Defense Digest

New Jersey Environmental Insurance Law:  The Battle Over Coverage Between Insurers and Policyholders Arising From Owned Property Exculsion Clauses in CGL Policies

Ever since the explosion of environmental contamination bodily injury and property damage claims in the 1970s, insurers and their policyholders have been battling over what, if any, insurance coverage exists for such claims. A significant amount of the litigation that has arisen from these environmental coverage disputes has occurred in the state of New Jersey and has involved various types of exclusion clauses contained in commercial general liability (CGL) policies of insurance.

Generally, CGL policies are meant to provide insurance coverage for damage or loss sustained to third person(s) and are not insurance policies providing an insured with first-party coverage for losses sustained to the insured's own property. CGL policies often contain an exclusionary clause, excluding from the insurer's indemnification obligation any claims based upon damage or loss to property that is owned, occupied, rented, or otherwise under the care, custody, or control of the policyholder. Such an exclusionary clause is commonly referred to as the "owned property exclusion."

In environmental coverage cases, the owned property exclusion clause has led to coverage disputes between insurers and their policyholders over such issues as whether the exclusion bars coverage for damage arising from contaminated groundwater located on the insured's property; whether the exclusion bars any and all coverage for clean up costs to the insured's owned property, regardless of whether said costs are deemed necessary to prevent migration of the contaminants to the adjoining property of a third party; and how and when to afford coverage when the same remediation expenses may alleviate areas of both covered damage (third party damage) and non-covered damage (first party damage to the insured). Although there is no one uniform judicial voice among the various states in this country, on all of these issues New Jersey's current environmental coverage decisional law, with regard to the owned property exclusion clause contained in most CGL policies, can be summarized as follows.

The owned property exclusion generally bars coverage for claims for damage to property owned, occupied, rented, or otherwise under the care, custody, or control of the policyholder. New Jersey Department of Environmental Protection v. Signo Trading International Inc., 130 N.J. 51 (1992). In environmental coverage cases, such property damage claims most often involve claims for damage to soil and/or groundwater, located beneath the soil, brought against an insured either by (1) a private party, who now owns the land formerly owned by the insured and who is compelled to clean up contamination alleged to have originated while the insured owned the property, or (2) a private party, who owns property adjacent to the insured's property and who has sustained property damage as a result of the migration of contaminants from the insured's property to said third party property, or (3) directly by a governmental entity (i.e. DEP) for clean-up costs associated with the remediation of contaminated or polluted property on property presently or formerly owned by the insured, and/or the remediation of affected adjacent third property. The New Jersey Supreme Court has held that response costs imposed to remediate environmental damages do qualify as potential damages under CGL insurance policies, subject to any applicable exclusions in said policy. Morton International v. General Accident, 134 N.J. 1, 27 (1993). These response costs may include expenses relating to the monitoring, investigating, and testing of soil and groundwater for pollutants or other contaminants; soil excavation and fill; and removal of underground storage tanks or other fixtures.

Of significance, for purposes of the owned property exclusion, New Jersey courts, like courts in many other states, have held that groundwater located below the surface of real property is not considered "property owned by the insured." Morrone v. Harleysville Mutual Insurance Co., 283 N.J. Super. 411, 419-20 (App. Div. 1995); Strand v. North River Insurance Co., 292 N.J. Super. 476, 482 (App. Div. 1996). Among the various rationales offered in favor of this unique view of groundwater are that groundwater is a public resource belonging to the government and is, thus, considered "third party" property for purposes of owned property insurance policy exclusions; groundwater is public property because all citizens have a proprietary interest in their state’s natural resources; an owner of land does not exercise care or control over the groundwater below the surface of the land and, therefore, cannot be said to "own" the groundwater; and groundwater, in its natural state, simply cannot be considered property that is "owned" by anyone. Since groundwater is not considered "owned property" for purposes of the owned property exclusion, the exclusionary clauses found in most CGL policies of insurance will not bar coverage for claims against a policyholder arising from contaminated groundwater located below the surface of the insured's own property, including costs associated with monitoring or remediating groundwater.

Under New Jersey law, whereas the owned property exclusion in CGL policies will not permit an insurer to bar coverage for damages arising from the remediation of contaminated groundwater located beneath the insured's owned property, generally, the same exclusion will permit insurers to bar coverage for damages arising solely from the remediation of contaminated soil located on the insured's owned property. However, there is an exception to this general rule barring damages associated with the remediation of property owned by the insured. Barring any other exclusions that may be contained in the CGL policy at issue, other than the owned property exclusion, clean-up costs to remediate contaminated land owned by an insured will be covered if there is sufficient evidence of the existence of an immediate and imminent threat of damage to third party property caused by the contaminated property owned by the insured. Signo, 130 N.J. at 61-63. Only if the wording of the particular owned property exclusion clause is ambiguous will the courts require that an analysis be made as to whether the clear expectations of the parties will be reasonably met by the non-application of the owned property exclusion. For this exception to apply, there need not be evidence of actual damage to third party property. All that is required is evidence of an immediate and imminent threat of damage to third party property as a result of the off-site migration of contaminants from the insured's property.

Thus, in New Jersey, the critical question in determining whether insurance coverage under a CGL policy may be extended to an insured for damages related to remediation expenses to clean up contamination of the insured's owned land, despite an owned property exclusion in the policy, is whether the environmental response expenses are deemed to have been solely for the purpose of remediating the insured's own land (soil) or whether any of the remediation costs can be deemed to have been necessary to prevent immediate and imminent threatened damage to third party property. Where a policyholder is removing contaminated soil from his own property and there is no evidence that the contamination has reached the groundwater or migrated to third party property, the owned property exclusion will operate to bar coverage. However, once groundwater contamination or other third party property becomes involved (either by way of evidence of actual damage or the threat of imminent and immediate damage caused by the migration of contaminants), an insurer may not rely on the owned property exclusion to bar coverage.

The New Jersey courts' interpretation of the owned property exclusion in CGL policies is at odds with that of courts in some other jurisdictions, who have not interpreted the owned property exclusion to deny coverage to an insured for damages related to clean-up costs of the insured's own property. The latter say that interpreting the owned property exclusion clause to require off-site migration of pollutants before coverage can be afforded would frustrate the common sense expectations of the insured. The argument is that the average insured would expect coverage for environmental clean-up costs, regardless if only a minimal amount of pollutants had migrated from its premises, without actually reaching third party property or without being deemed to cause an immediate and imminent threat of harm to third party property. Signo, 130 N.J. at 81-82 (Judge O'Hern, dissenting and citing to Globe Indemnity Co. v. California, 43 Cal. App. 3d 745 (1974).)

Unfortunately, the current state of the case law in New Jersey regarding the enforceability of an owned property exclusion in a CGL policy has created difficulties in determining which remediation costs are covered under the policy and which are not. This is because oftentimes clean-up expenses of contaminated property serve both objectives of remediating the insured's own property (which ordinarily would not be covered under a CGL policy because it would be considered first party coverage) and remediating actual or imminent and immediate threatened damage to third party property (for which, absent any other exclusions in the CGL policy, there would ordinarily be coverage). In addition, when groundwater contamination on an insured's property has been found, remediation of the soil is often a necessary step to remediation of the contaminated groundwater. If this is the case, such soil remediation costs that are determined to be necessary to remediate actual groundwater contamination (for which there is coverage) will not be barred by an owned property exclusion. The Muralo Company, Inc v. Employer's Liability Insurance of Wausau, 334 N.J. Super. 282, 291 (App. Div. 2000). In such cases where it is not clear whether the purpose and effect of the remediation expenses are to remediate the insured's owned property or to remediate groundwater or third party property, the court will require that an attempt be made at apportioning those expenditures attributable to correcting damage to the insured’s property and those expenses which are attributable to the abatement of damage to adjacent lands or contaminated groundwater. Signo, 130 N.J. at 61.

In summary, New Jersey courts will interpret the owned property exclusion in CGL policies more strictly against coverage and, thus, in favor of insurers, as compared to courts in other jurisdictions. Nonetheless, New Jersey courts will allow coverage for damages related to environmental contamination of an insured's owned property in certain specified circumstances, despite the existence of an owned property exclusion clause in a CGL policy (i.e. when those costs are necessary to prevent further migration to third party property already contaminated or third party property that is deemed to be in imminent threat of contamination if remediation is not undertaken). There is a possibility that the New Jersey Supreme Court may revisit the issue of whether the owned property exclusion should be allowed to bar coverage for damages related to the environmental clean up costs of the insured's own property, regardless of whether there has been evidence of actual migration or an imminent threat of migration of the contaminants to third party property. Dicta in several New Jersey Appellate Division decisions, after the Supreme Court's decision in Signo, supra., would appear to invite the New Jersey Supreme Court to do so.

*Patricia is a shareholder in our Roseland, New Jersey office. She can be reached at (973) 618-4116 or pmcdonagh@mdwcg.com.