Opinion ID: 1992368
Heading Depth: 2
Heading Rank: 2

Heading: Damages because of property damage.

Text: The pertinent language in the policies all sums which the insured shall become legally obligated to pay as damages because of ... property damageclearly requires that damages must occur because of property damage. The policies here define property damage in identical or substantially similar language: Property damage means injury to, loss of use of or destruction of tangible property. A number of cases that have considered the question have held that contamination of the environment constitutes property damage as that term is used in the CGL policies. [7] In addition many courts recognize that the improper release of toxic wastes may cause property damage not only to the actual owner of the land, but also to the government. The government, these courts point out, has an interest independent of and behind the titles of its citizens in all the air and earth (that is, its natural resources) within [its] domain. [8] Response or cleanup costs are essentially compensatory damages for injury to [government] property. United States Fidelity & Guar. Co. v. Thomas Solvent Co., 683 F.Supp. 1139, 1168 (W.D.Mich. 1988); Specialty Coatings Co., 180 Ill. App.3d at 392, 129 Ill.Dec. at 315, 535 N.E.2d at 1080. In other words, the damages to natural resources is simply measured in the cost to restore them to their original state. Ohio v. United States Dep't of the Interior, 880 F.2d 432, 441-45, 459 (D.C.Cir.) (holding that cost of restoration is the proper measure of damages under CERCLA, even if greater than the diminution in value of the damaged property), reh'g denied, 897 F.2d 1151 (D.C.Cir. 1989); Aerojet-General Corp., 211 Cal. App.3d at 231, 257 Cal.Rptr. at 630; United States Aviex Co., 125 Mich.App. at 589, 336 N.W.2d at 843; Waste Management of Carolinas, Inc. v. Peerless, Ins. Co., 72 N.C.App. 80, 93, 323 S.E.2d 726, 735 (1984), rev'd on other grounds, 315 N.C. 688, 340 S.E.2d 374, reh'g denied, 316 N.C. 386, 346 S.E.2d 134 (1986). This court has likewise allowed reasonable costs of restoration of property, including cleanup costs. See, e.g., Conrad v. Board of Supervisors, 199 N.W.2d 139, 142 (Iowa 1972). In Conrad, farm owners sued the county for polluting their farm pond. Lignin sulfite, which the county had used on a crushed rock road to reduce the loss of rock and hold down the dust, had found its way to the pond after heavy rains. This court held that the plaintiffs were entitled to recover the reasonable and necessary costs to restore the pond to its previous condition. Id. at 142. The reasonable cost to restore property to its status quo is but one proper measure of damage to property which is harmed because of pollution. Another proper measure is the difference between the market value of the property before contamination and the market value after contamination. Mel Foster Co. Properties, Inc. v. American Oil Co., 427 N.W.2d 171, 174 (Iowa 1988) (owner of property which was contaminated by leakage of gasoline brought nuisance action against owners of sources). This measure of damages is analogous to one codified at 42 U.S.C. § 9607(c) which is used when the EPA sues for damages for injury to, destruction of, or loss of natural resources. 42 U.S.C. § 9607(a)(4)(C). Case law has generally held that damages in the CGL policy includes costs of preventive measures taken to prevent or halt continuing damages. See, e.g., American Economy Ins. Co. v. Commons, 26 Or.App. 153, 156, 552 P.2d 612, 613 (1976); Globe Indem. Co. v. People, 43 Cal.App.3d 745, 751-52, 118 Cal.Rptr. 75, 79-80 (1974). In Commons, a fire that broke out on the insured's property subsequently spread to adjacent property. The State put out the fire and sought to recover its fire suppression costs from the insureds. The court noted that [t]he policy does not limit coverage to property damage but instead covers damages because of property damage. This latter language is broader and more inclusive than the former. Because the fire spread to forest land on the corporate farm, the state entered and fought the fire. The liability of the property owners, the insureds, for the suppression costs arose because the state fought the fire, and the state did so because there was property damage. It follows that the insurers are liable for the suppression costs since the insureds' liability arose because of the state's action. Commons, 26 Or.App. at 156-57, 552 P.2d at 613. There are limitations. For example, [p]reventive measures taken to prevent property damage from occurring at some point in the future, in the absence of past or current property damage, are the obligation of the insured as part of its cost of doing business; preventive measures taken in response to continuing property damage that was unexpected and unintended are within the coverage provided by the policy. Chesler, Rodburg & Smith, Patterns of Judicial Interpretation of Insurance Coverage for Hazardous Waste Site Liability, 18 Rutgers L.J. 9, 67 (1986-87). Courts have applied the preventive measures principle in pollution cases. See, e.g., Broadwell Realty Servs., Inc., 218 N.J.Super. at 516, 528 A.2d at 76. In Broadwell, the insured's underground tank seeped gasoline into adjacent properties. The insurer argued that the property owned exclusion foreclosed coverage for work done on the insured's own property to prevent continued seepage onto the property of third parties. The court rejected the insurer's argument, concluding that the policy covered costs for work done on the property owned by the insured to prevent further gasoline seepage on to the property of others. Id. at 528, 528 A.2d at 82. It is not surprising that recent pollution cases have placed limitations on the preventive measures principle. Property damage must occur before response or cleanup costs are covered. Costs incurred to pay for preventive measures taken in advance of pollution are not damages because of property damage. But costs for preventive measures taken after such pollution are damages because of property damage and so are covered. See AIU Ins. Co., 51 Cal.3d at 842, 799 P.2d at 1279, 274 Cal.Rptr. at 846; Aerojet-General Corp., 211 Cal.App.3d at 237, 257 Cal.Rptr. at 635; Minnesota Mining, 457 N.W.2d at 184; Boeing Co., 113 Wash.2d at 887, 784 P.2d at 515-16. The following hypothetical taken from Aerojet-General Corp., illustrates the limitations: Petitioners have two underground storage tanks for toxic waste. Tank # 1 has leaked wastes into the soil which have migrated to the groundwater or otherwise polluted the environment. Tank # 2 has not leaked, but government inspectors discover that it does not comply with regulatory requirements, and could eventually leak unless corrective measures are taken. Response costs associated with Tank # 1 will be covered as damages, because pollution has occurred. Tank # 2 would not be covered. Likewise, the expense of capital improvements to prevent pollution in an area of a facility where there is none, or improvements or safety paraphernalia required by government regulation and not causally related to property damage, would not be covered as damages. 211 Cal.App.3d at 237-38, 257 Cal.Rptr. at 635. We too think the government's interest in protecting its natural resources is a form of property right. We hold that any injury to the environment resulting from contamination by hazardous waste constitutes property damage within the meaning of the CGL policies. We further hold that any injury to the environment resulting from contamination is incurred because of property damage and represents the measure of damages to the property. This is true whether such costs are incurred on property owned by the insured, the state or federal government, or third parties. We reach this last conclusion because the coverage provision before us does not specify that coverage depends on the nature or location of property damage. We construe such provision to include damages because of property damage in general, regardless of by whom it is suffered. Cf. Chesapeake Utils. Corp. v. American Home Assurance Co., 704 F.Supp. 551, 556 (D.Del.1989) (reaching same conclusion under facts similar to those here); AIU Ins. Co., 51 Cal.3d at 843, 799 P.2d at 1279, 274 Cal.Rptr. at 846 (same). In addition we hold that response costs for preventive measures employed after pollution has taken place are incurred because of property damage under the CGL policies. However, costs incurred to pay for preventive measures taken in advance of pollution are not incurred because of property damage. We think the recordthough sparseis sufficient to raise a genuine issue of material fact concerning damage to the environment resulting from A.Y. McDonald's past practices. As we noted, lead is a hazardous substance under the pertinent regulations. It has been contaminating the foundry site for over thirty years. We think, however, the record is not sufficient for us to determine whether the remedial measures required by the EPA decision and the consent decree were and will be necessary because of property damage. So we cannot precisely say which costs in connection with those measures are covered as damages. Undoubtedly, some part of those costs may be covered because they constitute legally compelled expenses for the cleanup of existing pollution. The EPA decision and the consent decree may, however, require expenditures to prevent future pollution that has not yet occurred, or to prevent pollution from a source that has not yet caused pollution. These costs would not be causally related to property damage and so would not be covered as damages under the policies. Cf. Aerojet-General Corp., 211 Cal.App.3d at 237, 257 Cal.Rptr. at 634-35 (reaching same conclusion in similar circumstances). In summary, we think the record is sufficient to generate a material fact question concerning coverage under the insuring language: all sums which the insured shall become legally obligated to pay as damages because of ... property damage. A.Y. McDonald has polluted the environment by contaminating the soil, a natural resource that constitutes government property. This pollution is injury or damage to such property. Because of this property damage, A.Y. McDonald is legally obligated to clean up the pollution and to prevent further damage. In doing so, A.Y. McDonald has, and will, incur response costs. These costs are compensation for an injury sustained. Or, in the words of the policy, they are damages. These response costs are not, as the defendants and some amici claim, economic costs or costs of doing business to comply with some governmental regulation like OSHA's. Costs resulting from compliance with governmental safety regulations are not incurred because of property damage. Rather they are incurred to insure safety. As we said, preventive measures are not covered under the CGL policies in the absence of property damage. See Minnesota Mining, 457 N.W.2d at 184. Nor do we see our interpretation of the term damages as rendering that term superfluous in the CGL policies. This argument, as espoused in NEPACCO and Armco, ignores our holding that only damages incurred because of property damage are covered. When read as a whole, the language of the policy ... indicates that sums which the insured becomes legally obligated to pay are not covered unless related to `property damage caused by an occurrence.' Minnesota Mining, 457 N.W.2d at 180 n. 4. In addition, we are not impressed by the hypertechnical distinction between legal and equitable forms of relief made in NEPACCO and Armco. Although purporting to rely on cases holding that injunctive costs are not damages under the CGL policies, we note neither case mentioned Doyle v. Allstate Insurance Co., 1 N.Y.2d 439, 136 N.E.2d 484, 154 N.Y.S.2d 10 (1956). In Doyle the insured who was covered by a CGL policy sued his insurer for costs of successfully defending an injunction suit against the insured. The insurer refused to defend the insured in the suit which was instituted by a neighbor to enjoin the insured from operating a dog kennel on the insured's property. Holding for the insured, the court recognized that if the insured proved he was entitled to equitable relief, equity could grant damages in addition to or as an incident of some other special equitable relief. Doyle, 1 N.Y.2d at 443, 136 N.E.2d at 486, 154 N.Y.S.2d at 13. Had damages been awarded in the injunction action, the court concluded the insurer would have been obligated to pay. Id. at 443, 136 N.E.2d at 487, 154 N.Y.S.2d at 13. In so holding, the court said: [T]here can be no doubt that the insurer here undertook (1) to pay on behalf of the insured all sums which the insured became legally obligated to pay as damages by reason of his operating a kennel for dogs, and (2) to defend any suit in which the insured might be legally obligated to pay damages by reason of his operating a kennel for dogs. The policy does not draw any distinction between damages awarded by a court of law and those awarded by a court of equity. The insured was justified in expecting that if suit was instituted against him wherein he might be legally obligated to pay a sum of money as damages because of his operating a dog kennel, the insurer would defend. Id. at 443, 136 N.E.2d at 487, 154 N.Y.S.2d at 14; see also Johnson v. Carter, 143 Iowa 95, 100, 120 N.W. 320, 322 (1909) (where equity has obtained jurisdiction, and one of the parties has applied for specific relief found impossible or impracticable, the court will give damages or decree other proper relief). Our conclusion that CERCLA response costs are a measure of environmental damage renders minor any distinction between equitable and legal damages. The EPA could have cleaned up the site and sued A.Y. McDonald for its response costs. In these circumstances there would have been a clear duty under the policies to pay. See United States Aviex Co., 125 Mich.App. at 589, 336 N.W.2d at 843. From the insured's standpoint it also makes little difference. Whether the damages are legal or equitable, the insured still has to pay. Finally, we reject any notion that there is any significance in the fact that CERCLA makes a distinction between harm to natural resources and response costs. As one court noted, [h]owever damages and response costs are measured, we do not believe ... that CERCLA intended that reimbursement of response costs be treated as definitionally or conceptually distinct from recovery of damages. Congress clearly intended considerable overlap between the two forms of recovery. It is clear that response costs can, in certain situations, be recovered as damages to natural resources .... Seen in this light, whether recovery of remedial costs is sought under the response cost subdivision or that allowing recovery for damages to natural resources, it can be construed to fall within the scope of the insurance policies at issue here. Moreover, we fail to see how the distinction made by CERCLA between response costs and damages to natural resources forecloses response costs from being characterized as damages in a generic sense under CGL policies. More significantly, our ultimate conclusion as to whether reimbursement of response costs is damages for insurance purposes is ... predominantly a question of how, under state law, insurance policies should be interpreted. AIU Ins. Co., 51 Cal.3d at 830-31, 799 P.2d at 1270-71, 274 Cal.Rptr. at 837-38 (citations omitted).