Bausch & Lomb Inc. v. Utica Mutual

• Decision Date: 26 August 1999
• Docket Number: No. 40,40
• Citation: 735 A.2d 1081,355 Md. 566
• Parties: BAUSCH & LOMB INCORPORATED v. UTICA MUTUAL INSURANCE COMPANY.
• Court: Maryland Court of Appeals

735 A.2d 1081

355 Md. 566

BAUSCH & LOMB INCORPORATED v. UTICA MUTUAL INSURANCE COMPANY.

No. 40, Sept. Term, 1997.

Court of Appeals of Maryland.

August 26, 1999.

Rhonda D. Orin, (Jordan S. Stanzler, Lorelie S. Masters, Michael P. Allen, Anderson Kill & Olick, L.L.P., on brief), Washington, DC: Paul Walter, Baltimore, (on brief), for petitioner.

John B. Wyss, (Wiley, Rein & Fielding, on brief), Washington, DC: M. King Hill, III, Venable, Baetjer & Howard, on brief, Towson, for respondent.

E. Charles Dann, Jr., Goodell, Devries, Leech & Gray, L.L.P., Baltimore, for Amicus Curiae Insurance Environmental Litigation Association.

Argued before BELL, C.J., ELDRIDGE, RODOWSKY, CHASANOW¹, RAKER and WILNER and ROBERT L. KARWACKI (Retired, specially assigned), JJ. ELDRIDGE, Judge.

We issued a writ of certiorari in this case, involving comprehensive general liability (CGL) policies, to consider the scope of an endorsement which was substituted in place of an exclusion for the insured's own property.

Utica Mutual, the insurer, sold standard form CGL policies annually to Bausch & Lomb from at least 1970 to 1986. The standard language in these policies provided as follows:

"The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

A. bodily injury or

B. property damage

to which this insurance applies, caused by an occurrence...."

The policies defined "occurrence" as

"an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured...."

The policies defined "property damage" as

"physical injury to or destruction of tangible property which occurs during the policy period...."

The policies also contained specific exclusions from coverage, including a paragraph (k) which excluded coverage for property owned by, occupied by, rented to, used by, or in the care, custody, or control of the insured.² At issue in this case are the four policies from 1982 through 1985 which contained endorsement number 18, a separately negotiated rider, which eliminated exclusion (k) and substituted "own property" coverage with a limit of $50,000 per occurrence less a $10,000 per year deductible.³

I.

Bausch & Lomb, a manufacturer of health care and optical products, purchased the Diecraft manufacturing facility in Sparks, Maryland, in 1965. The plant machined and plated parts used in telescopes and microscopes. From 1958 through 1975, the Diecraft plant carried on metal plating activities which created waste plating bath liquids, solvents, and waste waters that were disposed on-site into a waste disposal system composed of a series of settling tanks, an unlined earthen lagoon, a holding tank, three large dry wells, and a network of piping. The disposal techniques did not depart from accepted industrial practices of the time.⁴

In November 1982, Bausch & Lomb first discovered that its property was contaminated with certain heavy metals. Bausch & Lomb reported these findings to the federal Environmental Protection Agency in February 1983. In the fall of 1983, Bausch & Lomb hired an environmental engineering and consulting firm, Fred C. Hart Associates, to investigate the Diecraft property. In mid 1984, Hart discovered that the Diecraft property, in addition to being contaminated with heavy metals, was also contaminated with unacceptable levels of the hazardous chemical compound trichloroethylene (TCE). In November 1985, Hart reported its findings to Bausch & Lomb that the TCE contaminated the subsurface groundwater as well as a small stream that flowed to adjacent land then owned by the Knott Development Corporation. By late 1987, Hart determined that the source of the contamination was the on-site disposal system.

On June 19, 1987, the new owners of the Knott property, Highlands Park I Limited Partnership, threatened to sue Bausch & Lomb, alleging damage to the ground water and surface water on its property. On June 26, 1987, Bausch & Lomb informed Utica of Highland Park's potential claim and requested reimbursement for $76,000 spent to date for testing at the Diecraft facility. This was Bausch & Lomb's first indication to Utica that it expected the insurer to indemnify it for the pollution expenses related to the Diecraft facility. Utica denied coverage in a letter dated July 21, 1987. The neighboring landowner's threat to sue never materialized into an actual lawsuit.

At all times, Bausch & Lomb cooperated with the State of Maryland in performing necessary testing and clean-up of the Diecraft site. A state agency, the Maryland Waste Management Administration, placed the Diecraft facility on the master list of potentially hazardous sites in 1984. In 1986, Bausch & Lomb and the State had a meeting during which Bausch & Lomb indicated its willingness to cooperate with the State in cleaning up the pollution. The State never brought formal administrative enforcement proceedings to order Bausch & Lomb to clean up the Diecraft property. In 1988, after the present litigation had begun between Utica and Bausch & Lomb, Bausch & Lomb carried out a pollution treatment program devised by Hart and approved by the State. Bausch & Lomb spent approximately $530,000 in investigating and testing the site to determine the extent of the contamination and approximately $231,000 to remove the contaminated sludge that had accumulated in the dry wells on the property.

On November 20, 1987, Utica brought this action against Bausch & Lomb in the Circuit Court for Baltimore County, seeking a declaratory judgment that it had no duty to defend or indemnify Bausch & Lomb for expenses incurred in connection with the contamination of the Diecraft facility. Bausch & Lomb filed a counterclaim for damages for alleged breach of contract. In 1991 the circuit court issued a declaration and a money judgment in favor of Bausch & Lomb for clean-up costs in the amount of $231,262.53, attorneys' fees of $534,500, and expenses in the amount of $44,306.47. The court also declared that Utica had a duty to defend any future actions "brought to compel removal of hazardous waste material, and to pay the cost of removing such material ... depending on whether potential for liability exists...." The court, however, held that Utica did not have a duty to defend or indemnify for "investigatory damages required by the State of Maryland" and for Bausch & Lomb's other expenses in investigating and testing the polluted site.

The circuit court rejected arguments by Utica that Bausch & Lomb's clean-up costs were incurred voluntarily. The court held that, although the State had not brought an enforcement action, it would have done so if necessary and would have required Bausch & Lomb's compliance in cleaning up the site. Additionally, the court rejected Utica's argument that the clean-up costs were not "damages" within the meaning of the policy. The court held that the term "damages" was ambiguous and therefore construed it broadly in favor of Bausch & Lomb. Finally, the circuit court declined to apply the "own property" exclusion, holding that the State's regulatory power with respect to groundwater constituted a sufficient interest to trigger third party coverage.

Both sides appealed to the Court of Special Appeals which reversed and ordered the entry of a declaratory judgment in favor of Utica. Utica Mutual v. Bausch & Lomb, 91 Md.App. 1, 603 A.2d 1241 (1992). The intermediate appellate court held that Bausch & Lomb's investigative and clean-up costs were not "damages" within the insurance policy's coverage because CGL policies only indemnify "`actual, tangible'" damages and not "`essentially prophylactic measures'" unconnected with "`any harm to specific third parties.'" 91 Md.App. at 15,603 A.2d at 1248, quoting Maryland Cas. Co. v. Armco, Inc., 822 F.2d 1348, 1353 (4th Cir.1987),cert. denied, 484 U.S. 1008, 108 S.Ct. 703, 98 L.Ed.2d 654 (1988). The Court of Special Appeals further stated that the cost of Bausch & Lomb's clean-up measures did not constitute liability damages within the meaning of a CGL policy because they were voluntary "preventive" costs. 91 Md. App. at 20, 603 A.2d at 1250. The appellate court rejected Bausch & Lomb's argument that the insurer should pay damages on the theory that the groundwaters underlying the Diecraft site allegedly belonged to the State, and that by contaminating those groundwaters, a third party's property had been damaged. Finally, the Court of Special Appeals held that the circuit court erred in granting Bausch & Lomb judgment for expenses and attorneys' fees.

Both parties filed in this Court petitions for a writ of certiorari, and we granted both petitions. Bausch & Lomb v. Utica Mutual, 327 Md. 557, 611 A.2d 115 (1992). This Court disagreed with the Court of Special Appeals' holding that Bausch & Lomb's investigative and clean-up costs were voluntarily taken as merely preventive measures. Instead, we took the position that the "response costs, undertaken in the regulatory context, represented a sum the corporation was legally obligated to pay" because the "tacit threat of formal State intervention was" always present. Bausch & Lomb v. Utica Mutual, 330 Md. 758, 780, 625 A.2d 1021, 1032 (1993) (Bausch & Lomb I). In addition, this Court held that "environmental response costs fall within" the policy definition of "damages." 330 Md. at 782, 625 A.2d at 1033. Nonetheless, we held that Utica was not obligated to pay under the standard terms of the CGL policies because no third party property damage had occurred. We held that the State of Maryland's regulatory interest in the ground water "does not constitute a property interest within the contemplation of the insurance policy," 330 Md. at 788, 625 A.2d at 1036. This Court also upheld the Court of Special Appeals' determination that Bausch & Lomb was not entitled to expenses and attorneys' fees.

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