On Appeal from the United States District Court for the District of New Jersey, D.C. Civil Action No. 88-1994.
Mansmann, Greenberg and Scirica, Circuit Judges.
Appellant, American Motorist Insurance Company (AMICO), brought this diversity action in the United States District Court for the District of Maryland against Levolor Lorentzen, Inc. seeking a declaratory judgment that it had no obligation to indemnify or defend Levolor with respect to certain claims asserted against it by the United States Environmental Protection Agency (EPA). These claims arose because hazardous substances generated by Levolor may have been deposited into a quarry in Maryland that was placed on the National Priorities List in December 1982 pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. (CERCLA). The complaint sought a declaratory judgment that AMICO had no duty to defend or indemnify Levolor as there was no "suit" pending against Levolor seeking damages, Levolor's potential liability was not the result of an "occurrence," or "accident" and was not for "property damage" within the meaning of the policies, no event had triggered coverage, and the "pollution exclusions" in the policies precluded coverage. Levolor counterclaimed seeking "a declaratory judgment ordering AMICO to defend and indemnify" it and "to pay damages incurred by [it] as a result of [AMICO's] breach" of its duty to provide coverage.
On Levolor's motion the case was transferred to the District of New Jersey where it made a motion for partial summary judgment and AMICO made a cross motion for summary judgment. On October 14, 1988, the district court in an opinion and accompanying order, ruled on these motions. American Motorists Ins. Co. v. Levolor Lorentzen, Inc., No. 88-1994 (D.N.J. Oct. 14, 1988). In its opinion it recited that Levolor was AMICO's insured under a series of annual comprehensive general liability policies starting in 1980.*fn1 It recited that the EPA had informed Levolor of its potential liability under CERCLA as a potentially responsible party because industrial waste it generated was, after intermediate transfers, deposited at the Maryland site.
The court recited that on October 23, 1987, Levolor entered into a consent decree with other potentially responsible parties under which it assumed partial responsibility for the implementation and funding of the investigatory and remedial measures mandated by the EPA in Phase I of the cleanup of the Maryland site. Furthermore, Levolor's cooperation in negotiation with the other parties was necessary for a determination of the parties' respective liabilities for Phase II of the cleanup. Thereafter, on or about February 5, 1988, the United States, on behalf of the EPA, brought an action against Levolor and the other potentially responsible parties under 42 U.S.C. §§ 9606(a), and 9607(a)(4)(A), and (B) so that a consent decree could be entered to provide for a mechanism to enforce the settlement if necessary.*fn2
The district court further indicated that when Levolor was notified of its potential liability in 1986, it informed AMICO and requested indemnity and defense under its policies. AMICO reserved its rights and Levolor retained outside counsel to represent it in the negotiations with the other potentially responsible parties and the EPA. In February 1987, AMICO declined coverage and brought this action.
The district court set forth that the parties agreed that New York law was applicable to the coverage issues. It found that there was no dispute of material fact with respect to Levolor's liability under the consent decree for cleanup costs or with respect to the terms of the insurance policies which required AMICO to pay all sums which Levolor became legally obligated to pay "as damages" because of bodily injury or property damage to which the insurance applied. The court held that the New York Court of Appeals would construe "damages" to include "statutorily-mandated cleanup operations." Thus, the New York Court would hold that an insurer liable under its policies to pay for damages to property would be "obligated to indemnify the insured for the remedial expenses imposed by CERCLA." Accordingly, inasmuch as the district court concluded "that the cleanup costs imposed on Levolor for the Maryland site constitute 'damages' within the terms of the policies providing coverage to Levolor," it denied AMICO's motion for summary judgment. American Motorists Ins. Co. v. Levolor Lorentzen, Inc., No. 88-1994, slip op. at 8-9 (D.N.J. Oct. 14, 1988).
The court next considered and denied Levolor's motion for partial summary judgment "regarding AMICO's obligation to indemnify Levolor for sums it is legally obligated to pay as damages. . . ." The denial was predicated on its conclusion that there was "a genuine issue of material fact with respect to the timing of any 'occurrences' under the terms of the policy coverage." It then indicated, quite significantly in regard to our disposition of the case, as follows:
Because the existence of a dispute of material fact with respect to when an 'occurrence' might have taken place precludes summary judgment on the issue of indemnification, this court need not reach the issue of whether the claim for cleanup costs falls under the pollution exclusion clause of the policies. However, the applicability of the clause has a significant impact on the issue of AMICO's obligation to provide a defense.
The pollution exclusion clause provides that the policies do not apply
to [claims of] bodily injury or property damage arising out of the discharge, dispersal, release or escape of . . . contaminants or pollutants into or upon land . . .; but this exclusion does not apply if such discharge, dispersal, release, or escape is sudden and accidental.
Thus, a three-step analysis is necessary. First, coverage must exist under the general terms of the policy: there must be an occurrence resulting in property damage for which Levelor is legally obligated to pay damages. Next, the court must inquire whether the injury was caused by a release of pollutants. If ...