Peabody Essex Museum, Inc. v. U.S. Fire Ins. Co., Civil Action No. 06cv11209-NG.

• Court: United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
• Writing for the Court: Gertner
• Citation: 623 F.Supp.2d 98
• Parties: PEABODY ESSEX MUSEUM, INC., Plaintiff, v. UNITED STATES FIRE INSURANCE COMPANY, Defendant/Third-Party Plaintiff, v. Century Indemnity Company, Third-Party Defendant.
• Docket Number: Civil Action No. 06cv11209-NG.
• Decision Date: 31 March 2009

623 F.Supp.2d 98 PEABODY ESSEX MUSEUM, INC., Plaintiff,
v.
UNITED STATES FIRE INSURANCE COMPANY, Defendant/Third-Party Plaintiff,
v.
Century Indemnity Company, Third-Party Defendant. Civil Action No. 06cv11209-NG. United States District Court, D. Massachusetts. March 31, 2009.

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COPYRIGHT MATERIAL OMITTED

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Jeremy A.M. Evans, Martin C. Pentz, Foley Hoag LLP, Boston, MA, for Plaintiff.

Michael F. Aylward, Morrison Mahoney LLP, Boston, MA, for Defendant/Third-Party Plaintiff.

Brian G. Fox, Mt. Laurel, NJ, David B. Chaffin, White and Williams LLP, Boston, MA, for Third-Party Defendant.

MEMORANDUM AND ORDER RE: MOTIONS FOR SUMMARY JUDGMENT

GERTNER, District Judge.

I. INTRODUCTION

This dispute between an insured, Peabody Essex Museum, Inc. ("the Museum"), and its insurer, United States Fire Insurance Co. ("U.S. Fire"), arose out of the 2003 discovery of oil damage to the land neighboring the Museum's property. The aggrieved landowner and the state environmental protection agency traced the damage to the Museum, which identified its underground tanks as the likely source. U.S. Fire refused to defend the Museum or cover the expense of cleanup. The Museum then settled its neighbor's claim for $300,000 and brought this suit against U.S. Fire for (1) breach of contractual duties to defend and indemnify, (2) declaratory judgment, (3) violation of state consumer protection law, and (4) negligence. U.S. Fire, in turn, sued the Museum's prior insurer, ACE Property & Casualty Insurance Company ("ACE"), for contribution.¹ All parties have moved for summary judgment.

In a typical suit for indemnity under an insurance contract, the insured bears the burden of proof as to coverage. Where the insurer is found to have breached its duty to defend—as U.S. Fire was in this case, see Electronic Order 12/19/2007—that burden shifts to the defendant. See Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 610 N.E.2d 912 (1993). U.S. Fire bears the burden of proving that the oil damage was not covered, either (1) because of when the damage to the neighboring property occurred, namely after pollution damage was wholly excluded from the U.S. Fire policy in December of 1985, or (2) because of how the discharge occurred, namely not "sudden and accidental," since a leak that commenced gradually is outside the policy coverage. Because of its dual burden, in the Peabody Essex— U.S. Fire case and in the U.S. Fire—ACE case, if U.S. Fire fails to prove that Peabody Essex's damages were "not sudden," it would be obliged to pay the plaintiff without being indemnified by ACE.

As explained below, there is contradictory evidence as to the first issue—whether the damage to the neighboring property occurred before or after December of 1985. But there is simply no evidence on the second issue—whether the breakage that caused the oil to escape from its tank occurred suddenly or gradually. No expert has shed any light on this question, and with good reason: Whatever caused the oil spill likely happened underground and possibly a generation back. The tanks and associated piping were unearthed and replaced long ago. No photographs reflect

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their condition at the time. And today, a new wing of the Museum sits atop the site of the former tanks.

In the usual case, the absence of evidence would redound to the detriment of the plaintiff who bore the burden of proof. With the burden of proving non-coverage on U.S. Fire as defendant in the Peabody Essex—U.S. Fire action, and as third party plaintiff in the U.S. Fire-ACE action, the result is the opposite.

Accordingly, I GRANT partial summary judgment for the Museum on the suddenness issue, DENY summary judgment on all other aspects of the claims between U.S. Fire and the Museum, and GRANT summary judgment for ACE as against U.S. Fire. I further RESERVE judgment on two outstanding legal issues: whether a demand letter from the Museum's neighbor triggered U.S. Fire's duty to defend, and whether U.S. Fire's indemnity obligations should be prorated to two years (the duration of its coverage).

II. FACTS

Plaintiff, the Museum, is a nonprofit corporation organized under Massachusetts law and located in Salem, Massachusetts. Defendant and third-party plaintiff, U.S. Fire, is a Delaware corporation with its principal place of business in New Jersey. ACE, the third-party defendant, is a Delaware corporation and successor to Aetna Insurance Co.

In May 2003, Heritage Plaza Enterprises, LLC ("Heritage"), discovered heavy fuel oil in the soil at Heritage Plaza ("Heritage Site"), located next to the Museum's property, during the redevelopment of a former police station into condominiums. Pl. Mot. Summ. J., Ex. A (document # 20-2). Heritage then retained an environmental consulting firm, conducted soil and ground water investigations, and submitted a Downgradient Property Status Opinion ("DPS Opinion") to the Massachusetts Department of Environmental Protection ("DEP"). Id. Following the investigation by the environmental consultant, Heritage concluded that the oil had migrated from an "upgradient" source, but did not initially identify the Museum as that source. Id. On October 17, 2003, Heritage concluded that the Museum was the source of the oil release, notified the Museum, and demanded contribution in the amount of $400,000 for clean-up costs pursuant to Mass. Gen. Laws ch. 21E, § 4A. Id. In response, the Museum retained ENSR International ("ENSR"), an environmental consultant, and initiated its own site investigation. Pl. Mot. Summ. J., Ex. B (document # 20-3).

ENSR concluded that the fuel oil had likely escaped from underground storage tanks ("USTs") that had been installed on the Museum's property in the 1960s or from the tanks that replaced them in the 1970s:

Based upon the observed distribution of LNAPL [light non-aqueous phase liquid] measured in soil borings and monitoring wells during the site investigations . . . and available records provide by [the Museum], it is highly likely that the source of the release of the No. 4 fuel oil to the subsurface occurred from the former 1960 and/or 1970s Tanks, or associated piping, sometime between the late 1960's and 1986 . . . . [T]hese 10,000 gal [USTs] were originally located in the area of the Asian Art Export Wing which was constructed in 1986 on the museum property.

Id. The Museum reported ENSR's findings to the DEP and submitted an Immediate Action Plan on January 26, 2004. Id. Three days later, the DEP issued to the Museum a Notice of Responsibility ("NOR") pursuant to Mass. Gen. Laws ch. 21E, § 5 stating that the Museum was a potentially responsible party with liability

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for the response costs. Pl. Mot. Summ. J., Ex. C (document # 20-4).

The Museum notified U.S. Fire of the Heritage claim on October 28, 2003. Pl. Mot. Summ. J., Ex. G (document # 20-7). U.S. Fire disclaimed any duty to defend the Heritage claim on the ground that Heritage's letter did not constitute a "suit." Id. On February 18, 2004, the Museum notified U.S. Fire that the DEP had issued an NOR and again requested a defense. Id. The Museum also encouraged U.S. Fire to reevaluate its initial denial of coverage in connection with Heritage's 2003 letter and urged U.S. Fire to explore settlement options. Id. Unlike U.S. Fire, ACE agreed to defend against the Heritages (subject to a reservation of rights).

On March 17, 2004, U.S. Fire decided to "participate" in the Museum's defense of the NOR and coordinate payments with ACE, subject to a reservation of rights. Id. U.S. Fire later limited its "participation" by capping reimbursement at $200 instead of the $475 hourly rate paid by the Museum to its defense counsel, arguing that the higher rate was unreasonable. Id. It then agreed to pay only 40% of that $200 per hour (ACE paid the remaining 60%). Id. Prior to this lawsuit, U.S. Fire did not actually pay any of the Museum's defense costs it had promised or extend coverage for the Heritage claim.²

On June 21, 2005, the Museum settled the Heritage claim for $300,000. Pl. Mot. Summ. J., Ex. D ¶ 4 (document # 20-5). Nonetheless, the Museum claims that investigatory and remedial activities remain ongoing. Moreover, additional oil has been rediscovered at Heritage Plaza in June 2007, which may lead to additional monitoring, reporting, and cleanup costs. Id.

A. The Policies

In 1983, the Museum's predecessor, the Peabody Museum of Salem, purchased a primary liability insurance policy from U.S. Fire ("Policy") covering the period of December 19, 1983, to December 19, 1986. Monk Aff. Supp. Summ. J., Ex. 1 (document # 58-2). The policy required U.S. Fire to defend the Museum against "any suit against the insured seeking damages on account of such . . . property damage . . . to which this insurance applies, caused by an occurrence." Id. U.S. Fire further promised to indemnify the Museum for "all sums" the Museum became "legally obligated to pay as damages because of . . . property damage." Id. Property owned, occupied, or rented to the Museum was excluded from coverage. Id.

Until December 19, 1985, when an "absolute pollution exclusion" was added,³ the Policy contained a provision that excluded coverage for:

bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water;

Id. However, there was an exception to the exclusion clause: "this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental." Id. (emphasis added).

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The Museum had a virtually identical policy from Aetna, predecessor to ACE, for the period from December 19, 1980, to December 19, 1983 ("ACE Policy"). Pl. Mot. Summ. J., Ex. F at 33 (documents # 20-7, 20-8). It contains a similar pollution exclusion...