Kentopp v. Franklin Mut. Ins. Co.

• Decision Date: 22 July 1996
• Parties: EUGENE KENTOPP AND DIXIE KENTOPP, HUSBAND AND WIFE, PLAINTIFFS-APPELLANTS, v. FRANKLIN MUTUAL INSURANCE COMPANY, DEFENDANT-RESPONDENT.
• Court: New Jersey Superior Court

293 N.J. Super. 66

679 A.2d 701

EUGENE KENTOPP AND DIXIE KENTOPP, HUSBAND AND WIFE, PLAINTIFFS-APPELLANTS, v. FRANKLIN MUTUAL INSURANCE COMPANY, DEFENDANT-RESPONDENT.

Superior Court of New Jersey, Appellate Division.

Argued May 15, 1996.

Decided July 22, 1996.

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Before Judges SHEBELL, STERN and NEWMAN.

John R. Lanza argued the cause for appellants (Thatcher & Lanza, attorneys; Mr. Lanza, of counsel; Franklin G. Whittlesey, on the brief).

Anthony P. Pasquarelli argued the cause for respondent (Methfessel & Werbel, attorneys; Mr. Pasquarelli, on the brief).

The opinion of the court was delivered by SHEBELL, P.J.A.D.

Plaintiffs, Eugene Kentopp and Dixie Kentopp, appeal from the entry of summary judgment dismissing their action for a declaratory judgment that defendant, Franklin Mutual Insurance Company (Franklin), having issued a homeowner's policy containing comprehensive general liability (CGL) coverage, was obligated to defend and indemnify them in a third-party lawsuit arising from the discovery of contaminants on their property after it was sold. Plaintiffs assert that: (1) the "owned property" exclusion in the insurance policy did not relieve Franklin from its duty to defend and indemnify them for cleanup costs associated with both soil and groundwater contamination, and, in any event, the absence of an alienated property exclusion in the policy rendered the "owned property" exclusion ambiguous; and (2) the "business risks" exclusion in the policy did not relieve the insurer of its duty to defend and indemnify.

As to those claims related to the groundwater contamination, we hold that the "owned property" exclusion does not preclude coverage for defense and indemnification related to groundwater contamination. See Morrone v. Harleysville Mut. Ins. Co., 283 N.J. Super. 411, 662 A.2d 562 (App.Div. 1995). Regarding the claims related to soil contamination damages, we are constrained by the holding in State, Dep't of Envt'l Protec. v. Signo Trading Int'l, Inc., 130 N.J. 51, 612 A.2d 932 (1992), to conclude that the policy bars coverage for on site soil contamination under the "owned property" exclusion and will not discuss the issue further. We reject plaintiffs' argument that the absence of an alienated property exclusion causes an invalidation of the "owned property" exclusion when the insured property is transferred. Further, the policy includes an exclusion for "locations not insured" that effectively operates as an alienated property exclusion. The issue of whether the "business risks" exclusion in the policy bars the groundwater damage claims cannot be decided on this record because it is not clear whether the groundwater contamination resulted from plaintiffs' personal or business activities.

In July 1992, Anthony D'Altrui and John P.J. Papa, partners, trading as RAAD Associates, a New Jersey partnership (RAAD), filed a complaint in the Law Division ("Altrui suit") against Elizabethtown Gas Company (Elizabethtown), Frank J. Banisch, III, individually and trading as Banisch Associates (referred to collectively as Banisch) and Eugene and Dixie Kentopp, husband and wife, seeking damages for contamination and remediation of property purchased by RAAD from the Kentopps. Elizabethtown allegedly owned a coal gasification operation "contiguous to the site purchased by RAAD on the same side of Bush Kill Creek and on the opposite side of Bush Kill Creek" that produced polycyclic aromatic hydrocarbons that contaminated the soil on the property purchased by RAAD from the Kentopps. RAAD also asserted that Banisch, a New Jersey licensed planner and potential investor in the development of the site, negligently failed to alert RAAD to "any potential environmental concern at, in, under or adjoining the Site" prior to RAAD's acquisition of the site.

On September 18, 1992, the Kentopps and RAAD executed a stipulation of dismissal and settlement in the action. By letter dated April 6, 1993, Franklin declined to indemnify or defend the Kentopps. RAAD filed an amended complaint on October 14, 1993, adding Jersey Central Power & Light Company (Jersey Central), as a defendant. The complaint alleged that Jersey Central was the successor to companies who had owned and operated the coal gasification operation on the Flemington site now owned by Elizabethtown. Despite the release, the amended complaint asserted a breach of contract claim against the Kentopps, specifying that they breached their agreement with RAAD to indemnify and hold it harmless from all claims and liability arising from contamination of the property sold to RAAD, and that the Kentopps breached their agreement to immediately remediate the property or advance money to RAAD for that purpose. Banisch and Elizabethtown filed answers and cross-claimed against the Kentopps for contribution and indemnification. On June 24, 1994, the plaintiffs' motion for summary judgment to dismiss the cross-claims for indemnification brought pursuant to the Comparative Negligence Act, N.J.S.A. 2A:15-5.1 to -5.4, was granted, leaving the cross-claims for common law indemnification and contribution pursuant to the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 to -23.11z.

On August 11, 1993, the Kentopps filed this action against Franklin seeking a declaration that it must defend and indemnify plaintiffs against all claims asserted by RAAD, Elizabethtown and Banisch in the D'Altrui lawsuit. Franklin filed an answer with a counterclaim for a declaration that it had no duty either to defend or to indemnify plaintiffs. Both parties moved for summary judgment and on January 6, 1995, summary judgment was granted in favor of Franklin declaring that it had no duty to defend or indemnify plaintiffs.

Plaintiffs had owned the site in Flemington from November 3, 1972, until March 12, 1991, when they sold it to RAAD. The home the Kentopps resided in and a separate garage were located on the property. They operated a transmission repair shop in a portion of the garage until 1983, and rented the garage to various persons who operated automobile repair businesses on the premises. In October 1990 plaintiffs removed an underground storage tank used for oil heating. The removal had been inspected by a DEP inspector who determined that there was no evidence of environmental contamination from the tank.

RAAD demolished the garage and planned on converting the residence to office space. It hired a planning consultant to inventory potential environmental hazards at the site. The consultant could not determine if hazardous substances were spilled at the site and recommended environmental testing by the DEP. A report dated April 1992 by an engineering concern hired by RAAD to conduct soil samplings at the site indicated that hazardous materials were found in the soil. The report noted that "environmentally significant levels of carcinogenic PAH polyaromatic hydrocarbon compounds" were found in soil samples collected at the site. It concluded that "a likely source" of the carcinogen PAH was the former coal gasification operations located on adjacent property owned by Elizabethtown. However, the report also suggested that a foundry believed to have been operated on the site of plaintiffs' property over sixty years ago could be a source of "similar wastes by virtue of the operation of high temperature metal working." The report noted that the site was adjacent to the Bushkill Brook and that the brook "displayed a bright green algae color indicating a possible biological loading upstream from the property."

A third environmental report by another engineering firm hired by RAAD, dated September 9, 1994, reported that manufactured gas plant (MGP) wastes, including PAHs, were located in the property's soil. According to this report, the MGP wastes were generated through the operation of two former MGP facilities located within 200 feet of the subject property. The on-site levels of these wastes exceeded "New Jersey non-residential soil cleanup standards for several PAHs and construction debris." Soil testing found no evidence of gasoline or fuel oil. The report concluded that MGP wastes from the off-site gas manufacturing operations were disposed of on the subject property.

On April 19, 1993, DEP and RAAD executed a "Memorandum of Agreement" that provided for remediation of environmental contaminants at the site. The DEP reported in a letter dated July 7, 1993, that remediation was necessary because the on-site soils exceeded the "Direct Contact Soil Cleanup Criteria." DEP found that the site contained fill material polluted by contaminants "commonly associated with the auto repair industry." The letter noted that groundwater quality at the site was not tested, and therefore, DEP reached no conclusion regarding possible groundwater contamination.

Plaintiffs maintained a series of homeowner's insurance policies for the property issued by Franklin from April 2, 1977, through April 2, 1991. The pertinent coverage, exclusion and definition provisions of the policy in effect from April 2, 1990, through April 2, 1991, state:

Section IA Main Liability Coverage

Coverage E. Personal Liability To Others

We will pay for the benefit of insureds, up to our limits of liability, those sums which insureds become legally obligated to pay as damages because of bodily injury or property damage which occurs during the policy term and is caused by an occurrence covered here.

....

Section IIB. Supplemental Coverages

....

2. Damage to Property of Others

Coverage E is extended to include, up to the limit specified here, damage to property of others (that is not insureds or other residents, of an insured premises) caused by an insured, regardless of the insured's legal responsibility. But we do not cover damage:

A. Caused intentionally by an insured older than age 12

B. Arising out of the following:

* Business (that of any insured or anyone else)

*

...