureds and insurers that creep is an inherent defect, at least in New York. Of equal significance, a concurrent cause clause in an insurance policy is valid and will be implemented whenever one of the contributing causes of a loss is excluded.
QUACKENBUSH
-Joyce J. Dillon
The extent to which a Liquidator or Receiver of a defunct insurer can be compelled to comply with an arbitration requirement has been the subject of a good deal of discussion in the industry and disagreement in the courts. Now, after a complicated series of cases involving years of procedural wrangling, the claims between Allstate and Chuck Quackenbush, the Receiver of Mission Insurance Company were finally settled. According to the terms of the settlement, Allstate must pay the Receiver $7.5 million. Prior to settlement, however, a series of rulings in the case upheld the use of arbitration for the resolution of a Liquidator's claims where there were broad arbitration clauses in the reinsurance agreements.
History
Before Mission's insolvency, Mission and Allstate had entered into several reinsurance contracts with each other. In some of the agreements Mission acted as the reinsurer, and on other contracts Allstate acted as the reinsurer. All of the reinsurance contracts contained broad arbitration agreements.
In 1987, because of Mission's insolvency and pursuant to the California Insurance Code's insolvency procedure, Allstate filed proofs of claim with Mission's court-appointed Liquidator, Chuck Quackenbush (the California Insurance Commissioner). Some of the proofs of claim concerned the amounts owed by Mission to Allstate under reinsurance agreements, and others stated the amount of set-offs that Mission might try to claim by virtue of Allstate's reinsurance obligations to Mission.
Then, in 1990, Quackenbush sued Allstate in California Superior Court for contract and tort damages based on Allstate's alleged breach of its reinsurance contracts. Allstate removed the case to federal court on diversity grounds. Allstate then moved the federal court to stay the action and compel arbitration of the dispute under the Federal Arbitration Act (the "FAA") in accordance with the arbitration agreements between the parties. In response, Quackenbush moved the federal court to refrain from hearing the case on the basis of the doctrine of Burford abstention and remand the case to the state court. In addition, Quackenbush argued that the issue of whether Allstate could set off its claims against his claims was a matter of state law that was already pending in the state court liquidation proceeding.
The federal district court granted Quackenbush's motion, concluding that it should abstain because its decision of the substantive legal issues involved, such as Allstate's right to offset its obligations to Mission by Mission's obligations to it, would interfere with California's comprehensive scheme for regulating the insurance industry. (The basis for withholding jurisdiction pursuant to the doctrine of Burford abstention is to prohibit interference with a comprehensive state regulatory scheme).
The Ninth Circuit, however, vacated the district court's order and ordered the case sent to arbitration. The court held that Burford abstention is only applicable where the relief sought is equitable, not legal, in nature. Thus, because Quackenbush was seeking damages, Burford abstention was incorrectly invoked.
Subsequently the Supreme Court of the United States, in a unanimous decision, affirmed the Ninth Circuit's opinion, although it narrowed the Ninth Circuit's language somewhat. Quackenbush v. Allstate Ins. Co., --- U.S. ---, 116 S.Ct. 1712 (1996). The Supreme Court held that Burford abstention only supports the remand or dismissal of a case where the relief sought is discretionary. Since Quackenbush had not sought any type of discretionary relief, the district court should not have remanded the case to the state court on the basis of Burford abstention.
The case was thus remanded to the district court, Quackenbush moved for an order staying the federal proceeding, and Allstate moved to enjoin Quackenbush from litigating its set-off defenses in the state proceeding and to compel arbitration. In two separate orders, the court denied Quackenbush's motion to stay the federal proceedings and denied Allstate's motion for an injunction. The effect of these orders was to allow both the state liquidation proceeding and the federal action to proceed simultaneously. Both parties appealed the district court's orders to the Ninth Circuit.
The Ninth Circuit Decision
In Quackenbush v. Allstate Ins. Co., 121 F.3d 1372 (1997), the Ninth Circuit held that the state liquidation proceedings were the appropriate forum for the resolution of Allstate's claims against Mission. The court also held that the liquidator's claims against Allstate were correctly submitted to arbitration.
While the court recognized that the suits between the parties appeared to be "two sides of the same coin," it stressed that the proceedings were in fact distinct from one another as the set-off issue, which was the primary source of dispute, was only relevant in the federal proceeding where Allstate was the defendant. Id. at 1382. Therefore, the court reasoned, allowing both cases to proceed independently was the correct outcome, even though the resolution of the state court issues in the liquidation proceeding might have a preclusive effect on Allstate's set-off defenses in the federal court proceeding.
[It is important to note, however, that in an unpublished opinion a California appellate panel held that once the district court had compelled arbitration of Quackenbush's claims against Allstate, the Superior Court handling Mission's insolvency should have stayed its proceedings pending the resolution of the arbitration. In re Mission Ins. Co., No. B107839, Cal. App., 2d Dist. (Aug. 22, 1997).]
As to the arbitration issue, the Ninth Circuit held that the district court had reached the right result. The Ninth Circuit held that the FAA required the district court to order Quackenbush's claims against Allstate to be resolved through arbitration. The Ninth Circuit, using strong language, said that because of the existence of the broad arbitration clauses in the reinsurance agreements, the district court had no discretion under the FAA to order anything except that the parties proceed to arbitration.
The court rejected all of Quackenbush's arguments as to why the dispute should not be resolved through arbitration. First, the Ninth Circuit categorically rejected Quackenbush's argument that the parties had, in some way, intended to exempt insolvency claims from the broad scope of issues covered by the arbitration agreements, since there was no evidence of such an intention. Second, the court found Quackenbush's suggestion that the state-law issues implicated in the case were statutory, and therefore not arbitrable, without merit. Finally, the court addressed Quackenbush's contention that the McCarran-Ferguson Act, which prohibits the preemption of state laws regulating the insurance business by federal law, prevents these claims from being resolved through arbitration. While the court acknowledged that the McCarran-Ferguson Act would prevent the arbitration of Allstate's claims against Mission by preempting California's statutory insolvency scheme, it noted that, in this case, where Mission's trustee was asserting claims against Allstate, the act had no relevance because the statutory insolvency scheme was not implicated.
Conclusion
It remains to be seen how much influence this decision will have. It may serve to weaken generally obstacles to arbitration raised under McCarran-Ferguson in insolvency situations, or it may be limited to situations where the Liquidator is also a claimant; in other words, it may simply be a matter of not allowing the Liquidator to eat his cake and have it too.
IS AN ARBITRATION PANEL A "TRIBUNAL"?
David W. Kenna
In the course of an arbitration in England under the English Arbitration Act of 1996, entitled Medway Power Limited against TBV Power Limited and Marubeni Europower Limited, Medway Power Limited moved the United States District Court for the Southern District of New York, Duffy, J., for an order requiring General Electric Company, a non-party to the Medway arbitration, to produce documents for use in that arbitration. In the Matter of the Application of Medway Power, Limited for an Order under 28 U.S.C. §1782 to Conduct Discovery of General Electric Company for use in an Arbitration pending in the United Kingdom against TBV Power Limited and Marubeni, Europower Limited.
28 U.S.C. §1782(a) provides:
Assistance to foreign and international tribunals and to litigants before such tribunals.
(a) The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation. The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court. By virtue of his appointment, the person appointed has power to administer any necessary oath and take the testimony or statement. The order may prescribe the practice and procedure, which may be in whole or part the practice and procedure of the foreign country or the international tribunal, for taking the testimony or statement or producing the document or other thing. To the extent that the order does not prescribe otherwise, the testimony or statement shall be taken, and the document or other thing produced, in accordance with the Federal Rules of Civil Procedure.
A person may not be compelled to give his testimony or statement or to produce a document or other thing in violation of any legally applicable privilege.
In resisting Medway's motion, General Electric pointed to the United States Code's consistent distinction between "tribunals" and "arbitrations" as evidence that the term "tribunal," as used in the Code, does not encompass "arbitrations." For example, see 5 U.S.C. §552b(c)(10) (agency not required to disclose information concerning "the agency's participation in a civil action or proceeding, an action in a foreign court or international tribunal, or an arbitration.")
Judge Duffy first looked to the definition of "tribunal" to determine whether Section 1782 is applicable to private arbitrations. Citing Webster's New World Dictionary (3d College Ed. 1986), Judge Duffy determined that "tribunal" does not encompass a private arbitration. Though Judge Duffy acknowledged that under Section 1(a) of the English Arbitration Act of 1996, "the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal," he held that this "does not make an arbitration a tribunal in a formal sense." Judge Duffy held instead that for purposes of Section 1782 a private arbitration is not a tribunal.
Judge Duffy determined that Congress's intent in enacting Section 1782 was to assist "official, governmental bodies exercising an adjudicatory function," rather than to assist arbitrations that are treated by Congress and the courts as creatures of contract that a court should enforce just like any other contractual obligation.
Furthermore, Judge Duffy noted that Section 1782, as originally enacted, referred only to judicial proceedings. In 1964, however, the term tribunal was added to make it clear that assistance is not confined to proceedings in conventional courts, but also to foreign governmental agencies exercising a judicial or quasi-judicial function. Thus, Congress chose not to include the term "arbitrator" or any term or terms more inclusive than "foreign and international tribunals."
The only case presented by Medway as on point was In Re Application of Technostroyexport, 853 F.Supp. 695 (S.D.N.Y. 1994), in which the Court expressed the view that "an arbitrator or an arbitration panel is a `foreign ... tribunal' within the meaning of Section 1782(a)," Judge Duffy distinguished Technostroyexport which involved a discovery dispute between parties that had formally agreed to submit their controversy to arbitration. General Electric, however, was not a party to the Medway arbitration and did not consent to arbitrate any dispute with Medway. Nor had General Electric agreed to abide by any decision of the English attorney selected as an arbitrator in the Medway matter.
Finally, Judge Duffy noted the inherent incongruity in permitting a district court anywhere in the United States to order discovery, under Section 1782, for a foreign arbitration while under the Federal Arbitration Act only the court of the district in which the arbitration is taking place can compel discovery and then only of witnesses found in that same district. Judge Duffy denied Medway's petition.
The Medway decision carries important implications in reinsurance arbitrations because it raises a question as to the jurisdiction of United States courts to compel discovery of non-parties such as intermediaries who are otherwise key players in the negotiation of reinsurance contracts. Whereas under Technostroyexport Section 1782 appeared to provide a valuable tool for United States District courts to enforce discovery demands against non-parties such as intermediaries, Medway significantly limits the availability of such discovery devices in foreign private arbitrations by delineating a rigid definition of "tribunal" that does not encompass private arbitration.
According to Medway a United States court does not have the authority under Section 1782 to enforce a discovery demand made of a reinsurance intermediary in a foreign reinsurance arbitration unless the intermediary is a party to the arbitration or had otherwise agreed to abide by the decisions or orders of the arbitrator.
In order to compel discovery from an intermediary the party demanding discovery would be required to show that the intermediary was a signatory to the reinsurance contract and therefore subject to the arbitration clause or, in the more likely event the intermediary was not a signatory, the movant would have to prove that the intermediary is an agent of the reinsured. See Mutual Benefit Life Insurance Company v. Zimmerman, 783 F.Supp. 853, aff'd, 790 F.2d 899 (3rd Cir. 1992). The moving party has the burden of proving the agency relationship.
NEW YORK FEDERAL JUDGE HOLDS MULTIPLE DEDUCTIBLES APPLIES TO POLLUTION SPILLS
Ronnie A. Rifkin
The New York Courts continue to litigate the issue of single versus multiple occurrences in pollution coverage cases. In a recent case, the Southern District of New York essentially reaffirmed the Second Circuit's decision in Stonewall Insurance Company v. Asbestos Claims Management Corp., 73 F.3d 1178 (2d Cir. 1995), modified on other grounds in denial of pet. for reh'g, 85 F.3d 49 (2d Cir. 1996), in which the Court held that under New York's "unfortunate event" test each contaminated location was the site of a separate occurrence. In Consolidated Edison Company of New York, Inc. v. Employers Insurance of Wausau, et. al. (November 21, 1997), the Southern District of New York denied the insured Con Edison's motion for partial summary judgment, holding that Con Edison failed to establish that contamination at each site arose out of one "occurrence."
BACKGROUND
Con Edison commenced suit against four of its insurers including Century Indemnity Company for reimbursement of costs associated with cleanup of two sites, one located in Kansas City, Kansas and the other in Kansas City, Missouri. Con Edison moved for summary judgment on the sole issue of whether Century was obligated to reimburse Con Edison on the basis that the contamination at both sites constituted a single occurrence under the Century policy.
During the 1980's these sites had been contaminated with PCBs shipped by Con Edison. Under a Consent Order issued by the Environmental Protection Agency, Con Edison, as a potentially responsible party, was liable to pay cleanup costs incurred at these sites. As a result, Con Edison sought reimbursement from its excess insurers for cleanup and remediation expenses. Con Edison has since settled its claims with all the defendant insurers except Century.
The opinion begins with a brief summary of Con Edison's excess coverage with Century. Century's policy provided excess layer coverage to Con Edison of $1.5 million per "occurrence" in excess of $4 million any one "occurrence." The term "occurrence" was undefined in Century's policy. The policy, however, incorporated by reference the definition of "occurrence" in a policy issued to Con Edison by Wausau Insurance Company, which defined "occurrence" as
(1) an accident; or
(2) an event; or
(3) continuous or repeated exposure to conditions which results in bodily injury, personal injury or property damage. All damages arising out of such exposure to substantially the same general conditions shall considered as arising out of one occurrence.
In an obvious effort to maximize coverage, Con Edison argued that PCB contamination at both sites was a single occurrence and that the costs associated with the property damage suffered at each site should be combined, subject only to a single $4 million "occurrence" limit under the Century policy. Century countered that each PCB-contaminated spill was a separate occurrence, thus requiring damages in excess of $4 million each "occurrence" in order to trigger its policy.
SINGLE OCCURRENCE REJECTED
Con Edison first argued that, because the Consent Order issued by the Environmental Protection Agency referred to both sites, the Environmental Protection Agency in effect treated both sites "as a single matter." The insured also argued that the activity at both sites was so similar that there was no meaningful distinction between the two. The court addressed -- and rejected -- both these arguments.
The Court concluded that there was insufficient evidence to demonstrate that the Environmental Protection Agency viewed the two PCB spills as one matter. In fact, the Court believed that the Environmental Protection Agency handled these sites in a completely separate manner by referring to each site individually in the Consent Order and by analyzing each site separately for cleanup purposes. The Court even noted that the Consent Order provided separate investigations at each site and that the Environmental Protection Agency imposed separate penalties and established separate trust funds for each contaminated site.
The Court also held that even if the insured could show that the Environmental Protection Agency had treated the sites as one matter, "it would not follow a fortiori that the pollution spills at the two sites are 'one occurrence' under the Century policy." "Whether spills at the two sites are one matter for purposes of an Environmental Protection Agency investigation is a question of administrative procedure and federal law... Whether there was one 'occurrence' or more in this case is a question of contract interpretation and state law."
The Court also considered that the sites were not in the same neighborhoods, and in fact were located in two different states in two different cities. Moreover, Con Edison primarily shipped mineral oil and capacitors to the Missouri site while the Kansas site accepted only PCB-laden transformers. Con Edison's shipment of different materials to each site resulted in different disposal processes. Recognizing this, the Court believed that there were enough meaningful distinctions between the two sites to justify treating the two spills as separate occurrences.
Con Edison made a final plea to the Court that the property damage at the two sites arose out of "exposure to substantially the same general conditions." Con Edison pointed to the last sentence of the definition of "occurrence" in the Century policy, "Damages arising out of the same general conditions shall be considered as arising out of one occurrence..." and argued that the "exposure to substantially the same conditions", i.e., the contamination by PCB Treatment, Inc. and its subsidiaries, should be considered a single occurrence. The Court made short shrift of this argument by finding that the "contamination" did not arise from substantially the same general conditions, but rather the cause or "conditions" from which the damage arose was the separate spill at each site.
Clearly, the Court was also unwilling to accept Con Edison's position that the unfortunate event was "the general mishandling of PCBs."
It concluded that:
"Taken to its logical end, Con Edison's argument would result in only "one" occurrence even when pollution is spilled at two treatment sites located ten miles or one thousand miles apart, so long as the two sites serve similar functions, are operated by related corporate entities, and are the subject of a joint EPA investigation. The parties cannot have intended to construe "occurrence" so expansively."
The Court's ruling relied on recent New York case law finding that an occurrence is the underlying event that ultimately results in a filed claim. In Stonewall, the manufacturer's policy also provided a "per occurrence" limit. The manufacturer in Stonewall argued that there was only one occurrence, the sale and manufacture of asbestos-containing products. This argument was dismissed. Applying the "unfortunate event" test, the Court in Stonewall defined an "occurrence" as each installation of asbestos-containing material. Stonewall, 73 F.3d at 1213. Accordingly, the Stonewall Court concluded that "each location" was a separate occurrence requiring another deductible under the policy. The Court in Con Edison followed the reading of Stonewall as premising the number of "occurrences" on the number of discrete locations where the spilling occurred. In this case, Con Edison's repeated PCB spills happened at two different locations and amounted to two separate occurrences.
CONCLUSION
The District Court in Con Edison evidently was persuaded that Stonewall permitted such a narrow definition of occurrence in this case. Because the Court in Con Edison found that each location of PCB-contaminated spills was a separate occurrence, Con Edison was required to apply a separate $4 million "occurrence" retention for each site under its policy with Century.
TOO LITTLE, TOO LATE
Marilu Cain
(MCW represents certain first-party insurers in this case)
In an October 15, 1997 decision, the Superior Court of New Jersey granted summary judgment to certain first-party insurers in an environmental coverage action brought by PPG Industries, Inc. ("PPG"). PPG was seeking coverage under all-risk property insurance policies in effect in the 1960's for environmental damage at three sites in Hudson County, New Jersey.
The court held that summary judgment was mandated by the service-of-suit provision in the first-party policies at issue, which required PPG to commence suit against the insurer within twelve months of the "discovery by the Assured of the occurrence which gives rise to the claim." The insurers pointed out that the damage had occurred from the late 1920's through the early 1960's; PPG knew of the damage by the late 1950's; and PPG was formally notified of the alleged damage by the government in the 1980's, but brought suit in 1995. The court held that on these facts summary judgment was warranted, and noted that an insurer need not demonstrate prejudice to enforce a service of suit provision. As to the question of the time of "discovery," the court observed that even if only the time of the issuance of the Administrative Consent Order were considered, PPG was still out of time. The court disagreed with PPG that the terms "discovery" and "occurrence" in the service of suit provision were ambiguous. The court also rejected, as totally unfounded in the policy language, PPG's argument that the occurrence giving rise to the claim should not be deemed to occur until the $1,000,000 deductible had been exhausted
The court said:
[T]here is no support for this novel theory. The fair interpretation does not refer to the exhaustion of the deductible. Common sense compels that the insurer has a right to be made aware of the claim before the last dollar of the deductible is reached; to hold otherwise simply flies in the fact of logic.
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