Environmental Law Update - 2004 - Part II

Sunday, May 1, 2005 - 01:00

Part I of this article appears in the April 2005 issue of The Metropolitan Corporate Counsel.

New Jersey state and federal courts addressed environmental issues in a wide variety of contexts this past year, from typical disputes over land development and insurance coverage to more obscure controversies such as whether solid waste transporter fees imposed by the DEP violate the commerce clause. Part II of this article addresses several important decisions in the insurance and solid waste arenas, and discusses environmental decisions arising in private party disputes.

Insurance

In Benjamin Moore & Co. v. Aetna Casualty & Insurance Co., 179 N.J. 87 (2004), the Supreme Court of New Jersey determined that an insured must satisfy the full deductible for each triggered policy in a "long-tail" environmental exposure case before it is entitled to indemnity from the insurer. In reaching its conclusion, the Court applied Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), which posits that environmental injury occurs during each phase of contamination, from exposure to manifestation, thereby triggering each applicable insurance policy (known as the "continuous-trigger" theory of liability). Owens- Illinois also instructs how to allocate responsibility among different carriers once it is determined which policies have been triggered. Under Owens-Illinois, each carrier's share is allocated according to the "pro-rata approach," which is based upon the time its policies cover the risk and the coverage limits in its policies. The Court also applied Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 (1998), which held that each layer of excess insurance must be exhausted in each policy year before the next layer is reached.

The Court rejected the argument of the policy holder in Benjamin Moore that it be allowed to select one triggered policy to cover its claims and pay a single deductible for that policy only, known as the "joint and several" approach to allocation. The Court held there was "no principled basis" to treat progressive environmental damage as separate occurrences in order to maximize insurance coverage and, therefore, that it needs to be characterized as a fractionalized single occurrence in determining the applicability of deductibles. In short, the Court found that policy holders wishing to live by Owens-Illinois also must be prepared to die by it. This holding will dismay policy holders who now must pay in full all deductibles for all triggered policies before being entitled to coverage as a result of environmental injury occurring over a number of years.

Several summary judgment decisions were remanded for the taking of evidence on whether facts fit within policy coverage or exclusions. The insurance dispute in Nav-Its, Inc. v. Selective Insurance Company of America, No. A-1566-02T2 (App. Div. Dec. 23, 2003) arose from a claim filed against a contractor who was performing tenant "fit-out" work on a commercial building which resulted in fumes being released into the space of an adjoining tenant, allegedly injuring him. The contractor sought coverage from its insurer, which denied on the basis of the pollution exclusion in the policy. The policy provided that damages arising out of a "pollution hazard" were not covered, except if the injury arose from the "actual discharge or release" of any "pollutants" occurring entirely within a building, provided both the release and the exposure occurs within a single forty-eight (48) hour period. The injured tenant had reported being exposed to the fumes only "while he was at work," on three occasions over a six-day period. The Appellate Division reversed summary judgment in favor of the insured and remanded for trial the issue of whether the pollution exclusion applied based on a factual examination of whether the tenant suffered separate exposures each day or one continuous exposure.

Estate of Mimi v. Selective Ins. Co. of America, No. A-3976-02T2 (App. Div. June 8, 2004) arose out of a suit brought against the seller of cedar mulch alleging that exposure to toxins in the mulch caused the death of one of the mulch seller's customers. The mulch seller's insurer denied coverage and refused to defend the suit on the basis of the pollution exclusion in the policy, which excluded coverage for "an active or physical event" that could constitute a "discharge, dispersal, seepage, migration, release or escape" of a "pollutant," but not general "exposure" to some unidentified substance, i.e. a "toxin." The Appellate Division found that the claim reasonably could be interpreted to allege a cause of action falling outside the pollution exclusion, and held that the ambiguity must be resolved at the summary judgment stage in favor of the possibility of coverage. See also Cycle Chem, Inc. v. Lumbermans' Mutual Casualty Company, 365 N.J. Super. 58 (App. Div. 2003), in which the Appellate Division held that it was error to grant summary judgment to the carrier without giving the insured an opportunity to demonstrate a sufficient factual nexus between its necessary and incidental operations at or from the insured premises and the occurrence out of which its alleged liability arose.

See also Atlantic Disposal Service, Inc. v. Federal Ins. Co., No. A-2980-01T2 (App. Div. June 14, 2004), where the insurer attempted to disclaim responsibility for the insured's litigation expenses relating to environmental enforcement actions unless and until there had been a showing of an "occurrence" during the covered period. According to the insurer, no "occurrence" could be established if the insured were to wage a successful defense against the action, such that it were found not guilty of an act of pollution. On the other hand, if the insured were unsuccessful in defending the case, an "occurrence" would have been found and the insured would be entitled to said costs. The Appellate Division properly held that this argument "defies logic and common sense," as well as the "normal expectations of the policy holder," and emphasized that an insurer has a duty to defend the insured unless and until the insurer establishes non-coverage of the claim.

Solid Waste Management

Continuing a long-standing tradition, commerce clause issues in environmental law arose this year in the context of solid waste management. In American Trucking Associations v. State of New Jersey, 180 N.J. 377 (2004), the Supreme Court of New Jersey invalidated as an unconstitutional tax DEP's annual hazardous waste transporter registration fees. Plaintiffs argued that the fees, which were imposed on a per vehicle basis, were not fairly apportioned because the same flat fee was imposed on each vehicle delivering or collecting waste in New Jersey, regardless of the number of trips made by each truck. According to plaintiffs, the effect of imposing the same fee on each truck was unfair to out-of-state haulers due to the greater frequency with which New Jersey haulers conducted their activities in-state. The narrow issue presented to the Court was whether the fees had the effect of charging a greater fee per activity to out-of-state than in-state transporters. Against DEP's argument that the fees were not an illegal flat tax but an allowable "user fee," the Court invalidated the fee on the basis that it was not fairly apportioned nor related to the payor's actual use of in-state facilities. In dicta, the Court noted that apportionment based on tonnage hauled or mileage would be a link to the level of activity that might render the fee constitutional.

See also American Marine Rail v. City of Bayonne, 289 F. Supp. 2d 56 (D.N.J. 2003), where the Court found that an issue of fact existed as to whether the denial of a solid waste transporter's bid for inclusion in the county Solid Waste Management Plan, which proposed processing solely waste generated in New York, violated the dormant Commerce Clause, thereby precluding summary judgment.

DEP was soundly chastised in NJDEP v. Marisol, Inc., 367 N.J. Super. 614 (App. Div. 2004), where its assessment of penalties against a waste storage facility operator for violations of the Solid Waste Management Act involving the visibility of labels on drums was overturned by the Appellate Division, which concluded that the penalty assessment qualified for exemption under the Grace Period Law. The Appellate Division vacated the penalties, finding that the operator had addressed the violations immediately and DEP could not prove that they were anything more than "minor violations." In a scathing opinion, the Court criticized DEP for failing to promulgate regulations implementing the Grace Period Law in the eight years since its enactment, interpreting this failure as "affirmative evidence of DEP resistance to the dictates of the Grace Period Law" and observing that the agency "has proceeded upon an old regulatory framework and self-developed practices to assess monetary penalties which at worst violate the Grace Period Law and at best ignore its terms."

Contractual Agreements

Cirignano v. Recuperacion De Terrenos S.A. de C.V., No. A-5395-02T2 (App. Div. Apr. 30, 2004), is a cautionary decision for draftsmen of contracts. The facts arose out of a lease with an option to purchase which was to be triggered when the property, which was impacted by environmental contamination, received a no further action letter ("NFA") from DEP. The lease contained no representation as to the time frame in which landlord would complete the remediation and provided that the option to purchase would be null and void if landlord should fail to obtain an NFA. The tenant sought to exercise the option and sued, claiming delay by the landlord in satisfying DEP requirements. The Appellate Division affirmed the dismissal of the complaint, finding no requirement under the lease for landlord to satisfy agency requirements within any particular time frame and, in fact, finding that the landlord had no obligation under the lease actually to obtain the NFA.

Shareholder Liability

In NJDEP v. Camden Asphalt and Concrete Co., No. A-6786-02T5 (App. Div. Jul. 13, 2004), a concrete company and its sole shareholder appealed from DEP's determination that each was jointly and severally liable for the removal and disposal of solid waste from an industrial site and for payment of a fine for illegally operating a solid waste facility without a permit. The Appellate Division found the shareholder liable on the basis that he was in control of the events that led to the violation and had legal responsibility to determine whether his company should continue to operate without the necessary permit.

Conclusion

The number of appellate decisions in the insurance area overturning trial court rulings suggests continued confusion over coverage issues, particularly the applicability of pollution exclusion clauses. The Benjamin Moore decision is a noteworthy set-back for policyholders. Of note this year is the infrequency of private party disputes and the absence of toxic tort litigation, although toxic tort claims underlie several insurance disputes. Although less frequently than in past years, environmental issues continue to overlap other practice areas, including contract and commercial law disputes.

Dennis J. Krumholz heads the Environmental Practice Group at Riker, Danzig, Scherer, Hyland & Perretti, LLP. He gratefully acknowledges the assistance of Christine A. LaRocca, an Associate in the Group, in the preparation of this article. This article is Part II of a condensed version of the Environmental Year in Review, published in New Jersey Lawyer in two parts on November 29 and December 6, 2004.

Please email the author at dkrumholz@riker.com with questions about this article.