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FEDERAL INS. CO. v. SUSQUEHANNA BROADCASTING CO.

December 21, 1989

FEDERAL INSURANCE COMPANY, Plaintiff
v.
SUSQUEHANNA BROADCASTING COMPANY, Defendant



The opinion of the court was delivered by: CALDWELL

 WILLIAM W. CALDWELL, UNITED STATES DISTRICT JUDGE

 I. Introduction.

 The parties have cross-moved for summary judgment pursuant to Fed.R.Civ.P. 56. This declaratory judgment action was brought by plaintiff, Federal Insurance Company (Federal), to establish that it has no duty to indemnify defendant, Susquehanna Broadcasting Co. (SBC), for the costs of cleaning up environmental pollution under comprehensive general liability insurance policies in effect between the parties. Plaintiff also asserted a claim for restitution of defense costs for allegedly non-covered claims. The main issues presented are those commonly occurring in litigation of this type: (1) whether response costs under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq., constitute "damages" within the meaning of the policies; and (2) whether a policy exclusion providing coverage only for "sudden and accidental" releases of pollutants bars indemnification. An additional issue is plaintiff's contention that under Pennsylvania law the settlement of litigation between SBC and plaintiffs in the underlying action extinguished the right of another defendant to seek contribution from SBC for response costs that defendant was required to expend under governmental order. The principal issues have been extensively litigated in the past, sometimes with sharp conflicts between courts. We will examine the motions under the well established standard. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). This is a diversity action controlled by Pennsylvania law.

 II. Background.

 Frederick Shealer operated a waste hauling and disposal business in the Gettysburg, Pennsylvania area. He would pick up and dispose of wastes for various waste generators, including Westinghouse Electric Corporation and SBC. Eventually, over a period of years, certain of these wastes contaminated soil and well water in adjoining residential areas. Those neighbors affected brought suit. See Fishel v. Westinghouse Electric Corp., 617 F. Supp. 1531 (M.D.Pa. 1985) and 640 F. Supp. 442 (M.D.Pa. 1986) for some background. *fn1" Westinghouse was also ordered by the Environmental Protection Agency (EPA) to clean up the contaminated areas pursuant to 42 U.S.C. § 9607(a). Westinghouse arranged a settlement with the plaintiffs and also joined SBC, and other third party waste generators, as third party defendants. Westinghouse sought contribution and indemnity for its liability to the plaintiffs and for response costs it incurred in complying with the EPA order. Upon their motion, the plaintiffs eventually were also permitted to bring direct claims against the third party defendants.

 SBC tendered defense of the claims to Federal in January of 1986. The insurance company at first declined to provide a defense, contending in letters to SBC's Chief Counsel, dated May 30, 1986 and June 3, 1986, that there was no coverage under primary and excess policies in force between the parties. Eventually, by letter dated February 19, 1987, Federal did agree to provide a defense but did so under a reservation of rights. Despite plaintiff's contrary contention, Federal did not assert at that time, or at any time previously, that it was denying coverage because CERCLA response costs were not damages within the meaning of the policy language. The first time Federal raised that issue was in a letter, dated September 22, 1987, from an environmental claims supervisor to defendant's Chief Counsel.

 In early 1988, plaintiff settled the neighbors' claims against defendant. On March 25, 1988, plaintiff notified defendant that Federal no longer considered itself obligated to act further on SBC's part since the remaining claims were those of Westinghouse against SBC, which sought contribution for costs plaintiff considered beyond the coverage it provided. Plaintiff paid the complete costs of defending the action up to the time of its withdrawal. Since that time, Westinghouse and the third party waste generator defendants agreed in the Fishel action to dismiss the claims against each other. See Fishel, supra, order, dated October 4, 1989.

 III. Discussion.

 Plaintiff's course of conduct in discharging its obligations to accept or deny coverage and, in turn, defend the action, forms the basis of a preliminary argument by defendant that Federal has waived its argument on the damages coverage issue or, alternatively, should be estopped from arguing it. SBC argues that plaintiff's failure to set forth its "'damages' defense" in its reservation of rights letter precludes its presentation in the instant action. (doc. no. 26, defendant's opposition and supporting brief at p. 15). Defendant claims that this position is particularly appropriate "where, as here, the insured is prejudiced because the insurer later seeks recoupment of defense costs or the insured has foregone the opportunity to obtain an early ruling as to that coverage issue." (Id. p. 16). Further prejudice is claimed in defendant's reply brief, (doc. no. 36 at p. 5), in that SBC "had accepted Federal's defense and effectively ceded control of the litigation to Federal and its designated counsel."

 We can make short work of the waiver argument. Defendant is simply wrong as a matter of Pennsylvania law in asserting that when an insurer "does not raise an objection to coverage, and defends with a reservation of rights, the failure to raise the issue results in waiver . . . as to that objection." (doc. no. 26 at p. 15-16). This position has been rejected by Pennsylvania courts and federal district courts interpreting Pennsylvania law. Rather, Pennsylvania uses an estoppel approach. See Pfeiffer v. Grocers Mutual Insurance Co., 251 Pa.Super 1, 379 A.2d 118 (1977). As stated in Weintraub v. St. Paul Fire And Marine Insurance Co., 609 F. Supp. 273, 275 (E.D.Pa. 1985) (cited cases omitted), under Pennsylvania law, "an insurer's failure to assert all possible defenses when denying coverage will create an estoppel only when such failure causes the insured to act to his detriment in reliance thereon." See also Bensalem Township v. Western World Insurance Co., 609 F. Supp. 1343 (E.D.Pa. 1985).

 We have no particular quarrel with the cases cited by defendant in support of its waiver argument. See Intel Corporation v. Hartford Accident And Indemnity Co., 692 F. Supp. 1171 (N.D.Cal. 1988) and Central Armature Works v. American Motorists Insurance Co., 520 F. Supp. 283 (D.D.C. 1980). They are simply inapposite here because they do not involve Pennsylvania law. *fn2" Other cases cited by defendant are distinguishable. Beckwith Machinery Co. v. Travelers Indemnity Co., 638 F. Supp. 1179 (W.D.Pa. 1986); Safeco Insurance Co. v. Ellinghouse, 223 Mont. 239, 725 P.2d 217 (1986) and Ebert v. Balter, 83 N.J.Super. 545, 200 A.2d 532 (1964), all involved cases where the insurer accepted coverage, defended the underlying action for some period of time without a reservation of rights, and then abruptly withdrew from the case. Imposition of liability on the company in those circumstances was in accord with the general Pennsylvania rule "that an insurance company may not undertake the defense of a suit which entails the defendant's relinquishing to the company the management of the case and then turn around and deny liability under its policy." Brugnoli v. United Nat'l Insurance Co., 284 Pa.Super. 511, 516, 426 A.2d 164, 166-67 (1981) (quoted case omitted). Here, as noted, there is a reservation of rights letter which compels a different conclusion. See Draft Systems, Inc. v. Alspach, 756 F.2d 293 (3d Cir. 1985).

 We must therefore determine if plaintiff should be estopped from arguing that its policies are inapplicable to defendant's claims because defendant is not seeking "damages" within the meaning of the policies. To apply estoppel here SBC must show that it has been prejudiced by plaintiff's failure to assert this ground in its reservation of rights letter and earlier denials of coverage. See Pfeiffer, supra. As noted, defendant claims prejudice because: (1) Federal has sought recoupment of defense costs; (2) defendant has foregone an opportunity to obtain an early ruling on this coverage issue; and (3) SBC accepted Federal's defense of the underlying action and ceded control of that litigation to Federal and its designated defense counsel.

 In light of the reservation of rights letter, none of these contentions, without more, establishes the necessary prejudice. Defendant knew that plaintiff was disclaiming coverage on other grounds so a claim for recoupment of counsel fees should not have been surprising. *fn3" Defendant has also foregone an early ruling on all coverage issues so its inaction in regard to this particular issue could not have been prejudicial. Finally, the ceding control of the litigation to Federal and its counsel is not sufficient. Defendant had knowledge of the initial refusal to defend and the plaintiff's issuance of the reservation of rights letter. Defendant nevertheless accepted plaintiff's choice of counsel. We will therefore address plaintiff's argument on the merits.

 There were various policies in effect during the relevant time period. *fn4" A representative policy contained the following language:

 Plaintiff contends that response costs under CERCLA are equitable in nature. In contrast, it is well established that damages are a legal remedy. Accordingly, it argues that its promise to pay on behalf of SBC any "damages" for which the latter may be liable is inapplicable here. Federal relies mainly upon Continental Insurance Companies v. Northeastern Pharmaceutical & Chemical Co., 842 F.2d 977 (8th Cir. 1988) (en banc) (NEPACCO) and Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348 (4th Cir. 1987). It has also referred us to AIU Insurance Co. v. Superior Court (FMC Corp.), 213 Cal.App.3d 1219, 262 Cal.Rptr. 182 (1989), review granted, (Cal. Nov. 30, 1989). NEPACCO held that under Missouri law an insurer's obligation to pay "damages" on behalf of its insured does not include CERCLA response costs. Maryland Casualty reached the same conclusion under Maryland law. SBC counters with cases in support of its position that response costs, or more generally costs necessary to repair property damage, are damages within the meaning of the policy language. *fn5" See, e.g., Aerojet General Corp. v. San Mateo County Superior Court (Cheshire and Companies), 211 Cal.App.3d 216, 257 Cal.Rptr. 621 (1989); New Castle County v. Hartford Accident and Indemnity Co., 673 F. Supp. 1359 (D.Del. 1987); Avondale Industries, Inc. v. Travelers Indemnity Co., 697 F. Supp. 1314 (S.D.N.Y. 1988), aff'd, 887 F.2d 1200 (2d Cir. 1989); National Indemnity Co. v. United States Pollution Control, Inc., 717 F. Supp. 765 (W.D.Okla. 1989).

 Each of these lines of cases has its own theme. Those holding that response costs, or costs of restoring property, are recoverable as damages refuse to assign a technical meaning to the word "damages," referring the lay person's point of view and emphasizing the reasonable expectations of the insured. Those holding that such costs are not recoverable start from the premise that damages has a technical, but nonetheless, accepted meaning which does not include the costs of complying with equitable actions. The ...


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