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The plaintiffs-insureds were insured under certain primary, excess and/or umbrella comprehensive general liability (“CGL”) insurance policies sold by defendants-insurers.  The insureds received a Potentially Responsible Party Letter (“PRP letter”) from the United States Environmental Protection Agency (“EPA”) for potential liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) in connection with a superfund site.  The superfund site had been the site of a business that distilled and recycled industrial cleaning solvents.  Drums containing residual sludge from the solvent recovery process had been buried at the site, began to leak and caused water and soil contamination.

The business had received drums of used industrial cleaning solvents from insureds.  The insureds notified insurer of the PRP letter and requested coverage and defense for the claims set forth in the letter.  Insurers replied by reserving its rights and requesting more information.  Certain recipients of the PRP letter entered into a consent decree with the EPA and were permitted to file suit against non-settling recipients of the PRP letter, including insureds.

The settling parties and the EPA subsequently initiated lawsuits against the non-settling parties.  The insurers continued their reservation of rights and refused to defend and indemnify insureds.  The insureds initiated a lawsuit against the insurers alleging declaratory judgment, breach of contract, and statutory bad faith.

The insurers’ duty to defend and indemnify turned on the pollution exclusion contained in the CGL policy entered into between the two parties and which is included in all standard CGL policies.  Particularly, the parties disagreed as to the meaning of the term “sudden and accidental” within the terms of the exclusion.  The insurers argued that the term required an abrupt event.

The insureds argued that the term meant “unexpected and unintended,” as used in “occurrence-based” coverage language from which the pollution exclusion grew.

The insurers moved for summary judgment on all counts.  The insureds moved for partial summary judgment to:  1) declare as a matter of law that insurers may not deny coverage to insureds on the basis of the pollution exclusion; 2) declare insurers had a duty to defend; and 3) strike insurers’ affirmative defenses alleging that there is no covered “occurrence” and that the property damage for which insureds are liable was “expected or intended.”

In determining the application of the pollution exclusion, the court noted that it was required to interpret the term “sudden and accidental” pursuant to the decision of the Pennsylvania Supreme Court in Sunbeam v. Liberty Mut. Ins. Co., 781 A.2d 1189 (2001).  In Sunbeam, the Pennsylvania Supreme Court stated that the interpretation of the term “sudden and accidental” is based on a determination of whether the term has a specialized meaning in the insurance industry and whether regulatory estoppel applies based on the insurance industry’s representations to the Pennsylvania Insurance Department of its meaning of the term “sudden and accidental.”

The court concluded that the evidence was insufficient to establish that the term “sudden and accidental” had a trade usage and meant “unexpected and unintended.”  As a result, the court granted insurers’ summary judgment motion as to the counts for declaratory judgment and breach of contract on the issue of trade usage.

However, the court found that a genuine issue of material fact exists as to whether regulatory estoppel should apply and denied insurers’ summary judgment motion as to the counts for declaratory judgment and breach of contract on the issue of regulatory estoppel.

Addressing the insureds’ count alleging statutory bad faith, the court noted that the area of law following the Sunbeam decision is still unclear.  Because the area of law was unclear, insurers had a basis for denying coverage and a right to litigate the issue of coverage.  As a result, the court concluded that the insurer did not act in bad faith and granted insurers’ summary judgment motion as to the count alleging statutory bad faith.

The court additionally denied the insurers’ summary judgment motion as to the insureds, Simon Resources, Inc. and Mid-State Trading Company, based on their standing because an issue of material fact existed.

As to the insureds’ partial summary judgment motion, the court denied the motion also based on the issue of regulatory estoppel.

Date of decision:  January 10, 2008

Simon Wrecking Company, Inc. v. AIU Insurance Company, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 03-CV-3231, 2008 U.S. Dist. LEXIS 1845, (E.D. Pa. Jan. 10, 2008) (Brody, J.).