Source: http://www.lexology.com, March 4, 2014
By: Brian Margolies, Traub Lieberman Straus & Shrewsberry LLP

In its recent decision in Lennar Mare Island v. Steadfast Ins. Co., 2014 U.S. Dist. LEXIS 26405 (E.D. Cal. Feb. 28, 2014), the United States District Court for the Eastern District of California had occasion to consider the relationship between a fixed site pollution liability policy and a remediation cost containment policy.

The Lennar decision concerns environmental liabilities at a former Naval base on Mare Island in Vallejo, California.  The site was transferred to the City of Vallejo in 2002.  The City agreed to undertake an environmental remediation of the site that would be funded by the Navy.  The City later transferred the property to Lennar Mare Island, LLC (“LMI”).  LMI, in turn, contracted with CH2M Hill Constructors, Inc. (“CCI”) to perform the required environmental remediation.

Steadfast Insurance Company issued two policies relevant to the site.  First, it issued a Remediation Stop Loss policy to CCI (the “RSL Policy”), providing cost overrun protection with respect to CCI’s remediation efforts.  Second, Steadfast issued an Environmental Liability Insurance policy (the “ELI Policy”) to LMI that insured against cleanup costs resulting from a pollution condition not known to LMI prior to the policy period, but instead first discovered during the policy period.

The Steadfast policies referenced each other in an effort to ensure that they did not provide overlapping coverage.  Thus, the ELI Policy defined “Known Pollution Conditions” as:

… all conditions specifically described in the Scope of Work Endorsement to the Remediation Stop Loss Policy . . . and which require or  may ultimately require any form of remedial investigation or action . . .

The Scope of Work Endorsement in the RSL Policy, in turn, made reference to the conditions and activities specifically outlined in that policy and certain attachments thereto.  The RSL Policy also contained the term Known Pollution Conditions, which it defined as being limited to the conditions described in the Scope of Work Endorsement requiring any form of remedial investigation or action.

At issue in the Lennar decision was LMI’s right to insurance coverage for PCB contamination in Building 116 of the site.  The RSL Policy’s Scope of Work Endorsement, and certain attachments thereto, made reference to PCB contamination in concrete floor slabs in Building 116.  The endorsement also referred to PCB contamination in transformer pads in Building 116.  The RSL Policy did not, however, make reference to PCB contamination in the wood floor of Building 116.  Thus, when CCI encountered PCB contamination in the building’s wood floor during the policy period, a question was raised as to whether LMI was entitled to remediation cost coverage for this contamination under the ELI Policy.

LMI filed a declaratory judgment action and promptly moved for summary judgment.  Steadfast stated in opposition to the motion that it had obtained several documents suggesting that LMI and/or CCI was aware of the PCB contamination in the wood floor prior to the inception date of the ELI Policy, and thus it may be a Known Pollution Condition for which coverage was unavailable.  Steadfast argued, therefore, that at a minimum, it should be entitled to further discovery on the issue.  Steadfast, in fact, had been pursuing such additional discovery but was mired in several non-party discovery disputes at the time LMI filed for summary judgment.  LMI countered that any such discovery was irrelevant, since the ELI Policy defined the term Known Pollution Conditions as anything identified in the RSL Policy’s Scope of Work Endorsement, and that as such, anything not identified in the Scope of Work Endorsement was not a Known Pollution Condition.  In other words, because the Scope of Work Endorsement did not specifically identify PCB contamination in the wood floor of Building 116, it necessarily followed that this could not be a Known Pollution Condition for the purpose of the ELI Policy, regardless of when LMI first became aware of or discovered this condition.

The court disagreed with LMI’s reading of the two policies.  While the RSL Policy stated that only those conditions specifically identified could be considered Known Pollution Conditions for the purpose of the RSL Policy, the definition of Known Pollution Conditions in the ELI Policy contained no similar restriction.  In other words, an area of contamination could be considered a Known Pollution Condition for the purpose of the ELI Policy even if not specifically identified in the RSL Policy’s Scope of Work.  In any event, the ELI Policy’s insuring agreement made clear that coverage was unavailable for any pollution condition discovered outside of the policy period.  The court reasoned that LMI’s interpretation of the ELI Policy “that anything not listed as a known condition in the RSL Policy necessarily was discovered during the policy period – would collapse the two provisions of the ELI Policy [i.e., the discovery requirement and the known conditions prohibition] into one.”  Thus, the court denied LMI’s motion for summary judgment without prejudice, and permitted Steadfast additional time to take discovery into the known conditions issue.