In an Opinion dated July 27, 1992, published at F.Supp. , the Court addressed a number of motions between a predecessor-in-title and successor-in-title to an industrial site located in Fords, New Jersey at which substantial polluting activities have occurred for more than three decades. This Opinion addresses a different aspect of environmental cleanup litigation: the battle between an insured and its insurers for coverage to pay for the costs of remediating the contaminated site.
Insurance is a vital component of our society, through which individuals, corporations and other entities help assure their future economic stability in the face of unexpected liabilities. As the regulatory tide has turned sharply against waste disposal practices once commonly engaged in, insureds have called in increasing numbers on their insurers to pay for staggering liabilities being retroactively imposed on them pursuant to state and federal environmental laws. These liabilities were in large part unforeseen and unpredicted by either insurers or insureds. Unlike the relationship that typically exists between jointly liable parties under environmental laws, however, the relationship between insureds and their insurers was voluntarily entered into, and is governed by contract. Thus, whatever policy considerations might be implicated by the tremendous impact of environmental cleanup liabilities, in the face of legal insurance contracts, the allocation of risks between insureds and insurers for liabilities imposed by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") as amended, 42 U.S.C. § 9601 et seq., requires that the Court do no more than apply contract law principles to determine the parties' rights.
Before the Court are a number of motions for summary judgment filed by both defendant/third-party plaintiff W.R. Grace & Co.-Conn. ("Grace") and the third-party defendant insurance companies (the "Insurers").
Between 1959 and 1978, Grace operated an industrial chemical manufacturing facility in Fords, New Jersey known as the Hatco Chemical Division. The operation was purchased by Grace as an ongoing business that specialized in the production of lubricants, plasticisers and other chemicals for use in manufacturing applications. As by-products of these manufacturing operations, the Hatco facility emitted a wide variety of primarily organic chemical compounds, including various esters, phthalates and alcohols. Early in Grace's ownership of the plant, effluent containing these chemicals was pumped directly into streams and ditches that drained directly into the Passaic River.
The waste streams from the manufacturing operations contained large amounts of product that, if re-captured, could be reprocessed and sold. At some point in the early to mid 1960s, Grace constructed unlined ponds that were intended to hold the effluent so that the useful product could be recovered. Later, under pressure from state and local regulatory agencies to curtail the flow of toxic waste directly into the surface waters of the State, Grace constructed clay-lined lagoons and a sewer trunk line that tied into a regional sewerage authority's lines, so that its effluent could be treated. In addition to surface water pollution, government agencies took enforcement measures to abate air pollution caused by the evaporation into the air of the organic waste effluent that was held in the ponds and lagoons.
Discovery in this case has also revealed that the ponds were used to dump other chemicals that had been used in the manufacturing process. Heat transfer fluids containing polychlorinated biphenyls ("PCBs"), used in high-temperature reaction processes, were dumped by employees of Grace from 55 gallon drums directly into the ponds. The phthalic anhydride production facility produced naphthalene effluent as a waste product that was pumped directly onto the soil. Thick tarry residues left in the reaction vessels after distillation of phthalic anhydrides, called "bottoms", were removed from the vessels and dumped in a pile directly on the ground next to the phthalic anhydride plant.
Grace sold the Hatco facility a predecessor corporation of the plaintiff in this action, the Hatco Corporation ("Hatco"). Hatco filed the primary action in this case against Grace in 1989. It seeks indemnification and contribution under CERCLA and contract for all sums expended to remove hazardous substances disposed of on-site and to remediate lands damaged by the disposals.
Grace in turn has sued its primary and excess insurers for indemnification, because it claims that all of the damages for which it may be found liable to Hatco fall within the meaning of "occurrences" under the primary and excess comprehensive general liability policies, and are therefore covered by the policies.
I. Standard for Summary Judgment
Summary judgment shall be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see Hersh v. Allen Products Co., 789 F.2d 230, 232 (3d Cir. 1986). In making this determination, a court must draw all reasonable inferences in favor of the non-movant. Meyer v. Riegel Products Corp., 720 F.2d 303, 307 n.2 (3d Cir. 1983), cert. dismissed, 465 U.S. 1091, 104 S. Ct. 2144 (1984). Whether a fact is "material" is determined by the substantive law defining the claims. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510 (1986); United States v. 225 Cartons, 871 F.2d 409, 419 (3d Cir. 1989).
"At the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249, 106 S. Ct. at 2511. Summary judgment must be granted if no reasonable trier of fact could find for the non-moving party. Id.
II. Grace's Motion For Summary Judgment On the Issue of Trigger of Coverage
Grace seeks summary judgment holding that all insurance policies in effect from the first disposal of a pollutant through the date of manifestation of any contamination afford coverage to a claim of continuous environmental contamination. Grace thereby seeks a declaration that New Jersey law follows the "continuous trigger" theory of insurance coverage. For the reasons that follow, the Court will grant Grace's motion in part and deny it in part.
A. Maryland Casualty Policies and Excess Policies Following Form
Under primary insurance policies issued by Maryland Casualty Company ("Maryland Casualty") to Grace between 1961 and 1973, Maryland Casualty agreed
To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . injury to or destruction of property, including the loss of use thereof, caused by occurrence.
"Occurrence" is defined in those policies as
either an accident or a continuous or repeated exposure to conditions which result during the policy period in injury to or destruction of . . . property including the loss of use thereof which is accidentally caused and . . . tangible or physical property, including the loss of use thereof.
All damages arising out of such exposure to substantially the same general conditions shall be considered as arising out of one occurrence.
"Property damage" is undefined in the Maryland Casualty policies covering the years 1961 to 1967. That term is defined in the Maryland Casualty policies covering the years 1967 to 1973 as "injury to or destruction of property". Except for London defendants policies in effect between 1959 and 1962 these terms are all incorporated, under a "following form" provision, into the excess insurance policies in force during the period the Maryland Casualty policies were in effect.
Construing language substantially the same as that included in the Maryland Casualty policies, courts have found that all policies in effect from the first date of exposure to asbestos until the manifestation of asbestos-related disease must provide coverage. See, e.g., Keene, 667 F.2d at 1045; Lac D'Amiante Du Quebec, Ltee. v. American Home Assur. Co., 613 F. Supp. 1549 (D. N.J. 1985), later proceeding, 864 F.2d 1033 (3d Cir. 1988). These holdings have been based on the finding that "injury" begins at the time of first exposure to asbestos and continues thereafter. Keene, 667 F.2d at 1046; Lac D'Amiante, 613 F. Supp. at 1558-59, 1561. Thus, although Grace argues to the contrary, the continuous trigger theory, based on the plain language of the definition of occurrence, requires the insured to prove injury-in-fact during a policy period for coverage to be triggered. Sandoz, Inc. v. Employer's Liability Assur. Corp., 554 F. Supp. 257, 266 (D.N.J. 1983); See Kelly, Messick, Schoenleber & Miller Assocs. v. Atlantic Mut. Ins. Co., 218 N.J. Super. 395, 412 (App. Div. 1987) ("negligence committed by an insured does not trigger coverage until a party is damaged by such negligence"). Courts that have found continuous injury during multiple policy periods have concluded that, under the plain terms of the insurance policies, coverage is continuously triggered until the injury is manifested.
Provisions like those in the Maryland Casualty policies require that, for coverage to be provided, an accident or a continuous or repeated exposure to conditions need only "result" in injury during the policy period. Thus, for continuing injuries, courts have concluded that a continuous "occurrence" causing continuous injury triggers each policy in effect at any point during the continuing injurious process. Keene, 677 F.2d at 1046; Lac D'Amiante, 613 F. Supp. at 1558-59, 1561.
Further, despite the Insurers' contention to the contrary, the policy language does not expressly restrict coverage to only the injury that resulted during the policy period. Such a provision could have been expressly included in the policies.
Thus, courts have held that any policy triggered during the continuing injury is liable to the extent of policy limits for all damages arising from the continuing occurrence. Keene, 677 F.2d at 1050; Lac D'Amiante, 613 F. Supp. at 1562-63. The consequent result where multiple policies have been triggered is that each triggered policy has been held jointly and severally liable for the covered injuries. Id.; see also Sandoz, Inc. v. Employer's Liability Assur. Corp., 554 F. Supp. 257, 266-67 (D. N.J. 1983) (indicating that when harm is indivisible, policies should be jointly and severally liable). In sum, although an insured must prove that actual injury occurred during the policy period, coverage is not limited to only the injury that occurs during that period if the injury is part of a continuous, indivisible process.
Moreover, although Gottlieb did not address the issue of joint and several liability, the Court finds Lac D'Amiante persuasive, and agrees that the New Jersey Supreme Court would interpret the policy language to find that a policy triggered by a continuing occurrence under the policy terms in the Maryland Casualty policies would be jointly and severally liable to policy limits for all damages resulting from that occurrence, including damage that occurred before and after the policy period, subject to contribution from other insurers. The rationale for adopting joint and several liability is twofold.
First, the language of the policies themselves do not limit coverage to injury that occurs during the policy period. Lac D'Amiante, 613 F. Supp. at 1562. Thus, as a matter of contract interpretation, overlapping coverage, in effect, had been bargained for. Second, because the Insurers agreed to "pay all sums which the insured shall become legally obligated to pay as damages", they in effect step into the shoes of the insured. Here, regardless of when Grace disposed of hazardous substances on the Fords site, under tort law principles and CERCLA it will be jointly and severally liable for the full extent of damage sustained by Hatco during any period of time if the harm sustained was indivisible. ACandS, Inc. v. Aetna Cas. and Sur. Co., 764 F.2d 968, 974 (3d Cir. 1985); Lac D'Amiante, 613 F. Supp. at 1562. Thus, provided Grace bears its burden to establish that injury was continuous and is indivisible, all triggered Maryland Casualty policies and the excess policies following form to the Maryland Casualty policies are jointly and severally liable for all continuous harm. Conversely, because joint and several liability arised only when the injury sustained is indivisible and continuous, Lac D'Amiante, 613 F. Supp. at 1562; Sandoz, Inc., 554 F. Supp. at 266-67, to the extent the Insurers can rebut any showing by Grace that the injury at issue in this case is indivisible, apportionment of liability will be allowed.
B. The Continental Casualty Policies and Excess Policies Following Form
Between the years 1973 and 1985, Grace's primary insurance was provided by Continental Casualty Company ("Continental"). Under the Continental policies, the insurer agreed to
pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages including liability assumed under contract because of . . . Property Damage . . . to which this insurance applies, caused by an occurrence. . . .
"Occurrence" is defined in the Continental policies as
either an accident, event or continuous or repeated exposure to conditions which unintentionally causes injury to or destruction of property.
"Property Damage" is defined as
Injury or destruction of property which occurs during the policy period including the loss of use thereof at any time resulting therefrom. . . .
Similarly, like the Maryland Casualty policies, the Continental policies do not limit liability to only that damage proved to have occurred during the policy period. The policies state that Continental will pay Grace for all sums for which Grace becomes legally obligated to pay because of accidental property damage that occurs during the policy period. Under CERCLA's strict liability regime, Grace could be held liable to pay for all damage at the Hatco site even if its contribution to the site conditions consisted solely of damage caused during a single year. Because the policy language places Continental in Grace's shoes, it may be required to provide coverage for damage that occurred outside of the policy period, provided that Grace's liability for that damage resulted from damage that occurred during the policy period. Consequently, the joint and several liability applied to the Maryland Casualty policies for all damage sustained as a result of a continuing occurrence extending over more than one policy period applies to the Continental policies as well.
Grace contends that coverage is triggered from the date of first disposal through the date of manifestation of injury. It has failed, however, to establish as an undisputed fact, for purposes of summary judgment, that "injury" occurred within the meaning of the policy language at the time of first disposal. Nor has it established beyond dispute the date of the first disposal. Further, it has not established as undisputed fact that injury was a continuous process, is indivisible, and occurred during any given year.
The Court has been presented with no evidence that suggests that the disposals of chemical waste by Grace have resulted in continuous, indivisible injury to the Fords site. It is possible that only some portions of the property damage will meet these requirements. Thus, while it may appear that seepage and migration of chemicals into and under the ground will have been a continuous injurious process, that does not necessarily mean that surface contamination cannot be separated from the subsurface contamination, and allocated to specific policy periods for purposes of coverage. These and many other questions have not been briefed or otherwise addressed by the parties, and must await trial for resolution.
In its Reply Memorandum, Grace asserts that it seeks only a declaration as to the legal question of when coverage is triggered under the policies in issue, and that it does not seek to have the Court apply that standard to determine whether coverage actually was triggered for any particular policy. Reply Memorandum at 32-33. In view of the factual vacuum that exists, the Court can do no more than declare the general principles that will determine whether coverage has been triggered under the insurance contracts and related excess insurance contracts. The Appellate Division aptly noted in Gottlieb that the issue of when coverage has been triggered is "fact sensitive and not properly the subject of an absolute rule." 238 N.J. Super. at 537.
Accordingly, to the extent Grace can prove that: (1) injury or destruction to property commenced during a covered policy period, and (2) the injury or damage was continuous and indivisible through some date not later than the manifestation of the injury,
coverage would be "triggered" as to each policy in effect during that span of time. Further, provided that coverage is actually afforded by a policy and is not in any way precluded or excluded by the terms or conditions of the policy or by operation of law, that policy will be jointly and severally liable to the extent of policy limits for all damages that resulted from the entire continuing indivisible occurrence. To that extent, Grace's motion will be granted.
III. Cross-Motions for Summary Judgment On The Pollution Exclusion Provisions of Various Insurance Policies
The Insurers have moved for summary judgment in their favor holding that all excess umbrella insurance policies in effect from June 30, 1971 do not provide coverage for gradual pollution. Grace has cross-moved for summary judgment in its favor that all post-June 30, 1971 excess umbrella insurance policies provide coverage for gradual pollution provided that such pollution was unexpected and unintended.
By separate motion, Grace seeks a declaration that three excess insurance policies issued by American Employers' Insurance Company (" Employers'") that covered the period between October 20, 1962 and June 30, 1971, and one excess insurance policy issued by Employers' Commercial Union Insurance Company ("Commercial Union") that covered the period between June 30, 1971 and June 30, 1974, all provide coverage for gradual pollution.
The underwriters at Lloyd's of London and the London Market Companies (collectively, "the London defendants") also move separately for summary judgment as to the effect of the pollution exclusions in policies issued by them between 1959 and 1962.
For the reasons set forth below, the Court will grant the Insurers' motion in part and deny it in part, grant Grace's motions in part and deny them in part, and deny the London defendants' motion.
The subject of the cross-motions are all of the excess comprehensive general liability insurance policies at issue in this case that were in force between June 30, 1971 and June 1985. All post-1971 excess policies contained what are referred to as "pollution exclusions". There are two different exclusions contained in the various policies, which will be discussed below. Many of the excess policies also contained "following form" provisions that defined the extent to which their coverage followed the coverage provided in the underlying primary comprehensive general liability insurance policies. These provisions also varied from policy to policy. The underlying primary policies in effect during the period in issue all provided special policy limits for "gradual pollution."
The cross-motions require a two-part analysis. First, the parties maintain contrary positions as to whether the pollution exclusion clauses exclude all coverage for gradual pollution. Second, the parties maintain contrary positions as to the effect that the following form provisions contained in many of the excess policies have on any gradual pollution coverage in the underlying primary policies.
A. The Insurers' Motion On the Pollution Exclusions in the Post-1971 Policies
All of the excess insurance policies in effect from June 30, 1971 to June 30, 1985 contain some form of pollution exclusion. None of the primary insurance policies in effect between 1961 and 1976 contained pollution exclusions. The two Continental primary insurance policies in effect from June 30, 1976 to June 30, 1985 contained pollution exclusion provisions. Only two variations of pollution exclusions are involved in this case. They will be discussed individually.
All policies that contain pollution exclusions, other than those issued by the London defendants, with only minor variations, use the Insurance Services Office ("ISO") standard form exclusion, discussed at length in New Castle County v. Hartford Accident and Indem. Co., 933 F.2d 1162, 1181, 1192-1203 (3d Cir. 1991). That provision bars coverage for:
bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.
The Insurers contend that the ISO exclusion bars coverage for "gradual pollution", and that it is undisputed that all of the pollution in issue in this case was gradual. Therefore, they seek summary judgment in their favor that none of the policies including the ISO exclusion cover the claims asserted against Grace by Hatco.
The ISO exclusion is an absolute bar to coverage for property damage caused by pollution, with a narrow exception. That exception exists when the "discharge, dispersal, release or escape" is "sudden and accidental." The Insurers make several arguments why the Court should find gradual pollution excluded from coverage by the ISO standard pollution exclusion in this case.
First, they argue that the pollution exclusion unambiguously bars coverage for gradual pollution. The gist of the Insurers' argument is that the exclusion's requirement that the discharge or release of pollution be "sudden" precludes recovery for any discharge or release that is "gradual". This argument is essentially the common argument that "sudden" necessarily has a temporal meaning, and means either "abrupt" or of short duration. See New Castle, 933 F.2d at 1192. That argument has been litigated throughout the country. The numerous courts that have addressed the issue, however, have split, with no clear majority view having developed. See New Castle, 933 F.2d at 1195-96 nn. 60, 61 (collecting cases). This Court need not lay out the various arguments of the opposing views, as it believes that the Third Circuit Court of Appeals' extensive analysis under Delaware law in New Castle is highly persuasive and would be adopted without reservation by the New Jersey Supreme Court were it to reach the issue. The conclusion of the Third Circuit, that the term "sudden" is ambiguous, and that the phrase "sudden and accidental" should therefore be construed to mean "unexpected and unintended", New Castle, 933 F.2d at 1198-99, is essentially the same as the conclusion reached by the Appellate Division in Broadwell Realty Servs., Inc. v. Fidelity & Cas. Co., 218 N.J. Super. 516, 536 (App. Div. 1987) ("We thus construe the word 'sudden' as meaning unexpected and unintended").
The Insurers next argue that decisions finding ambiguity in the term "sudden" relied on the doctrine of contra proferentem, which they argue is inapplicable to the contracts in issue in this case. This argument fails because the Insurers misconstrue the doctrine of contra proferentem. Contra proferentum is a general doctrine under which ambiguous language in a contract is construed against its drafter. In re Estate of Miller, 90 N.J. 210, 221 (1982); see also In re Community Medical Center, 623 F.2d 864, 866 (3d Cir. 1980). It means literally "Against the party who proffers". See Black's Law Dictionary 327 (6th ed. 1990). The Insurers narrowly conceive of the doctrine as one of interpretation of insurance contracts against the insurer, and contend that it has no application when the parties to an insurance contract are equally sophisticated. This view has been rejected by the New Jersey Appellate Division:
principles [of interpretation] are no less applicable merely because the insured is itself a corporate giant. The critical fact remains that the ambiguity was caused by language selected by the insurer.
CPS Chemical Co. v. Continental Ins. Co., 222 N.J. Super 175, 189-90 (App. Div. 1988).
The ISO pollution exclusion included in the excess policies was indisputably drafted by committees of insurance representatives. New Castle, 933 F.2d at 1181. No evidence has been submitted to the Court that indicates the pollution exclusion was inserted in the insurance policies at Grace's urging. To the contrary, all evidence proffered indicates that the ISO pollution exclusion was inserted at the insistence of the Insurers. Thus, the doctrine of contra proferentum applies to construction of the pollution exclusion, and dictates that it be construed against the Insurers.
Because the Insurers have failed to establish that the ISO pollution exclusion bars coverage for gradual pollution as a matter of law, their motion for summary judgment will be denied.
The London defendants contend that the pollution exclusion included in their post-1971 policies is fundamentally different from the ISO exclusion, and unambiguously bars coverage for the pollution in issue in this case. That provision states:
This Insurance does not cover any liability for:
(1) . . . loss of, damage to or loss of use of property directly or indirectly caused by seepage, pollution or contamination, provided always that this paragraph (1) shall not apply to liability for . . . loss of or physical damage to or destruction of tangible property, or loss of use of such property damaged or destroyed, where such seepage, pollution or contamination is caused by a sudden, unintended and unexpected happening during the period of this Insurance.
(2) The cost of removing, nullifying or cleaning-up seeping, polluting or contaminating substances unless the seepage, pollution or contamination is caused by a sudden, unintended and unexpected happening during the period of this Insurance.
(3) Fines, penalties, punitive or exemplary damages.
This Clause shall not extend this Insurance to cover any liability which would not have been covered under this Insurance had this Clause not been attached.
The central argument of the London defendants is that use of the phrase "sudden, unintended and unexpected" instead of the "sudden and accidental" phrase included in the ISO exclusion, removes the ambiguity of the term "sudden", and makes clear that it connotes abruptness, thereby precluding coverage for "gradual" pollution. They argue that if "sudden, unintended and unexpected" is construed no differently than "sudden and accidental", then the term "sudden" would be given a redundant meaning, and would thereby be read out of the contract.
This argument, though possessing facial appeal, must be rejected. The word "sudden" has connotations of both the unexpected and unintended. See The Compact Edition of the Oxford English Dictionary 3139 (1980) (defining "sudden" as "happening or coming without warning or premonition" and "unpremeditated, done without forethought"). So too does the word "accidental". Id. at 14 (defining "accidental" as "happening by chance, undesignedly or unexpectedly"). Thus, to a great extent, the terms "sudden" and "accidental" in the ISO exclusion are redundant. New Castle, 933 F.2d at 1194. The Court cannot conclude that the mere replacement of "accidental" with the phrase "unexpected and unintended" conclusively demonstrates that the term "sudden" has some definite other meaning. Although that may be a plausible construction of the phrase, it is still ambiguous, because it is equally plausible that the phrase was meant as a string of terms of similar meaning, a practice routinely engaged in by drafters of insurance contracts.
B. Grace's Cross-Motion On the Pollution Exclusions in the Post-1971 Policies
By cross-motion, Grace seeks a declaration that the pollution exclusions in all of the excess insurance policies bar coverage only when the policyholder expected and intended the injury caused by the release of pollutants. Its argument is based primarily on dicta in Broadwell Realty Servs., Inc. v. Fidelity & Cas. Co., 218 N.J. Super. 516 (App. Div. 1987), and will be rejected.
The policies in issue provide coverage for damage that results from "occurrences. " Occurrence" is an insurance industry term with well-defined meaning. Several variations of the definition are involved in this case. The Maryland Casualty primary policies define occurrence to mean:
either an accident, event or continuous or repeated exposure to conditions which result during the policy period in injury to or destruction of . . . property . . . which is accidentally caused.
The Continental primary policies define occurrence as:
either an accident, event or continuous or repeated exposure to conditions which unintentionally causes injury to or destruction of property.
Another variation in some of the excess insurance policies defines occurrence as:
(A) an accident, or a happening (B) an event, or continuous or repeated exposure to conditions, which unexpectedly results in . . . property damage . . . during the policy period.
These definitions unambiguously convey that damage which is expected, intended or not accidental is not covered by the policies in which they are included.
By contrast, the pollution exclusion clearly and unambiguously places the focus of the policyholder's expectation or intention not on the resulting "damage", but on the "discharge, dispersal, release or escape" of the pollutants. Thus, as the Third Circuit recently stated in New Castle County v. Hartford Accident & Indemnity Co., F.2d , , No. 91-3857 (3d Cir. July 28, 1992) ("New Castle II"):
The occurrence clause provides coverage when the damage was unexpected and unintended, though caused by an intentional act, whereas the pollution exclusion clause excludes coverage except when the discharge was unexpected and unintended. So an insured can point to unexpected and unintended damage as a result of a deliberate act of discharge, and therefore have an occurrence, yet still be excluded from coverage because the discharge was expected and intended.
Broadwell was a suit over insurance coverage for costs expended to clean up gasoline that had gradually leaked out of an underground storage tank. Id. at 519. At issue was whether gradual leakage of gasoline fell within the meaning of "sudden and accidental" in the pollution exclusion. The insurers argued that "sudden" meant "abrupt" and instantaneous, and maintained that the gradual leakage was therefore excluded from coverage. Id. at 530. The Appellate Division construed the word "sudden" in the "sudden and accidental" phrase of the ISO pollution exclusion to mean "unexpected and unintended," and held that coverage was not automatically barred because the leakage was gradual. Id. at 536.
The sole issue before the Broadwell court pertaining to the pollution exclusion was whether the term "sudden" in that provision meant abrupt and short in duration. Nothing in the facts of the case as set forth by the Appellate Division indicated that there was an issue as to whether the owner of the gasoline storage tank expected or intended the gasoline to leak out of the tank, or expected or intended the resulting harm to occur. Thus, the court was not required to determine whether the "sudden and accidental" phrase in the pollution exclusion referred to the release of the gasoline or to the resulting harm. In dicta, however, the court noted and agreed with an earlier Law Division decision, Jackson Tp. Municipal Utilities Authority v. Hartford Acc. & Indem. Co., 186 N.J. Super. 156, 164 (Law Div. 1982), which held that the pollution exclusion was "simply a restatement of the definition of 'occurrence' -- that is, that the policy will cover claims where the injury was 'neither expected nor intended.'" Broadwell, 218 N.J. Super. at 534. Grace seizes on this language to support its position that damage must be intended, and not merely the act of releasing or dispersing the pollutant.
The dicta in Broadwell relied on by Grace ignores the plain language of the pollution exclusion. As is often true of dicta, because the issue was not squarely before the Appellate Division, it may not have thought through and articulated a rule of law as carefully as it otherwise would have. This is evidenced by the Appellate Division's somewhat inconsistent treatment of the issue in the next paragraph of Broadwell. There, the court stated that "where . . . the dispersal of pollutants is both accidental and unforeseen, . . . the 'sudden and accidental' exception to the [pollution] exclusion is applicable. . . ." Id. at 535 (emphasis added). This statement, unlike the statement from Broadwell relied on by Grace, properly focuses the intent inquiry on the act of releasing the pollutants, and not the resulting harm.
This Court predicts, as did the Fourth Circuit Court of Appeals in its recent Liberty Mutual opinion, that the New Jersey Supreme Court would reject the rule stated in dicta in Broadwell, relied on by Grace, and instead hold that the pollution exclusion bars coverage when the "discharge, release, dispersal or escape" was expected and intended, and not only when the resulting damage was expected and intended.
Further, the Court predicts that the New Jersey Supreme Court would not find it necessary for an insured to be aware of the harmful nature of the pollutants when they were discharged or released. Requiring such knowledge would eviscerate the plain language of the exclusion, by bringing into it an element of knowledge of potential to cause harm. This would be at odds with the exclusion's plain language. The ISO exclusion was one step removed from the absolute pollution exclusion that in 1985 became standard policy language in the form CGL policy. See N. Ballard and P. Manus, Clearing Muddy Waters: Anatomy of the Comprehensive General Liability Pollution Exclusion, 75 Cornell L. Rev. 610, 633 (1990). The exception contained in the ISO exclusion is narrow, and designed to insure only against releases of pollutants unintended by the insured. It was not designed to protect insureds against the future consequences of routine business practices involving the releases of chemicals and other contaminants into the environment. Thus, "knowledge of the nature of the substance discharged is irrelevant." New Castle II, F.2d at , Slip Op. at 14. Consequently, to the extent Grace's dumping or pouring of chemicals onto the ground at the Hatco facility was expected and intended, and "performed as part of a regular business activity", Liberty Mutual, 957 F.2d at 1158, coverage will be barred by the pollution exclusions contained in the policies issued to Grace. Grace's cross-motion for summary judgment holding that all unexpected and unintended damage is not barred from coverage by the pollution exclusion will therefore be denied.
Whether releases or discharges were expected and intended may or may not involve fact-sensitive issues. The routine permanent disposal of chemicals, such as phthalate anhydride distillation bottoms and naphthalene residues, directly onto the land at the Hatco site as a sort of chemical waste landfill, for example, leaves essentially no room for Grace to argue that the discharge was unexpected and unintended. Whether Grace expected and intended all of the consequences of its acts, such as seepage of the distillation bottom chemicals into the ground, is irrelevant. It need only have intended the disposal.
By contrast, Grace's temporary storage of effluent and solids in lined and unlined ponds, ditches and muck storage areas before pumping it offsite, either into the sewer system or otherwise, does not admit of as simple an analysis. As to surface residues that must be removed from lined or unlined areas, there is little or no room for Grace to argue that the discharges were unexpected and unintended. Grace knew or should have known that residues would remain, and cannot argue that they were unexpected or unintended.
Whether Grace expected and intended the effluent and solids to escape into the ground, however, poses factual issues that may be dependent on a number of factors. Those factors include the adequacy of any lining to prevent subsurface seepage, and Grace's knowledge, constructive or actual, of the possibility of seepage from either lined or unlined areas into the ground. Evidence in the record indicates that Grace may have known as early as the mid-1960s that chemicals were seeping into the ground and groundwater at the site. See (JA 80-82). Due to the undeveloped state of the record on this motion, none of these issues can be definitively resolved at this stage in the litigation.
C. Cross-Motions on the Effect of the Excess Pollution Exclusions on Gradual Pollution Coverage in the Primary Policies
1. Gradual Pollution: "Coverage" or "Policy Limit"?
All of the primary policies in issue contain provisions that have been described by the parties as "gradual pollution" coverage provisions. The gradual pollution provisions in the primary policies, however, are not "coverage" provisions, but rather limitations of liability. The provisions are essentially identical, except that different dollar amounts were provided in different years. A typical provision states:
It is . . . understood and agreed that the [insurer]'s limits of liability notwithstanding the limit of liability stated on the declarations page are:
(2) Under coverage D [property damage] - $ 100,000 aggregate for injury to or destruction of property arising from gradual pollution or continuous discharge, leakage, or overflow of smoke, fumes, waste or other materials.
This interpretation of the gradual pollution provision presents arguable difficulty only with respect to those primary policies that included both a gradual pollution provision and a pollution exclusion. Two such policies were issued by Continental and were effective between June 30, 1976 and June 30, 1984. It is only in these policies that the gradual pollution provision can be construed to provide additional coverage.
The first policy, No. CCP 2483440, contained both a $ 200,000 limitation of liability for gradual pollution, amended to $ 500,000 as of June 30, 1978, and an ISO pollution exclusion provision, with no policy language that reconciles ...