Maryland Cas. Co. v. Continental Cas. Co.

• Decision Date: 13 June 2003
• Docket Number: Docket No. 01-7482.
• Citation: 332 F.3d 145
• Parties: MARYLAND CASUALTY COMPANY, Plaintiff, W.R. GRACE & CO., Defendant-Appellant, v. CONTINENTAL CASUALTY CO., Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

332 F.3d 145

MARYLAND CASUALTY COMPANY, Plaintiff, W.R. GRACE & CO., Defendant-Appellant, v. CONTINENTAL CASUALTY CO., Defendant-Appellee.

Docket No. 01-7482.

United States Court of Appeals, Second Circuit.

Argued: January 14, 2003.

Decided: June 13, 2003.

COPYRIGHT MATERIAL OMITTED

Anthony J. Marchetta, Pitney, Hardin, Kipp & Szuch, LLP, New York, NY, for Defendant-Appellant.

Elizabeth M. DeCristofaro (Charles A. Booth, William M. Harstad, and Sara A. Decatur, on the brief), Ford Marrin Esposito Witmeyer & Gleser, LLP, New York, NY, for Defendant-Appellee.

Before: KEARSE and B.D. PARKER, Jr., Circuit Judges, and RAKOFF, District Judge.^*

B.D. PARKER, Jr., Circuit Judge.

This appeal concerns a series of rulings made by the United States District Court for the Southern District of New York (John S. Martin, Jr., Judge) over the course of ten years. At issue is defendant-appellee Continental Casualty Co.'s duty to defend defendant-appellant W.R. Grace & Co. for environmental claims arising from gradual pollution under three separate insurance policies that were in effect, for relevant purposes, from 1973 until 1984.¹ For the reasons that follow, we conclude that the District Court's rulings concerning the first two policies were correct, and we affirm the judgment of the District Court insofar as those two policies are concerned. With respect to the third policy, however, we vacate the judgment of the District Court in favor of Continental and remand the case to the District Court.

BACKGROUND

The issue on this appeal is whether, under three primary comprehensive general liability ("CGL") insurance policies in effect between 1973 and 1984, Continental had a duty to defend Grace in litigation involving claims arising from Grace's "gradual pollution" of the environment.² The first of these policies covered June 30, 1973 to June 30, 1976 (the "1973 Policy"); the second June 30, 1976 to June 30, 1983 (the "1976 Policy"); and the third June 30, 1983 to June 30, 1986 (the "1983 Policy").³

The 1973 Policy purported to insure Grace against claims of gradual pollution and provided that Continental's limit of liability for such claims would be:

$200,000 each claim and $200,000 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.

The 1973 policy contained an exclusion for property damage resulting from pollution that was not "sudden and accidental," but the exclusion applied only to the operations of Teal Petroleum Company, a subsidiary of Grace.

The 1976 Policy also purported to insure Grace for property damage resulting from gradual pollution up to a limit of $200,000, which was increased to $500,000 in June 1978. Like the 1973 Policy, the 1976 Policy also contained an exclusion for property damage resulting from pollution that was not "sudden and accidental." Unlike the 1973 Policy, however, the 1976 Policy's pollution exclusion was not limited to one subsidiary of Grace. The exclusion provided that the 1976 Policy would not apply:

to personal 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, oil or other petroleum substance or derivative, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere, or any water-course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

The proper interpretation of this pollution exclusion — in particular, the meaning of its exception for "sudden and accidental" discharges — is a central issue in this appeal.

The 1983 Policy also contained a gradual pollution clause (with a $500,000 limit on property damage coverage), as well as an exclusion for property damage arising out of pollution that was not "sudden and accidental." The pollution exclusion was identical to the one contained in the 1976 Policy.

Maryland Casualty Company, Grace's primary insurer from the late 1950s until 1973, sued Grace and Continental in the Southern District of New York in 1988. The complaint alleged that Grace and its subsidiaries may have been responsible for environmental contamination at nine waste disposal sites located throughout New York State. (Compl. ¶¶ 11-15.) The complaint further alleged that the New York Department of Environmental Conservation, the United States Environmental Protection Agency, and the City of New York were investigating Grace's potential liability for the contamination at these sites. (Id.) Maryland sought a declaratory judgment establishing that it was "under no obligation to provide Grace with any defense benefits or indemnification in connection with [the enumerated sites], or to pay any of Grace's expenses incurred in connection with those sites." (Compl. at 10.)

Before either defendant responded to the complaint, the action was stayed pending the outcome of a motion to dismiss in a related case Grace had filed in the Superior Court of Massachusetts. In the Massachusetts case, Grace contended that Maryland, Continental, and other insurers had provided coverage to Grace for certain environmental claims. See W.R. Grace & Co. v. Admiral Ins. Co., No. 87-6624 (Mass.Super. Ct., Am. Compl. filed May 9, 1988). The Massachusetts Superior Court ultimately dismissed the Admiral case on grounds of forum non conveniens. Grace had also filed another action in Massachusetts Superior Court, in which it sought a declaration that various insurers were obligated to defend and indemnify it with respect to certain asbestos claims. The Superior Court dismissed that action on forum non conveniens grounds as well, concluding that New York would be a more appropriate forum than Massachusetts, and the Supreme Judicial Court affirmed. See W.R. Grace & Co. v. Hartford Accident & Indem. Co., 407 Mass. 572, 583-86, 555 N.E.2d 214 (1990).

In the Southern District of New York action, Grace then asserted counterclaims against Maryland, cross-claims against Continental, and third-party claims against a number of its other insurers. Grace sought two forms of relief: (1) a declaration that the CGL policies obligated Maryland, Continental, and the other insurers to defend and indemnify Grace with respect to certain claims and liabilities arising out of environmental conditions at sites identified in certain underlying actions brought by various private and governmental parties; and (2) monetary damages for breach of the insurers' duty under the CGL policies to defend and indemnify Grace with respect to the underlying actions. (Answer, Countercl. and Cross-cl. of Def. W.R. Grace & Co. ¶¶ 26-27.)

After issue was joined, the parties disputed which state's — or states' — laws should be applied to the insurance policies. When the choice-of-law issue was before the District Court, Grace was seeking coverage for twenty-six sites located in twelve states, and Grace argued that the law of the state in which each site was located should govern the applicability of the insurance agreements to the claims arising out of that site. Of the twenty-six sites, nine were located in New York, more than any other state. The insurers argued that New York law should govern all the insurance policies, for all purposes. The District Court concluded that New York had the most significant contacts with the policies and, therefore, applied New York law to all contract interpretation questions. (Mem. and Order, June 8, 1992, at 4, 8.)

The litigation proceeded, and Grace and Continental filed cross-motions for partial summary judgment with respect to Continental's duty to defend. Grace moved for partial summary judgment on the ground that the administrative letters that it had received from state and federal governments constituted "suits seeking damages" within the meaning of the policy language, triggering the insurers' duty to defend. The District Court found that approximately half of the administrative letters triggered the duty to defend, but the court nonetheless denied Grace's motion for partial summary judgment because it also found that "Grace has not established that it has provided timely notice of suit and occurrence to the insurers as the policies require." (Mem. Op. and Order, Apr. 28, 1994, at 8.) Continental cross-moved for partial summary judgment on its duty to defend Grace from gradual pollution claims. The District Court granted Continental's motion, concluding that: (1) with respect to the 1973 and 1976 Policies, New York Ins. Law § 46(13)-(14) prohibited the issuance of insurance for gradual pollution, and (2) with respect to the 1983 Policy (which was issued after the repeal of section 46(13)-(14)), Continental provided no insurance for gradual pollution, and undertook no duty to defend, because Grace's deductible for gradual pollution claims equaled the amount of its coverage. (Id. at 15-16.) The court granted Grace's motion for reargument on the effect of N.Y. Ins. Law § 46(13)-(14), but adhered to its previous ruling. (Mem. and Order, Aug. 23, 1994, at 1.)

Grace eventually settled with all parties except Continental, and all of the parties except Grace and Continental were eventually dismissed. Grace renewed its motion for partial summary judgment against Continental in January 2000, arguing for the first time that a 1990 settlement agreement modified the parties' insurance policies and obligated Continental to indemnify and defend Grace with respect to gradual pollution claims.⁴ The District Court denied the motion, concluding that the 1990 agreement had no effect on the parties' obligations with respect to gradual pollution claims. The court relied on the "clear language" of the 1990 agreement, which provided that it would have no effect upon any of the parties' rights and obligations "`except those relating to Products claims.'" (Mem. Op. and Order...