Owens-Illinois, Carter-Wallace Bar Enforcement of Non-Cumulation Clauses in Environmental Contamination Cases, New Jersey Supreme Court Rules in Key Insurance Case

A site is used for waste disposal. The wastes that were deposited at the site seep into, and migrate through, the groundwater at and near the site for many years. Finally, the contamination is discovered, government agencies move to clean it up, and lawsuits are filed to recover the cleanup costs from the companies that ran or used the site. Those companies, in turn, file declaratory judgment actions seeking indemnification from the insurance companies that issued them comprehensive general liability (CGL) policies for the relevant time period.

The issues raised by such cases have bedeviled courts for years. Legal doctrines that were designed to address simpler situations have been asked to respond to modern environmental problems and dramatic changes in our understanding of how those problems arise and develop. The New Jersey Supreme Court has grappled with those issues several times over the past decade, and this spring, in its decision in Spaulding Composites Co. v. Aetna Cas. & Sur. Co., 176 N.J. 25 (2003), the Court issued its latest pronouncement in the area, holding that a so-called “non-cumulation clause” in a CGL policy could not be enforced so as to limit sharply the potential liability of the insurer for the losses caused by its policyholder’s hazardous waste. To understand Spaulding, however, it is helpful to review those earlier Supreme Court cases and the issues they presented.

The first issues addressed by the Court concerned occurrence-based policies, which cover losses caused by any “occurrence” within the policy period. How does one decide when an “occurrence” took place when the contamination continued to spread over time periods covered by many different policies and many different insurers? That is, when did the injury occur? And after determining which policies were triggered, how does one go about allocating the total liability, which can often run into tens of millions of dollars?

The Court answered both of those questions in 1994 in its landmark decision in Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994). (While Owens-Illinois involved primarily claims of personal injury from exposure to asbestos-containing products, the Court noted the similarity of such cases to those involving property damage from exposure to hazardous substances: in both kinds of cases, injury does not manifest itself until long after initial exposure.) After abandoning as “hopeless” the task of determining exactly when the occurrence took place in a typical “long-tail” environmental contamination case, the Court adopted the so-called “continuous trigger” theory for cases of progressive indivisible injury or damage from exposure to injurious conditions. In such cases, the Court held, courts may treat the progressive injury or damage as an occurrence within each of the years of a CGL policy that was in place during the relevant time period. The continuous trigger theory provides the rule for deciding when an insurer’s obligation to respond under a CGL policy is activated, or triggered. Thus, if the period of damage lasted many years, during which multiple policies were in place, all of those policies would be triggered, not, for example, just the one policy that was in effect when the exposure began or when the injury manifested itself. (The Court subsequently held that the initial trigger, i.e., the event that turns the continuous trigger on, is the deposit of the waste into the landfill, rather than its leaching out of the landfill and reaching groundwater. Quincy Mut. Fire Ins. Co. v. Borough of Bellmawr, 172 N.J. 409 (2002).)

The Owens-Illinois court also adopted a method for allocating liability among the triggered policies: pro-ration by time and limits. (The Court initially referred to this method as pro-ration by years and limits, but later acknowledged that it would sometimes be necessary to consider days rather than years because a given policy might be triggered for some fractional portion of a year. See Quincy Mut. Fire Ins. Co. v. Borough of Bellmawr, 172 N.J. 409 (2002).) Concluding that neither the policy language nor normal rules of interpretation provided any help for deciding the issue, the Court based its choice of an allocation scheme on several considerations, namely ensuring the efficient use of resources to deal with the injuries, encouraging (or at least not discouraging) the purchase of insurance so that risks and costs can be spread, and principles of simple justice. Under the Court’s chosen allocation method, the coverage provided by a given policy is determined by considering both the period of time the policy was in effect and the policy limit. This figure is then compared to the total coverage provided by all of the triggered policies, yielding a percentage that is then applied to the policyholder’s loss. The policyholder is required to pay for any pro-rated loss assigned to years in which it chose to go uninsured or self-insured.

Four years later, the Court had occasion to consider the applicability and effect of Owens-Illinois in a different context: a hazardous waste landfill corresponding to the hypothetical example described above. In Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), the Court reaffirmed the continuous trigger theory and allocation principles articulated in Owens-Illinois, and found them applicable to cases where the progressive and indivisible injury is to property, not health, and the source of the injury is hazardous waste deposited in a landfill, rather than a product containing harmful constituents. The Carter-Wallace court also clarified the operation of the Owens-Illinois allocation principles as between primary and excess insurers. (Owens-Illinois dealt explicitly only with allocation among primary insurers, and between primary insurers and insureds.) It adopted a scheme of vertical loss allocation by years. Under that scheme, after pro-ration of damages “horizontally” across years according to Owens-Illinois, the policies implicated in each particular year are then exhausted “vertically,” beginning with the primary layer and proceeding through successive excess layers until the pro-rated loss is fully paid.

These earlier cases formed the background for the Court’s most recent decision. The Court in Spaulding considered a narrow question: whether a non-cumulation clause in a CGL policy issued by Liberty Mutual Insurance Company to Spaulding could be enforced consonant with the continuous trigger and pro-rata allocation principles announced in Owens-Illinois and Carter-Wallace. Spaulding had purchased a number of CGL policies from Liberty Mutual between 1976 and 1984. Each policy contained the same non-cumulation clause, which provided:

(A) The limit of liability stated in the schedule as applicable to ‘each occurrence’ is the total limit of [Liberty Mutual’s] liability for all damages because of personal injury or property damage as a result of any one occurrence.
. . .

(C) For the purpose of determining the limit of [Liberty Mutual’s] liability, all personal injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be construed as arising out of one occurrence.

(D) If the same occurrence gives rise to personal injury pr property damage which occurs partly before and partly within the policy period, the ‘each occurrence’ limit and the applicable aggregate limit of this policy shall be reduced by the amount of each payment made by [Liberty Mutual] with respect to such occurrence under a previous policy of which this policy is a replacement.

See Spaulding, 176 N.J. at In 1990, the EPA identified Spaulding as a potentially responsible party (PRP) for disposing of hazardous wastes at the Caldwell Trucking Company site in Fairfield Township, New Jersey. Eventually, EPA and a group consisting of other PRPs for the site obtained judgments of liability against Spaulding totaling $13,000,000. In the meantime, Spaulding had filed for bankruptcy and commenced a declaratory judgment action against its insurers. Spaulding obtained a summary judgment against the insurers, including Liberty Mutual. The trial court recognized that the continuous trigger theory adopted by Owens-Illinois warranted treating the progressive damage caused by Spaulding’s waste as a separate occurrence within each of the years of a CGL policy, and therefore held the non-cumulation clause to be inapplicable as a matter of law because it covered only cases of a single occurrence causing damages over multiple years.

On interlocutory appeal by Liberty Mutual, the Appellate Division reversed, holding that the non-cumulation clause was both clear and effective. Spaulding Composites Co. v. Liberty Mut. Ins. Co., 346 N.J. Super. 167 (2001). The Appellate Division distinguished both Owens-Illinois and Carter-Wallace, asserting that the policies at issue in those cases were ambiguous and treating both cases as merely providing an interpretive rationale to be used where the language of the policy was unclear. For the Appellate Division, Liberty Mutual’s non-cumulation clause was clear, so that neither Owens-Illinois nor Carter-Wallace applied. Spaulding thereafter assigned all of its rights to coverage to the PRP group, and the Supreme Court granted the PRP group’s leave to appeal.

The Court unanimously reversed the decision of the Appellate Division and reinstated the grant of summary judgment in favor of the PRP group, holding that the language of the non-cumulation clause made it inapplicable as a matter of law, and that even if it were not facially inapplicable, it could not be enforced consonant with the principles articulated in Owens-Illinois and Carter-Wallace. The Court emphasized the revolutionary nature of its decision and its reasoning in Owens-Illinois, and its far-reaching effect. “What made Owens-Illinois so important,” the Court stated, “is that it looked beyond contract language and traditional rules of insurance policy interpretation to develop a fair and uniform methodology for addressing complex environmental insurance coverage issues.” Spaulding, 176 N.J. at 40 (emphasis added). Contrary to the suggestion of the Appellate Division, it “did not simply provide an interim measure calculated to fill in an ambiguous policy provision.” Id. at 41. Instead, as the Court had noted in Carter-Wallace, it set forth a “presumptive rule” for resolving allocation issues in continuous trigger cases, responding to “the need for courts to choose one method, and apply it consistently, when allocating liability for progressive injuries.” Id. at 42.

Echoing the reasoning of the trial court, the Supreme Court first held that the non-cumulation clause was inapplicable as a matter of law. “At the heart of a non-cumulation clause,” said the Court, “is the notion of a ‘single occurrence with multiple year effects. . . . [It] seeks to avoid . . . the ‘cumulation’ of insurance policy limits when only one insured act or ‘occurrence’ is involved.” Id. at 44. But Owens-Illinois had ‘clearly rejected” the notion that the policies at issue in an environmental exposure case are triggered by just one occurrence. Id. Instead, the progressive injury stemming from environmental contamination should be treated as an occurrence within each of the years of a CGL policy or policies. So understood, the injuries caused by Spaulding’s waste could not be characterized as a single occurrence. Therefore, the non-cumulation clause was inapplicable on its own terms.

The Court went even further, however. “[E]ven if the non-cumulation clause was not facially inapplicable,” it continued, “we would not enforce it because it would thwart the Owens-Illinois pro-rata allocation methodology.” Id. Adopting the reasoning of the Illinois appellate court in Outboard Marine Corp. v. Liberty Mut. Ins. Co., 670 N.E.2d 740 (Ill. Ct. App.), appeal denied, 675 N.E.2d 634 (Ill. 1996), the Court wrote that under a pro-rata allocation methodology, “the non-cumulation clause, which would allow the insurer to avoid its fair share of responsibility, drops out of the policy.” Id. This is necessary to implement the policies underlying Owens-Illinois. “The pro-rata sharing methodology has, at its core, a public policy that favors maximizing, in a fair and just manner, insurance coverage for cleanup of environmental disasters. By applying the non-cumulation clause, insurers who were actually ‘on the risk’ would be insulated from their fair share of liability in direct contravention of Owens-Illinois.” Id. at 45.

Spaulding represents another victory for policyholders and for other parties who would benefit from the proceeds of their policies. It again reaffirms not just the holding of Owens-Illinois but the policy considerations at the heart of its reasoning: efficient (and maximum) use of insurance resources, risk-spreading, and fairness (especially to the policyholder). It signals to the lower courts that Owens-Illinois and its progeny should be construed and applied broadly, so that the policies behind them are not frustrated by crabbed interpretations of those opinions. Finally, by applying Owens-Illinois effectively to delete a policy provision rather than simply interpreting a provision or filling a gap, it shows how far the Supreme Court is willing to go to effectuate the change in environmental insurance coverage law that it began in 1994.