Opinion ID: 691337
Heading Depth: 2
Heading Rank: 2

Heading: Environmental clean-up costs mandated by the EPA constitute damages.

Text: 22 We now turn to the issue of whether environmental response and clean-up costs mandated by the EPA are damages within the meaning of the insurance contract, thereby triggering Travelers' duty to indemnify. Travelers notes that these costs are equitable in nature. Likewise, Travelers contends that the word damages is clear and unambiguous, and that it refers to legal and not equitable relief. Hence, Travelers maintains that the district court correctly held that the term damages does not contemplate the relief sought here. 23 Contrary to Travelers' contention, the issue of whether response and clean-up costs mandated by an environmental regulatory agency are damages is far from clear and has been the subject of extensive nationwide litigation. See Maryland Casualty Co. v. Wausau Chem. Corp., 809 F.Supp. 680, 690-91 (W.D.Wis.1992)(compiling conflicting cases). For example, two circuit courts of appeals cases have reached contrary conclusions interpreting the same state law. Compare Continental Ins. Cos. v. Northeastern Pharmaceutical & Chem. Co., 842 F.2d 977 (8th Cir.) (denying recovery under Missouri law, concluding that damages refers only to compensatory relief which does not include clean-up costs), cert. denied, 488 U.S. 821, 109 S.Ct. 66, 102 L.Ed.2d 43 (1988), with Independent Petrochemical Corp. v. Aetna Casualty and Sur. Co., 944 F.2d 940, 946-47 (D.C.Cir.1991)(granting recovery to insured under Missouri law, concluding that the lay insured would not distinguish between legal and equitable relief when construing 'damages.' ), cert. denied, 503 U.S. 1011, 112 S.Ct. 1777, 118 L.Ed.2d 435 (1992). The Michigan Supreme Court, however, has yet to address the issue. Nevertheless, ADC contends that, based on Michigan appellate caselaw directly on point, the district court erred in finding the as damages provision inapplicable. 24 In United States Aviex Co. v. Travelers Ins. Co., 125 Mich.App. 579, 336 N.W.2d 838 (1983), the Michigan Court of Appeals specifically addressed the question whether environmental clean-up costs constituted damages under the insurance policies at issue. In that case, the Michigan Department of Natural Resources notified the insured that the insured had the obligation to conduct an investigation regarding the extent of on-site contamination and to correct the same. The Department threatened legal action if the insured did not comply. The insured later brought an action against its insurer, Travelers, for a declaratory judgment seeking coverage under the insurance contract for costs incurred in determining and correcting the contamination. 25 As in our case, Travelers attempted to avoid liability on the basis that the costs incurred by the insured were not compensatory in nature, and therefore, were not damages within the meaning of the policy. The Michigan Court of Appeals disagreed. The court explained: 26 [T]he Attorney General is empowered to file a suit to recover the full value of the injuries done to the natural resources of the state.... If the state were to sue in court to recover any traditional damages, including the state's costs incurred in cleaning up the contamination, ... defendant's obligation to defend against the lawsuit and to pay damages would be clear. 27 It is merely fortuitous from the standpoint of either plaintiff or defendant that the state has chosen to have plaintiff remedy the contamination problem, rather than choosing to incur the costs of clean-up itself and then suing plaintiff to recover those costs. 28 Id. 336 N.W.2d at 843 (citations omitted). This position has been generally accepted by other Michigan appellate courts. See Polkow v. Citizens Ins. Co. of America, 180 Mich.App. 651, 447 N.W.2d 853 (1989) (response and clean-up costs with respect to environmental contamination are damages within the meaning of an insurance policy), rev'd on other grounds, 438 Mich. 174, 476 N.W.2d 382 (1991); Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 662 F.Supp. 71, 75 (E.D.Mich.1987) (applying Michigan law) (Damages include money spent to clean up environmental contamination); Upjohn Co. v. New Hampshire Ins. Co., 178 Mich.App. 706, 444 N.W.2d 813, 819 (1989)(holding correction of contamination compensable under insurance policies), rev'd on other grounds, 438 Mich. 197, 476 N.W.2d 392 (1991). 29 We construe these Michigan appellate court cases to hold that response and environmental clean-up costs mandated by the EPA constitute damages. The fact that the insured cooperates and assumes the obligation to conduct the clean-up, rather than forcing the EPA to incur the expenses of a clean-up and then bring a coercive suit, does not change the bottom line that a legal obligation exists. Accordingly, we reverse the district court as to the second issue and hold that, under Michigan law, government imposed environmental clean-up costs constitute damages. 30 C. An owned property exclusion clause does not apply to environmental clean-up costs mandated by the EPA. 31 Travelers, on cross-appeal, contends that the district court erred in failing to enforce the owned property exclusion in the Travelers/ADC insurance contracts. As stated, this exclusion bars coverage for property damage to (1) property owned or occupied by or rented to the insured.... In our case, Travelers notes that the only clean-up mandated by the EPA is for contamination on ADC's own property, specifically the lagoon. Travelers contends, therefore, that since ADC is not obligated to clean up anyone else's property, the owned property exclusion in the parties' contracts excludes this situation from the scope of coverage. 32 ADC contends that the district court properly found that, under Michigan law, the owned property exclusion does not preclude coverage. ADC, again relying on Michigan appellate court authority for support, contends that where the contamination has spread or threatens to spread to adjacent property, to groundwater, or to other natural resources, an owned property exclusion will not bar coverage. Polkow, 447 N.W.2d at 857; Upjohn Co., 444 N.W.2d at 818-20; United States Aviex Co., 336 N.W.2d at 843-44. 33 In Polkow, for example, an insured brought suit against its insurer for soil and groundwater contamination clean-up costs associated with the insured's business operations in hauling and storing waste oil. The insurer argued that any contamination present was limited to the insured's own property and thereby excluded from coverage under its owned property provision. The Polkow court first determined that groundwater is not owned by the property owner, but rather, by the state. Thus, such contamination does not fit within the policy's exclusion. What is significant, however, is that the court went on to announce a broad government interest in preserving the environment: 34 Alternatively, we conclude that the alleged contamination in this case falls outside of the policy exclusion for damage to the insured's own property.... We hold that these allegations are essentially for injury to the public interest in the well-being of the environment and natural resources of this state. 35 Id. It is this strong public interest, the court went on to note, that vests the EPA and other regulatory organizations with the significant authority to compel cooperation, remediation, and enforcement in such matters. Another Michigan Court of Appeals has expressly adopted this broad approach. Upjohn Co., 444 N.W.2d at 819 (We note 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 because of its independent interest, behind the titles of its citizens, in all the air and earth (i.e., its natural resources) within its domain.). Thus, these courts recognized, in environmental contamination clean-up cases, an independent governmental interest that supersedes any owned property exclusion in the policies. 36 In the present case, we decline to adopt Travelers' contention that the contamination poses no threat to the environment. The Record of Decision, incorporated into the consent decree between the EPA and the ADC, states: Actual or threatened releases of hazardous substances from this site, if not addressed by implementing the remedial action selected in this Record of Decision, may present an imminent and substantial endangerment to public health, welfare, or the environment. We accept the determinations of the EPA, as presumably the district court did, and conclude that the Adrian site posed at least a significantly probable threat to the environment. 37 The Michigan Supreme Court could very well rely on the above Michigan appellate court authority to disallow the application of any owned property exclusion. We think, however, that the Michigan Supreme Court might also find somewhat more persuasive the analysis set forth in Patz v. St. Paul Fire & Marine Insurance Co., 15 F.3d 699 (7th Cir.1994), a recent Seventh Circuit Court of Appeals decision. In Patz, insureds sought to recover from their insurers environmental clean-up costs that were incurred because the state ordered the insureds to remedy the soil and groundwater contamination that was, as in our case, exclusively on the insured's property. The Seventh Circuit, Posner, J., rejected the applicability of the owned property exclusion to government mandated response costs, making a critical distinction between casualty insurance and liability insurance. The court concluded that the plaintiffs were not seeking to recover for damage to their property, but rather, they were seeking the cost of liability that the Department of Natural Resources imposed on them. Id. at 705. The court reasoned: 38 [The insureds] are not attempting to obtain an insurance award for a reduction in the value of, or other damage to, their land. How could they? It is a policy of liability insurance, not casualty insurance, on which they have sued. They seek to recover the cost of complying with a government order to clean up a nuisance. The fact that the clean up occurred on their land is irrelevant. For all we know, the damage to the land was much less than the cost of cleaning it up. 39 Id. In essence, the court concluded that the clean-up costs constituted an existing liability to the government rather than a claim for the decrease in the value of the owned property. In doing so, the court determined that ownership of the groundwater and/or contaminated property is irrelevant. The Patz court qualified its holding, however, and warned that the mere desire of an insured to voluntarily reduce potential future liability could very well be barred by the owned property exclusion. The court noted, The owner of an automobile cannot charge the expense of a fancy new braking system to his liability insurer on the ground that the system will make it less likely that he will injure someone in an accident. Id. See also Joslyn Mfg. Co. v. Liberty Mut. Ins. Co., 23 F.3d 1212 (7th Cir.1994)(finding owned property exclusion inapplicable, following the reasoning of Patz). 40 Our ruling is in accordance with that of Patz. Although ADC cooperated voluntarily, it was under a government mandate to conduct the environmental clean-up. Thus, consistent with our prior conclusions that the PRP letter constituted a suit for which ADC has incurred damages, there was indeed liability to a third party--the EPA. 41 Considering the strong uniformity of the Michigan appellate courts, and the persuasive reasoning of the Patz decision, we hold that the owned property exclusion does not bar recovery for ADC's liability. We therefore affirm the district court's determination on this issue. 42 We therefore REVERSE the district court's grant of summary judgment for the Defendant/Appellee, Travelers, AFFIRM the grant of summary judgment on behalf of the Plaintiff/Appellant, ADC, and REMAND to the district court for further proceedings in accordance with this opinion. 43