Titan Corp. v. Aetna Casualty & Surety Co.

• Decision Date: 10 February 1994
• Docket Number: No. D015938,D015938
• Citation: 22 Cal.App.4th 457,27 Cal.Rptr.2d 476
• Court: California Court of Appeals Court of Appeals
• Parties: The TITAN CORPORATION et al., Cross-Complainants and Respondents, v. AETNA CASUALTY AND SURETY COMPANY, Cross-Defendant and Appellant.

Page 476

27 Cal.Rptr.2d 476

22 Cal.App.4th 457

The TITAN CORPORATION et al., Cross-Complainants and Respondents, v. AETNA CASUALTY AND SURETY COMPANY, Cross-Defendant and Appellant.

No. D015938.

Court of Appeal, Fourth District, Division 1, California.

Feb. 10, 1994.

Buchalter, Nemer, Fields & Younger, Randolph P. Sinnott, Cheryl A. Orr and Margo T. Wright, Los Angeles, for cross-defendant and appellant

Hufstedler, Kaus & Ettinger and Thomas J. Ready, Wiley, Rein & Fielding, Laura A.

Foggan, Daniel E. Troy and Steven D. Silverman, Washington, DC, for amicus curiae on behalf of cross-defendant and appellant

Gray, Cary, Ames & Frye, Edward J. McIntyre and Robert C. Longstreth, San Diego, for cross-complainant and respondent.

FROEHLICH, Associate Justice.

Respondent The Titan Corporation (Titan) owned a plant in New Jersey (hereafter the "Keasbey site" or "Keasbey facility") that had been operating since 1906. When Titan decided to close the plant in 1985, it began investigating the extent of its environmental cleanup responsibilities under a New Jersey statute. The investigation revealed the site had some forms of pollution.

Titan then purchased a policy of insurance from appellant Aetna Casualty and Surety Company (Aetna). The Aetna policy contained, among other provisions, a "pollution exclusion" which on first consideration appears unambiguously to declare that the policy covered neither pollution damages nor cleanup liabilities. Titan nevertheless made a claim on the policy for the costs of cleaning up the Keasbey facility. Aetna denied the claim.

After trial the court below made factual and legal findings which had the net effect of declaring Aetna liable for part of the cleanup costs. On appeal, we are asked to review the policy and its exclusions, and to determine whether the evidence, viewed most favorably in support of the judgment, supports the conclusion the policy applied to the costs incurred by Titan.

I BACKGROUND

A. The Facility

For nearly 80 years Titan and its predecessors produced "soft" ferrite at the Keasbey facility. The ferrite manufacturing process produced, as a by-product, waste streams of ferrite sludge. Titan disposed of waste sludge by allowing it to flow into two "infiltration/percolation" lagoons (the "I/P lagoons") ¹ under permit from the New Jersey Department of Environmental Protection (NJDEP). Titan also placed on the southeastern portion of the site piles of waste materials (i.e., scrap ferrite, old pallets, empty or partially filled drums, etc.). The waste streams and scrap material were classified as nonhazardous. "Hazardous" wastes were disposed of off site as required by state and federal regulations.

B. The Cleanup

Titan's decision to close the facility in September 1985 triggered obligations under New Jersey's Environmental Cleanup Responsibility Act (ECRA). (N.J.S.A., §§ 13:1K-6 et seq.) ECRA is a strict liability statute requiring the owner to clean up a facility before transferring the property or ceasing operations. To comply with its obligations, Titan retained Dames & Moore as its environmental consultant to investigate the site, perform the required sampling, and prepare a cleanup plan.

The initial site evaluation, submitted to the NJDEP in October 1985, identified a number of areas of contamination. ² This October 1985 report did not, however, identify "TCE" contamination or groundwater contamination, nor did it identify the dumped brick, concrete, wood or rubbish as "contaminants" for ECRA cleanup.

Following issuance of the October 1985 report, Titan purchased the Aetna policy, effective February 1986. After issuance of the Aetna policy, Titan discovered the so- Additionally, in June 1986 the NJDEP identified as a "deficiency" certain solid waste piles (i.e., the brick and rubble from demolished buildings, ceramic waste, etc.). ⁴ The NJDEP required removal of this waste as part of the cleanup operation.

                called "TCE spill area." 3  The TCE contamination was first discovered when groundwater sampling during March and April 1986 revealed TCE contamination of the groundwater, leading to the discovery of TCE contamination of the soil
                

The remediation efforts thus entailed cleanup of the I/P lagoons and overflow area, as well as the TCE spill area; removal of the oil storage tanks and excavation of some surrounding soil; excavation of soil along the fuel oil transfer line; soil cleanup around the drum storage area; and cleanup of the solid wastes. Among the areas remediated was a 70-foot-by-15-foot strip of land owned by an adjacent business (the "Carborundum land") which had been contaminated by the leaking fuel oil transfer line.

The NJDEP did not require Titan to remediate water below the surface, but it did require preparation of a groundwater remediation contingency plan. Additionally, many of the steps required by the NJDEP (such as cleaning up the TCE, remediation of the I/P lagoons and overflow, cleaning up the oil tank and fuel transfer lines, etc.) represented removal of sources of existing or potential groundwater contaminants.

C. The Policy

Titan made a claim on the Aetna policy for the costs of cleaning up in compliance with the NJDEP requirements at the site. In its letter denying coverage Aetna cited the following reasons for denial: the basic policy terms, the "pollution" exclusion, and the "owned property" exclusion.

The Aetna policy provided for numerous exclusions, two of which are pertinent here. First, its "owned property" exclusion provided:

"This insurance does not apply:

.......................

(k) to property damage to (1) property owned or occupied by or rented to the insured; (2) property used by the insured...."

Second, the policy was modified by an endorsement, known as the "absolute pollution exclusion," which provided that the insurance would not apply

"(1) to bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants: (a) at or from premises owned, rented or occupied by the named insured; [or] ... (c) which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for the named insured....

"(2) to any loss, cost or expense arising out of any governmental direction or request that the named insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. [p] Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed."

D. The Lawsuit

The action began when one of Titan's insurers, Employers Insurance of Wasau, filed an action seeking a declaration of the various insurers' duties to pay for the cleanup. Aetna became involved on cross-complaint by Titan. Prior to trial, all but two of the insurers settled with Titan. Only Pacific Indemnity Company and Aetna remained as insurers.

In the first phase of the two-phase trial, a jury determined Titan reasonably spent $890,905.42 on the cleanup, a conclusion not disputed on appeal.

Pacific then settled, leaving only Aetna to litigate phase two of the trial involving the question of whether the policy covered the damages. This phase was tried to the court.

The court first concluded the costs were governmentally compelled cleanup costs which (under AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253) constituted "property damages" under a comprehensive general liability policy such as the one issued by Aetna. ⁵ The court secondly concluded that the "known risk" doctrine (under Ins.Code, §§ 22, 250) was inapplicable, because (1) it was waived for not having been raised in the letter denying coverage; (2) some elements of the environmental contamination, such as the TCE spill and the required remediation of the solid wastes, were unknown to the insured until after the policy became effective; and (3) under Chu v. Canadian Indemnity Co. (1990) 224 Cal.App.3d 86, 274 Cal.Rptr. 20, Titan's knowledge of some problem areas before Aetna's policy period commenced (i.e., the I/P lagoons, etc.) did not charge Titan with knowledge of different problems, to wit, the TCE spill and solid waste cleanup.

The court then ruled that the exclusions were inapplicable. It concluded the pollution exclusion was inapplicable because part of the costs was the removal of solid wastes: the piles of brick, concrete, wood and rubbish. Since the policy defined pollutants as "... solid, liquid, gaseous, or thermal irritant[s] or contaminant[s], including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste," and the solid wastes were neither irritants nor contaminants, the court concluded the pollution exclusion did not apply to the costs associated with that portion of the cleanup.

The court also rejected application of the "owned property" exclusion. It pointed to the surface and groundwaters, which qualify as third party property, and which were threatened with or actually contaminated by the I/P lagoons, the TCE spill area, the fuel

                oil tanks and transfer-line leaks. 6  Perceiving that the costs were incurred to remedy injury to third party property, the court deemed the "owned property exclusion" inapplicable
                

II ANALYSIS

A. The Dispositive Issues Are Whether Aetna's Policy Covers the Costs Associated with Cleanup of the "TCE Spill" and Solid Wastes

Aetna raises numerous contentions on appeal. Before turning to the central issues, however, we may narrow our focus by first eliminating aspects not at the core of the trial court's judgment or of this appeal.

Several of Aetna's appellate arguments focus on the fact Titan was aware of some of the areas of contamination, and of its ECRA obligations to clean up contamination, before the inception of Aetna's policy. The evidence clearly shows that several problems (i.e., the I/P lagoons and...