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September 12, 1997

THE AETNA CASUALTY AND SURETY CO., ROBIN ANTHONY GILDART JACKSON, an Underwriter at Lloyd's, London, et al., Defendants.

The opinion of the court was delivered by: BROTMAN


 Plaintiff Chemical Leaman Tank Lines, Inc. ("Chemical Leaman") instituted this action against Aetna Casualty and Surety Company ("Aetna") and the London Market Insurers ("LMI"), seeking a declaratory judgment that the defendant insurers were required to provide coverage for costs connected to the environmental cleanup of plaintiff's Bridgeport, New Jersey facility. The jury determined that Chemical Leaman was entitled to partial coverage under several Aetna primary policies and LMI excess policies. *fn1"

 Pursuant to the Third Circuit's remand, this Court opened an allocation proceeding in accordance with Owens-Illinois. At the Court's direction, Chemical Leaman and the LMI submitted briefs and presented oral argument concerning the application of the Third Circuit's decision and Owens-Illinois. The Court designated the Hon. Joel B. Rosen, United States Magistrate Judge, to conduct intensive settlement discussions in line with the Owens-Illinois court's emphasis on the importance of dispute-resolution efforts. See Owens-Illinois, 650 A.2d at 995-96. The parties were unable to reach a settlement, and the Court now addresses the allocation issues before it.



 Chemical Leaman is a tank truck company specializing in the transportation of various chemicals and other liquids. It operates a number of tank truck cleaning facilities around the country, including the subject site in Bridgeport, New Jersey. The company used the Bridgeport site from at least 1960 to 1985 to clean trucks. From 1960 to 1969, Chemical Leaman placed contaminated rinsewater at its Bridgeport facility into a wastewater treatment system consisting of unlined ponds and lagoons. In 1969, the New Jersey Department of Health responded to community complaints about bad odors and ordered Chemical Leaman to construct a wastewater treatment and/or disposal plant. Chemical Leaman continued to use the pond and lagoons system until 1975, when it installed a water treatment system. By 1977, Chemical Leaman had drained the ponds and lagoons of liquid, dredged the accumulated sludge out of the lagoons, and filled all the ponds and lagoons with brickbat, sand, and concrete.

 In 1981, the New Jersey Department of Environmental Protection ("DEP") ordered Chemical Leaman to investigate the extent and degree of groundwater contamination at and around the Bridgeport site. The investigation revealed that the ponds and lagoons were the primary source of groundwater contamination. In 1984, the Federal Environmental Protection Agency ("EPA") placed the site on the Superfund national priorities list pursuant to section 105 of the Comprehensive Environmental Response, Compensation and Liabilities Act ("CERCLA"). The EPA alleged that Chemical Leaman was strictly liable for damages and cleanup costs resulting from the onsite contamination. In July 1985, Chemical Leaman entered into a consent order with the EPA. Chemical Leaman admitted liability under CERCLA and agreed to undertake a Remedial Investigation and Feasibility Study ("RI/FS") of the groundwater. Chemical Leaman has incurred expenses in performing the RI/FS and is further obligated to pay for all costs of removal or remedial action incurred by the United States or the State of New Jersey, as well as for damages for injury to, destruction of, or loss of natural resources. The contamination at Bridgeport involved not only groundwater, but also soil and wetlands.

 The tank truck company gave notice of claims to Aetna in April 1988, and to the LMI in March 1989. Aetna and the LMI refused to defend or indemnify Chemical Leaman for costs it had incurred and costs to be incurred in the future in connection with the cleanup of the Bridgeport site.

 Chemical Leaman purchased comprehensive general liability insurance ("CGL") from Aetna covering successive years, from April 1, 1959 through April 1, 1985. It purchased excess CGL policies covering the same period from the LMI. *fn2" For purposes of the allocation issues currently before the Court, the Court need not discuss the provisions of the Aetna policies.

 The LMI's CGL policies were standard-form "occurrence-based" policies; in other words, the excess policies insured against "occurrences" as defined in the policies. The insuring clause typically provided that the LMI agreed:

subject to the limitations, terms and conditions [of the policy] to indemnify the Assured for all sums which the Assured shall be obligated to pay by reason of the liability . . . imposed upon the Assured by law, . . . for damages . . . on account of: . . . (ii) Property Damage . . . caused by or arising out of each occurrence.

 The LMI policies generally defined an "occurrence" as "an accident or a happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in . . . property damage . . . during the policy period." From April 1, 1971, through April 1, 1985, each of the LMI's policies contained pollution exclusion clauses barring coverage for discharges of pollutants, unless such discharges were "sudden and accidental" or "sudden, unintended, and unexpected." *fn3"


 Chemical Leaman filed this declaratory judgment action in April 1989, after the insurers refused to defend or indemnify it for costs it had incurred and costs to be incurred in the future in connection with the cleanup of the Bridgeport site. Following extensive discovery and adjudication of numerous motions, this Court tried the case in March 1993.

 After a three-week trial, the jury determined that Chemical Leaman was entitled to coverage for investigation and remediation of soil contamination under the April 1, 1960 to April 1, 1971 LMI policies; wetlands contamination under the April 1, 1961 to April 1, 1971 LMI policies; and groundwater contamination under the April 1, 1960 to April 1, 1981 LMI policies. *fn4" In arriving at the verdict, the jury found that there was continuous, indivisible damage to the three environmental media in policy years at issue. Applying New Jersey's continuous trigger theory, the Court had instructed the jurors they could find property damage occurred during a given policy year if there was proof a continuous, indivisible process of injury occurred during that year. Further, the Court had charged the jury that "Chemical Leaman may be entitled to coverage under the defendants' insurance policies for property damage that occurs during a policy period, but that originally began during an earlier policy period."

 Also underlying the jury's verdict was its response to detailed interrogatories on Chemical Leaman's intent and expectation to cause property damage and to discharge pollutants during each policy year. For wetlands, the jury found that while Chemical Leaman did not expect or intend to cause damage to the swamp area, it did expect and intend to discharge pollutants into this medium in the 1971-78 policy years. *fn5" Coverage for wetlands contamination after 1971 was precluded, therefore, because the Court had determined that the 1971-85 LMI policies' pollution exclusion clauses barred coverage for intended or expected discharges of pollutants. With regard to soil, the Court had granted partial summary judgment to the LMI under post-1971 policies upon application of the exclusion clause.

 Based on the jury's verdict, the Court entered a judgment order entitling Chemical Leaman to recover "the full amount of any and all costs of investigating and remediating" soil, wetlands, and groundwater contamination at Bridgeport under the liable policies. Chemical Leaman Tank Lines, Inc v. Aetna Cas. and Sur. Co., 1993 U.S. Dist. LEXIS 18435, No. 89-1543, j. order (D.N.J. Apr. 7, 1993), aff'd in part and rev'd in part, 89 F.3d 976, cert. denied, 117 S. Ct. 485, 136 L. Ed. 2d 379 (1996). The 1960-71 LMI (and Aetna) policies were held jointly and severally liable to policy limits for investigation and remediation costs connected to soil damage; the 1961-71 policies, for wetlands damage; and the 1960-81 policies, for groundwater contamination.

 The LMI, along with Aetna, appealed this Court's legal determinations, the jury's verdict, and the Court's post-verdict judgment. Following oral argument of the appeal, Chemical Leaman and Aetna settled all claims arising from this dispute.

 The Third Circuit subsequently affirmed this Court's judgment as it related to the LMI, except as to this Court's holding that all triggered LMI policies under the verdict were jointly and severally liable. The Court of Appeals noted that in the year following the trial of this matter, the New Jersey Supreme Court in Owens-Illinois had rejected joint and several liability in continuous trigger coverage cases. The New Jersey Supreme Court had instead adopted a risk-based allocation of liability among triggered policies, "i.e., proration on the basis of policy limits, multiplied by years of coverage." Chemical Leaman, 89 F.3d at 995 (quoting Owens-Illinois, 650 A.2d at 993). The Court of Appeals accordingly remanded the case to this Court solely for a "reallocation of damages among applicable policies" in accordance with Owens-Illinois. Chemical Leaman Tank Lines. Inc. v. Aetna Cas. and Sur. Co., 89 F.3d 976, Nos. 93-5777 & 93-5794, j. order at 3 (3d Cir. June 20, 1996), cert. denied, 136 L. Ed. 2d 379, 117 S. Ct. 485 (1996)




 A threshold question for this damages allocation is: which of Chemical Leaman's Bridgeport cleanup costs are potentially recoverable under the LMI policies? Chemical Leaman does not dispute the LMI's argument that these excess CGL policies carry only a duty to indemnify, and not a duty to defend. *fn6" The parties disagree, however, about whether certain cleanup costs are indemnity costs or defense costs.

 a. Recoverability of RI/FS Costs

 The parties' principal disagreement concerns the proper allocation of the costs incurred by Chemical Leaman in performing the RI/FS it undertook at Bridgeport pursuant to its 1985 consent order with the EPA. Chemical Leaman, relying on this Court's 1993 judgment and on the New Jersey Supreme Court's March 1996 decision in General Accident Ins. Co. v. State of New Jersey Department of Environmental Protection, 143 N.J. 462, 672 A.2d 1154 (1996) ("Fairclough "), contends that all of its RI/FS costs should be considered recoverable indemnity expenses. The LMI, citing Endicott Johnson Corp. v. Liberty Mutual Ins. Co., 928 F. Supp. 176 (N.D.N.Y. 1996), appeal dismissed, 116 F.3d 53 (2d Cir. 1997), argue for a "fair allocation" of RI/FS costs between defense and indemnity. The Endicott Johnson court held that only those RI/FS costs primarily attributable to feasibility studies *fn7" should be treated as indemnity expenses, while RI/FS costs primarily related to remedial investigation *fn8" should be deemed defense costs. 928 F. Supp. at 183-84.

 The Court first considers Chemical Leaman's argument that the 1993 judgment in this case bars the LMI's argument. Plaintiff notes that the judgment provided that the Aetna and LMI policies were liable to indemnify Chemical Leaman "for the full amount of any and all costs of investigating and remediating" contamination at the Bridgeport terminal. Plaintiff asserts that the LMI in their appeal did not contest their obligation to indemnify for investigation costs, and that the Third Circuit's subsequent affirmance of the judgment "except as to the allocation of liability among applicable policies" has foreclosed any further challenge to the Court's ruling on this issue. The LMI counter that they appealed their liability for investigation costs in the form of appealing the joint and several liability component of the judgment.

 Regardless of whether the LMI's appeal left in place a finding of LMI liability for any and all RI/FS costs, the Court is bound to revisit the RI/FS matter in the wake of the New Jersey Supreme Court's intervening March 1996 decision in Fairclough. The Court must conform its resolution of the RI/FS issue to New Jersey law as it exists at present, even if the state's law is different than it was when the 1993 judgment order was entered. Air Products and Chemicals, Inc. v. Hartford Accident & Indem. Co., 25 F.3d 177, 181 (3d Cir. 1994) (citing Vandenbark v. Owens-Illinois Glass Co., 311 U.S. 538, 543, 85 L. Ed. 327, 61 S. Ct. 347 (1941)). The Third Circuit's affirmance except as to allocation among applicable policies was issued three months after Fairclough, but in the absence of a specific appellate challenge by the LMI regarding RI/FS costs the Third Circuit did not address the impact of this New Jersey Supreme Court decision. Accordingly, the Court does not read the Third Circuit's decision as mandating one application or another of Fairclough to this case.

 In Fairclough, a CGL insurer sought a determination that its expenditures of response costs pursuant to New Jersey remediation investigation requirements constituted indemnity coverage exhausting the policy's indemnity limits, and not defense coverage. The carrier had stipulated with the insured that when the policy's indemnity limits were exceeded, the defense obligation expired. 672 A.2d at 1157-58. The trial judge agreed with the insurer, reasoning that the response costs were in the nature of damages under the CGL policy and were, therefore, indemnification costs, not defense costs. The New Jersey Appellate Division, however, reversed, holding that the costs of the investigations were defense costs under a policy provision that the insurer "may make such investigation and settlement of claim or suit as it deems expedient." Id. at 1158.

 The New Jersey Supreme Court granted certification and reversed the Appellate Division's judgment. There should be a presumption, it ruled, that the costs of an RI/FS mandated by a government agency are indemnity costs. "The advantage of a black-letter rule is simplicity in administration. We must avoid, at all costs, another war of experts to determine how much of the costs should be allocated to defense and how much to indemnity." Id. at 1162.

 The Fairclough presumption can only be overcome if the policyholder demonstrates that the insurance company has derived an unjust benefit from such an allocation to indemnity to the extent that it has relieved the insurance company of an expense that it would otherwise have incurred under its obligation to defend. If an insured sets forth evidence, in other words, that an RI/FS expenditure "clearly kills two birds with one stone in the sense of fulfilling a defense obligation while also relieving the policyholder of a potential claim for damages," a court should apply a variety of factors to develop a fair allocation of the RI/FS costs between defense and indemnity provisions of the given policy. Id.

 The LMI interpret Fairclough as requiring a fair allocation of RI/FS costs between defense and indemnity in every case. Moreover, they assert that Fairclough ultimately failed to provide a black-letter rule on how to accomplish such a fair allocation, and that this Court should follow the approach taken in Endicott Johnson, i.e. treatment of feasibility-studies costs as indemnity and remedial-investigation costs as defense.

 Fairclough is clear, however, that an RI/FS should only be allocated in part to defense if the insured shows that allocation to indemnity alone would provide a windfall to its insurance company. In the present case, the insured -- Chemical Leaman -- does not contest the presumption that all mandated RI/FS costs are indemnity costs, but in fact embraces the presumption. Accordingly, the Court rules that all of Chemical Leaman's mandated RI/FS investigation and remediation costs are indemnity costs subject to recovery under the indemnity provisions of the LMI policies.

 b. Recoverability of $ 45,000 Penalty

 The parties also disagree about the recoverability of $ 45,000 which Chemical Leaman paid to the EPA on account of a penalty in November 1995. *fn9" The LMI contend that the $ 45,000 remittance by Chemical Leaman constituted payment of a penalty, and as such is unrecoverable under this Court's reasoning in Town of Gloucester v. Maryland Cas. Co., 668 F. Supp. 394, 401-02 (D.N.J. 1987) (Brotman, J.) (holding that defendant insurers were not obligated to indemnify plaintiff township for fines and penalties assessed by the State of New Jersey for violations of environmental regulations).

 Chemical Leaman responds that it does not seek recovery from the LMI for the $ 45,000 penalty, because it has already been reimbursed by its environmental contractor, Geraghty & Miller ("G&M"). Chemical Leaman asserts that as a means of obtaining reimbursement from G&M, it deducted $ 45,000 from its payment of an October 1995 G&M invoice for Bridgeport work. According to the invoice, submitted as an exhibit, Chemical Leaman paid $ 48,066.82 in satisfaction of an invoice of $ 93,066.82 for services rendered.

 Chemical Leaman states that the effect was the same as if G&M had paid the penalty directly to the EPA, and the tank truck company had paid the full amount of the G&M invoice (instead of subtracting the $ 45,000). Plaintiff therefore contends that the full amount of the G&M invoice -- including the $ 45,000 offset -- is a properly reimbursable indemnity cost.

 The key question appears to be whether it can be properly said that in connection with the invoice in question, Chemical Leaman actually incurred the full invoice amount as an indemnifiable Bridgeport cleanup cost. Chemical Leaman essentially contends that it "paid" G&M $ 45,000 of the invoice amount in the form of paying the $ 45,000 penalty assessed against Chemical Leaman by the EPA. Notwithstanding any agreement between Chemical Leaman and G&M, the Court is unconvinced that Chemical Leaman's payment of the penalty to the EPA should be so interpreted for purposes of indemnification. Such an approach would functionally violate the bar on recovery of fines and penalties under the subject insurance policies. Town of Gloucester, 668 F. Supp. at 401-02. Accordingly, the Court deems as recoverable the $ 48,066.82 paid by Chemical Leaman to G&M on account of the October 1995 G&M invoice, but not the $ 45,000 paid by Chemical Leaman to the EPA on account of the 1995 penalty.


 Having resolved the disputes between Chemical Leaman and the LMI regarding what categories of costs are recoverable from the LMI, the Court can turn to a discussion of the total recoverable past costs at issue in this litigation. *fn10" As directed by the Court, the LMI in October 1996 forwarded to Chemical Leaman an analysis of the cost invoices which plaintiff submitted to LMI for Bridgeport through September 1996. The analysis was prepared by an environmental consultant, Douglas Swanson, who served as an expert trial witness for the LMI in this case. Swanson classified the cost invoices into the three categories of contamination for which the judgment requires coverage: groundwater, soil, and wetlands (See LMI Oral Arg. Ex. D3 (cost summary spreadsheet)).

 Chemical Leaman states that Swanson's aggregate past cost summaries for the three media "do not exactly match the costs that Chemical Leaman has submitted to the LMI," and that plaintiff inadvertently neglected to submit to the LMI certain invoices totaling "a relatively small amount of costs." (Pl.'s Reply Mem. on Alloc. Issues at 13-14 n.13). Additionally, Chemical Leaman submitted documentation at oral argument of response costs invoiced after September 1996 totaling approximately $ 2.7 million. With these caveats, plaintiff otherwise accepts the LMI aggregate past cost summaries for Bridgeport as accurate.

 a. Groundwater-Contamination Response Costs

 Swanson allocated approximately $ 6.8 million -- $ 6,796,041.76 -- to groundwater. Applying Endicott Johnson, Swanson classified $ 4,133,208.76 of the groundwater costs as recoverable indemnity costs; $ 1,465,932.47 as defense costs; and $ 1,187,219.55 as "uncertain" RI/FS costs, i.e. costs not clearly attributable to either remedial investigations or feasibility studies.

 Additionally, Swanson identified $ 9,680.98 paid to Environmental Resources Management, Inc. ("ERM"), one of Chemical Leaman's environmental consultants, as unrecoverable because it was paid before the 1985 Chemical Leaman-EPA consent order. The LMI assert that at the outset of trial, Chemical Leaman stipulated that it would only seek to recover costs derived from the EPA's claim against Chemical Leaman. As a result, the LMI state, costs incurred before the entry of the consent decree establishing Chemical Leaman's obligation to perform the Bridgeport RI/FS are unrecoverable. Chemical Leaman has stipulated that it will forego its claim for these amounts.

 In light of the Court's ruling that all RI/FS costs are recoverable indemnity expenses pursuant to Fairclough, the Court has determined that all of the $ 6,796,041.76 Swanson allocated to groundwater are recoverable indemnity costs, save for the $ 9,680.98 paid to ERM prior to the EPA consent order. Among the two invoices Chemical Leaman submitted at oral argument was a December 1996 invoice from the EPA for groundwater oversight costs, totaling $ 1,492,662.32. The Court deems the additional amount to be indemnity, and grants Chemical Leaman's request that it be considered in a calculation of past costs. Accordingly, the documentation submitted to the Court indicates a total, on the record, of $ 8,279,023.10 for Chemical Leaman's recoverable past costs related to groundwater contamination.

 Swanson allocated $ 1,544,332.10 to soil. The parties' submissions to the Court, evaluated in the context of the Court's rulings supra on cost allocation methodology, indicate that all of these monies are recoverable indemnity expenses, save for the following: 1) the $ 45,000 penalty payment by Chemical Leaman to the EPA, and 2) $ 10,510.81 in payments to ERM for services rendered prior to entry of the EPA consent order. ...

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