In re Eastern Transmission Corp.

Decision Date09 July 1992
Docket NumberMDL No. 764.
Citation870 F. Supp. 1293
PartiesIn re TEXAS EASTERN TRANSMISSION CORPORATION PCB CONTAMINATION INSURANCE COVERAGE LITIGATION.
CourtU.S. District Court — Eastern District of Pennsylvania

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Peter J. Nickles, Coleman S. Hicks, Covington & Burling, Washington, DC, for Texas Eastern Transmission Corp.

Lawrence E. Carr, Jr., Margaret H. Warner, Carr, Goodson & Lee, P.C., Washington, DC, for Fidelity and Cas. Co. of New York, Boston Old Colony Ins. Co.

Mary Ann D'Amato, Robert M. Flannery, Mendes & Mount, New York City, for Certain Underwriters at Lloyd's of London, Ins. Co. of Ireland.

Regina A. Mapes, White & Williams, Philadelphia, PA, for Insurance Co. of North America.

Stephen Sonderby, Haskell & Perrin, Chicago, IL, for Continental Cas. Co.

Ignatius John Melito, Siff, Rosen & Parker, P.C., New York City, for First State Ins. Co.

Leonard L. Rivkin, John L. Rivkin, Erica Garay, Rivkin, Radler, Bayh, Hart & Kremer, Uniondale, NY, John C. Sullivan, Manta & Welge, Philadelphia, PA, for Associated Elec. & Gas Ins. Services, Ltd.

Stephen Cuyler, Michael J. Jones, Cuyler, Burk & Matthews, Morristown, NJ, for Employers Mut. Ins. Co.

Karen L. Douglas, Merlo, Chapello & Douglas, Ltd., Chicago, IL, for Prudential Reinsurance Co.

Edward M. Dunham, Jr., Miller Marvin Dunham Doering & Schreiber, Philadelphia, PA, for Aetna Cas. & Sur. Co.

David Richman, Pamela Ullman, Pepper, Hamilton & Scheetz, Philadelphia, PA, for The Home Ins. Co.

Marjorie Mintzer, Sheft & Sheft, New York City, Mitchell S. Pinsly, Margolis, Edelstein, Scherlis, Sarowitz & Kraemer, Philadelphia, PA, for American Home Assur. Co., Highlands Ins. Group, Ins. Co. of the State of Pennsylvania, Lexington Ins. Co., Ranger Ins. Co., Republic Ins. Co., Stonewall Underwriters, Inc.

Lorraine M. Armenti, McElroy, Deutsch & Mulvaney, Morristown, NJ, Thomas C. DeLorenzo, Marshall, Dennehey, Warner, Coleman & Goggin, Philadelphia, PA, for Intern. Ins. Co.

Lise Luborsky, Duane, Morris & Heckscher, Philadelphia, PA, for Pennsylvania Ins. Guar. Ass'n.

K. Thomas Shahriari, Gilberg & Kurent, Washington, DC, James M. Prahler, Partenheimer & Didomenicis, Philadelphia, PA, for Nat. Sur. Corp.

                                                  TABLE OF CONTENTS
                   I. Introduction                                                             page 1300
                  II. Procedural History                                                       page 1300
                 III. Summary Judgment Standard                                                page 1301
                  IV. Motions to Strike                                                        page 1302
                      A. Motion to Strike Texas Eastern's Motion for Summary Judgment          page 1302
                      B. Motion to Strike Certain Evidence Offered by Texas Eastern in
                          Support of its Motion for Summary Judgment                           page 1302
                
                      C. Supplemental Motion to Strike                                       page 1303
                   V. Choice of Law                                                          page 1305
                  VI. Governing Principles of Insurance Law                                  page 1306
                      A. Texas Rules of Insurance Contract Construction                      page 1306
                      B. Texas Rules Concerning the Burden of Proof                          page 1306
                 VII. Imputation of Employee Knowledge                                       page 1307
                VIII. Facts                                                                  page 1308
                      A. Preliminary Issues                                                  page 1308
                      B. Factual Background                                                  page 1308
                         1. Texas Eastern's Corporate History                                page 1309
                         2. Texas Eastern's Operational History                              page 1309
                         3. Texas Eastern's Knowledge of PCBs in its Lubricant               page 1310
                         4. The Change-Out Program                                           page 1313
                         5. Tracking Environmental Legislation                               page 1313
                         6. PCB Contamination in the Natural Gas Pipeline                    page 1314
                         7. PCB Cleanup                                                      page 1315
                         8. The Results of Weston's Survey                                   page 1315
                         9. Texas Eastern's Problems Become Public Knowledge                 page 1317
                        10. Texas Eastern's Negotiations with EPA                            page 1318
                        11. Texas Eastern's Notice to its CGL Carriers                       page 1319
                  IX. Occurrence                                                             page 1320
                      A. The Policy Language                                                 page 1320
                      B. Texas Law                                                           page 1320
                      C. The Applicable Facts                                                page 1323
                         1. Knowledge that the Lubricant was Escaping into the Environment   page 1324
                         2. Knowledge that the Lubricant Contained PCBs                      page 1327
                      D. The Alternative Theory of an Occurrence                             page 1328
                   X. Damages                                                                page 1329
                      A. Equitable Relief as Damages                                         page 1330
                      B. Compliance Costs as Property and/or Bodily Injury Damage            page 1334
                      C. Civil Fines and Penalties                                           page 1335
                         1. Choice of Law—Fines and Penalties                              page 1335
                         2. New Jersey Fines                                                 page 1338
                         3. Pennsylvania Fines                                               page 1338
                         4. EPA Fines                                                        page 1339
                  XI. Owned Property Exclusion                                               page 1339
                 XII. Pollution Exclusion                                                    page 1345
                XIII. Late Notice                                                            page 1350
                      A. The Policy Terms                                                    page 1351
                      B. Accrual of Texas Eastern's Obligation to Notify its CGL Insurers    page 1351
                         1. 1981                                                             page 1351
                         2. 1982                                                             page 1352
                         3. 1983                                                             page 1352
                         4. 1984                                                             page 1352
                         5. 1985                                                             page 1353
                         6. 1986                                                             page 1354
                         7. 1987                                                             page 1355
                      C. Texas Law                                                           page 1356
                      D. The Applicable Facts                                                page 1358
                      E. Prejudice                                                           page 1361
                 XIV. Duty to Defend                                                         page 1364
                      A. The Policy Language                                                 page 1364
                      B. Texas Law                                                           page 1364
                
OPINION

VanARTSDALEN, Senior District Judge.

I. INTRODUCTION

Texas Eastern Transmission Corporation (Texas Eastern), the owner-operator of a natural gas pipeline system extending from natural gas well fields in Texas, Louisiana, and the Gulf of Mexico to the New York metropolitan area, brought suit against approximately twenty-one insurance companies1 (the Carriers) that provided Texas Eastern with primary and excess comprehensive general liability (CGL) insurance coverage between 1958 and the present.2 Texas Eastern seeks to recover the expense that it will incur in the governmentally mandated environmental cleanup of polychlorinated biphenyl3 (PCB) contamination at multiple locations on Texas Eastern's property along the transmission line. The total costs are estimated to exceed $750 million. After more than two years of discovery, the parties have now filed cross-motions for summary judgment.

II. PROCEDURAL HISTORY

The present litigation consolidates three lawsuits, each seeking declaratory judgment as to the respective duties and liabilities of the Carriers to defend and/or indemnify Texas Eastern against claims and settlements made by and with the United States Environmental Protection Agency (EPA), various state agencies, and private parties.4

On December 11, 1987, Fidelity & Casualty Company of New York (Fidelity or F & C), Texas Eastern's primary CGL carrier throughout all relevant periods, filed Case No. 87-2925T against Texas Eastern in the United States District Court for the Northern District of Texas (Northern District action). The Northern District action was a diversity case establishing federal subject-matter jurisdiction pursuant to 28 U.S.C. § 1332.

On March 11, 1988, Associated Electric & Gas Insurance Services Limited (Aegis) and National Surety Corporation filed Civil Action No. 88-2126 in the United States District Court for the Eastern District of Pennsylvania (Eastern District action) against Texas Eastern, F & C, and Texas Eastern's other CGL insurers. Jurisdiction was based on 28 U.S.C. §§ 1330(a), 1603(a), and 1605(a)(2) of the Foreign Sovereign Immunities Act (FSIA), because one of the insurers, the Insurance Company of Ireland (one of the London Market Insurers), was an instrumentality of a foreign state.

On March 21, 1988, Texas Eastern filed an action in Texas state court, in Houston (Texas state court action), against all of its insurers.5 The Texas state...

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