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Morton International Inc. v. General Accident Insurance Co.

Decided: October 2, 1991.

MORTON INTERNATIONAL, INC., SUCCESSOR TO MORTON THIOKOL, INC., NOW NAMED THIOKOL CORPORATION, PLAINTIFF-APPELLANT, CROSS-RESPONDENT,
v.
GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, DEFENDANT-RESPONDENT, CROSS-APPELLANT, AND LIBERTY MUTUAL INSURANCE COMPANY, AFFILIATED FM INSURANCE COMPANY, AMERICAN HOME ASSURANCE COMPANY, CONTINENTAL CASUALTY COMPANY, FIRST STATE INSURANCE COMPANY, INSURANCE COMPANY OF NORTH AMERICA, UNDERWRITERS AT LLOYDS, LONDON, DEFENDANTS-RESPONDENTS, AND AETNA CASUALTY & SURETY COMPANY, ET AL., DEFENDANTS



On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County.

King, R.s. Cohen and Stern. The opinion of the court was delivered by King, P.J.A.D.

King

This case is another episode in a long history of litigation which began in 1976 when the State Department of Environmental Protection (DEP) instituted suit against Ventron Corporation, and others, alleging that a mercury processing facility located on its premises was polluting Berry's Creek in Bergen County. The DEP prevailed and Ventron was held strictly liable for clean-up costs in a decision affirmed by the this court and affirmed, as modified, by the Supreme Court. DEP v. Ventron, 182 N.J. Super. 210, 440 A.2d 455 (App.Div.1981), aff'd as modified, 94 N.J. 473, 468 A.2d 150 (1983). Subsequent purchasers of the contaminated property, Robert and Rita Wolf (the Wolfs), were successful in their crossclaim in that litigation and obtained a judgment because Ventron was guilty of fraudulent nondisclosure of the property's polluted condition. See 94 N.J. at 503-504, 468 A.2d 150.

The nominal plaintiff here, Morton International, Inc., (Morton or plaintiff) is the successor by acquisition to the rights of Ventron. When the Ventron complaint first was filed, all of the insurers of the owners of the contaminated property disclaimed coverage and refused to defend the action. After the Supreme Court's decision in 1983, Morton filed this declaratory judgment action in the Chancery Division seeking indemnity for remediation expenses and recoupment of the costs incurred in defending the suit brought by the DEP and the crossclaim asserted by the Wolfs. Twenty-one insurance companies were named in this declaratory judgment action. Partial summary judgment was granted to all defendants with respect to their obligation to defend and indemnify Morton on the crossclaim by the Wolfs. Cross-motions for summary judgment on the remaining issues were filed by plaintiff and the defendants which resulted in a ruling that only General Accident Insurance Company of America (General Accident) was liable and only for part of Morton's costs in defending the DEP suit but that no defendant had a duty to indemnify Morton with respect to the claims made in the Ventron case.

Judge Huot, the Law Division judge who granted the summary judgment, ordered a trial to establish the reasonable costs due for defense of the Ventron case. A trial was held before Judge Lesemann, and Morton was awarded judgment against General Accident for part of the Ventron case defense costs ($100,420.07) and attorneys' fees ($40,000) for successfully prosecuting the "cost of defense" trial. See R. 4:42-9(a)(6). The full costs of defense of the Ventron case were in excess of $1 million. Costs of remediation of environmental damage are yet undetermined.

Morton now appeals from the ruling dismissing its indemnity claims and from the claimed inadequate amount of the cost of the defense award contending that: (1) genuine issues of material fact were in dispute; (2) the judge erred in deciding as a matter of law and fact that the damages resulting from the mercury contamination were not caused by "an accident" within the meaning of the insurance policies; (3) the judge improperly construed the record and the law with respect to "occurrence" as defined in the insurance policies; (4) damage resulting from a covered "occurrence" took place after the plant closed; (5) the judge erroneously failed to order reimbursement of the full cost of defending the Ventron action and (6) the court abused its discretion in restricting the scope of discovery. General Accident's cross-appeal challenges Judge Huot's determination that it had any duty to defend Morton in the Ventron action.

On appeal from the rulings on the motions and cross-motion for summary judgment, R. 4:46-2, we affirm the judgment concluding that the insurers had no duty to indemnify Morton. We reverse that part of the judgment which concludes that General Accident had a partial duty to defend Morton and we vacate the award of counsel fees in Morton's favor.

The facts pertinent to decision were presented in various forms to Judge Huot on the cross-motions for summary judgment. This included portions of the trial testimony and documentary evidence presented at the initial liability trial, DEP v. Ventron, before Judge Lester. Documents relevant to the various coverages were

before Judge Huot and were not in dispute. The focus of the dispute in the Chancery Division was the inferences and conclusions to be drawn from these facts in the stipulated record. This suit was brought by Morton in the Chancery Division without a demand for a jury. Under the circumstances we see no practical difference between an adjudication at a bench trial or on this stipulated record on cross-motions for summary judgment. The decision was essentially a legal one for the judge.

This is the pertinent information about the insurance coverage. General Accident, Reserve and Liberty Mutual provided primary general liability insurance coverage for plaintiff between 1961 and 1976. General Accident insured plaintiff for the longest period of time, between 1961 and 1972. Reserve insured plaintiff for about the next two years; Liberty Mutual, for about one year. The remaining defendant insurance companies (London Market, American Home, Continental Casualty, INA, First State and FM Affiliated) provided excess coverage.

Although Judge Huot's opinion states that, chronologically, the first primary policy was issued by General Accident in 1964, the insurance coverage chart supplied by plaintiff in its appendix indicates that Continental Casualty actually provided the first primary coverage in 1960 and General Accident began its primary coverage in the last quarter of 1960 to the last quarter of 1971. Due to General Accident's long-term primary coverage, the focus of the judge's opinion was on the provisions of General Accident's policy.

As noted by Judge Huot, neither General Accident nor Morton was able to produce either the original or a copy of the insurance contract in existence at that time. Rather, sample policy forms were submitted and accepted by all parties as accurate for purposes of the cross-motions for summary judgment. A form dated "7/64" indicated that with respect to property damage liability, except involving an automobile, General Accident agreed "to pay on behalf of the insured all sums which the insured shall become legally obligated to pay . . . because of injury to or destruction of

property . . . caused by accident." The coverage applied only to "occurrences or accidents" which happened during the policy period and required that written notice be given to the company "as soon as practicable . . . in the event of an accident or occurrence." Similarly, the insured was required to "immediately forward to the company" any process served upon the insured if a claim was brought or suit was instituted. The policy, however, did not define the term "accident."

In subsequent policies, at least after 1964, the policy language was amended to delete the phrase "caused by accident" in that section which defined the company's non-automobile property damage liability and to substitute the words "resulting from an occurrence." An occurrence was then defined as

By 1966 occurrence had a new definition. The term was defined to mean

General Accident's description of the scope of its liability and definition of occurrence is substantially the same as those set out in the other excess policies covering plaintiff during the pertinent time period. Likewise, all of the insurance policies imposed upon plaintiff the duty to provide written notice in the event of an accident or an occurrence "as soon as practicable." Although General Accident's policy did not, several of the defendant insurers' policies contained pollution exclusions which would not provide coverage for bodily injury or property damage arising out of contamination or pollution unless it was the result of an accident.

By letter dated April 15, 1976 plaintiff directed its insurance broker, Marsh & McLennan, Inc., to notify all of its insurers that

it had been served with the complaint and crossclaim. Relying upon the pollution exclusions in its policies covering plaintiff, Affiliated F.M. denied coverage. Five days later Liberty Mutual denied coverage, relying on its pollution exclusion and maintaining that no covered occurrence had taken place. On June 3, 1976 Reserve denied coverage asserting that no covered occurrence took place, and relied on the existence of the pollution exclusion and an exclusion for liability based upon a willful violation of public law. General Accident denied coverage by letter dated April 12, 1977 on the grounds that the claim did not fall within the policy definition of either occurrence or property damage. In May 1979 Reserve was declared insolvent and ordered liquidated by an Illinois court.

This is the factual background. F.W. Berk & Co. (Berk) owned and operated a mercury processing plant from 1929 to 1960 on a 40-acre tract west of Berry's Creek in Bergen County. During that time Berk dumped untreated waste material on the property resulting in mercury-laden effluent draining on the tract. DEP v. Ventron, supra, 94 N.J. at 483, 468 A.2d 150. Velsicol Chemical Corporation (Velsicol) formed and capitalized Wood Ridge Chemical Corporation (Wood Ridge) as its wholly-owned subsidiary in 1960. Wood Ridge then purchased Berk's assets, including the 40-acre tract. From 1960 to 1974 Wood Ridge operated the mercury processing plant. In 1967 Wood Ridge declared a land dividend of 33 acres, subdivided from the 40-acre tract, to its parent corporation, Velsicol. DEP v. Ventron Corp., supra, 182 N.J. Super. at 217, 440 A.2d 455. Velsicol continued to permit Wood Ridge to dump untreated waste material on the 33-acre tract. 94 N.J. at 484, 468 A.2d 150. Velsicol remained the owner of the 33-acre tract. In 1968, however, it sold all the capital stock of Wood Ridge to Ventron Corporation (Ventron). 182 N.J. Super. at 217, 440 A.2d 455. After Ventron acquired the plant, it began to consider a program of treatment for plant wastes. Up to that point, the waste routinely coursed over the land through open drainage ditches. In March 1968, Ventron hired the firm of Metcalf & Eddy to study the effects of mercury on the land.

Three months later Ventron constructed a weir to aid in monitoring the effluent. 94 N.J. at 484, 468 A.2d 150.

The DEP monitoring of the effluent started in the mid-1960s. At that time the DEP took no action against Wood Ridge. In 1970, however, the contamination at Berry's Creek came to the attention of the United States Environmental Protection Agency (EPA) which tested Wood Ridge's waste water. The tests showed that the effluent deposited at least two to four pounds of mercury into Berry's Creek each day. Later in 1970, Wood Ridge installed a waste treatment system that abated, but did not completely halt, the flow of mercury into the creek. The plant continued to operate until 1974 when Wood Ridge merged into Ventron. Ventron then terminated the plant operations and sold the movable operating assets to Troy Chemical Company, an entity not involved in these proceedings. Id. at 484-485, 468 A.2d 150.

In February 1974 Wood Ridge gave a commercial real estate developer, Robert Wolf, an option to purchase the 7.1-acre tract on which the plant was located. In May of 1974 Ventron conveyed the tract to the Robert and Rita Wolf. The Wolfs planned to demolish the plant and construct a warehousing facility. In the course of the demolition, the mercury-contaminated water was used to wet down the structures and was allowed to run into the creek. When the DEP became aware of the situation, it ordered the demolition to stop, pending adequate removal or containment of the contamination. The Wolfs implemented a containment plan other than the one proposed by the DEP and proceeded with the project, ultimately constructing the warehouses. Id. at 485, 468 A.2d 150. The DEP instituted suit in March 1976. Ibid.

After a 55-day trial before Judge Lester, the defendants Berk, Wood Ridge, Velsicol and Ventron were held liable for damages caused by the creation of a public nuisance and the conduct of an abnormally dangerous activity. Ventron was also held liable to the Wolfs for fraudulently concealing material facts with respect to the pollution of the property it had sold to them -- determinations

later upheld by our Supreme Court. Id. at 493, 504, 468 A.2d 150.

The Supreme Court summarized this routine discharge of toxic chemicals at the site by Morton's predecessors over five decades in this way:

Beneath its surface, the tract is saturated by an estimated 268 tons of toxic waste, primarily mercury. For a stretch of several thousand feet, the concentration of mercury in Berry's Creek is the highest found in fresh water sediments in the world. The waters of the creek are contaminated by the compound methyl mercury, which continues to be released as the mercury interacts with other elements. Due to depleted oxygen levels, fish no longer inhabit Berry's Creek, but are present only when swept in by the tide and, thus, irreversibly toxified.

The contamination at Berry's Creek results from mercury processing operations carried on at the site for almost fifty years. [94 N.J. at 481-482, 468 A.2d 150].

The record before Judge Huot demonstrated that as early as 1956 plaintiff's predecessor was informed that the effluent from the mercury processing plant contained an unacceptable level of pollutants. A report filed by two senior State Health Department public health engineers on April 9, 1956 detailed the results of their inspection of the property. These inspectors found that the plant consumed 60,000 gallons of water per day, about 90% of which was used for cooling purposes. Industrial wastes were produced from three buildings and consisted mostly of cooling water which had a high solid content, mainly insoluble dimethylcithiocarbonates which are organic and inorganic mercury compounds. The waste passed through a sedimentation tank from which the settled solids were recovered and reprocessed. The effluents from the settling tanks combined into a private sewer which discharged into an open ditch about 1200 feet from the plant, which in turn discharged the effluent into Berry's Creek at a point 2500 feet from the plant. Both public health engineers concluded that the combined effluent from the plant had an unacceptably high level of suspended solids and that the settling tank serving the effluent from one of the buildings was not large enough.

On December 2, 1958 one of the public health engineers, John Wilford, again visited the property "to ascertain the current status

of their program for the treatment or disposal of their industrial wastes in order to eliminate pollution of Berry's Creek." He reported that the company had not been successful in persuading the Wood-Ridge Sewage Treatment Plant to accept plaintiff's wastes. Wilford made an inquiry about having a large settling tank constructed with an outfall to Berry's Creek. Nothing about the processing at the plant had changed. Wilford explained to the company's vice-president that a settling tank would not, itself, reduce the pollution to acceptable limits and that if the company intended to continue discharging effluent into Berry's Creek it would have to submit plans and specifications to the Department of Health for approval. Wilford admonished the corporate official "that as this matter has been brought to [his] attention over two years ago, this department has a right to expect some appreciable progress toward the elimination of this problem." A four-point course of action was outlined to the company to which its vicepresident agreed to comply. By March 17, 1959, however, it was clear to Wilford the company had made no progress "toward eliminating the polluting industrial waste therefrom from Berry's Creek." According to Wilford, the company was "cognizant" that its wastes contained mercury compounds which had to be removed.

In September 1959 and again in February 1960 Edward Griche, Inc. conducted an investigation into the nature of the waste emitted by the plant and the type of treatment which would clean the effluent. Both reports showed that the effluent from the processing plant contained many "deleterious characteristics" which included high suspended solids concentration. The report explored several treatment methods, some of which had proven to be highly successful and relatively cheap.

The State Department of Health again inspected the premises on February 4, 1960 taking samples of the industrial waste effluent for the purpose of determining "the current pollutional potential of the wastes." The written report which issued after that inspection showed that the "pollutional aspect" of the company's

wastes first came to the attention of the State Department of Health in 1956. Although the report indicates that the company was "very cooperative" and "desirous of rectifying the present pollution," it had yet to decide what type of treatment facility to install and was unable to negotiate for waste disposal with the Borough of Wood-Ridge. Samples of the effluent were taken from three buildings on the premises with a report noting that "no treatment as such is afforded the industrial wastes." The conclusion of this report, as in an earlier report, stated "the combined industrial wastes effluent from S.W. Berk & Company is unacceptable for discharge into Berry's Creek." The report warned that the decision as to the type of waste treatment to be effected had been under consideration for several years; the author threatened legal action to secure compliance with the pertinent statutes.

By March 22, 1960 the company knew that the municipal sewerage system would not be able to handle its wastes, even with pretreatment. A letter from the company to the Department of Health indicated, however, that the company was seeking "professional help on design of a treatment plant." By May 1960 it appeared that Velsicol would purchase Berk's property and assets. Velsicol was informed of the State Department of Health's inspection report of February 1960 and was told that Berk had been "planning to make certain installations to reduce the amount of pollution resulting from its operations . . . ." The sale was completed and the company's name changed to Wood-Ridge Chemical Corporation in July 1960. The State Department of Health again inspected the premises in August 1960 and issued a written report which noted that, despite the name change, "the official personnel remain the same as do also the chief production processes." At the time of this inspection, however, the plant was closed with full production expected to resume by October. Consequently, no sampling of waste was possible and the report merely noted that all production units produced wastes which flowed through a series of settling basins and united in a common ditch leading to Berry's Creek just below the outfall of the Wood-Ridge Sewerage Treatment Plant. Settling was the only treatment of the waste

provided and it was observed that some of the settling basins were in need of cleaning. Again, the company represented to department officials that it was "now planning to construct its own treatment devices."

The plant was again inspected on December 5, 1960. The department's analysis of the plant's effluents indicated "a deleterious waste due chiefly to its high turbidity, suspended solids and ether soluble content." The effluent sample taken during the December 1960 visit was removed from a 5-foot deep, 40-foot square lagoon which had recently been excavated behind the industrial property. That lagoon received all the industrial waste effluents from the plant buildings and acted as an additional settling tank with an average detention period of about two days. The lagoon effluent emptied into Berry's Creek through an underground storm drain pipe. The report concluded with the suggestion that the company proceed with its plans to install additional waste treatment equipment on the premises in order to provide a nonpolluting final effluent.

In February 1964 the State's supervising engineer for the stream pollution control program wrote to the corporation's vice-president observing that a year prior the company informed the State Department of Health that it had contracted with consulting engineers to design suitable industrial waste treatment facilities to treat the lagoon effluent. The State complained that it received no engineering studies or proposals with respect to treatment facilities. Cautioning that the lagoon was nothing more than a temporary or preliminary step leading to treatability studies on the plant's effluents, Wood-Ridge Chemical was directed to advise the State of its treatment program status and when completion of a satisfactory facility would occur. In response, the company forwarded a "report on industrial waste treatment facilities, Wood-Ridge Chemical Corporation," authored by Clinton Bogert Associates, Consulting Engineers. Representatives from the company met with State Board of Health officials on August 5, 1964. At that time they reached an agreement in which the company

was immediately to authorize final planning of new plant sewers and facilities for the collection and treatment of industrial wastes and to submit them to the department for approval within the next several weeks. These treatment facilities would be similar in general design to those recommended by the Clinton Bogert report. The effluent quality standards listed in the Bogert report would be adhered to as minimum requirements before the effluent was discharged into Berry's Creek and the existing waste-holding lagoon would be abandoned after completion and operation of the waste treatment facilities. This agreement was memorialized in a letter from the bureau to the company dated August 6, 1964.

By letter dated November 2, 1964 Wood Ridge reported to the Department of Health about its progress on the waste treatment facility. Wood Ridge promised that construction of a tile sewer and collecting sump for separation of process wastes would be completed by the end of November, after which further laboratory work would be done on the effluent and final plans for the treatment plant could be completed by March 31, 1965. The department responded by seeking greater haste on the company's part and indicating the hope that an adequate design and construction of a treatment project would be completed within the next few months so that "the source of pollution to Berry's Creek may be finally abated." By January 25, 1965 the Department of Health had apparently not received any information about the laboratory studies which were to accompany final installation of the sewers and collecting sump and sought additional information about the progress of the project. Apparently the sewer and collecting sump were completed on January 15, 1965. Wood Ridge planned to have the laboratory studies complete by March, with the planned treatment facilities "on stream by July 1965." In June 1965, however, the health department had received no reports on the laboratory studies or the design of the waste treatment facilities. Even by March 31, 1966 no treatment plant had been designed, let alone completed, at the site.

By late 1969 or early 1970 the federal Environmental Protection Agency became involved in the company's waste problems. John Ciancia, Chief of the Industrial Waste Section of the Federal Water Quality Administration, visited the site and determined that it was discharging process waste containing mercury. On October 23, 1970 the company approved a capital expenditure for improved effluent treatment -- a problem characterized by a company document as "currently at an emergency level." That document asserted that

We are discharging mercury at a rate which we cannot measure precisely, but which has been estimated by the F.W.Q.A. [Federal Water Quality Administration] at 4.2 lbs./day (55 GPM total discharge, averaged over 24 hours, 7 PPM mercury content). The preliminary standard which the F.W.Q.A. appears to be accepting from other mercury users is a maximum of 0.5 lbs./day, which we definitely exceed . . . . Ventron has already suffered adverse publicity because of alleged mercury discharges, and we will certainly receive more if we do not institute controls approved by the F.W.Q.A. While the current furor over mercury pollution undoubtedly contains much exaggeration and misinformation, it is unquestionably a toxic substance, and as such we are under a moral obligation, as well as an impending legal one, to effectively control the mercury effluent from our processes.

From subsequent correspondence between the federal agency and Ventron (by then, 1971, owner of the processing plant), we deduce that the parties were attempting to work out the details of a new treatment process to reduce the amount of mercury admittedly being deposited into Berry's Creek. Ventron never succeeded in preventing mercury contaminated effluent from reaching Berry's Creek. As noted, the processing plant tract was sold to the Wolfs in 1974 and their development of the property caused additional pollution problems which resulted in the suit filed by the DEP.

In March 1976 the DEP filed the complaint against Ventron, Wood Ridge, Velsicol, Berk and the Wolfs charging violation of the New Jersey Water Quality Improvement Act of 1971, N.J.S.A. 58:10-23.1, to -23.10; L. 1971, c. 173, and with creation and maintenance of a nuisance. As noted, after the 55-day trial, Judge Lester held Berk and Woodridge directly liable for the cleanup and removal of the mercury; held Velsicol and Ventron severally liable for half of the costs; held that the Wolfs were not liable; and, although the Spill Compensation and Control Act (N.J.S.A.

58:10-23.11 to 23.11c, L. 1976, c. 141) did not apply retroactively, held that monies from the spill compensation fund should be made available for the cleanup. The Wolfs obtained judgment in their favor on their crossclaim against Ventron for fraudulent nondisclosure of mercury pollution in the sale of part of the tract, which judgment included costs and counsel fees incurred by the Wolfs in their defense of the DEP action. We essentially affirmed the judgment but modified in a number of respects, including the imposition of joint and several liability on Ventron and Velsicol for all costs incurred in the cleanup and removal of mercury pollution in Berry's Creek. We precluded payments from the spill compensation fund if other sources were available to pay for the cleanup and approved future monitoring of Berry's Creek at the expense of Velsicol and Ventron. Id. at 483, 468 A.2d 150. The Supreme Court affirmed the judgment of this court, modifying it only as to the counsel fee award to the Wolfs. Id. at 505, 468 A.2d 150.

In July 1985 Morton, the successor to Ventron, filed this complaint seeking a declaratory judgment that each of the insurance company defendants was obligated under their respective policies to provide indemnification and a complete defense on the DEP's suit. Judge Huot found that none of the defendant insurance companies had an obligation to indemnify Morton because Morton's predecessors' conduct in polluting the property did not come within the scope of coverage of the policies with respect to accidents or occurrences. He found the dumping of the mercuryladen effluent on the property neither an unexpected or unintentional misfortune (an accident) nor something unintended or unanticipated by the insured. Judge Huot found "ample demonstrative evidence" to establish that Wood Ridge, and therefore Morton, knew that the property was being polluted as far back as 1956. Thus, according to Judge Huot, "[t]he only available conclusion is that with that knowledge, Wood Ridge realized, foresaw and ...


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