American Ins. Co. v. Fairchild Industries, Inc.

• Decision Date: 01 June 1995
• Docket Number: D,No. 813,813
• Citation: 56 F.3d 435
• Parties: 25 Envtl. L. Rep. 21,224 AMERICAN INSURANCE COMPANY, a Nebraska Corporation; and Associated Indemnity Corporation, a California Corporation, Plaintiffs-Counter-Defendants-Appellees, v. FAIRCHILD INDUSTRIES, INCORPORATED, a Delaware Corporation, Defendant-Counter-Claimant-Appellant. ocket 94-7606.
• Court: U.S. Court of Appeals — Second Circuit

Page 435

56 F.3d 435

25 Envtl. L. Rep. 21,224

AMERICAN INSURANCE COMPANY, a Nebraska Corporation; and

Associated Indemnity Corporation, a California

Corporation, Plaintiffs-Counter-Defendants-Appellees, v. FAIRCHILD INDUSTRIES, INCORPORATED, a Delaware Corporation,

Defendant-Counter-Claimant-Appellant.

No. 813, Docket 94-7606.

United States Court of Appeals, Second Circuit.

Argued Dec. 5, 1994.

Decided June 1, 1995.

Steven W. Phillips, Foley, Hoag & Eliot, Boston, MA (Leslie B. Bellas, John A. Shope, Foley, Hoag & Eliot, Boston, MA, of counsel), for defendant-counter-claimant-appellant.

K. Thomas Shahriari, Gilberg & Kurent, Washington, DC (Mitchell A. Stearn, Alan C. Nessman, Gilberg & Kurent, Washington, DC, of counsel), for plaintiffs-counter-defendants-appellees.

Frank M. Pell, Ainsworth, Sullivan, Albany, NY (Edward Zampino, Peter E. Mueller, Victor C. Harwood, III, of counsel), for amicus curiae Aetna Cas. and Sur. Co.

Thomas W. Brunner, John E. Barry, Cynthia L. Kendrick, Wiley, Rein & Fielding, Washington, DC, for amicus curiae Ins. Environmental Litigation Ass'n.

Before: KEARSE and WINTER, Circuit Judges, and CONNER, District Judge. ^*

WINTER, Circuit Judge:

Plaintiffs-appellees are insurers whom the parties refer to collectively as "Fireman's Fund," as shall we. The defendant-appellant is their insured, Fairchild Industries, Incorporated ("Fairchild"), a Delaware Corporation that manufactured aircraft at a plant in Farmingdale, New York. This appeal involves a dispute over Fairchild's right to indemnification and costs of defense for remediation efforts necessitated by environmental contamination at two areas on the Farmingdale site. Judge Wexler directed a verdict for Fireman's Fund. We affirm on the ground that Fairchild's notice of claims was untimely as a matter of law.

BACKGROUND

From 1950 until 1981, Fairchild and the previous owner of the Farmingdale facility, Republic Aviation Company ("Republic"), discharged treated industrial wastewater into a 13-acre basin located near the main manufacturing facility. A second area of contamination was a storage tank at the site that developed an apparently slow leak resulting in an underground plume of perchloroethylene ("PCE").

In 1983, the New York State Department of Environmental Conservation ("NYSDEC") began investigating the Farmingdale site. The investigation commenced with a letter to Fairchild alluding to potential liability and warning that Fairchild could be liable for cleanup costs under either N.Y. Environmental Conservation Law Sec. 27-1313 or the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), 42 U.S.C. Sec. 9601 et seq. The letter stated that it "constitute[d] a claim by the State of New York" under CERCLA. However, the letter did not specify any particular remedial action or detail the extent of Fairchild's exposure to liability.

Thereafter, Fairchild and the NYSDEC engaged in ongoing negotiations in which the agency took an increasingly serious view of pollution resulting from sediments in the basin. In 1985, a letter from the NYSDEC to Fairchild stated that, based on "existing information" regarding the basin, "investigation and remediation efforts are required." Meanwhile, Fairchild retained the consulting firm of Geraghty & Miller to study the Farmingdale site. In December 1985, the consultants produced a report on the environmental problems associated with the basin. This report was given to NYSDEC for examination. In 1986, Fairchild entered into a consent order with the NYSDEC indicating that the agency believed that the basin constituted "a significant threat to the environment" and that a remediation plan might be required. In 1987, Geraghty & Miller sent a memo to Fairchild outlining the consultants' views as to viable options in negotiating with NYSDEC. In that memo, Geraghty & Miller advised Fairchild that it might be "impossible" to show that the sediments in the basin were non-hazardous.

The PCE plume was not discovered until 1988, at which time the full extent of the contamination from that source was not known.

In early June 1988, Fairchild officials, its counsel, and consultants met with the NYSDEC regarding both the basin and the PCE plume. An internal Fairchild summary of the meeting states: "[The basin and plume] will most likely be reclassified from Class 2A to Class 2 as a result of the findings of the Phase II investigation. This means that remedial action will be required at both sites."

In August and September 1989, the NYSDEC officially reclassified the Farmingdale site as a Class 2 site, an "Inactive Hazardous Waste Site" requiring remediation. The reclassification was based upon the sediment in the discharge basin and the 6,500 foot PCE plume. In September 1989, Fairchild notified Firemen's Fund of the existence of a claim against it.

The insurance contracts at issue were in effect between 1965 and 1982 and required notice to the insurer of "occurrences" or "claims." The pertinent provisions regarding such notices are set out in the margin. ¹

The two policies purchased for 1977 and 1978 also contained a clause providing that the insured's failure to comply with a notice provision would not bar liability unless the insurer was prejudiced by such failure.

As noted, two distinct forms of notice were contemplated. A notice of occurrence was to be given "as soon as practicable" when the insurance manager became aware of an event that a reasonable person might believe would give rise to a liability covered by the policy. A notice of claim was to be given "immediately" upon any entity making a claim upon Fairchild for which the insurer might be responsible.

In August 1991, Fireman's Fund brought a suit in the Eastern District of New York seeking a declaratory judgment that it was under no obligation to defend or indemnify Fairchild for any environmentally related liability at five sites located throughout the United States. The parties settled the disputes involving four of the five sites but could not resolve the issues pertaining to Farmingdale.

The parties proceeded to try the Farmingdale case to a jury. Four days into the trial, Judge Wexler sua sponte directed a verdict against Fairchild on all claims. In a written memorandum, the district court grounded its decision on two theories that need not be examined in detail given our disposition of this matter. Fairchild then brought this appeal.

DISCUSSION

We hold that Fairchild's notice of claim was untimely as a matter of law with respect to both the discharge basin and the PCE plume.

This is a diversity case in which the parties agree that New York law applies. Under that law, compliance with the notice provisions of an insurance contract is a condition precedent to an insurer's liability. See Commercial Union Ins. Co. v. International Flavors & Fragrances, Inc., 822 F.2d 267, 271 (2d Cir.1987). If an insured fails to provide timely notice as required by the particular policy, then, absent a valid reason for the delay, the insurer is under no obligation to defend or indemnify the insured. See, e.g., Allcity Ins. Co. v. Jimenez, 78 N.Y.2d 1054, 1055, 576 N.Y.S.2d 87, 88, 581 N.E.2d 1342, 1343 (1991). The burden is on the insured to show that a delay was reasonable under the circumstances. Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 441, 340 N.Y.S.2d 902, 904-06, 293 N.E.2d 76, 78-79 (1972).

A. Notice of Claim Regarding the Discharge Basin

Fireman's Fund argues that a "claim" regarding the discharge basin was made upon Fairchild by the 1983 letter from the NYSDEC, noting that the letter repeatedly uses the word "claim." Fairchild responds that a "claim" must make a relatively particularized request or demand, which was lacking in the initial communications from the NYSDEC. Fairchild argues that no "claim" was made until the reclassification of the Farmingdale site in 1989.

We first address the meaning of "claim." Unlike the term "occurrence," which leaves room for differences of opinion as to whether a particular event is likely to lead to liability under the relevant policy, the term "claim" would not seem to be a fertile ground for disputes. Giving the term its ordinary meaning, a claim is an assertion by a third party that in the opinion of that party the insured may be liable to it for damages within the risks covered by the policy. It "must relate to an assertion of legally cognizable damage, and must be a type of demand that can be defended, settled and paid by the insurer." Evanston Ins. Co. v. GAB Business Servs., Inc., 132 A.D.2d 180, 185, 521 N.Y.S.2d 692, 695 (1st Dep't 1987) (interpreting a standard "claim" provision). A claim may be made without the institution of a formal proceeding. Indeed, the pertinent provisions of the policies at issue distinguish between "a claim" and "a suit." A third person's assertion of liability is a claim, moreover, whether or not there is reason to believe that there actually is liability. Unless the assertion is made in circumstances so unusual that they negate the possibility of a formal proceeding involving defense costs as well as liability, virtually any assertion of an exposure to liability within the risks covered by an insurance policy is a claim.

We have thus previously indicated that a notice of occurrence requirement is treated differently under New York law from a notice of claim requirement. See New York v. Blank, 27 F.3d 783, 795-96 (2d Cir.1994). In the case of the former, the insured's knowledge of events that create only a very distant possibility of a claim may not trigger a notice of occurrence provision so long as the insured has a good faith and reasonable belief that no liability covered by the policy will result. Id. at 795. A notice of occurrence provision thus focuses on the insured's knowledge of events and reasonable conclusions based on that knowledge. See Christiania Gen. Ins. Corp. v. Great American...