SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-703-93T3
RELIANCE INSURANCE COMPANY,
Plaintiff-Respondent-
Cross-Appellant,
v.
ARMSTRONG WORLD INDUSTRIES, INC.,
Defendant-Appellant-
Cross-Respondent.
_______________________________________________
Argued: May 15, 1996 - Decided July 22, 1996
Before Judges Shebell, Stern and Newman.
On appeal from the Superior Court of New
Jersey, Law Division, Cumberland County.
Christopher Sipes (pro hac vice) of Covington
& Burling, and Donald Kiel of Pitney, Hardin, Kipp &
Szuch argued the cause for defendant-appellant/cross- respondent (Mark S. Herr of Cohen, Shapiro,
Polisher, Shiekman and Cohen, and Robert N. Sayler,
Marc S. Mayerson and Mr. Sipes of Covington & Burling,
on the brief).
Charles W. Gabage and Steven Engelmyer argued the cause
for plaintiff-respondent/cross-appellant (Eisenstat,
Gabage & Berman, attorneys; Mr. Gabage, on the brief;
Hangley, Connolly, Epstein, Chicco, Foxman & Ewing,
attorneys; Steven R. Fischer, Regina A. Vogel, and
Deborah Weinstein, on the brief).
Karen L. Jordan, Deputy Attorney General, argued the
cause amicus curiae for State of New Jersey,
Department of Environmental Protection (Deborah T.
Poritz, Attorney General of New Jersey, attorney;
Mary C. Jacobson, Assistant Attorney General, of
counsel; Ms. Jordan, on the brief).
Laura A. Foggan (pro hac vice) of Wiley, Rein & Fielding argued the cause amicus curiae for Insurance Environmental Litigation Association (Smith, Stratton, Wise, Heher & Brennan, attorneys; Wendy L. Mager, on the brief; Wiley, Rein & Fielding, attorneys; Ms. Foggan, John E. Barry and Steven D. Silverman, of
counsel).
Nielsen V. Lewis argued the cause amicus curiae for The
New Jersey State League of Municipalities (Goldshore,
Wolf & Lewis, attorneys; Mr. Lewis, on the brief;
Stickel, Koenig & Sullivan, attorneys; Fred G. Stickel,
III, of counsel and on the brief; Skey, Dumont &
Matejek, attorneys for amicus curiae The New Jersey
State League of Municipalities).
Cooper, Rose & English, and Kirkpatrick & Lockhart,
attorneys (pro hac vice) for amici curiae WMX
Technologies, Inc., and ASARCO Incorporated; Anderson,
Kill, Olick & Oshinsky, attorneys for amici curiae
Allied Signal, Inc., BOC Incorporated and Metex, Inc.;
and Hannoch Weisman, attorneys for amici curiae London
International U.S. Holdings, Inc., Princeton-Gamma- Tech, Inc. and Prospect Industries, Inc. (Jerry
Fitzgerald English, Matthew L. Jacobs and Bruce H.
Nielsen (pro hac vice), Elizabeth A. Sherwin, and
Suzanne Q. Chamberlin, and Jordan S. Stanzler (pro hac
vice), on the brief).
The opinion of the court was delivered by
SHEBELL, P.J.A.D.
This appeal involves the issue of comprehensive general
liability ("CGL") policies of insurance providing coverage for
costs of remediation of environmental pollution to groundwater
beneath an insured's site, and whether the "owned property"
exclusions of the policies bar coverage. We hold that the costs
of remediation of groundwater pollution is covered and may not be
denied under the "owned property" exclusion of the CGL policy.
Defendant, Armstrong World Industries, Inc. (Armstrong), was
a prior owner of a manufacturing site determined to have been
contaminated__ possibly through defendant's activities__and
subject to various environmental cleanup requirements. In
addition to the soil on the site, its groundwater was also
contaminated.
For a period of time defendant was insured through CGL
policies issued by plaintiff, Reliance Insurance Company
(Reliance), that incorporated exclusions for damage to property
"owned, occupied by or used by" or "premises alienated by" the
insured. Long after, when defendant notified plaintiff it was
being sued by a site transferee for indemnification for the costs
of environmental cleanup, plaintiff denied coverage and initiated
this action for a declaration of policy coverage. The Law
Division concluded that because there was no evidence that any
groundwater pollution had harmed a third-party, the "owned
property" and "alienated property" exclusions would bar coverage.
The court also concluded that because defendant suffered no
prejudice from plaintiff's delay in denying coverage, plaintiff
was not estopped from asserting the exclusions as a bar to
coverage. Plaintiff's cross-appeal relates to the court's ruling
that any spills that occurred were "accidents" under the
policies.
Plaintiff instituted this action on November 16, 1990
seeking a declaration that pending claims for property damage
against Armstrong in a lawsuit Armstrong ultimately settled
involving claims for environmental contamination created by its
former manufacturing plant were not covered under policies
plaintiff's predecessor had issued. Defendant counterclaimed,
alleging breach of contract and requesting a declaration of
coverage. On July 17, 1992, defendant was granted partial
summary judgment, the court ruled that the policy language
"caused by accident" did not contain a temporal limitation.
Although the court denied without prejudice the cross-motions
regarding the policy exclusions, it ruled that remediation
expenses incurred to prevent the immediate threat of off-site
contamination were not excluded from coverage. Reliance Ins. Co.
v. Armstrong World Indus., Inc.,
259 N.J. Super. 538, 564-68 (Law
Div. 1992), opinion modified,
265 N.J. Super 148 (Law Div.
1993).
Following the Supreme Court's decision in State, Dep't of
Envtl. Protec. v. Signo Trading Int'l., Inc.,
130 N.J. 51 (1992)
involving "owned property" exclusions as they related to
environmental contamination of a party's site, Reliance moved for
reconsideration. In its decision reported as Reliance Ins. Co.
v. Armstrong World Indus., Inc., supra, 265 N.J. Super. at 162-64, the court concluded that the policy exclusions barred
coverage. These cross appeals followed. We have calendared
back-to-back these appeals and seven others which we decide
today. Adron, Inc. v. Home Ins. Co., ___ N.J. Super. ___ (App.
Div. 1996); Kentopp v. Franklin Mut. Ins. Co., ___ N.J. Super.
___ (App. Div. 1996); Ohaus v. Continental Cas. Ins. Co., ___
N.J. Super. ___ (App. Div. 1996); Sagendorf v. Selective Ins.
Co., ___ N.J. Super. ___ (App. Div. 1996); Smidth v. Travelers
Ins. Co., ___ N.J. Super. ___ (App. Div. 1996); Strnad v. North
River Ins. Co., ___ N.J. Super. ___ (App. Div. 1996); United
Mobile Homes, Inc. v. Foremost Ins. Co., ___ N.J. Super. ___
(App. Div. 1996). We have permitted the Department of
Environmental Protection (DEP), the New Jersey State League of
Municipalities (League of Municipalities), Insurance
Environmental Litigation Association (Insurance Environmental),
and various private insured corporations (insureds) to
participate in the appeals as amicus curiae. The full exposition
of the issues through the arguments provided by all participating
has been invaluable to this court.
Defendant's property, a glass manufacturing plant in
Millville, had been in use since the 1800s, and was acquired by
defendant in 1938. 259 N.J. Super. at 542. Over the years,
before and after defendant acquired it, areas of the site were
used as dumping grounds for waste from the manufacturing process,
including hazardous and petroleum substances. In 1969, defendant
sold the property to the Kerr Glass Manufacturing Corporation
(Kerr) under a contract that required defendant to indemnify Kerr
from damages related to defendant's prior operations. Id. at
542-43. In 1983 Kerr sold a portion of the site to American
National Can Company (ANCC). Id. at 543. In 1985, ANCC
transferred the property to Triangle Acquisition Corporation
(Triangle). Ibid.
In anticipation of the transfer to Triangle, ANCC instituted
an environmental investigation pursuant to the terms of the
Environmental Cleanup Responsibility Act (ECRA), N.J.S.A. 13:1K-6 to -13.See footnote 1 Ibid. In June 1985, ANCC entered into an
administrative consent order with DEP. ANCC alleged that two
portions of the site indicated soil and groundwater pollution. A
fourteen-acre area in the northeast corner of the site had been
used for "widespread" dumping at least until the late 1960s, and
sampling of the area's soil and the sediment in a tributary
contiguous to the area indicated the presence of such
contaminants as total petroleum hydrocarbons (TPHCs), arsenic,
lead and mercury. Further, these contaminants were in the
groundwater beneath that area. It was not known whether soil
contaminants present in other areas of landfill had entered the
groundwater.
Environ Corporation's (Environ) 1987 ECRA Sampling Plan set
forth specific findings of pollutants in two particular areas.
The report noted that:
The ground water sample [from one of the two
shallow monitoring wells] was also analyzed
for [contaminants]. Only arsenic was present
at concentrations above ISEE guidelines.
The ground water sample from [the other
shallow monitoring well] was analyzed [for
contaminants]. PAHs and PPMs were not
detected . . . . Petroleum hydrocarbons were
present, but at concentrations below the ISEE
recommended cleanup guidelines.
The ground water sample from [the one deep
monitoring well] was analyzed for
[contaminants]. Most of the TPHCs and PP+40
compounds were not detected, and of those
that were, all were present at concentrations
below the ISEE recommended cleanup
guidelines.
A relatively small and low-level arsenic
plume is present in the western corner of AEC
1. At this time, it is premature to develop
any remedial system for this arsenic
contamination. ENVIRON proposes to develop
an appropriate remedial system, if necessary,
or establish alternate concentration levels
as cleanup levels after evaluating the
effects of this plume on off-site
environments (e.g., the Maurice River). . . .
Previous river sediment sampling indicated
that contamination currently exists from
upstream of the facility. It is likely that
arsenic levels in the Maurice River could be
high, given the various industrial activities
that have occurred at upgradient locations in
the past.
Arsenic, in general, has an extremely high
distribution coefficient that contributes to
a highly attenuated migration of arsenic in
ground water. This means that the arsenic
plume cannot be readily removed from the
aquifer because the desorption or dissolution
rate of arsenic constituents from the aquifer
material to ground water is extremely slow
. . . [and], migration of the arsenic plume
will be extremely slow. Therefore a ground
water remedial plan is not proposed at this
time.
The report noted as to a second area that:
[I]t is premature to develop a remedial
system for the arsenic contamination in the
area of the former drainage ditch. An
appropriate remedial approach, if needed, or
alternate concentration levels will be
developed after further investigation of the
interaction of ground water and surface water
and evaluation of the effects of this arsenic
plume on the Maurice River. Currently, the
arsenic concentration in the downgradient
well . . . is well below the action level for
arsenic
As part of its overall conclusions as to groundwater
contamination, the report said:
Ground water sampling results identify two
areas (AECs 5 and 8) where VOCs have been
detected at elevated levels and two areas
(AECs 1 and 46) where arsenic has been
detected above the drinking water standard of
50 ppb. Although concentrations of these
constituents have been detected above the
informal ECRA action levels and/or state
MCLs, alternate concentration levels will
likely be used to make a final determination
of the need for ground water cleanup. To
establish alternate concentration levels, it
will first be necessary to understand the
interaction of ground water and the Maurice
River.
In January 1989, DEP conditionally approved ANCC's sampling
plan, one of the conditions of which was further groundwater
sampling. In January 1990, DEP notified ANCC that its cleanup
plan was unapproved because "the ground water investigation has
not been completed and all sources of contamination have not been
delineated." On March 1, 1990, ANCC set forth additional
remediation plans.
Environ continued testing and periodically reporting on
ongoing soil sampling. In its June 1992 progress report, Environ
reported that as of May 1992 various monitoring wells in AEC 1
and AEC 46 still tested positive for arsenic.
Following ANCC's environmental investigation, in 1989 it
filed a Federal action against Kerr seeking contribution, under
the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"),
42 U.S.C.A.
§9607(a), for the costs of
pollution remediation. 259 N.J. Super. at 543. Kerr then filed
a third-party complaint against Armstrong. Ibid. Armstrong
received process on April 3, 1989, and on April 13, 1989, it
wrote plaintiff informing it of the lawsuit and stating it
believed plaintiff and its other carriers were obligated to
defend it. Defendant enclosed copies of the third-party
complaint, informed plaintiff of the attorney it had initially
contacted for defense, and requested plaintiff contact its legal
department with any objections. It also advised plaintiff to
"coordinate . . . the defense of this lawsuit" with Armstrong's
attorney. On June 28, 1989, plaintiff responded that it had
received the third-party complaint and that it would "notify
[defendant] within a reasonable time of [its] decision in this
matter." Plaintiff reserved its rights under the policies.
By February 1990, defendant had, over the course of the
federal litigation, incurred almost $650,000 in defense fees.
Between April 1989 and November 1990, defendant's Associate
General Counsel of Legal Affairs and its General Manager of
Insurance allegedly spoke to plaintiff's claims representatives
many times, without plaintiff seeking to disclaim liability under
the policies. Defendant's Insurance Department's General Manager
had a similar experience. Defendant contends that on November
20, 1990, after plaintiff filed the complaint in this matter, it
first learned plaintiff was disclaiming coverage. On March 12,
1991, defendant settled the federal lawsuit having spent more
than $1 million defending the action. The terms of the
settlement were confidential and the agreement was filed under
seal. 259 N.J. Super. at 544 n.2.
Between 1942 and 1952 Reliance's predecessor, Standard
Accident Insurance Company, issued annual CGL policies to
defendant. 259 N.J. Super. at 544. Each policy described
coverage in part as follows:
Coverage C__Property Damage Liability . . .
[The insurer agrees t]o pay on behalf of the
insured all sums which the insured shall
become obligated to pay as damages because of
injury to or destruction of property,
including loss of use thereof, caused by
accident.See footnote 2
[259 N.J. Super. at 548.]
The scope of coverage was limited by specific exclusions, in
particular the "owned-property" and contractual-liability
exclusions:
This policy does not apply . . . to injury to
or destruction of (1) property owned,
occupied by or used by or rented to the
insured, or (2) except with respect to the
liability under sidetrack agreements and the
use of elevators or escalators, property in
the care, custody or control of the insured;
or (3) any goods or products manufactured,
sold, handled or distributed or [premises
alienated] by the name insured or work
completed by or for the name insured, out of
which the accident arises.
This policy does not apply . . . to liability
assumed by the insured under any contract or
agreement except a contract as defined
herein.
[Ibid.]
Within the "Conditions" section of the policy, the term "contract" was defined as follows: "A warranty of goods or
products or, if in writing, a lease of premises, easement
agreement, agreement required by municipal ordinance, sidetrack
agreement, or elevator or escalator maintenance agreement."
Ibid. The terms "property," "accident," and the phrase "all sums
which the insured shall become obligated to pay as damages" were
not defined. Ibid.
Defendant argues that plaintiff lost the right to rely upon
any coverage exclusions because it failed to make a timely
coverage determination and to communicate that decision to
defendant in a reasonable manner. In determining whether an
insurer should be estopped from asserting exclusion defenses
under policies because of prejudice to the insured, the test is
whether the insurer's acts or omissions "constitute[d] a material
encroachment upon the rights of an insured to protect itself by
handling the claim directly and independently of the insurer."
Griggs v. Bertram,
88 N.J. 347, 359 (1982).
Prejudice justifying an estoppel against the insurer will be
presumed where
there has been a long lapse of time without
any indication by the insurance carrier of a
loss or rejection of coverage, during which
the insured justifiably expects to be
protected by the carrier and cannot, except
at the risk of forfeiting coverage, act for
itself under the policy [because] . . . there
is a realistic restraint upon the insured's
contractual freedom of action and a
significant incursion upon its legitimate,
protectable interests.
[Id. at 362.]
The court here concluded that plaintiff took no action to
prejudice defendant. 265 N.J. Super. at 156. We agree.
Plaintiff did not investigate the site or "assume the defense" of
the insured. Defendant engaged counsel on its own behalf before
it received plaintiff's June 28, 1989, acknowledgement letter.
Id. at 155-56. There is no indication that plaintiff caused
defendant to suffer any inability to direct its own defense and
investigate the matter. Plaintiff's June 28, 1989, letter to
defendant said: "We are presently reviewing our obligation to
[you]. We will notify you within a reasonable time of our
decision in this matter." 265 N.J. Super. at 155. This letter
did not imply that plaintiff believed it had a duty to defendant
or that plaintiff was acting for or would defend defendant.
Therefore, despite the significant time interval,
plaintiff's failure to more timely notify defendant of its
decision as to the applicability of the policy exclusions may
only act as an estoppel if in fact defendant can show actual
prejudice. See Miller v. Board of Trustees of Teachers' Pension
& Annuity Fund,
179 N.J. Super. 473, 477 (App. Div.) (prejudice
an element of estoppel), certif. denied,
88 N.J. 502 (1981).
Inasmuch as defendant had itself secured the services of private
counsel and ultimately reached a settlement, we see no evidence
that plaintiff's actions prejudiced defendant in the settled
litigation.
Defendant, however, asserts that the Federal action did not
raise the possible bar of the policy exclusions, and as a result
it "did not try even to develop" any facts in that action about
off-site migration of pollution, the absence of which proof
ultimately ended in the decision in this case that coverage was
precluded under the "owned property" exclusion. Defendant
asserts it was thereby prejudiced. Any lack of proof regarding
those aspects of the case in our view cannot properly be
attributed to an insurer's failure to defend. If such proofs
were necessary for defendant to prevail on the coverage issue, it
was defendant's obligation to discover the facts establishing its
claim of coverage. In any event, our ruling in this appeal
regarding groundwater pollution coverage renders that aspect of
the alleged prejudice moot.
The Law Division judge noted that although DEP had made
allegations against defendant's transferee claiming groundwater
pollution, "there is no evidence presented that groundwater
pollution has affected any actual third party adjacent property
claimant." 265 N.J. Super. at 160. Thus, based on State v.
Signo, supra, 130 N.J. at 64, holding that CGL policies do not
provide coverage for the mere threat of third-party damage where
there has been no injury, the judge concluded that the mere
possibility of off-site migration of pollution would not be
sufficient to invoke coverage. 265 N.J. Super. at 160-61.
The burden is on the insured to bring the claim within the
basic terms of the policy. Diamond Shamrock Chems. v. Aetna Cas.
& Sur. Co.,
258 N.J. Super. 167, 216 (App. Div. 1992), certif.
denied,
134 N.J. 481 (1993). The carrier, however, bears the
burden of establishing that any matter falls within the
exclusionary provisions of the policy. Hartford Acc. & Indem.
Co. v. Aetna Life & Cas. Ins. Co.,
98 N.J. 18, 26 (1984).
Although plaintiff contests the cause and extent of
groundwater pollution at the site, it acknowledges that "there is
some evidence here that the groundwater at the . . . [site] has
been contaminated." Thus, the question is whether the
groundwater beneath defendant's site is property of the insured.
In 1992, our Supreme Court held that the typical CGL policy
did not cover the costs of preventing future environmental damage
to a third party unless those costs result from "prevent[ing]
imminent or immediate future damage when a present injury has
already been demonstrated." State v. Signo, supra, 130 N.J. at
64. A year later the Court in Morton Int'l v. General Acc. Ins.
Co. of Am.,
134 N.J. 1, 27 (1993), cert. denied, ___ U.S. ___
114 S.Ct. 2764,
129 L.Ed.2d 878 (1994), decided that "environmental-response costs and remediation expenses" were "damages" under the
terms of the CGL policies before it. The Court referred
approvingly to Justice O'Hern's dissent in Signo, supra, where he
sought to apply a "common man's" approach to the insurance policy
definition of "damages." Ibid.
Between 1987 and 1992, United States District Court Judge
Brotman twice applied New Jersey law in the area of insurance
coverage for groundwater pollution. Gloucester Tp. v. Maryland
Cas. Co.,
668 F. Supp. 394 (D.N.J. 1987); Chemical Leaman Tank
Lines, Inc. v. Aetna Cas. and Sur. Co.,
788 F. Supp. 846 (D.N.J.
1992). In the earlier of the two cases, Gloucester Tp., supra,
he was deciding insurance coverage issues involving the expenses
of cleanup that the Township was incurring in connection with a
court-ordered closure of its landfill. 668 F. Supp. at 395-96.
The judge recognized in that case, which involved present and
continuing damage to "groundwater both on and offsite," that "the
reality of toxic dump clean-up and the clean-up at issue in the
case at bar requires repairs and preventive measures to
environmental systems such as groundwater which do not follow
property boundaries, but rather 'flow' both on the property of
the insured and third party neighbors." Id. at 399. Citing an
unpublished decision of this court in which we "found that the
underlying claim of DEP did state a colorable claim under parens
patriae for damages to the natural resources of the state," he
said that a legal cause of action exists to protect these
resources. Id. at 398. He thus concluded that the costs of
cleanup and closure constituted "damages" under the subject CGL
policies. Id. at 399-400.
Later, in Chemical Leaman, supra, Judge Brotman was again
interpreting insurance policy exclusions in a pollution matter,
where the plaintiff, presented with cleanup costs under Federal
law for remediating contamination of ground and surface water "in
the vicinity" of its plant, sought insurance coverage under its
CGL policies. 788 F. Supp. at 848-51. The judge again concluded
that the insured's "cleanup costs which it is obligated to pay
pursuant to [the Federal law] with respect to ground and surface
water contamination in the vicinity of," but not at its plant,
constituted compensable "property damage" under the relevant
provisions of the CGL policies. Id. at 852.
We have heretofore expressly addressed the "owned property"
exclusion as it relates to an insured's pollution of groundwater
beneath the insured's site. Morrone v. Harleysville Mut. Ins.
Co.,
283 N.J. Super. 411, 419-20 (App. Div. 1995). In Morrone,
the insurer appealed a grant of summary judgment directing it to
provide the insured a defense under several occurrence-based
"garage" policies. 283 N.J. Super. at 413-14. The insured had
sold the property, and thereafter purchasers sued her alleging
gasoline leaks that caused both soil and groundwater
contamination. Id. at 414. One of the insurer's defenses was
that the exclusion barring coverage did not extend to "property
damage to property owned . . . by the insured . . . ." Id. at
416-17.
In Morrone, we considered the conflicting trial court
decisions in Reliance, supra, and UMC Stamford, Inc. v. Allianz
Underwriters Ins. Co.,
276 N.J. Super. 52 (Law Div. 1994). Id.
at 418-19. After addressing the reasoning of each, we said:
These cases raise potentially far-ranging
concepts of ownership of groundwater beneath
a person's land. They are each well-reasoned; one is not clearly more cogent than
the other.
[Id. at 419.]
We recognized groundwater's "unique" qualities, and ultimately concluded that "groundwater does not clearly fall within the category of 'owned property' for the purposes of the exclusion."
Id. at419-20. Because exclusionary clauses must be narrowly read
and ambiguities are to be resolved in favor of the insured,
Voorhees v. Preferred Mut. Ins. Co.,
128 N.J. 165, 175 (1992), we
held that the insurer was obligated to defend groundwater damage
claims, despite the policy's owned property exclusion. See also,
Pittston Co. v. Allianz Ins. Co.,
905 F. Supp. 1279 (D.N.J.,
1995).
We see no need to revisit the issue or to rehash the various
policy arguments for and against holdings finding coverage and
exclusion. They have, as we noted, been well argued before us.
For varying reasons, the majority of jurisdictions to have
considered the ownership-of-groundwater issue have concluded that
groundwater below real property does not "belong" to the property
owner. See Carol Crocca, Annotation, Liability Insurance
Coverage For Violations of Antipollution Laws,
87 A.L.R. 4th 444,
536-39 (1991). Some courts have expressly concluded, largely
based on environmental statutes not unlike New Jersey's, that
groundwater is a public resource belonging to the government and
is thus "third party" property for purposes of "owned property"
exclusions in insurance policies. See Intel Corp. v. Hartford
Acc. & Indem. Co.,
952 F.2d 1551, 1565 (9th Cir. 1991) (under a
California statute all water within the state was state property,
and therefore "[d]amage to groundwater is not damage to property
'owned or occupied or rented to' the [insured]" under the
policy); AIU Ins. Co. v. FMC Corp.,
799 P.2d 1253, 1261 n.6 (Cal.
1990) (under the California water code all water belonged to the
people of the state, but water use may be acquired by appropriation); State v. New York Cent. Mut. Fire Ins. Co., 542 N.Y.S.2d 402, 403 (App. Div. 1989) (court held that under New York law groundwater is a natural resource protected by the State as trustee for the public, and therefore oil that had either entered the groundwater or threatened to do so caused "damage to the property of a third party"); Aronson Assoc. Inc. v. Pennsylvania Nat. Mut. Cas. Ins. Co., 14 Pa. D & C 3rd 1, 9 (Dauphin Co. 1977) (under Pennsylvania's Clean Streams Act, "streams and pools" beneath the insured's lands constituted "state waters," so that the owned property exclusion did not apply to exclude insurance coverage for cleanup costs, aff'd mem., 422 A.2d 689 (Pa. Super. Ct. 1979); Riehl v. Travelers Ins. Co., Civil Action 83-0085 (W.D. Pa. August 7, 1984), slip op. at 4 (citing Aronson, supra, the court found that the "surface and sub-surface waters" on the insured's land were "not property owned by the insured," and that consequently coverage existed for "damages to the waters of The Commonwealth of Pennsylvania," rev'd on other grounds, 772 F.2d 19, 22-24 (2d Cir 1985) (court reverses grant of summary judgment but does not indicate whether lower court erred in finding that where the insured had polluted groundwater, the "owned property" exclusion was inapplicable); UpJohn Co. v. New Hampshire Ins. Co., 444 N.W.2d 813, 819 (Mich. 1989) (Michigan court concluded that the "owned property" exclusion did not apply to remediation costs at the insured's Puerto Rico property, stating in part that "we believe that
contamination of the groundwater was compensable under both
policies because groundwater belonged to the people of Puerto
Rico rather than to" the insured, citing a Puerto Rican statute),
modified on other grounds,
461 N.W.2d 486 (Mich. 1990), rev'd,
476 N.W.2d 392 (Mich. 1991); and Maryland Cas. Co. v. Wausau
Chem. Corp.,
809 F. Supp. 680, 693 (W.D. Wis. 1992) (under
Wisconsin law groundwater beneath a person's land is not owned by
him or her "but is akin to an easement not subject to the owned-property exclusion").
Some courts have gone even farther, clearly expressing that
the State's interest in groundwater is a property right.
Spangler Const. v. Industrial Crankshaft,
388 S.E.2d 557, 563
(N.C. 1990) (where the court noted that "injury to the State's
natural resources is `property damage'" under CGL policies
because the state's interest in protecting its natural resources
is a property right); Minnesota Mining & Mfg. Co. v. Travelers
Indem. Co.,
457 N.W.2d 175, 182 (Minn. 1990) ("[p]ollution of the
groundwater is damage to public property" because the state on
behalf of its citizens has a proprietary interest in state
natural resources); City of Edgerton v. General Cas. Co.,
493 N.W.2d 768, 783-84 (Wis. App. 1992) (the court found that the
"owned property" exclusion is inapplicable "where the concern is
not primarily the premises of the insured, but rather the
substantial harm to third-party property, including natural
resources [such as groundwater] belonging to the people of the
state"), aff'd in part, rev'd in part,
517 N.W.2d 463 (Wis.) (on
appeal, court did not reach the "owned property" exclusion
issue), cert. denied, ___ U.S. ___,
115 S. Ct. 1360,
131 L. Ed.2d 217 (1995); and Patz v. St. Paul Fire & Marine,
15 F.3d 699,
705 (7th Cir. 1994) (the court did not reach the issue of whether
groundwater under the insured's property is owned by it, but
nonetheless commented that "the cases appear to hold" that
groundwater is "owned" by the State).
However, numerous other courts have concluded that
groundwater in its natural state cannot be deemed "property" that
is "owned" by anyone. See United States Aviex Co. v. Travelers
Ins. Co.,
336 N.W.2d 838, 843 (Mich. Ct. App. 1983) (court held
that based on application of the "reasonable use" doctrine as
applied in Michigan, the owner of land atop groundwater does not
"own" the groundwater subjacent); LaSalle Nat'l Trust v.
Schaffner,
818 F. Supp. 1161, 1169-70 (N.D. Ill. 1993) (court
reasoned that because groundwater in Illinois is subject to the
"reasonable use" doctrine it "is not a matter of legal title,"
and therefore could not be "owned" by the insured); Figgie Int'l,
Inc. v. Bailey,
25 F.3d 1267, 1271 (5th Cir. 1994) (based on the
insured's failure, in connection with a coverage action, to
establish actual contamination of groundwater under its property,
the court expressly refused to resolve whether Louisiana "owns
water above and below real property," but cited an earlier state
decision where that particular court treated groundwater as a
"fugitive mineral"__something owned by no one until captured
(citing Adams v. Grigsby,
152 So.2d 619, 622-24 (La. Ct. App.),
certif. denied,
153 So.2d 880 (La. 1963)); Claussen v. Aetna Cas.
& Sur. Co.,
754 F. Supp. 1576, 1580 (S.D. Ga. 1990) (under
Florida law, the ownership of land does not carry with it any
ownership of vested rights to underlying groundwater not actually
diverted and applied to a beneficial use, so that a CGL "owned
property" exclusion would not bar coverage); cf. Gerrish Corp. v.
Universal Underwriters,
947 F.2d 1023 (2d Cir. 1991) (the court
noted that the "presence of . . . pollution in . . . groundwater"
was "proof of damages to property not owned, controlled, or
possessed" by the insured, so that the "owned property exclusion"
was inapplicable), cert. denied,
504 U.S. 973,
112 S. Ct. 2939,
119 L. Ed.2d 564 (1992); United States v. Conservation Chem.
Co.,
653 F. Supp. 152, 200 (W.D. Mo. 1986) (the district court
adopted a special master's conclusions that groundwater was not
"owned or controlled" by the insured, so that a policy exclusion
on those grounds could not defeat coverage).
Nevertheless, at least one court has expressly concluded
that, as within its jurisdiction, groundwater is not "owned" by
the State. Bausch & Lomb, Inc. v. Utica Mut. Ins. Co.,
625 A.2d 1021, 1035-36 (Md. 1993). In Bausch & Lomb, the Maryland Supreme
Court considered whether the State possessed the requisite
property interest in groundwater contaminated by environmental
pollution to qualify the groundwater as "third-party property"
for purposes of the insured's CGL policy. Id. at 1024-25. After
noting that "the State is said to be the owner of the navigable
waters within its boundaries," the court explained that such
"ownership" was not absolute but as a "quasi trustee for the
public benefit and to support the rights of navigation and
fishery to which the entire public are entitled therein." Id. at
1033. With respect to "subterranean waters," the court stated
that it had previously "suggested a preference for" the "American
Rule," which held that "the landowner is limited to a reasonable
exercise of the owner's proprietary right in the water, i.e.,
such an exercise as may be reasonably necessary for some useful
or beneficial purpose, before obstructing, diverting or removing
percolating water to the injury of a neighbor." Id. at 1034.
But the court concluded that "common-law principles of
groundwater were created to adjudicate disputes between
neighboring property owners who claimed a right to use" the
groundwater, and were thus of limited help in deciding the
question of state ownership of groundwater. Ibid.
Turning its attention to particular enactments, the court
noted that "[n]either the Maryland Constitution nor any statute
proclaims the State to be the owner of waters within its
borders." Ibid. Nevertheless, it noted the "many provisions" in
state statutes where the legislature had included groundwater
within the definition of "waters of the State" and "waters of
this State," but distinguished such statutes as pertaining to
"the State's regulatory maintenance of clean water." Ibid.
After noting that nothing in its review of any legislative
history indicated that "the legislature ascribed ownership of
groundwater to the State," it concluded that the "legislative
pronouncements" of record merely demonstrated that the state "has
committed itself to regulatory oversight of the groundwaters of
Maryland to benefit . . . citizens." Ibid. And although in the
case before it "the question of groundwater ownership [arose] in
the context of a potentially insurable injury by pollution,"
Maryland's "interest in groundwater [nonetheless] rests on its
power to preserve and regulate." Id. at 1036. Thus, it found
the State's power was not a "property interest within the
contemplation of the insurance policy in dispute." Ibid.
Finally, several courts that have generally concluded that
groundwater is "property of the state" have also recognized that,
under particular circumstances, it might still be considered the
insured's "property" for purposes of the "owned property"
exclusions. See Shell Oil Co. v. Winterthur Swiss Ins. Co.,
15 Cal. Rptr 2d 815, 844 (Cal. App. 1993) (court concluded that
although private ownership rights in groundwater might be
"limited" by California law that stated that all water in the
state was the property of the people, there was a question of
fact as to whether the groundwater at issue fell within the
"care, custody or control" language of the policy's "owned
property" exclusion), reh'g denied and opinion modified on other
grounds (February 22, 1993), review denied (May 13, 1993); cf.
Lane v. Federated Rural Electric,
834 P.2d 502, 505 (Or. Ct.
App.) (groundwater and the right to control such groundwater
belong to the public, and while the insured had a right to
appropriate the groundwater under its realty, there was no
evidence that it had made any attempt to do so, so that such
groundwater was not within the exclusion for property "owned,
used or otherwise controlled" by the insured), review denied,
843 P.2d 454 (Or. 1992).
Our United States Supreme Court has expressly recognized
"the legal fiction of state ownership" with respect to
groundwater resources, noting "the demise of the public ownership
theory" as to natural resources, and stating that it was merely
"legal shorthand" for the State's legitimate interest in
preserving and regulating important resources. Sporhase v.
Nebraska,
458 U.S. 941, 951,
102 S. Ct. 3456, 3465,
73 L. Ed.2d 1254, 1263 (1982); see also Toomer v. Witsell,
334 U.S. 385, 402,
68 S. Ct. 1156, 1164,
92 L. Ed. 1460, 1466 (1948). (State-ownership is merely expressive "of the importance to its people
that a State have power to preserve and regulate the exploitation
of an important resource").
In Morrone, supra, we applied the principle of construing exclusions against the insurer where terms are deemed ambiguous. 283 N.J. Super at 420. We recognize that "in the absence of a specific definition in an insurance policy, the words must be interpreted in accordance with their ordinary, plain and usual meaning." Daus v. Marble, 270 N.J. Super. 241, 251 (App. Div. 1994). The exclusion, however, is for damages to the property of the insured. Although the insured has a property right in the
reasonable use of the groundwater, payment is not being sought
for damage to or loss of the right to use groundwater. We remain
firm in our conclusion that the exclusion should not apply where
the damage is to the groundwater itself instead of to the
insured's "property" right of reasonable use.
Our courts adhere to the "reasonable intention of the
parties" test where "the phrasing of the policy is so confusing
that the average policyholder cannot make out boundaries of
coverage." Signo Trading, supra, 130 N.J. at 62-63 (quoting
Weedo v. Stone-E-Brick, Inc.,
81 N.J. 233, 246-47 (1979)). In
this case, the absence of the definition of "property" could
easily confuse the average policyholder as to the extent of
coverage when attempting to apply the exclusion to the costs
related to discovery, monitoring and remediation of polluted
groundwater.
We must also consider whether the groundwater falls under
the "care, custody or control" of the insured exclusion. In New
Jersey, the "care, custody or control" exclusion of a CGL policy
is not applicable where the damage is "merely incidental" to the
property upon which the work is being done by the insured.
Condenser Serv. v. American Mut. Liab. Ins. Co.,
58 N.J. Super. 179, 183-84 (App. Div. 1959), certif. denied,
31 N.J. 548 (1960).
Moreover, our courts generally view the "care, custody or
control" issue as fact sensitive. See e.g., Elcar Mobile Homes,
Inc. v. D.K. Baxter, Inc.,
66 N.J. Super. 478, 491 (App. Div.
1961) ("We are of the opinion that what constitutes 'care,
custody, or control' [under the terms of a policy exclusion] . .
. depends not only upon whether the property is realty or
personalty, but as well upon many other facts, such as the
location, size, shape and other characteristics of the property,
what the insured is doing to it and how, and the interest in and
the relation of the insured and others to it.") Thus, in
Morrone, supra, 283 N.J. Super. at 420, we noted that
groundwater, "other than being a source of potable water . . . is
certainly not susceptible to the custody or control of a property
owner." We adhere to this ruling.
We turn to the "alienated premises" exclusion which we have
held "is designed to extend the [owned property] exclusion to
claims by subsequent owners of property previously owned by the
insured." Wickner v. American Reliance Ins. Co.,
273 N.J. Super. 560, 567-68 (App. Div. 1994), aff'd,
141 N.J. 392 (1995). We are
satisfied that this exclusion is inapplicable to claims of this
nature relating to groundwater. Inasmuch as the owned property
exclusion is inapplicable, it cannot be extended by the alienated
property exclusion whose purpose is limited to preventing the
circumvention of the owned property exclusion. Further, since
the insured did not own the groundwater, it was not part of the
premises alienated by the insured.
The policies are contingent in part upon damages being
"caused by accident." Plaintiff contends that the judge erred in
construing those provisions to apply to continuous discharges of
pollutants over many years, while effectively ignoring what
plaintiff says was an intended temporal limitation upon any event
deemed an "accident."
In Morton, supra, the Court had to determine the extent of
coverage under CGL policies for the owners of a mercury-processing plant who sought reimbursement for costs incurred in
defending a DEP action and remediating pollution at the site.
134 N.J. at 6-7. Justice Stein reviewed the development of CGL
policies from accident-based to occurrence-based, stating that
the term "accident" in the pre-1966 policies was "generally
construed . . . to encompass ongoing events that inflicted injury
over an extended period provided that the injury was unexpected
or unintended from the insured's standpoint." 134 N.J. at 31
(citations omitted). And see our opinion in the same case,
concluding that the "pre-1966 policy . . . left the definition of
'accidents' to the courts which more broadly construed the term."
266 N.J. Super. 300, 336 (App. Div. 1991). Morton involved both
pre- and post-1966 policies, and the Supreme Court noted that,
with respect to the accident based policy at issue, "the
Appellate Division correctly acknowledged that the trial court
had focused improperly on the manner in which the injury had been
caused and had erroneously concluded that the policy did not
provide coverage for the unexpected result of a deliberate act."
134 N.J. at 81.
Plaintiff asserts that the judge erred in construing
"accident" without regard to any temporal element. We disagree.
Our Supreme Court noted that the pre-1966 policies were construed
generally to encompass ongoing injuries or harmful events over an
extended period so long as the injury was neither expected nor
intended. Morton, supra, 134 N.J. at 31; 266 N.J. Super. at 336;
Diamond Shamrock, supra, 258 N.J. Super. at 199-200; and
Broadwell Realty Srvs. v. Fidelity & Cas. Co. of N.Y.,
218 N.J.
Super. 516, 532 (App. Div. 1987), overruled in part on other
grounds, Morton, supra, 134 N.J. at 28. The Court went on to
hold
that in environmental-coverage litigation a
case-by-case analysis is required in order to
determine whether, in the context of all the
available evidence, "exceptional
circumstances [exist] that objectively
establish the insured's intent to injure"
[citation omitted]. Those circumstances
include the duration of the discharges,
whether the discharges occurred
intentionally, negligently or innocently, the
quality of the insured's knowledge concerning
the harmful propensities of the pollutants,
whether regulatory authorities attempted to
discourage or prevent the insured's conduct
and the existence of subjective knowledge
concerning the possibility or likelihood of
harm.
[134 N.J. at 86-87.]
The Court also addressed the standard for pollution-exclusion policies. Id. at 87. It did not, however, differentiate between the accident-based and occurrence-based policies for purposes of whether the single pre-1966 policy applied to the ongoing pollution at the site, thereby implying that damages sought under an accident-based policy are not automatically excluded simply because they occurred over time. We reject plaintiff's assertion that the record indicates
defendant in fact understood that the term "accident" had a
temporal meaning, inasmuch as the applicable standard is one of
the insured's objectively reasonable expectations rather than its
subjective understanding. Meier v. New Jersey Life Ins. Co.,
101 N.J. 597, 617 (1986). There does not appear to be any question
of fact presented as to whether defendant either expected or
intended the damages at issue here, as that inquiry was framed by
the Morton Court. 134 N.J. at 86-87. Nonetheless, we do not
preclude development of the issue on remand.
Finally, plaintiff contends that the California Court of
Appeals has already addressed this issue between these two
parties and concluded that "an accident policy covers only
unexpected and unintended events which are also sudden" (citing
Armstrong World Industries, Inc. v. Aetna Casualty & Sur. Co.,
26 Cal. Rptr.2d 35, 91 (Cal. App. 1993), review granted sub nom.
and opinion superceded, In re Asbestos Ins. Coverage Cases,
866 P.2d 1311 (Cal. 1994) review transferred to Cal. App.,
904 P.2d 370 (Cal. 1995), decision after transfer,
52 Cal. Rptr.2d 690
(Cal. App. 1996). Plaintiff has not briefed the subsequent
developments in that case, and the opinion to which it cites was
subsequently superseded.
866 P.2d 1311. In any event,
California law would not be applicable here. "[T]he construction
of a contract will ordinarily be governed by the law of the state
in which the contract was made, and this general rule is
applicable to policies of insurance." Keystone Ins. Co. v.
Bowman,
138 N.J. Super. 544, 549 (App. Div. 1976).
Reversed and remanded.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-703-93T3
RELIANCE INSURANCE COMPANY,
Plaintiff-Respondent-
Cross-Appellant,
v.
ARMSTRONG WORLD INDUSTRIES, INC.,
Defendant-Appellant-
Cross-Respondent.
_________________________________________________________________
STERN, J.A.D. (concurring).
State v. Signo Trading Intern., Inc., 130 N.J. 51 (1992), is controlling on us, even though only two of the four-member majority (and two of the dissenters) are now on the Court. Nevertheless, despite its statement with respect to the "owned property exclusion," that "courts should resort to the doctrine of reasonable expectations only when `the phrasing of the policy is so confusing that the average policy holder cannot make out the boundaries of coverage,'" 130 N.J. at 62 (citation omitted), in that case there was no injury to any property other than the insured's. Signo involved no evidence of either contaminated groundwater, see 130 N.J. at 65, or injury to a third party. Furthermore, there was no endeavor "to prevent imminent or immediate future damages when a present injury has already been demonstrated." Id. at 64. According to the Court, therefore,
"the policy does not cover the costs of clean-up performed by or
on behalf of an insured on its own property when those costs are
incurred to alleviate damage to the insured's own property and
not to the property of a third party." Id. at 63. The Court
held "that the effect of the owned property exclusion is to make
the policies' coverage inapplicable in the absence of property
damage to third parties ...." Id. at 66-67.
In Morrone v. Harleysville Mutual Ins. Co.,
283 N.J. Super. 411 (App. Div. 1995), a panel of this court concluded that
"ground water does not clearly fall within the category of `owned
property' for purposes of the exclusion" because of the general
rules concerning construction of insurance policies and
exclusions. The court also held that groundwater is "not
susceptible to the custody or control of the property owner."
Id. at 420. Thus, the panel concluded that a carrier had a duty
to defend a former property owner in a groundwater contamination
case. But Morrone involved a declaratory judgment action after
complaints were filed "against plaintiff by subsequent
purchasers." Id. at 414.
I am satisfied that the holding of Morrone is dispositive of
the principal issue of whether groundwater is "owned property"
for purposes of the policy exclusion and that because groundwater
is not "owned property," its contamination must give rise to
"damages" to some third party. In light thereof Signo is not
dispositive, and it is irrelevant whether the insured is sued by
a subsequent purchaser, an adjoining property owner or the State,
or is required to take remedial action by the Department of
Environmental Protection. I would not revisit the issues
resolved in Morrone. Cf. Hellwig v. J.F. Rast & Co.,
215 N.J.
Super. 247, 254 (App. Div. 1987) (Stern, J.A.D. concurring).
I add only that the question of whether a carrier has an
obligation to defend or indemnify under an insurance policy poses
a very different issue than whether the insured can be held
responsible for losses to a third party or the costs of
remediation. That groundwater is not "owned property" in terms
of the carrier's obligation to its insured does not, of course,
impact on the common law and statutory obligations of the insured
for groundwater contamination under its property.
I join the opinions of the court in this and the related
cases.
Footnote: 1In 1993 ECRA was amended and is now known as the Industrial
Site Recovery Act (ISRA), L. 1993, c. 139.
Footnote: 2The 1951 calendar year policy evidently included an
endorsement changing the "caused by accident" language to an
"occurrence" basis, though the trial judge stated that all of the
subject policies were "pure `accident' based". 259 N.J. Super.
at 550.