City of Johnstown, N.Y. v. Bankers Standard Ins. Co.

• Decision Date: 22 June 1989
• Docket Number: D,No. 930,930
• Citation: 877 F.2d 1146
• Parties: , 58 USLW 2084, 19 Envtl. L. Rep. 21,132 CITY OF JOHNSTOWN, NEW YORK, Plaintiff-Appellant, v. BANKERS STANDARD INSURANCE COMPANY, Pacific Employers Insurance Company, Defendants-Appellees. ocket 88-9051.
• Court: U.S. Court of Appeals — Second Circuit

Page 1146

877 F.2d 1146

29 ERC 2011, 58 USLW 2084, 19 Envtl.

L. Rep. 21,132

CITY OF JOHNSTOWN, NEW YORK, Plaintiff-Appellant, v. BANKERS STANDARD INSURANCE COMPANY, Pacific Employers Insurance Company, Defendants-Appellees.

No. 930, Docket 88-9051.

United States Court of Appeals Second Circuit.

Argued March 28, 1989.

Decided June 22, 1989.

James B. Tuttle, (Dreyer, Kinsella, Boyajian & Tuttle, Albany, N.Y., of counsel), for plaintiff-appellant.

Paul R. Koepff, (Kathleen A. Gallagher, Mudge Rose Guthrie Alexander & Ferdon, New York City, of counsel), for defendants-appellees.

Thomas W. Brunner, James M. Johnstone, and John W. Cavilia, (Wiley, Rein & Fielding, Washington, D.C., of counsel), for amicus curiae Ins. Environmental Litigation Ass'n.

Before FEINBERG and PIERCE, Circuit Judges, and MOTLEY, District Judge. ^*

PIERCE, Circuit Judge:

The City of Johnstown, New York (the "City") appeals from an order of the United States District Court for the Northern District of New York (Cholakis, Judge ), granting summary judgment to appellees Bankers Standard Insurance Company and Pacific Employers Insurance Company. The City was originally sued by the State of New York in the federal district court under (1) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") (codified as amended in scattered sections of 26, 33, 42 & 49 U.S.C.), and (2) the state law of public nuisance and restitution, for the costs of studying and cleaning up certain wastes that are allegedly seeping from a City landfill into surrounding groundwaters. The City gave notice of the suit to appellees, their insurers. Appellees claimed that the City's comprehensive general liability policies did not cover any such liability, whereupon the City brought this action in the federal district court, seeking a declaration that the insurers should defend and indemnify the City in the suit brought by the State. The insurers successfully moved for summary judgment based on the argument that, because the City had notice of the contamination, the pollution damages alleged in the State's complaint against the City were not covered by the City's insurance policies. On appeal, the City challenges the district court's grant of summary judgment. We reverse the grant of summary judgment.

BACKGROUND

For purposes of our review, the basic facts are undisputed. Since 1947, the City of Johnstown, Fulton County, New York has owned and operated a landfill. The landfill now receives only general household refuse, but until 1979 the landfill also received various industrial wastes, and from 1973-1979 sewage sludge was dumped at the site. Over the last fifteen years, evidence has emerged that indicates that certain wastes leaking from the dump may have polluted the surrounding groundwaters. As a result, in June 1987, the State of New York brought an action in the federal district court against the City and various generators and a transporter of wastes (the "CERCLA action"). The complaint in that action charged that each defendant was jointly and severally strictly liable for the costs of studying and remedying the environmental problems created by the landfill. See State of New York v. City of Johnstown, et al., No. 87-CV-636 (N.D.N.Y. filed June 5, 1987).

The City gave due notice of the CERCLA action to its insurers, including appellees. According to the district court, Bankers Standard Insurance Company had issued a comprehensive liability insurance policy to the City for the period from April 1, 1983 to April 1, 1984, and Pacific Employers Insurance Company had issued a similar policy for the period from April 1, 1984 to December 31, 1985. In addition, Pacific Employers had provided the City with excess liability coverage for at least part of that 33-month period.

The insurance companies disclaimed coverage, arguing that the potential liability at issue fell within various exclusions in the City's policies. The insurers therefore disavowed any obligation either to defend the City in the lawsuit, or to indemnify the City should there ultimately be a judgment entered against the City. The City thereafter brought this diversity action in the district court, seeking a declaration that the insurers must defend and indemnify the City in the underlying CERCLA action.

In lieu of answering, the insurers moved to dismiss or, in the alternative, for summary judgment. The insurers' oral argument on the motion was based on two different, but not unrelated, grounds. First, the insurance companies pointed out that the policies specifically excluded losses or damages "expected" or "intended" by the City. The insurers argued that, in light of the earlier warnings of contamination, the alleged environmental damage that underlay the CERCLA suit was certainly expected by the City, and thus was not covered by the insurers' policies. Second, they argued that the City knew of the contamination before the inception of the relevant policies, and that therefore the contamination was a "known risk," and that thus the policies did not cover any liability resulting from that contamination. In their memorandum in support of the motion, however, the insurers essentially conflated the two arguments, asserting that because the pollution damage alleged in the CERCLA complaint was a "known risk," it was "expected" by the City and therefore was not covered under the City's policies with appellees.

At the conclusion of argument held on November 4, 1988, Judge Cholakis granted the insurers' motion for summary judgment. The district court ruled, in pertinent part, as follows:

There has been material produced before this Court which would indicate that the City of Johnstown was aware of conditions from which it could expect the release and subsequent damage alleged in the CERCLA complaint.

The [City] has not come forward with anything to rebut the information submitted to the Court by the [insurers].

In this Court's judgment there has been an affirmative showing that the allegations contained within the CERCLA complaint occurred in such a fashion that the occurrences listed in the policy did not occur or the occurrences defined in the policy did not occur within the policy term of either the Bankers Standard Insurance Company or the Pacific Employers Insurance Company.

Therefore, the [insurers'] motion ... is granted.

It is difficult to determine from the transcript of that hearing which of the two arguments proffered by the insurers was relied upon by the district court. On appeal the insurers press their "known risk" argument and urge that the district court's decision was not based upon the "expect" or "intend" language of exclusion in the City's policies. However, as was earlier noted, in their submissions on the summary judgment motion the insurers conflated the two arguments. Thus, the district court's opinion could have been based upon either the "known risk" theory or the "expect"/"intend" language in the relevant policies. As the discussion below reveals, however, summary judgment was improper on either ground.

DISCUSSION

The City's complaint herein sought a declaration from the district court requiring the insurers to both defend and indemnify the City in the underlying CERCLA action. Under New York law, the duty to defend and the duty to indemnify are separate and distinct. E.g., Niagara County v. Utica Mut. Ins. Co., 80 A.D.2d 415, 420, 439 N.Y.S.2d 538, 541 (4th Dep't), app. dismissed, 54 N.Y.2d 608, 427 N.E.2d 1191, 443 N.Y.S.2d 1030 (1981); see International Paper Co. v. Continental Casualty Co., 35 N.Y.2d 322, 326, 320 N.E.2d 619, 621, 361 N.Y.S.2d 873, 876 (1974) (insurer's obligation to furnish insured with a defense is heavy, and broader than its duty to pay); Technicon Elecs. Corp. v. American Home Assurance Co., 141 A.D.2d 124, 130, 533 N.Y.S.2d 91, 95 (2d Dep't 1988). At this stage, we need only address the issue of the duty to defend. The insurer's duty to defend works, in essence, as a form of "litigation insurance" for the insured. See Servidone Constr. Corp. v. Security Ins. Co., 64 N.Y.2d 419, 423-24, 477 N.E.2d 441, 444, 488 N.Y.S.2d 139, 142 (1985). The duty to defend is triggered "whenever the allegations in the complaint fall within the risk covered by the policy"; thus, "[i]f, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured." Ruder & Finn, Inc. v. Seaboard Sur. Co., 52 N.Y.2d 663, 669-70, 422 N.E.2d 518, 521, 439 N.Y.S.2d 858, 861 (1981).

The district court properly held that the CERCLA complaint "does allege claims which would come within the meaning of the policy or policies issued by the defendants to the City of Johnstown," and that therefore the insurers' duty to defend was implicated by the underlying CERCLA action. The question is whether the insurers met their burden of showing that they were relieved of that duty by virtue of the terms of the policies.

New York courts have consistently held that, as noted, an insurer seeking to avoid its duty to defend bears a heavy burden. That burden, in practice, is seldom met. See Technicon Elecs., 141 A.D.2d at 144, 533 N.Y.S.2d at 104. "Indeed, before an insurance company is permitted to avoid policy coverage, it must ... establish[ ] that the exclusions or exemptions [claimed] apply in the particular case, and that they are subject to no other reasonable interpretation." Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 311, 476 N.E.2d 272, 275, 486 N.Y.S.2d 873, 876 (1984) (citations omitted). To avoid the duty to defend, the insurer must show that the allegations in the underlying complaint are "solely and entirely" within the policy's exclusions from coverage. International Paper, 35 N.Y.2d at 325, 320 N.E.2d at 621, 361 N.Y.S.2d at 875. A court applying New York law, then, should only excuse an insurer from its duty to defend if it can be concluded as a matter of law that there is no possible...