In Federal Insurance Company, v. Cherokee Ardell, LLC., et al 2011 U.S. Dist. LEXIS 32516 (D.N.J. 3/28/11), the shareholders of Ardell Industries, Inc. ("Ardell") entered into an agreement in 1989 to sell the American Razor Blade Corp. ("ARB") site to Ardell Acquisition Corporation. The contract was then assigned to American Safety Razor Company ("ASR"), a company affiliated with Ardell Holdings, Inc. The transaction triggered the requirements of what was then known as the New Jersey
In 1996, ASR and Ardell filed insurance claims with Federal Insurance Company ("Federal") to recover their cleanup costs. Federal subsequently entered into a Settlement Agreement and Release whereby Federal assumed responsibility for the remedial environmental cleanup of the contaminated. Federal then retained the services of Cherokee Environmental Risk Management ("CERM") to assist with the investigation and remediation of the Site. In May 1998, Federal and CERM entered into an agreement ("1998 Remediation Agreement") whereby CERM created an entity Cherokee Ardell, L.L.C. ("Cherokee") to assume responsibility for the cleanup. Pursuant to the 1998 Remediation agreement, Cherokee obtained two insurance policies from American International Specialty Lines Insurance Company ("AISLIC"). The first policy was a $2MM Cleanup Cost Cap Policy with a term of ten years and a Self-Insured Retention ("SIR") of $766,015. The second policy was a Pollution Legal Liability Select Policy (“PLL”) with a limit of $2MM per incident and aggregate limit of $5MM. Federal was named as an additional insured in both policies.
In May 2001, Cherokee notified AIG Domestic Claims, Inc. ("AIGDC") that the clean-up costs under the Cost Cap Policy were approaching the SIR. AIGDC informed Cherokee of acceptance of coverage under both policies. However, by 2006 the remediation had still not been completed. ASR notified Federal that ASR dissatisfied with the pace of the remediation project and that ASR was receiving pressure from NJDEP. ASR then sent a second letter claiming that Federal was in breach of the 1996 Settlement Agreement. Cherokee forwarded these letters to AISLIC and submitted a notice of claim under the PLL policy based on the potential ASR lawsuit. In December 2006, AISLIC accepted coverage under the PLL Policy subject to a reservation of rights.
In August 2007, ASR sent Federal a draft of a complaint, alleging breach of contract, breach of duty of good faith, and violation of the New Jersey Environmental Rights Act. Federal forwarded the draft complaint to Cherokee and AISLIC. Federal then independently settled with ASR In October 2007, AISLIC notified Federal and Cherokee that it was withdrawing its acceptance of defense because the claims in the ASR Letters fell outside the definition of “Loss” as defined in the PLL Policy. A week later, Federal terminated the 1998 Remediation Agreement with Cherokee and retained the services of Shaw Environmental Corp. ("Shaw") to take over the remediation project.
In June 2008, Federal filed a breach of contract action against Cherokee and sought indemnification under the policies from AISLIC. Cherokee also filed a cross claim against AISLIC for indemnification. AISLIC then filed a motion for partial summary judgment claiming that it was not obligated to reimburse Federal or Cherokee under the Cost Cap Policy. Federal and Cherokee sought summary judgment on their PLL claims.
At the time of the lawsuit, AISLIC had reimbursed Cherokee a total of $594,375 under the Cost Cap Policy and had not issued reimbursements for expenses under the PLL. AISLIC argued that the $928,103 sought by the Federal and Cherokee were incurred after the Termination Date and therefore not covered. AISLIC additionally argued that Federal and/or Cherokee failed to satisfy the condition that Cleanup Costs be reported prior to the Termination Date. In contrast, Federal and Cherokee argued that under the Cost Cap Policy, AISLIC had a "continuing duty" to indemnify for costs that were "first incurred" before the Termination Date even if the costs were expended and paid after that date. They noted that since the operative word used in Coverage A was "incurs" rather than "pays" or "expends," a precise reading of the policy meant that an insured does not have to actually pay for the costs and expenses but rather only become liable to pay for the costs during the policy term. They also argued that the Cost Cap Policy is a traditional claims-made insurance policy where the policy payment obligation is triggered by the insured's claim for coverage rather than the insured parties' payment of expenses.
The court agreed with AISLIC, ruling that that the Cost Cap Policy covered only those expenses which Federal and Cherokee incurred, expended, paid for and reported within the policy period. The court said that from a plain reading of the Coverage A language as a whole and in conjunction with the definition of the term "Loss," it was clear that the Cost Cap Policy covered only those expenses which Federal and Cherokee incurred, expended, paid for and reported within the ten-year policy period
With respect to PLL Policy, Federal and Cherokee asserted that the 2006 ASR claims gave rise to a “Loss” and additional Clean-Up Costs related to compliance with the ACO and ECRA. However, the Court found that there was a question of fact whether Federal and Cherokee were “legally obligated” by statute or governmental order to pay expenses based upon the claims brought by ASR. Instead, the Court found that the nature of costs sought by Federal appeared to arise from its contractual agreement with ASR to remediate the site and not directly from environmental laws. Thus, the court denied Federal’s cross-motion for summary judgment
Federal subsequently filed a motion for reconsideration. Following a denial of that motion, the parties settled the case.
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