Coverage Issues Stemming from Dry Cleaner Contamination Suits

In recent years, there has been a growing number of dry cleaners claiming to be “organic,” “green,” or “eco-friendly.” While that may be true with respect to some, many dry cleaners continue to use a cleaning method involving the use of a solvent called perchloroethylene, commonly known as perc. And, there seems to be an increasing number of lawsuits stemming from environmental problems associated with historic dry cleaning operations utilizing this chemical. As a result of past disposal practices and spills of perc, many current and former dry cleaning sites are contaminated. By some estimates, 75% of dry cleaner facilities operated in past decades have caused environmental contamination. Cleanup costs range from tens of thousands of dollars to several million dollars.

Forest Park National Bank & Trust v. Ditchfield, 10 CV 3166 (N.D. Ill. May 21, 2010), presents a typical “dry cleaner contamination” fact pattern. In that case, a bank foreclosed on an Illinois residence, and then filed a lawsuit in federal court against the owners and operators of an adjacent strip mall and its dry cleaning tenant. The bank contends that after acquiring the residence, it learned that perc from the dry cleaner had leached into the soil and groundwater under the residence. Even though the residence is located on a block targeted by the city for a big redevelopment project, the bank claims that it has not been able to sell the property because of the perc contamination. The bank sought compensatory damages in excess of $100,000. Certain defendants filed a third-party complaint against their insurer alleging that it failed to provide defense and indemnity against the underlying suit.

Similarly, in Neal v. Cure, 937 N.E.2d 1227 (Ind. Ct. App. 2010), neighboring property owners brought a lawsuit against a landlord that leased commercial property to a dry cleaning tenant. The plaintiffs, who owned commercial property near the landlord's building, alleged that they were having health problems, and that the value of their property had decreased because of perc in the soil and the air inside their building. The plaintiffs settled with the dry cleaning tenant, and then continued to pursue statutory and common law claims against the landlord. The appellate court affirmed the trial court's grant of summary judgment in favor of the landlord because of the landlord's lack of involvement in or knowledge of the dry cleaner's actions.

In a recent high-profile suit, the Suffolk County Water Authority, which bears responsibility for providing potable drinking water to more than one million residents in Suffolk County, New York, sued various companies involved in the creation of perc and the dry cleaning equipment that used the chemical. The Water Authority claims to have detected perc contamination in more than 150 of its wells, requiring expensive remediation and prevention measures. The Water Authority alleges that the defendants were aware that dry cleaners customarily dumped perc wastewater into public sewer systems or dry wells, and that equipment companies even directed dry cleaners to do it. See Suffolk Co. Water Auth. v. Dow Chem. Co., 30 Misc. 3d 1202(A) (Sup. Ct. Suffolk Co. Dec. 17, 2010).

To date, there are surprisingly few reported coverage decisions concerning whether and to what extent dry cleaner contamination may be covered under a comprehensive general liability policy. But the handful of decisions that do exist provide a good framework for discussing key issues that often arise when coverage is sought for dry cleaner contamination.

Lost Policies

Because the release of perc often took place decades ago, many policyholders no longer have their policies from that time frame. For example, in the Forest Park and Neal cases, the contamination purportedly began in the 1970s and 1980s, respectively. If the dry cleaner defendants in those lawsuits had kept their insurance policies, they might now be entitled to defense and indemnity. However, if the dry cleaners did not maintain copies of their old policies, the dry cleaners could find themselves uninsured.

Kleenit, Inc. v. Sentry Insurance Company, 486 F. Supp. 2d 121 (D. Mass. 2007), is illustrative. Kleenit was the owner and operator of a dry cleaning chain. Kleenit sought insurance coverage from Travelers for the environmental remediation of two sites in Massachusetts. Kleenit believed that Travelers provided comprehensive general liability insurance to Kleenit during the period of 1964-1970. However, both the original owner and accountant of the insured business were deceased, the insurance agency that handled most of the insured's policies during the relevant time frame was defunct, and neither Kleenit nor Travelers could locate copies of the policies at issue. Against this backdrop, Travelers moved for summary judgment.

The court held that, under Massachusetts law, Kleenit was required to show by a preponderance of evidence both the existence and contents of the policies. With respect to the policy period of 1964-1967, Kleenit submitted ledger entries reflecting payments to its insurance agent. In addition, an employee who began working at Kleenit in 1967 testified that when he began working at Kleenit, “everything was Travelers.” The court stated that, at best, the ledger entries merely established that Kleenit made payments to its insurance agent for some sort of insurance. The court further noted that even assuming that “the payments were indeed payments of premium to Travelers, the entries say nothing about the type of insurance involved, nor do they establish in any way the terms of the missing policy.” Accordingly, the court granted summary judgment in Travelers' favor for the years 1964-1967.

With respect to the years 1967-1970, Travelers admitted that it found a reference to a comprehensive general liability policy issued to Kleenit during the time period in question. In addition, Kleenit produced ledger sheets reflecting payments to Travelers, and Kleenit's annual reports for 1967 and 1968 contained a summary of Kleenit's insurance coverage, including the limits of coverage. Finally, Kleenit asserted that the terms of the 1967-1970 policy could be inferred from the 1970-1973 policy. The court held that: 1) it could not consider the annual reports because they had not been properly authenticated; 2) while the ledgers reflected payments to Travelers and referenced the same policy number that Travelers had conceded it identified in its own records, the ledger sheets said nothing about the specific material terms of the policies; and 3) there was no evidence in the record to suggest that the 1970-1973 policy was a renewal of the previous policy. In light of the above, the court concluded that Travelers also was entitled to summary judgment with respect to policy years 1967-1970.

As Kleenit demonstrates, if old policies have been discarded, it can be very difficult for a dry cleaner or other insured to prove the terms and conditions of coverage.

Known Loss

As a general rule, liability insurance coverage does not exist for property damage that the insured knows about when the policy is issued. This issue was litigated in Crawfordsville Square, LLC v. Monroe Guaranty Insurance Company, 906 N.E.2d 934 (Ind. Ct. App. 2009). In Crawfordsville, a shopping mall operator purchased a parcel of land adjacent to the mall that contained several businesses, including a dry cleaner. During the due diligence process, the shopping mall operator learned that the soil and water under the parcel were contaminated. The shopping mall operator agreed to proceed to buy the parcel so long as the seller established an escrow account of $44,000 on account of such contamination.

Upon the closing of the transaction, the shopping mall operator added the parcel to its existing general commercial liability insurance policy. Subsequently, the Indiana Department of Environmental Management demanded that the shopping mall operator remediate the site. The shopping mall operator sought coverage from its insurer, which the insurer denied. The court held that under the known loss doctrine, losses which exist at the time of the insuring agreement, or which are so probable or imminent that there is insufficient risk being transferred between the insured and insurer, are not properly subjects of insurance. The court stated that the record in that case clearly indicated that the shopping mall operator had knowledge of actionable contamination. As such, summary judgment was properly granted in favor of the insurer.

Pollution Exclusion

Prior to the early 1970s, commercial general liability policies did not exclude coverage for pollution claims. Between the early 1970s and 1985, however, insurers started adding qualified pollution exclusion clauses in their policies. The qualified pollution exclusion barred pollution claims except where the polluting discharge or release was sudden and accidental. In 1985, most commercial general liability policies began including absolute pollution exclusions barring coverage for even sudden and accidental discharges and releases of contaminants. The effect of pollution exclusion clauses has been litigated in the context of dry cleaner environmental contamination.

In Morrow Corporation v. Harleysville Mutual Insurance Co., 101 F. Supp. 2d 422 (E.D. Va. 2000) (“Morrow I“), a dry cleaner sought defense and indemnity with respect to a lawsuit brought against it by a shopping center operator stemming from the presence of perc. Certain policies contained absolute pollution exclusions, and others contained qualified pollution exclusions excepting sudden and accidental discharges of pollutants. The court easily found that the policies with an absolute pollution exclusion barred coverage. The more difficult question was whether the dry cleaner's discharge of perc was sudden and accidental.

The court in Morrow I held that the phrase “sudden and accidental” means “both unexpected and unintended and quick or abrupt.” The court found that the shopping mall operator's allegations against the dry cleaner were of sufficient breadth to encompass releases that were both sudden and accidental for purposes of assessing whether a duty to defend is owed:

[T]he underlying complaint alleged that “during the operation of the Facility, [the dry cleaner and its employees] spilled or released [perc] and discharged [perc] ' into the environment.” ' [A]llegations employing these terms were sufficient to trigger [the insurer's] duty to defend [the dry cleaner] against the [shopping mall operator's] lawsuit, because “the obligation to defend ' arises whenever the complaint alleges facts and circumstances, some of which, if proved, fall within the risk covered by the policy.”

The court stated that the insurer may ultimately succeed in proving that the contamination arose from “a continuous pattern” of pollution during the coverage period, in which event the insurer would have no duty to indemnify the dry cleaner. However, with respect to the duty to defend, the inquiry is not whether the releases were in fact sudden and accidental, but simply whether the underlying complaint's allegations reasonably encompassed sudden and accidental releases of perc.

Employers Insurance of Wausau v. California Water Service Company, 2008 WL 3916096 (N.D. Cal. 2008), also interpreted a qualified pollution exclusion. The complaints in the underlying suits, which were filed by the California Department of Toxic Substance Control (“DTSC”), alleged that several dry cleaning businesses and property owners released perc into the soil and groundwater beneath the central business district of Chico, CA. The California Water Service Company (“Cal Water”) was named as a defendant in each of the underlying actions. The DTSC alleged that Cal Water's activities of pumping water and operating, monitoring and shutting down of certain wells affecting the Chico city water supply all purportedly contributed to the dispersal of the contamination in the groundwater.

Cal Water sought defense and indemnity from its insurer, which had issued general liability insurance policies to Cal Water. The policies issued between 1972 and 1986 contained a qualified pollution exclusion, which barred coverage arising from the discharge of pollutants except when such discharge is sudden and accidental. The court held that the relevant discharge for coverage purposes was that of third-party dry cleaners and not the subsequent activities of Cal Water which spread the environmental contamination. Cal Water contended that there were sudden and accidental discharges by the dry cleaners, and as such, the exception to the pollution exclusion applied. The court denied the insurer's motion for summary judgment on the duty to defend, holding as follows:

Cal Water appears to acknowledge that many of the discharges by the dry cleaner facilities were made as part of their routine operations. Nevertheless, it points to a number of discharges by two of the dry cleaners ' that may qualify as sudden and accidental. These alleged sudden and accidental releases include five or six spills of [perc] of 3 to 4 gallons each from April 1986 through September 1976 by [one dry cleaner] and 1 to 5 gallon spills once every 5 or so years by [another dry cleaner]. ' Although Cal Water makes no attempt to demonstrate how much, if any, of the environmental damage would have been caused by these spills over and above the routine disposal of [perc] into the water by the dry cleaners, the evidence is enough to defeat summary judgment on the duty to defend.

Finally, in State Farm Fire and Casualty Company v. Walnut Avenue Partners, LLC, 675 S.E.2d 534 (Ga. Ct. App. 2009), a shopping center operator sued a former dry cleaning tenant seeking damages connected with remediating the property. The dry cleaner's insurer sought a declaratory judgment that it was not obligated to provide a defense due to the pollution exclusion in the dry cleaner's umbrella policy. The body of the policy excluded certain specified instances of property damage arising out of the discharge or release of pollutants. One endorsement to the policy narrowed the scope of the pollution exclusion in the body of the policy by exempting from it discharges that are “quick, abrupt and accidental.” Another endorsement broadened the scope of the pollution exclusion in the body of the policy by eliminating any pollution coverage which would have otherwise existed under the policy. The court held that the conflicting endorsements created an ambiguity in the policy, and that, as a result, the trial court did not err in construing the policy to provide coverage for quick, abrupt and accidental discharges of pollutants.

Timing of Accident

With respect to dry cleaner contamination alleged to have taken place decades earlier, the insurance policies that potentially might provide coverage typically are older, occurrence-based policies. Under occurrence policies, so long as the insured can plead and prove that an “accident” occurred during the policy period, coverage may be available. In assessing whether an accident occurred during the policy period, issues often arise, as they did in the cases discussed below, as to whether the contamination at issue was the result of an accident, and if so, whether the accident took place during the policy period.

In Hinkle v. Crum & Forster Holding, Inc., __ F. Supp. 2d __, 2010 WL 3023174 (D. Ala. 2010), the current property owners brought a contribution action against the former property owners due to groundwater contamination on and emanating from the property. The current and former owners operated a dry cleaning business on the property. The current property owners settled with the former property owners for more than $2 million, an assignment of rights against the former property owners' insurers, and a covenant not to collect on the judgment against the former owners. The current property owners then sued the former owners' insurers. The court dismissed the suit on summary judgment, holding that the current property owners “failed to prove or establish sufficient evidence of an 'occurrence,' i.e., an accident during the policy period impacting the ground water.” For example, the court held that “the deliberate dispersal of contaminants from a barrel in order to find a wedding ring” was not an accident and, in any event, such incident occurred three years before any of the insurance policies at issue were purchased.

In Pilgrim Enterprises, Inc. v. Maryland Casualty Company, 24 S.W.3d 488 (Tex. App. 2000), a dry cleaner alleged that its insurer had a duty to provide it with a defense with respect to certain environmental lawsuits filed against the dry cleaner by the dry cleaner's landlord and adjacent property owners for personal injuries and property damage. Each applicable policy defined the term “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” The insurer argued that it was required to defend the dry cleaner only if the alleged property damage or bodily injury manifests or becomes identifiable during the policy period. By contrast, the dry cleaner argued that the court should find an “occurrence” under the policies if the injured parties were exposed to contaminants during the policy period. The trial court ruled in favor of the insurer, but the appellate court reversed, holding that, under Texas law, “for CGL policies covering continuous or repeated exposure to conditions, injury can occur as the exposure takes place.” The appellate court concluded: “Because the pleadings potentially allege exposure during the policy periods and damages for this exposure, we conclude that [the insurer] owes [the dry cleaner] a duty of defense, even if it should later become apparent that the contamination of which the plaintiffs complain occurred at a later point.”

In Morrow Corporation v. Harleysville Mutual Insurance Co., 110 F. Supp. 2d 441 (E.D. Va. 2000) (“Morrow II“), the policies at issue defined the term “occurrence” as “the date on which bodily injury or property damage first manifests itself.” The court held that, under Virginia law, the term “manifests” means “discoverable or subject to being discovered by reasonable means, not actually discovered or perceived.” Although the perc contamination at issue was not actually known or discovered by the shopping center that had sued its dry cleaner tenant until after the expiration of the policies at issue, the court held that such contamination “may have manifested itself years earlier, at the point at which the [perc] contamination from each iterative discharge was detectable and discoverable in the soil and groundwater by virtue of reasonable testing.” As a result, the insurer was required to provide a defense to the dry cleaner.

Damages

Comprehensive general liability policies typically limit coverage to claims against the insured for damages. A question that has arisen in dry cleaner environmental coverage actions is whether a lawsuit seeking reimbursement for the cost of environmental remediation constitutes a suit seeking “damages.”

This precise issue came up in Morrow I. The insurer argued that the lawsuit by the shopping center operator against the dry cleaner for reimbursement for the cost of environmental remediation was not a damages action. The court disagreed, holding that, under Virginia law, “environmental remediation costs constitute damages within the meaning of a comprehensive general liability insurance policy,” particularly when “the suit is brought by a private party seeking to recover the clean-up costs it incurred, as opposed to one brought by a governmental agency seeking to compel a polluter to pay to remediate pollution damage.”

Similarly, in Spic and Span, Inc. v. Continental Casualty Company, 552 N.W.2d 435 (Wis. Ct. App. 1996), the court held that a lawsuit brought by the developer of a shopping center against a dry cleaner that formerly operated at the site was a suit for “damages.” The insurers argued that the developer was not seeking “damages” because it merely sought indemnification from the dry cleaner for government-mandated response costs. The court disagreed, holding that, under Wisconsin law, a suit seeking to recover remediation costs and other damages with respect to contamination that extended beyond the premises formerly occupied by the dry cleaner fell within the meaning of “damages.”

Finally, in Employers Insurance, Cal Water sought to recover from its insurer the estimated costs to comply with certain consent decrees it had entered into with the DTSC. The court held that, under California law, costs incurred pursuant to a consent decree in a water contamination case constitute “damages” under a comprehensive general liability policy.

Conclusion

To date, there have been only a handful of reported decisions addressing coverage issues arising from dry cleaner contamination. Whether coverage exists has depended on the policy language, the governing law, and the nature and cause of the contamination at issue.

Chet A. Kronenberg is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP.

In recent years, there has been a growing number of dry cleaners claiming to be “organic,” “green,” or “eco-friendly.” While that may be true with respect to some, many dry cleaners continue to use a cleaning method involving the use of a solvent called perchloroethylene, commonly known as perc. And, there seems to be an increasing number of lawsuits stemming from environmental problems associated with historic dry cleaning operations utilizing this chemical. As a result of past disposal practices and spills of perc, many current and former dry cleaning sites are contaminated. By some estimates, 75% of dry cleaner facilities operated in past decades have caused environmental contamination. Cleanup costs range from tens of thousands of dollars to several million dollars.

Forest Park National Bank & Trust v. Ditchfield, 10 CV 3166 (N.D. Ill. May 21, 2010), presents a typical “dry cleaner contamination” fact pattern. In that case, a bank foreclosed on an Illinois residence, and then filed a lawsuit in federal court against the owners and operators of an adjacent strip mall and its dry cleaning tenant. The bank contends that after acquiring the residence, it learned that perc from the dry cleaner had leached into the soil and groundwater under the residence. Even though the residence is located on a block targeted by the city for a big redevelopment project, the bank claims that it has not been able to sell the property because of the perc contamination. The bank sought compensatory damages in excess of $100,000. Certain defendants filed a third-party complaint against their insurer alleging that it failed to provide defense and indemnity against the underlying suit.

Similarly, in Neal v. Cure , 937 N.E.2d 1227 (Ind. Ct. App. 2010), neighboring property owners brought a lawsuit against a landlord that leased commercial property to a dry cleaning tenant. The plaintiffs, who owned commercial property near the landlord's building, alleged that they were having health problems, and that the value of their property had decreased because of perc in the soil and the air inside their building. The plaintiffs settled with the dry cleaning tenant, and then continued to pursue statutory and common law claims against the landlord. The appellate court affirmed the trial court's grant of summary judgment in favor of the landlord because of the landlord's lack of involvement in or knowledge of the dry cleaner's actions.

In a recent high-profile suit, the Suffolk County Water Authority, which bears responsibility for providing potable drinking water to more than one million residents in Suffolk County, New York, sued various companies involved in the creation of perc and the dry cleaning equipment that used the chemical. The Water Authority claims to have detected perc contamination in more than 150 of its wells, requiring expensive remediation and prevention measures. The Water Authority alleges that the defendants were aware that dry cleaners customarily dumped perc wastewater into public sewer systems or dry wells, and that equipment companies even directed dry cleaners to do it. See Suffolk Co. Water Auth. v. Dow Chem. Co. , 30 Misc. 3d 1202(A) (Sup. Ct. Suffolk Co. Dec. 17, 2010).

To date, there are surprisingly few reported coverage decisions concerning whether and to what extent dry cleaner contamination may be covered under a comprehensive general liability policy. But the handful of decisions that do exist provide a good framework for discussing key issues that often arise when coverage is sought for dry cleaner contamination.

Lost Policies

Because the release of perc often took place decades ago, many policyholders no longer have their policies from that time frame. For example, in the Forest Park and Neal cases, the contamination purportedly began in the 1970s and 1980s, respectively. If the dry cleaner defendants in those lawsuits had kept their insurance policies, they might now be entitled to defense and indemnity. However, if the dry cleaners did not maintain copies of their old policies, the dry cleaners could find themselves uninsured.

Kleenit, Inc. v. Sentry Insurance Company , 486 F. Supp. 2d 121 (D. Mass. 2007), is illustrative. Kleenit was the owner and operator of a dry cleaning chain. Kleenit sought insurance coverage from Travelers for the environmental remediation of two sites in Massachusetts. Kleenit believed that Travelers provided comprehensive general liability insurance to Kleenit during the period of 1964-1970. However, both the original owner and accountant of the insured business were deceased, the insurance agency that handled most of the insured's policies during the relevant time frame was defunct, and neither Kleenit nor Travelers could locate copies of the policies at issue. Against this backdrop, Travelers moved for summary judgment.

The court held that, under Massachusetts law, Kleenit was required to show by a preponderance of evidence both the existence and contents of the policies. With respect to the policy period of 1964-1967, Kleenit submitted ledger entries reflecting payments to its insurance agent. In addition, an employee who began working at Kleenit in 1967 testified that when he began working at Kleenit, “everything was Travelers.” The court stated that, at best, the ledger entries merely established that Kleenit made payments to its insurance agent for some sort of insurance. The court further noted that even assuming that “the payments were indeed payments of premium to Travelers, the entries say nothing about the type of insurance involved, nor do they establish in any way the terms of the missing policy.” Accordingly, the court granted summary judgment in Travelers' favor for the years 1964-1967.

With respect to the years 1967-1970, Travelers admitted that it found a reference to a comprehensive general liability policy issued to Kleenit during the time period in question. In addition, Kleenit produced ledger sheets reflecting payments to Travelers, and Kleenit's annual reports for 1967 and 1968 contained a summary of Kleenit's insurance coverage, including the limits of coverage. Finally, Kleenit asserted that the terms of the 1967-1970 policy could be inferred from the 1970-1973 policy. The court held that: 1) it could not consider the annual reports because they had not been properly authenticated; 2) while the ledgers reflected payments to Travelers and referenced the same policy number that Travelers had conceded it identified in its own records, the ledger sheets said nothing about the specific material terms of the policies; and 3) there was no evidence in the record to suggest that the 1970-1973 policy was a renewal of the previous policy. In light of the above, the court concluded that Travelers also was entitled to summary judgment with respect to policy years 1967-1970.

As Kleenit demonstrates, if old policies have been discarded, it can be very difficult for a dry cleaner or other insured to prove the terms and conditions of coverage.

Known Loss

As a general rule, liability insurance coverage does not exist for property damage that the insured knows about when the policy is issued. This issue was litigated in Crawfordsville Square, LLC v. Monroe Guaranty Insurance Company , 906 N.E.2d 934 (Ind. Ct. App. 2009). In Crawfordsville, a shopping mall operator purchased a parcel of land adjacent to the mall that contained several businesses, including a dry cleaner. During the due diligence process, the shopping mall operator learned that the soil and water under the parcel were contaminated. The shopping mall operator agreed to proceed to buy the parcel so long as the seller established an escrow account of $44,000 on account of such contamination.

Upon the closing of the transaction, the shopping mall operator added the parcel to its existing general commercial liability insurance policy. Subsequently, the Indiana Department of Environmental Management demanded that the shopping mall operator remediate the site. The shopping mall operator sought coverage from its insurer, which the insurer denied. The court held that under the known loss doctrine, losses which exist at the time of the insuring agreement, or which are so probable or imminent that there is insufficient risk being transferred between the insured and insurer, are not properly subjects of insurance. The court stated that the record in that case clearly indicated that the shopping mall operator had knowledge of actionable contamination. As such, summary judgment was properly granted in favor of the insurer.

Pollution Exclusion

Prior to the early 1970s, commercial general liability policies did not exclude coverage for pollution claims. Between the early 1970s and 1985, however, insurers started adding qualified pollution exclusion clauses in their policies. The qualified pollution exclusion barred pollution claims except where the polluting discharge or release was sudden and accidental. In 1985, most commercial general liability policies began including absolute pollution exclusions barring coverage for even sudden and accidental discharges and releases of contaminants. The effect of pollution exclusion clauses has been litigated in the context of dry cleaner environmental contamination.

In Morrow Corporation v. Harleysville Mutual Insurance Co. , 101 F. Supp. 2d 422 (E.D. Va. 2000) (“Morrow I“), a dry cleaner sought defense and indemnity with respect to a lawsuit brought against it by a shopping center operator stemming from the presence of perc. Certain policies contained absolute pollution exclusions, and others contained qualified pollution exclusions excepting sudden and accidental discharges of pollutants. The court easily found that the policies with an absolute pollution exclusion barred coverage. The more difficult question was whether the dry cleaner's discharge of perc was sudden and accidental.

The court in Morrow I held that the phrase “sudden and accidental” means “both unexpected and unintended and quick or abrupt.” The court found that the shopping mall operator's allegations against the dry cleaner were of sufficient breadth to encompass releases that were both sudden and accidental for purposes of assessing whether a duty to defend is owed:

[T]he underlying complaint alleged that “during the operation of the Facility, [the dry cleaner and its employees] spilled or released [perc] and discharged [perc] ' into the environment.” ' [A]llegations employing these terms were sufficient to trigger [the insurer's] duty to defend [the dry cleaner] against the [shopping mall operator's] lawsuit, because “the obligation to defend ' arises whenever the complaint alleges facts and circumstances, some of which, if proved, fall within the risk covered by the policy.”

The court stated that the insurer may ultimately succeed in proving that the contamination arose from “a continuous pattern” of pollution during the coverage period, in which event the insurer would have no duty to indemnify the dry cleaner. However, with respect to the duty to defend, the inquiry is not whether the releases were in fact sudden and accidental, but simply whether the underlying complaint's allegations reasonably encompassed sudden and accidental releases of perc.

Employers Insurance of Wausau v. California Water Service Company, 2008 WL 3916096 (N.D. Cal. 2008), also interpreted a qualified pollution exclusion. The complaints in the underlying suits, which were filed by the California Department of Toxic Substance Control (“DTSC”), alleged that several dry cleaning businesses and property owners released perc into the soil and groundwater beneath the central business district of Chico, CA. The California Water Service Company (“Cal Water”) was named as a defendant in each of the underlying actions. The DTSC alleged that Cal Water's activities of pumping water and operating, monitoring and shutting down of certain wells affecting the Chico city water supply all purportedly contributed to the dispersal of the contamination in the groundwater.

Cal Water sought defense and indemnity from its insurer, which had issued general liability insurance policies to Cal Water. The policies issued between 1972 and 1986 contained a qualified pollution exclusion, which barred coverage arising from the discharge of pollutants except when such discharge is sudden and accidental. The court held that the relevant discharge for coverage purposes was that of third-party dry cleaners and not the subsequent activities of Cal Water which spread the environmental contamination. Cal Water contended that there were sudden and accidental discharges by the dry cleaners, and as such, the exception to the pollution exclusion applied. The court denied the insurer's motion for summary judgment on the duty to defend, holding as follows:

Cal Water appears to acknowledge that many of the discharges by the dry cleaner facilities were made as part of their routine operations. Nevertheless, it points to a number of discharges by two of the dry cleaners ' that may qualify as sudden and accidental. These alleged sudden and accidental releases include five or six spills of [perc] of 3 to 4 gallons each from April 1986 through September 1976 by [one dry cleaner] and 1 to 5 gallon spills once every 5 or so years by [another dry cleaner]. ' Although Cal Water makes no attempt to demonstrate how much, if any, of the environmental damage would have been caused by these spills over and above the routine disposal of [perc] into the water by the dry cleaners, the evidence is enough to defeat summary judgment on the duty to defend.

Finally, in State Farm Fire and Casualty Company v. Walnut Avenue Partners, LLC , 675 S.E.2d 534 (Ga. Ct. App. 2009), a shopping center operator sued a former dry cleaning tenant seeking damages connected with remediating the property. The dry cleaner's insurer sought a declaratory judgment that it was not obligated to provide a defense due to the pollution exclusion in the dry cleaner's umbrella policy. The body of the policy excluded certain specified instances of property damage arising out of the discharge or release of pollutants. One endorsement to the policy narrowed the scope of the pollution exclusion in the body of the policy by exempting from it discharges that are “quick, abrupt and accidental.” Another endorsement broadened the scope of the pollution exclusion in the body of the policy by eliminating any pollution coverage which would have otherwise existed under the policy. The court held that the conflicting endorsements created an ambiguity in the policy, and that, as a result, the trial court did not err in construing the policy to provide coverage for quick, abrupt and accidental discharges of pollutants.

Timing of Accident

With respect to dry cleaner contamination alleged to have taken place decades earlier, the insurance policies that potentially might provide coverage typically are older, occurrence-based policies. Under occurrence policies, so long as the insured can plead and prove that an “accident” occurred during the policy period, coverage may be available. In assessing whether an accident occurred during the policy period, issues often arise, as they did in the cases discussed below, as to whether the contamination at issue was the result of an accident, and if so, whether the accident took place during the policy period.

In Hinkle v. Crum & Forster Holding, Inc. , __ F. Supp. 2d __, 2010 WL 3023174 (D. Ala. 2010), the current property owners brought a contribution action against the former property owners due to groundwater contamination on and emanating from the property. The current and former owners operated a dry cleaning business on the property. The current property owners settled with the former property owners for more than $2 million, an assignment of rights against the former property owners' insurers, and a covenant not to collect on the judgment against the former owners. The current property owners then sued the former owners' insurers. The court dismissed the suit on summary judgment, holding that the current property owners “failed to prove or establish sufficient evidence of an 'occurrence,' i.e., an accident during the policy period impacting the ground water.” For example, the court held that “the deliberate dispersal of contaminants from a barrel in order to find a wedding ring” was not an accident and, in any event, such incident occurred three years before any of the insurance policies at issue were purchased.

In Pilgrim Enterprises, Inc. v. Maryland Casualty Company , 24 S.W.3d 488 (Tex. App. 2000), a dry cleaner alleged that its insurer had a duty to provide it with a defense with respect to certain environmental lawsuits filed against the dry cleaner by the dry cleaner's landlord and adjacent property owners for personal injuries and property damage. Each applicable policy defined the term “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” The insurer argued that it was required to defend the dry cleaner only if the alleged property damage or bodily injury manifests or becomes identifiable during the policy period. By contrast, the dry cleaner argued that the court should find an “occurrence” under the policies if the injured parties were exposed to contaminants during the policy period. The trial court ruled in favor of the insurer, but the appellate court reversed, holding that, under Texas law, “for CGL policies covering continuous or repeated exposure to conditions, injury can occur as the exposure takes place.” The appellate court concluded: “Because the pleadings potentially allege exposure during the policy periods and damages for this exposure, we conclude that [the insurer] owes [the dry cleaner] a duty of defense, even if it should later become apparent that the contamination of which the plaintiffs complain occurred at a later point.”

In Morrow Corporation v. Harleysville Mutual Insurance Co. , 110 F. Supp. 2d 441 (E.D. Va. 2000) (“Morrow II“), the policies at issue defined the term “occurrence” as “the date on which bodily injury or property damage first manifests itself.” The court held that, under Virginia law, the term “manifests” means “discoverable or subject to being discovered by reasonable means, not actually discovered or perceived.” Although the perc contamination at issue was not actually known or discovered by the shopping center that had sued its dry cleaner tenant until after the expiration of the policies at issue, the court held that such contamination “may have manifested itself years earlier, at the point at which the [perc] contamination from each iterative discharge was detectable and discoverable in the soil and groundwater by virtue of reasonable testing.” As a result, the insurer was required to provide a defense to the dry cleaner.

Damages

Comprehensive general liability policies typically limit coverage to claims against the insured for damages. A question that has arisen in dry cleaner environmental coverage actions is whether a lawsuit seeking reimbursement for the cost of environmental remediation constitutes a suit seeking “damages.”

This precise issue came up in Morrow I. The insurer argued that the lawsuit by the shopping center operator against the dry cleaner for reimbursement for the cost of environmental remediation was not a damages action. The court disagreed, holding that, under Virginia law, “environmental remediation costs constitute damages within the meaning of a comprehensive general liability insurance policy,” particularly when “the suit is brought by a private party seeking to recover the clean-up costs it incurred, as opposed to one brought by a governmental agency seeking to compel a polluter to pay to remediate pollution damage.”

Similarly, in Spic and Span, Inc. v. Continental Casualty Company , 552 N.W.2d 435 (Wis. Ct. App. 1996), the court held that a lawsuit brought by the developer of a shopping center against a dry cleaner that formerly operated at the site was a suit for “damages.” The insurers argued that the developer was not seeking “damages” because it merely sought indemnification from the dry cleaner for government-mandated response costs. The court disagreed, holding that, under Wisconsin law, a suit seeking to recover remediation costs and other damages with respect to contamination that extended beyond the premises formerly occupied by the dry cleaner fell within the meaning of “damages.”

Finally, in Employers Insurance, Cal Water sought to recover from its insurer the estimated costs to comply with certain consent decrees it had entered into with the DTSC. The court held that, under California law, costs incurred pursuant to a consent decree in a water contamination case constitute “damages” under a comprehensive general liability policy.

Conclusion

To date, there have been only a handful of reported decisions addressing coverage issues arising from dry cleaner contamination. Whether coverage exists has depended on the policy language, the governing law, and the nature and cause of the contamination at issue.

Chet A. Kronenberg is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP.