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State v. Universal Underwriters Ins. Co., No. 539-9 -98 Wncv (Teachout, J., Aug. 20, 2003)

[The text of this Vermont trial court opinion is un official. It has been reformatted from the original. The accuracy of the text and the accompan ying data included in the Vermont trial court opinion database is not guaranteed.]

STATE OF VERMONT WASHINGTON COUNTY, SS.

STATE OF VERMONT )

) Washington Superior Court

v. ) Docket No. 539-9-98 Wncv

)

UNIVERSAL UNDERWRITERS INS. CO. )

FINDINGS AND CONCLUSIONS Part One (Liability) of Bifurcated Final Hearing o n the Merits

This matter came before the court on May 15 and 16 , 2003 for a final evidentiary hearing on the merits on Defendant’s liability to provide i nsurance coverage. Pursuant to Order of March 24, 2003, the damages portion of the final he aring is postponed and will be consolidated with the damages portion (if any) of State v. Peerl ess , Docket No. 681-12-01 Wncv. Plaintiff is represented by William E. Griffin, Esq. and Mark J. DiStefano, Esq. Defendant is represented by James H. Kallianis, Jr., Esq. and Antonin I..Z. Robbason, Esq. Following the hearing, the parties filed proposed findings of fact and several memoranda of law.

In this and the related State v. Peerless case, the State seeks reimbursement for funds spent by the State from the Petroleum Cleanup Fund to clean up petroleum contamination in East Clarendon, Vermont. The State alleges that the pet roleum at a single site came from facilities on two neighboring properties, one an auto dealership operated by C.H. Jorgensen, A Corporation, and the other a general store. In this case, the S tate seeks reimbursement in relation to the Jorgensen property, and in State v. Peerless , the State seeks reimbursement in relation to the general store property. In this case, the State ha s sued the insurer directly, and claims that insurance policies issued in relation to the Jorgen sen property provide coverage, whereas the insurer, Universal Underwriters Insurance Company ( Universal), claims that no coverage is available for a variety of reasons discussed below.2 Findings of Fact The factual history concerning discovery of contam ination at the site and remediation

efforts is set forth below. The issues between the parties involve the specific provisions of insurance policies and their application to the fac ts.

In June of 1990, the State Agency of Natural Resou rces received a report of contaminated wells in East Clarendon. Its Department of Environ mental Conservation (DEC) undertook an inspection and confirmed contamination by petroleum of drinking water wells in the area. DEC personnel suspected that the petroleum releases wer e coming from one or both of two adjoining properties, one owned by Clarence and Marilyn Jorge nsen on which a Honda dealership was operated, and the other owned by Judith Webster on which the East Clarendon General Store was operated. It determined that there was one undergr ound storage tank on the Jorgensen property and two on the Webster property. On July 9, 1990, it sent to C. H. Jorgensen, Jr. and Judith Webster letters identifying them as potentially res ponsible parties, and asking them to investigate and respond. DEC informed them that if they did no t comply, it would perform the work and seek reimbursement from them. On July 19, 1990, a letter was sent by Clarence Jorgensen on behalf of C.H. Jorgensen, A Corporation, stating th at the corporation declined to voluntarily perform the mitigation and site assessment efforts that DEC had identified.

Beginning in the fall of 1990, DEC undertook the i nvestigation and cleanup, and employed contractors for much of the work. On May 1 , 1991, Robert Haslam, who was the DEC project manager, conducted an inspection at the Jor gensen property. With the help of contract workers, he removed the asphalt and soil over the 1 000 gallon underground storage tank, exposing the upper 6" of the tank. He did not find a leak. He examined the space between the double walls of the underground storage tank, and f ound no petroleum, which indicated that

there was no leak between the inner and outer walls of the tank. There was no leak in the underground piping that was exposed by the excavati on. Another test conducted through the fill port revealed that the tank itself was sound.

He then investigated the dispenser, which was loca ted above ground at one end of the tank, and partially off to the side of it. The dis penser sat on top of a 4" thick concrete pad which was resting on the ground. A pipe ran from the top of the underground tank straight up to a union with another pipe (still underground) that ra n horizontally to a point below the dispenser, where it connected (still underground) to another p ipe that ran vertically straight up through a hole in the concrete pad to the dispenser above. M r. Haslam first removed the soil to a point as close as possible to the concrete pad, exposing the vertical pipe leading out of the tank and a portion of the horizontal pipe, and found no leak. He did not remove the soil under the concrete pad, and therefore did not expose a portion of the horizontal pipe or the vertical pipe that emerged from the ground through the concrete pad in to the above ground dispenser.

Mr. Haslam then went to the top of the dispenser i tself, which was above ground, sitting on the concrete pad, and opened the cover plate. W hen he looked down into the dispenser, he saw gas leaking at a union of pipes located approxi mately 8-10" above the top of the concrete pad. The vertical pipe coming from below ground an d through the concrete pad was joined to3

another pipe at this location, approximately 12" or more above the ground. Gas was dripping off the pipe union and running down through the hole in the concrete pad into the ground. The drip was immediately observable and steady. He then co llected a sample from the nearest monitoring well in the area with a bailer, and disc overed a 26" thickness of pure gasoline.

Charles Schwer was the Chief of the Sites Section of DEC, and was the person who authorized expenditures from the Petroleum Cleanup Fund (PCF). The PCF was established by statute for the purpose of providing funds for the cleanup of releases from underground storage tanks and compensating third parties for damages fr om releases. At the time pertinent to this case, the PCF could only be used in relation to rel eases from underground storage tanks. (In 1998, eligibility was expanded to include above gro und storage tanks.) Mr. Schwer was not clear whether the pipe union where the leak was dis covered should be treated as part of an underground storage tank or not, since it was locat ed above ground in a dispenser attached to an underground storage tank. There is a definition of underground storage tank in the PCF “Procedures” guidelines, but it did not help him de termine eligibility for use of PCF funds. He authorized the expenditures from the PCF nonetheles s, in order to avoid delay in dealing with a

serious level of contamination at the site.

10 V.S.A. Chapter 59 is entitled “Underground Liqu id Storage Tanks.” It includes two statutory sections pertinent to this case, each loc ated in a different Subchapter. 10 V.S.A. §1921

et seq. authorizes standards and criteria for regulating u nderground storage tanks for the purpose

of preventing ground and surface water contamination. 10 V.S.A. §1941 establishes the PCF for the purpose of cleaning up and restoring soils contaminated by releases from underground storage tanks. ANR has issued regulations pertinen t to its preventative regulatory function with respect to underground storage tanks. These regula tions are administered by a different department in the agency than the Sites Section, wh ich is the one that is responsible for cleanup of sites using PCF funds. With respect to the regu lation of underground storage tanks, both the statute and the regulations define “underground sto rage tank” as follows:

any one or combination of tanks, including undergro und pipes connected to it or

them, which is or has been used to contain an accum ulation of regulated substances, and the volume of which, including the volume of the underground pipes connected to it or them, is 10 percent or mor e beneath the surface of the ground.

10 V.S.A. §1922(10); Underground Liquid Storage Ta nk Regulations 8-201(31). The regulations define “facility” or “storage facility” as “one or more underground storage tanks, including any associated pipelines, fixtures, or ot her equipment.” UST Regs. 8-201(11).

Between October 15, 1990 and May 21, 2002, ANR pai d for investigation and cleanup expenses at the Jorgensen site from the PCF. The s tatute authorizes PCF expenditures for remediation expenses as well as for property damage to third parties, and both types of expenditures were made. For remediation, $900,000- 1,000,000 was spent, and approximately $260,000 was spent for damage to third parties, pri marily related to private water supplies. The4

cleanup continued, and in May of 1997, the cleanup had progressed sufficiently that the remedial system was decommissioned. The equivalent of more than 1000 gallons of petroleum product was recovered from the site. Ongoing monitoring wi ll continue for approximately 10 more

years.

The Jorgensen property is owned by Clarence and Ma rilyn Jorgensen. A corporation entitled C. H. Jorgensen, A Corporation, was the en tity that operated an auto dealership on the property. The corporation had purchased general co mmercial general liability policies from Universal every year since 1982, and Mr. and Mrs. J orgensen, as well as the corporation, were named insureds. Prior to 1984, the State Departmen t of Banking and Insurance (DBI) did not permit insurers to issue liability policies that ex cluded pollution coverage. Although Universal’s standard form policy contained such an exclusion, i n Vermont that exclusion was required by DBI to be deleted in order to implement compliance with the requirement that pollution coverage be included. It was provided on an “occurrence” ba sis.

In 1984, the insurance industry approached DBI wit h new proposals, and after negotiations, changes were allowed. From then on, insurers were permitted to issue standard form policies that excluded pollution coverage, but with a State Amendatory Part required in Vermont that built pollution coverage back into the policy on a “claims made,” rather than an

“occurrence,” basis. In addition, DBI allowed insu rers to negotiate with commercial insureds to exclude pollution coverage from their commercial co verage, as long as “individual risk filing” procedures were followed, which required documents clarifying the exclusion, signed by the business owner, to be filed and approved. DBI requ ired insurers to offer these business clients the option of purchasing separate policies for poll ution coverage. An individual risk filing was not needed to exclude pollution coverage from a com mercial umbrella policy if a pollution liability policy on the excluded risk was purchased by the insured. The Department did not, however, permit individual risk filings or exclusio n of pollution coverage with respect to personal lines of insurance.

For the policy year beginning February 1, 1990, wh ich is the year pertinent to this case, Universal issued two separate policies in relation to the Jorgensen property, providing for different kinds of coverage as follows:

Unicover policy: This was a multiple coverage insurance policy. I t covered C.H. Jorgensen, A Corporation, with garage and operation s coverage in the amount of $300,000. It also covered the corporation with commercial umbrel la coverage in the amount of $3,000,000. With respect to the commercial umbrella coverage, a n individual rate filing to exclude pollution coverage was signed on February 1, 1990, on behalf of C.H. Jorgensen, A Corporation, by its President, C.H. Jorgensen. The corporation purchas ed a separate Pollution Liability policy (see below). An individual risk filing was not actually required, since a concurrent pollution liability policy was purchased on the same risk. In any even t, pollution coverage was excluded from the commercial umbrella coverage. This Unicover policy also covered Mr. and Mrs. Jorgensen as named insureds with personal umbrella coverage in t he amount of $1,000,000. Although exclusion (h) in the policy states that pollution c overage is excluded, the Vermont Amendatory5

Part amends the personal umbrella coverage to remov e exclusion (h): “PERSONAL UMBRELLA Coverage Part 970 is amended to remove EXC LUSION (h).” (Plaintiff’s A, page 50.)

Pollution Liability policy : This was a separate policy that provided $1,000, 000 of coverage to the corporation and to Clarence H. and Marilyn Jorgensen for cleanup costs because of environmental damages caused by a pollution inci dent. Under exclusion (j) of this policy, coverage was excluded for “INJURY or ENVIRONMENTAL DAMAGE eminating (sic) from any underground storage facility.” The policy does not include a definition of this term.

C.H. Jorgensen, A Corporation, made a claim agains t Universal with respect to the release of petroleum on the property. On September 30, 1992, Universal wrote to the corporation that there was no coverage because of t he absolute pollution exclusion under the Unicover policy, and lack of coverage in the Pollut ion Liability policy “for this type of loss which deals with Underground Storage Tanks.” The S tate filed this suit on September 30, 1998. The State claims coverage under the Pollution Liabi lity policy through the corporation and Mr. and Mrs. Jorgensen, and under the personal umbrella portion of the Unicover policy through Mr. and Mrs. Jorgensen. Universal claims that with res pect to the Pollution Liability policy, the exclusion for underground storage facilities bars c overage. It further claims that there is no coverage under the Unicover policy because of the p ollution exclusion, and that to the extent coverage is claimed through Mr. and Mrs. Jorgensen on the personal umbrella coverage, the “business pursuits” exclusion bars coverage.

Conclusions of Law

1. Responsible parties.

Clarence and Marilyn Jorgensen, as owners, and C.H . Jorgensen, A Corporation, as operator, are all parties responsible for abating r elease of petroleum on the Jorgensen property, and for costs of investigation, removal and remedia l actions incurred by the state which are necessary to protect the public health and the envi ronment. 10 V.S.A. §6615(a).

2. Basis for liability.

The State is authorized by statute to seek reimbur sement of PCF cleanup expenditures when there is insurance coverage. 10 V.S.A. §1941( f). ANR v. U.S. Fire Ins. Co. , 173 Vt. 302

(2001).

3. Pollution Liability policy. Under the Pollution Liability policy, there is cov erage for the damages and pollution cleanup expenditures incurred by the State unless t he exclusion for underground storage facilities6

applies. Once a plaintiff has shown eligibility fo r insurance coverage, the defendant has the burden to prove that an exclusion applies. Id. ; see City of Burlington v. Assoc. Elec. & Gas Ins.

Servs. , 170 Vt. 358, 364 (2000). Therefore, it is Univer sal’s burden to show that the exclusion bars coverage.

Under exclusion (j) of the policy:

This insurance does not apply to INJURY or ENVIRONMENTAL DAMAGE eminating from any underground storage facility owned by, rented, leased or in the care, custody or control of any INSURED.

There is no definition of “underground storage fac ility” in the policy itself, so ordinary contract principles applicable to the construction of insurance policies are the frame of reference for applying this provision to the facts of the cas e. The purpose of the policy was to provide protection against the risk of pollution injury or damage, except for that “eminating (sic) from any underground storage facility,” and the terms mu st therefore be interpreted in light of that purpose, “with limitations and exclusions strictly construed.” City of Burlington v. Glens Falls Insurance Company , 133 Vt. 423 at 424 (1975). The effect of the ex clusion should be interpreted “in accord with the reasonable expectat ions” of the insured. Cooperative Fire Insurance Association of Vermont v. White Caps, Inc

. , 166 Vt. 355, 360 (1997).

The fundamental distinction between an underground storage facility and an above ground storage facility is whether or not it is bur ied in the ground. An underground storage facility is not capable of being monitored and main tained to the same extent as a comparable above ground facility. It makes sense that leaks f rom tanks buried beneath ground level represent a higher risk for insurers than those tha t can be more easily inspected and maintained, and that this difference reasonably justifies exclu ding them from a policy with a rate structure designed for above ground facilities. The fact th at the policy uses the phrase “underground storage facilities” is consistent with the use of t his distinction, since it is not only the tank itse lf, but also associated buried piping that is incapable of being seen and thereby represents undetectable risk. Hence, the exclusion applies no t only to the tank itself, but to its related appurtenances that are also underground. The word “facility” accomplishes this purpose, as it

makes clear that the exclusion is not limited to th e tank, but anything related to it that is also

buried.

The exclusion would therefore bar coverage for a r elease emanating from any of the pipes leading from the tank to the dispenser on the Jorge nsen property, to the extent that they were in the ground. This would include the first vertical p ipe leading out of the tank, the horizontal pipe still underground, and that portion of the next ver tical pipe located below the concrete pad. It does not make sense to apply the exclusion to a lea k in a dispenser that is located 12" above ground at a place where it is capable of being main tained and monitored. The leak occurred at a location clearly above ground, three pipe unions aw ay from the tank. The risk associated with

this location is no different than the risk from a leak at a comparable place in an above ground7

storage facility. In applying the exclusion in acc ordance with the “reasonable expectations” of

the insured, id ., an insured would reasonably expect that environm ental damage and injury emanating from a location below ground would be exc luded from coverage, whereas environmental damage and injury emanating from a lo cation above ground would not be

excluded.

Universal asks the court to use the definition in the underground storage tank regulatory statute and related regulations in interpreting the meaning of the term “underground storage facilities” in the policy exclusion. Neither exclu sion (j) nor any other term of the policy includes any reference to state statutes or regulations. Th erefore, there is no indication that it was the intent of either party to incorporate such definiti ons into the policy to set standards for purposes of interpreting exclusion (j).

Even if these definitions are used, however, they do not help Universal meet its burden of proof. The definition of “underground storage tank ” is as follows:

. . .any one or combination of tanks, including un derground pipes connected to it or them, which is or has been used to contain an accumulation of regulated substances, and the vo lume of which, including the volume of the underground pipes conne cted to it or them, is 10 percent or more beneath the surface of the ground.

10 V.S.A. §1922(10); UST Regulations §8-201(31). “ Facility” or “storage facility” is defined by regulation as “one or more underground storage tank s, including any associated pipelines, fixtures, or other equipment.” UST Regs. 8-201(11) . Therefore, to the extent pipes related to an underground storage tank are included, they are des cribed under the statutory definition as “underground.” It is arguable that the word “unde rground” in the definition of “facility” in Regulation 8-201(11) modifies all nouns in the rema inder of the sentence and not just “tanks,” and that the meaning of the exclusion is therefore ambiguous. The most reasonable interpretation of the provision is that it applies to tanks, pipes, and equipment to the extent they are underground. That is the reason that these ite ms are subject to regulation. The characteristic that distinguishes underground devices that contain regulated substances from above ground devices for the same purpose is that they are locat ed beneath the ground, and are therefore unavailable for monitoring. Regulated substances c an leak out of them and go directly into the ground without detection. They thereby represent a heightened hazard to public health and the environment, as they have the potential to cause a much greater degree of damage before the problem is discovered than do comparable devices ab ove ground.

Universal argues that Mr. Schwer’s authorization o f payments from the PCF to remediate the Jorgensen release site necessarily mandates app lying exclusion (j) to bar coverage, since DEC itself treated the release as coming from an un derground source. Mr. Schwer, a DEC site supervisor and not an expert in interpreting insura nce policy terms, made a practical decision in 1990 concerning PCF eligibility when he could find no clear guidance and was faced with a seriously contaminated site. This decision cannot be the basis for a legal decision construing a8

private insurance agreement between Universal and i ts insured, a contract to which the State was never a party. It is the court’s responsibility to construe the exclusion using principles of insurance policy interpretation developed in the la w. Mr. Schwer’s decision on PCF eligibility has very little value for that purpose, and is cert ainly not binding as to its effect in determining insurance coverage.

To the extent there is ambiguity in exclusion (j) at least as it relates to the facts of this case, the court resolves that ambiguity by interpre ting the exclusion as inapplicable where the leak was in piping in the dispenser apparatus, abov e ground, three pipe unions away from the tank. This interpretation uses the clear distincti on of above ground/below ground, or buried/unburied, as the standard for deciding wheth er piping related to an underground storage tank is excluded from a policy that is designed to exclude from coverage devices in which regulated substances are stored beneath the ground. It incorporates a principle that is sound as to

risk allocation, since it is based on the essential characteristic of underground tanks: that releases can occur without detection due to the practical in ability to monitor the facility for integrity, resulting in a greater degree of contamination than is likely to result from above ground tanks.

In sum, the court concludes that Universal has not sustained its burden to show that exclusion (j) bars coverage for the injury and dama ge resulting from the release from the pipe joint located 12" above ground within the dispenser . Therefore, there is insurance coverage under the Pollution Liability policy in the amount of $1,000,000 less retention.

4. Unicover policy.

The State’s expenditures fall within coverage unde r the policy terms, unless a pollution exclusion applies. It is Universal’s burden to sho w that the exclusion bars coverage. See City of Burlington v. Assoc. Elec. & Gas Ins. Servs. , 170 Vt. 358, 364 (2000).

The policy is actually a collection of three polic ies (garage and operations; commercial umbrella, and personal umbrella) under the terms of the policy language:

[E]ach Coverage Part is made up of its provisions, plus those of the State Amendatory Part (if any), the Ge neral Conditions, and that portion of the declarations re ferring to the coverage Part, including all endorsements made appl icable to that Coverage Part. Each Coverage Part so constituted b ecomes a separate contract of insurance.

Plaintiff’s Exhibit A (Unicover policy) at 13. Universal has met its burden to show that pollutio n coverage was excluded from the policy as to the corporation, as there was both a s eparate pollution policy and an individual risk filing excluding coverage. The State does not disp ute this conclusion.9

As to the personal umbrella coverage for the insur eds Mr. and Mrs. Jorgensen, however, neither of the individuals signed a consent to rate application. Universal’s argument that Mr. Jorgensen’s signature alone, given on behalf of the corporation, was sufficient to make the individual risk filing effective as to all insureds ignores the fundamental distinction between a signature given on behalf of a corporation and one given as an individual. Mr. Jorgensen simply did not sign in his individual capacity, and no one signed for Mrs. Jorgensen. More significantly, the individual risk filing was not authorized on pe rsonal lines of insurance, and therefore could not lawfully be effective. 8 V.S.A. §3541(a). Con sequently, the State Amendatory Part that removed exclusion (h) from personal umbrella covera ge applied to eliminate the pollution exclusion as to Mr. and Mrs. Jorgensen.

Universal argues that the State’s original claim i n this case did not specify that it was seeking coverage through Mr. and Mrs. Jorgensen on the personal umbrella coverage. It is clear from Judge Cheever’s decision on the cross motions for summary judgment, entered July 24, 2002, that the State was making such a claim at tha t time. Discovery continued after that date, and Universal never objected to the State making su ch a claim in the case. Universal cannot show prejudice. This theory of the claim will be t reated as if part of the original pleadings. V.R.C.P. 15(b).

Universal argues that an exclusion for “business p ursuits,” exclusion (i), bars coverage as to the individuals Mr. and Mrs. Jorgensen. This ar gument was raised for the first time in posthearing argument. There is insufficient evidence i n the record to support this defense. While facts are referred to in Universal’s memo argument on this issue, those facts were not admitted into evidence, and the court is not in a position t o make findings of fact on the predicate facts that would support this defense. In addition, Univ ersal waived this defense by not raising it either at the time of declining coverage, or in its answer to the complaint in this action. Middlebrook v. Banker’s Life and Casualty Co. , 126 Vt. 432 (1967); Armstrong v. Hanover Ins.

Co ., 130 Vt. 182 (1972).

Universal has not met its burden to show that the pollution exclusion applies under the personal umbrella policy covering Mr. and Mrs. Jorg ensen. Therefore, the court concludes that there is insurance coverage through the insureds Mr . and Mrs. Jorgensen under the Personal Umbrella portion of the Unicover policy in the amou nt of $1,000,000 less retention.10 Order

For the foregoing reasons, Plaintiff has establish ed liability as set forth above. The case will be scheduled for a hearing on damages which wi ll be consolidated with the damages portion, if any, of State v. Peerless , Docket No. 681-12-01 Wncv.

Dated at Montpelier, Vermont this ____ day of Augu st, 2003.

________________________________ Mary Miles Teachout Superior Judge