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CPC International Inc. v. Hartford Accident & Indemnity Co.

November 19, 1998


Before Judges Baime, Conley and Kimmelman.

The opinion of the court was delivered by: Baime, P.j.a.d.

[9]    Argued October 28, 1998

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

This case concerns insurance coverage for environmental pollution. CPC International, Inc. (CPC) and its subsidiary Brodson Properties *fn1 (Brodson) appeal from a summary judgment dismissing their claims against Allstate Insurance Company *fn2 (Allstate) and Hartford Accident & Indemnity Company (Hartford) for extensive environmental remediation costs. At issue is whether the Law Division erred by finding as a matter of law that CPC intended and expected to cause the environmental damage that was the subject of its claim. An ancillary question is whether the Law Division was correct in its Conclusion that coverage was barred by the doctrine of known loss. Our examination of the record discloses genuine issues of material fact that should not have been resolved by summary judgment.


In 1989, CPC filed a complaint for a declaratory judgment seeking indemnification from forty-three primary and excess insurers for substantial environmental remediation costs incurred at six chemical manufacturing sites formerly owned by its subsidiaries. In a case management order, the Law Division stayed all proceedings relating to three of the sites. The proceedings that followed pertained solely to three chemical and bulk pharmaceutical plants that had been operated by CPC's wholly owned subsidiary, S.B. Penick Company (Penick). CPC settled its claims against all of the insurers except Allstate and Hartford. It contended below, and continues to urge here, that the two remaining insurers are liable for indemnification under a series of primary, excess and umbrella policies issued between 1964 and 1986.

The parties filed cross-motions for summary judgment. On April 15, 1996, the Law Division issued an extensive letter opinion granting the insurers' motions and denying that of CPC. The court determined that CPC intended to harm the soil and groundwater at the Penick sites and was thus barred from coverage under the occurrence-based language contained in the insurance policies. The court found that CPC was aware of the pollution damage before entering the relevant insuring agreements and was precluded from recovering under the known loss doctrine.

Shortly after entry of the summary judgment order, CPC moved to dismiss the remaining counts dealing with the other three sites. Over the insurers' objections, the Law Division granted CPC's motion and entered an order of dismissal without prejudice. Allstate and Hartford appealed from the voluntary dismissal order. CPC then filed a cross- appeal from the order granting the insurers' motion for summary judgment. Allstate and Hartford subsequently withdrew their appeals. The cross-appeal remains.

The record can be fairly characterized as voluminous, consisting of thousands of pages of deposition testimony and reams of technical, scientific data. What emerges, however, is less than a complete picture. In their zeal to depict their clients in the most favorable light, counsel presented to the Law Division, and now to us, excerpts from depositions and technical memoranda devoid of contextual material. The result is a highly fragmented record from which it is exceedingly difficult to derive accurate and reliable Conclusions.

In its lengthy opinion, the Law Division listed more than eighty findings of fact from which it concluded as a matter of law that Penick expected or intended to cause the injury to the soil and groundwater upon which CPC's claims for coverage are based. We will discuss these findings later in our opinion. Suffice it to say, Penick is portrayed in the Law Division's opinion as a profit-hungry corporate bandit that conducted itself in a manner that was wholly unmindful of the environmental degradation its acts were nearly certain to cause. Perhaps, that portrait is accurate. Indeed, our examination of the record discloses excerpts from which it appears that many of the court's findings are well grounded.

We hasten to add, however, that the Law Division's most critical findings were based on the deposition testimony of three disgruntled, former CPC employees whose credibility was open to question. One of the employees was apparently convicted of having engaged in commercial bribery and was discharged by CPC, thus losing his pension. Another sustained severe financial losses when his bid to purchase one of CPC's businesses was rejected by a corporate officer whom the witness admitted he "hated." The third had left CPC to form a consulting company to testify in favor of insurers in environmental pollution cases and was paid by Hartford to testify in this case. The testimony presented by these witnesses may well be accurate, but we are reluctant to deprive a trier of fact of the opportunity to pass upon their credibility. Because of the fragmentary record and the diverse ways in which the evidence may be interpreted, we summarize only the most salient features of the case. A. The Lyndhurst Site

Penick acquired the Lyndhurst property in 1928. The site consists of approximately seventeen acres. Beginning in 1941, the plant produced various chemical products, including pharmaceutical formulations, specialty organic and botanical preparations, and pesticides. As part of its operations, Penick stored solvents, synthetic chemicals and raw botanical feed stocks in aboveground tanks, underground tanks and fifty- five gallon drums.

Conflicting evidence was presented concerning the testing of underground storage tanks for leaks and corrosion. Charles Butera, a Penick engineer, testified that Penick did not test tanks in Lyndhurst until the enactment of a municipal ordinance requiring inspections every five years. However, Edgar Nowak, the supervisor of construction and maintenance at the Lyndhurst site, related that tanks were inspected annually beginning in 1959 and that "suspect" tanks were pressure tested in order to determine their integrity. Penick employees knew that when a solvent such as toluene is mixed with water it has a corrosive effect, but most of Penick's tanks were not lined with a protective coating.

Tank 24, an underground tank used to store toluene, was installed in 1970. In May 1980, a Penick employee reported to Butera that a toluene spill from the "corroding" tank had occurred due to "head pressure." In reporting the leak to the Department of Environmental Protection (DEP), Butera represented that the amount of the leaked toluene was unknown, "but a hole at the tank end where [the] leakage occurred yielded no toluol odors, even when filled with water from recent rains." In his letter to the DEP, Butera stated that it could be "assumed . . . the small amount of toluol, which leaked out, [ultimately] evaporated and dissipated into the atmosphere in dilute amounts." In his deposition, Butera testified that he did not know how the spill was detected. However, he suggested that "varying numbers on the monthly audit" of the contents of the tank perhaps indicated that an inordinate amount of the chemical was lost, thus generating a suspicion that a spill had occurred or that the tank leaked. Thakor Tailor, an engineer formerly employed by Penick in its central engineering department, testified that tank 24 should not have been used for storing recovered toluene. According to Tailor, the tank was designed and manufactured for the storage of "pure toluol" and not for the storage of "recovered toluol" which contained corrosive contaminants. Tailor stressed that a leak in tank 24 could reasonably be expected because of the impurities and contaminants in the recovered toluol. Tailor also testified that an audit of the tank contents should have revealed a large loss of toluene which could only be the result of a leak of great magnitude.

We digress to note that Tailor's testimony pertaining to the toluene leak at the Lyndhurst plant and Penick's record respecting other leaks and spillages played an important part in the Law Division's findings. However, our reading of Tailor's deposition indicates that his testimony was brimming with hostility toward CPC. Apparently, Tailor had been convicted of commercial bribery, had lost his pension and was liable to CPC for damages under a civil judgment. We have underscored the word "apparently" because Tailor refused to answer questions concerning the circumstances surrounding his discharge from CPC.

The testimony of James Murtha, Penick's former director of regulatory and quality assurance affairs, also featured prominently in the Law Division's findings. Murtha, too, was extremely hostile to CPC, having suffered substantial financial losses in his failed attempt to purchase one of the company's extraction businesses and having been discharged from employment. In any event, Murtha testified that CPC should have discovered the leak in tank 24 long before it did and should have taken more aggressive measures to ameliorate the resulting environmental harm. Although the exact chronology of events is not clear, Murtha testified that the paved parking lot adjacent to the tank degraded substantially and the trees nearby had lost their leaves, suggesting that contaminants were leaking at an alarming rate. Murtha's investigation revealed that employees in a building near the tank had turned off the heater during the winter months because toluene odors in the basement generated fears of an explosion. Test drillings by Murtha and his colleagues indicated that between 50,000 to 100,000 gallons of toluene had leaked from the tank. Based upon the flow rate derived from the tank's capacity, Murtha estimated that the leak might have begun long before its discovery. Subsequent investigation of the inventories of the tank confirmed sharp discrepancies. Murtha testified that the inventories were not effectively monitored.

Edward Pietrosky, Jr., Penick's former manager of regulatory compliance, testified that he harbored suspicions "there was something peculiar with [the] system for about a year and a half" before the leak was discovered. Pietrosky noted that the parking lot adjacent to the tank had deteriorated, indicating that there was some leakage or spillage. Initially, Pietrosky suspected that the damage was caused by occasional spills from "overfilling" the tank. However, the severity of the damage ultimately led Pietrosky to suspect that there were other reasons for the deterioration of the pavement.

Pietrosky derided Penick's environmental record. According to Pietrosky, Penick was "deathly afraid" of "regulatory oversight" and deliberately "low ball[ed]" environmental problems to keep the DEP at bay. Pietrosky charged that Butera purposely mischaracterized the discharge as minor in his report to the DEP in order to avoid "rapid" regulatory response.

It is undisputed that tank 24 was taken out of service shortly after the leak from a hole was discovered. Extensive environmental studies indicated that a toluene plume had infiltrated the groundwater and that the toluene plume originated from a discrete leakage point in tank 24. In February 1982, Penick consultants proposed remedial measures to control and abate the toluene contamination, including the construction of an interceptor trench system. Penick later authorized construction of the system to prevent off-site migration of the toluene plume.

In 1987, benzene plumes were discovered in the northern and southern portions of the Lyndhurst site. The record is largely uninformative with respect to the cause of the contamination. Yet, it is clear that benzene was used in a botanical extraction process. In 1977, a leak in tank 97 was discovered and the tank was immediately taken out of service. CPC attributed the benzene plume to a leak that occurred prior to abandonment of tank 97.

In their documentary submissions, the insurers presented extensive evidence relating to the discharge of other pollutants at the Lyndhurst plant. For example, Murtha and Tailor testified that Penick discharged most of the production department wastes in an unlined drainage ditch leading to the plant's storm sewer system. They asserted that the pesticides department "dumped" one hundred gallons of process and general use wastes directly into the ditch on a daily basis, and that aqueous wastes from the solvent recovery plant were discharged directly into the sanitary sewer lines. According to their testimony, Penick routinely washed chemical spills and leaks into the sewers. However, much of this evidence was contested. Penick presented conflicting evidence indicating that shallow trenches inside and outside of the buildings were designed to be used as an emergency measure "[i]n the event of fire, tank rupture or leakage." Moreover, Penick presented evidence that only "trace solvents [were] carried with the water into the sewer" as part of a "thin layer of emulsion," which was permitted under the environmental regulations then in force.

The insurers presented additional evidence relating to Penick's practice of storing solvents in leaking, collapsed and broken drums. However, no evidence was presented indicating that these ...

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