Coverage Denied in NJ Environmental Suit Based on Policy’s Pending Litigation Exclusion

By: Sheila Raftery Wiggins

The New Jersey Appellate Division ruled that an insurer is not obligated to indemnify an insured for natural resources damages that it may pay in the underlying lawsuit brought by the New Jersey Department of Environmental Protection (“NJDEP”) because of the Policy’s Prior or Pending Litigation Exclusion.  This exclusion applies because the NJDEP’s suit is based on the same environmental contamination alleged in a 1987 Administrative Consent Order between the NJDEP and the insured.  Handy & Harman, et. al v. Beazley USA Services Inc. (Syndicates 623 and 2623 at Lloyd’s London), A-2068-20 (N.J. App. Div. March 2, 2023) (unpublished).

Lesson:  An administrative consent order – required by an environmental statute in order for the property to be sold in the 1980’s – is sufficient to constitute a “claim,” as defined by the Policy’s Prior or Pending Litigation Exclusion.

Factual background:  Handy and Harman operated a metal etching business in New Jersey in 1984-’85 and then sold the property.  Because the metal etching business used trichloroethylene (“TCE”) and other chemicals, the sale agreement required certain pre-closure approved cleanup and detoxification plans approved by NJDEP pursuant to the then-effective Environmental Cleanup Responsibility Act (“ECRA”), N.J.S.A 13:1K-6 to -14.  Under the ECRA, property transactions cannot proceed unless the NJDEP approves a negative declaration finding remediation has been completed or is no longer necessary or the NJDEP approves the Cleanup Plan.

Pursuant to ECRA, Handy & Harman entered into an Administrative Consent Order (“Order”) with NJDEP in January 1987 in order to sell the property.  The Order listed many requirements, including that the property owner promptly prepare and submit a Sampling Plan and Cleanup Plan to the NJDEP.  In 1990, Handy & Harman submitted a Cleanup Plan to NJDEP and then contaminated soils were removed.  Since 1986, no industrial activities have occurred at the site.

Policy:  In 2017, Handy and Harman purchased an Enviro Covered Location Insurance Policy from Beazley for the period of December 2017-December 2020.

The Policy contains the Prior or Pending Litigation Exclusion which excludes coverage arising from any claim, decree or legal proceedings against the insured or involving the covered location which:

      • took place prior to the effective date of the Policy and which the insured had received notice or otherwise had knowledge of as of such date, or
      • is based on substantially the same matters as alleged in the pleadings in such prior litigation, or
      • based upon or arising out of any act of the insured that gave rise to such prior or pending litigation.

The Policy defines “claim” as including:

      • a court or government agency order or government or regulatory action filed by the insured.

Lawsuit:  In December 2019, NJDEP filed a complaint against Handy and Harman alleging: (1) violations of New Jersey environmental laws and (2) common law reimbursement of costs and damages including: (i) damages arising from the discharge of hazardous substances and pollutants and (ii) funding the further assessment of any natural resource that may have been damaged by Handy & Harman’s actions.

The crux of the case is that TCE was placed into large storage drums on the property that leaked into the ground water and contaminated aquifers, causing the closure of municipal drinking wells and requiring the installation of filtration systems to municipal wells supplying clean drinking water.

Tender of defense and indemnification:  In response to Handy & Harman’s notice seeking defense and indemnification, Beazley issued a reservation of rights letter citing the Policy’s Prior or Pending Litigation Exclusion and Specified Coverage and Contamination Exclusion.

Applying New York law, the trial court granted Beazley’s motion for summary judgment, finding the exclusions to be valid.  This appeal followed.

Appeal issue/ruling:  To determine if the Prior or Pending Exclusion applies, the Appellate Division considered whether the lawsuit arises from any claim, decree, or legal proceedings against the insured or involving the covered property.

The Appellate Division found: (1) that the lawsuit arises from the Order because they are based on substantially the same underlying matter and (2) the Order is a type of “claim.”  The sale of the property could not proceed without the completion of the remediation or a negative declaration from NJDEP – this shows how involuntary, and thus, mandatory, the process was.  Thus, the Order was not merely a request from the NJDEP but, instead, satisfies the nature of a mandatory, obligatory “claim” as defined in the Policy.  The Appellate Division also noted that the lawsuit arises from “substantially the same matters” – the pollution, itself – as addressed in the Order.  Thus, the Appellate Division affirmed the ruling finding that no coverage in light of the Prior or Pending Exclusion.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

Proudly powered by WordPress