Case Briefs

A petition for rehearing and rehearing en banc, which had been supported by the United States as amicus curiae, was denied on June 21, 2011.

Laura A. Foggan, a partner, and Parker Lavin and Gregory Langlois, associates, at Wiley Rein LLP contributed this month's case brief. Foggan is a member of this newsletter's Board of Editors.

Fourth Circuit Finds No Coverage for Regulatory CERCLA Cleanup Under Maryland Law

In Industrial Enterprises, Inc. v. Penn America Insurance Co., No. 09-2346 (4th Cir. Mar. 18, 2011), reh'g denied (June 21, 2011), the U.S. Court of Appeals for the Fourth Circuit, applying Maryland law, held that a CGL policy does not cover a policyholder's liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA” or “Superfund”) for the costs of remediating contamination on its own land because such liability is not “damages because of ' property damage.”

The policyholder owned parcels of land near the Back River in Baltimore County, MD, portions of which previously were used as landfills. The U.S. Environmental Protection Agency (“EPA”) notified the policyholder and the owners of neighboring properties of their potential liability for environmental contamination as a result of pollution on their properties, including the costs of any investigation, response and remediation actions. The policyholder sought coverage under a CGL policy issued by its insurer, which denied coverage based on, inter alia, a pollution exclusion permitting coverage for losses arising out of the release of pollutants only if the release is sudden and accidental. The policyholder also entered into a coalition with the other potentially liable parties to uniformly respond to the EPA and to release themselves from any potential claims against each other. The policyholder filed suit against the insurer, seeking coverage for the costs of responding to the EPA, including defense costs and a $750,000 contribution to the coalition fund. The district court held that the insurer was required to cover the policyholder's defense costs based on evidence showing that the contamination potentially resulted from a sudden and accidental release. However, the district court also found, following a trial, that the $750,000 coalition fund payment was not a defense cost for which the insurer was liable.

On appeal, the Fourth Circuit, after determining that the insurer had preserved the issue for appeal, held that the policy did not provide coverage because the policyholder's CERCLA liability did not constitute liability for “damages because of ' property damage.” The court agreed with the insurer that, under Maryland law as reflected in Bausch & Lomb, Inc. v. Utica Mutual Insurance Co. , 625 A.2d 1021 (Md. 1993), a policyholder's liability for regulatory response costs is not liability for “property damage.” The Bausch & Lomb court emphasized that a CGL policy's property damage coverage is designed to insure against injury to a third person's property. The Fourth Circuit noted that because the state of Maryland in Bausch & Lomb sought the removal of contaminated soil and protection of groundwater based on its power to preserve and regulate ' and not on any property interest ' the Bausch & Lomb court held that no insurance coverage was available. Similarly, the Fourth Circuit reasoned, the U.S. government, through the EPA, did not seek to impose the costs of investigating and remediating the policyholder's property as a property owner but, instead, as a regulator authorized to protect the environment and public health. The court noted that the coalition members' own settlement agreement acknowledged that the government sought regulatory liability for cleanup of contamination on their properties and not recovery for damage to property the government itself owned. Moreover, the court explained that no evidence suggested that the CGL policy was intended to protect against the risk of CERCLA liability, given that the policy language was adopted prior to CERCLA's enactment in 1980 and that such language was designed to address an insured's tort liability for property damage caused to third parties.

Because the court held that the policyholder's CERCLA liability did not constitute liability for “property damage,” the court did not address whether the pollution exclusion barred coverage.

Judge Robert B. King filed a dissent to the opinion, arguing that the issue in this case was not whether the contamination of the land, surface water or groundwater is damage to property, but “whether the contamination damages a third person's property such that the liability coverage provisions of a CGL policy are implicated.” Judge King argued in his dissent that the EPA acknowledged that there was a potential for third-party property damage to the Chesapeake Bay and that the district court's holding should be affirmed.

A petition for rehearing and rehearing en banc, which had been supported by the United States as amicus curiae, was denied on June 21, 2011.

Laura A. Foggan, a partner, and Parker Lavin and Gregory Langlois, associates, at Wiley Rein LLP contributed this month's case brief. Foggan is a member of this newsletter's Board of Editors.