Industrial Enterprises, Inc. v. Penn America Insurance Co.

Mar 18: In the U.S. Court of Appeals, Fourth Circuit, Case No. 09-2346 and 09-2397. As described by the Appeals Court, the appeal involves whether a standard comprehensive general liability insurance policy (CGL policy), which indemnifies the insured for "all sums which the insured shall become legally obligated to pay as damages because of . . .property damage," covers the insured's liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for costs to remediate the presence of hazardous substances on the insured's land.

 

    On July 9, 1999, U.S. EPA sent Industrial Enterprises, Inc., and other owners of neighboring properties near the Back River in Baltimore County, Maryland, letters expressing the EPA's intent to include Industrial Enterprises' property and neighboring

properties in a Superfund Site designated for cleanup under CERCLA due to the presence of hazardous substances on the Site. EPA also advised Industrial Enterprises and the other property owners that they might be required to undertake or fund investigatory and cleanup actions to protect the public health, welfare, and the environment.

 

    Industrial Enterprises forwarded the EPA letter to its insurer, Penn America Insurance Company, requesting that it provide a defense. When Penn America denied coverage, Industrial Enterprises commenced this action for a judgment declaring that Penn America was obligated to pay Industrial Enterprises the sums that it had incurred and reasonably would incur as defense costs in response to the demands made by the EPA. It also demanded reimbursement of defense costs in an amount not less than $600,000.

 

    On the motions of the parties for summary judgment, the district court found a "potentiality" of insurance coverage, requiring Penn America to provide a defense, and accordingly it awarded Industrial Enterprises $465,774.50 for attorneys fees incurred, $89,070 in technical consulting fees incurred, and 6% interest on the sum of those amounts, all reduced by the $210,000 that Industrial Enterprises received in a settlement with the other property owners. The district court also denied Industrial Enterprises' claim for $750,000, which it paid in reaching a settlement and forming a defense coalition with the other neighboring property owners.

 

    On appeal, the Appeals Court, in a split decision, reversed the district court decision. The majority Appeals Court said, "Based on the decision of Bausch & Lomb, Inc. v. Utica Mutual Insurance Co., 625 A.2d 1021 (Md. 1993), where the Maryland Court of Appeals held that a similar CGL policy did not cover expenses incurred in response to the State's regulatory order to remove soil containing hazardous chemicals, we conclude that Industrial Enterprises' liability under CERCLA is not liability for 'property damage,' but rather regulatory liability for response costs. Accordingly, we conclude that Penn America's CGL policy does not cover Industrial Enterprises' regulatory liability and, therefore, Penn America has no duty to provide Industrial Enterprises with a defense."

 

    The majority concluded, "In sum, we hold that Penn America's standard CGL policy, which provides indemnity to Industrial Enterprises for sums that it becomes legally obligated to pay as damages because of property damage, does not provide indemnity to Industrial Enterprises for regulatory liability (including remediation costs) under CERCLA. And because the standard CGL policy in this case does not provide coverage for CERCLA liability, Penn America had no duty to provide a defense or to pay the costs of a defense with respect to such liability."

 

    The dissenting judge argued that, "Bausch & Lomb does not control the result in this case and said, "The issue is not whether contamination of land, surface water, or groundwater is damage to property (it assuredly is), but whether the contamination damages a third person's property such that the liability coverage provisions of a GCL policy are implicated. . . In Bausch & Lomb, there was no credible indication that the pollution contaminating the insured's soil and groundwater affected any property other than its own. . . Under the GCL Policy, Penn America is bound to provide coverage for 'property damage' inflicted by its insured upon third parties, in the 'sums which the insured shall become legally obligated to pay.'"

 

    Access the complete majority opinion and dissent (click here).