S.N. Golden Estates, Inc. v. Continental Cas. Co.

• Decision Date: 16 August 1996
• Citation: 293 N.J.Super. 395,680 A.2d 1114
• Parties: S.N. GOLDEN ESTATES, INC., and Stanley Neuman, Plaintiffs-Respondents, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant.
• Court: New Jersey Superior Court — Appellate Division

Page 395

293 N.J.Super. 395

680 A.2d 1114

S.N. GOLDEN ESTATES, INC., and Stanley Neuman, Plaintiffs-Respondents, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant.

Superior Court of New Jersey Appellate Division.

Argued May 20, 1996.

Decided Aug. 16, 1996.

James M. Adrian, New York City, for appellant (Ford, Marrin, Esposito, Witmeyer & Gleser, attorneys; William P. Ford and Mr. Adrian, on the brief).

Victoria J. Airgood, Cherry Hill, NJ, for respondents (Law Offices of Petro Morgos, attorneys; Ms. Airgood, on the brief).

Before Judges PETRELLA, SKILLMAN and EICHEN.

The opinion of the court was delivered by

SKILLMAN, J.A.D.

This is an insurance coverage case. Plaintiff S.N. Golden Estates, Inc. (Golden), a developer of new homes, purchased comprehensive liability insurance from defendant Continental Casualty Company (Continental) providing coverage for the period from May 9, 1986, to May 9, 1988, for a residential development known as Potts Mills Acres in Florence Township. The sections of Continental's policy relevant to this dispute are quoted and discussed later in this opinion.

On October 29, 1991, the owners of thirty-two of the thirty-seven homes in Potts Mill Acres, as well as the Township of Florence, filed an action in the Chancery Division against Golden, one of its principals, Stanley Neuman, who also was an insured under the Continental policy, and several of Golden's subcontractors alleging that the sewage systems installed in Potts Mills Acres were defective. More specifically, the complaint alleged that "a substantial number of the septic systems ... failed, causing effluent to seep onto and over the lawns of the properties of the plaintiffs and, in some cases, to back up into the residences." The complaint further alleged that even those plaintiffs whose own septic systems had not failed had been "deprived of the full use and enjoyment of their properties by reason of the malfunctioning of the [other plaintiffs'] septic systems." Plaintiffs sought equitable relief in the form of an order requiring defendants either to install the facilities necessary to connect their homes to the public sewage system or the removal or repair of their septic systems. Plaintiffs also sought compensatory and punitive damages.

Continental denied demands by Golden and Neuman that it provide them with a defense. Golden and Neuman then filed this action seeking a declaration that Continental is obligated to provide them with a defense in the underlying action and to indemnify them for any judgment that might be entered. Golden and Neuman also sought an award for counsel fees already incurred in prosecuting the declaratory action and defending the underlying action.

While the insurance coverage action was pending, the trial court in the underlying action granted a partial summary judgment in favor of plaintiffs which required Golden to prepare "a plan for remedial action." After Golden filed a motion for reconsideration, the trial court conducted further proceedings, including an evidentiary hearing. The court subsequently issued a letter opinion on July 30, 1993, reaffirming the partial summary judgment that granted plaintiffs equitable relief and transferring plaintiffs' damage claims to the Law Division.

The coverage action was brought before the trial court on cross-motions for summary judgment. On March 7, 1994, the trial court issued a letter opinion which concluded that Continental had a duty to defend Golden and Neuman. The court noted in the course of its opinion that "the homeowners alleged untreated effluent seeped across their lawns and into their homes causing injury to their residences, real property and lawns." The court did not make any ruling with respect to Continental's duty to indemnify Golden for any judgment that might be entered in the underlying action.

Thereafter, the court awarded plaintiff $66,376.09 for attorneys fees and costs incurred in prosecuting the declaratory judgment action. The court referred the determination of the amount to award for counsel fees and costs incurred in defending the underlying action to the trial judge in that action, who awarded Golden an additional $267,704.13. The court certified the order awarding these amounts as a final judgment.

Continental appeals, arguing that: (1) the trial court erred in concluding that it had a duty to defend Golden, (2) the trial court abused its discretion in awarding Golden counsel fees and other litigation expenses incurred in the declaratory judgment action, and (3) the trial court erred in awarding Golden the full amount of legal fees and other litigation expenses incurred in defending the underlying action without first affording Continental an adequate opportunity to inquire into the reasonableness of those expenses.

We affirm the parts of the judgment directing Continental to provide for the defense of Golden and Neuman in the underlying action and awarding plaintiffs $66,376.09 for litigation expenses incurred in prosecuting the declaratory judgment action. However, we vacate the part of the judgment awarding plaintiffs $267,704.13 for litigation expenses incurred in defending the underlying action and remand this part of the case to the trial court for reconsideration.

I

"Whether an insurer has a duty to defend is determined by comparing the allegations in the complaint with the language of the policy." Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 173, 607 A.2d 1255 (1992). "When multiple alternative causes of action are stated, the duty to defend will continue until every covered claim is eliminated." Id. at 174, 607 A.2d 1255. "If the complaint is ambiguous, doubts should be resolved in favor of the insured and thus in favor of coverage." Id. at 173, 607 A.2d 1255.

The policy which Continental issued to Golden for Potts Mill Acres provided coverage for "property damage to which this insurance applies, caused by an occurrence." "[P]roperty damage" was defined as "(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period." An "occurrence" was defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

We are satisfied that the complaint in the underlying action alleged "an occurrence" within the policy period that caused "property damage." Specifically, the complaint alleged that the failures of some plaintiffs' septic systems had caused effluent to seep across their lawns and into their homes, causing damage to their lawns and residences. The complaint further alleged the effluent had seeped onto the property and into the homes of some plaintiffs whose septic systems had not failed, causing them damages including the loss of use of their properties. Plaintiffs sought not only equitable relief but also general compensatory damages. Such allegations and claims for relief fall squarely within the terms of the quoted policy language. See Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 240-41, 405 A.2d 788 (1979) ("Whether the liability of the businessman is predicated upon warranty theory or, preferably and more accurately, upon tort concepts, injury to persons and damage to other property constitute the risks intended to be covered under the CGL").

Continental argues that even if the claims in the underlying action would fall within the terms of this basic coverage, they are excluded by certain relevant property damage exclusions. In considering the applicability of these exclusions to the homeowners' claims against Golden, we must keep in mind that "exclusionary clauses, drawn for the company by men learned in the law of insurance are to be strictly construed against the insurer; that the insured is entitled to protection to the full extent that any reasonable interpretation of them will permit." Ruvolo v. American Casualty Co., 39 N.J. 490, 498, 189 A.2d 204 (1963).

Continental relies upon the "Absolute Pollution" exclusion, which in pertinent part excludes coverage for "property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants ... at or from any site or location used by or for the named insured or others for the handling, storage, disposal, processing or treatment of waste." However, the properties owned by the plaintiffs in the underlying action cannot reasonably be characterized as a "site or location used ... for the handling, storage, disposal, processing or treatment of waste" simply because the houses located on the properties are served by on-site septic systems. Instead, these properties are used as sites for single family residences, and the homeowners' disposal or storage of waste through the septic system is simply incidental to that primary use. Furthermore, Golden's potential liability to those plaintiffs is not predicated upon the processing or treatment of waste but rather upon the construction of homes that include septic systems that are allegedly defective. Therefore, we conclude that the construction of a home that includes a septic system is not the kind of activity to which the "Absolute Pollution" exclusion applies.

In addition, the plaintiffs in the underlying action do not allege the kind of damages that the Absolute Pollution exclusion was designed to exclude from coverage. Several foreign jurisdictions have held that the absolute pollution exclusion was intended to apply only to environmental claims, and not to claims of personal injury or property damage which can be separated from the substance's environmental toxicity. See e.g. Minerva Enter., Inc. v. Bituminous Casualty Corp., 312 Ark. 128,...