Insurer of Cost Cap Policy May be Liable for Consequential Damages

In Handy & Harman v American International Group, et al, 2008 N.Y, Misc. LEXIS 7522 (Sup. Ct.-NY Cty 8/26/08), plaintiff operated a large precious metals manufacturing facility in Fairfield, Connecticut. In December 2003, plaintiff entered into an agreement to sell the property. The agreement required the plaintiff to demolish the existing structures and complete remediation within a year. In April 2004, plaintiff purchased a $2MM Cost Cap Insurance policy that had Self-Insured Retention of $4,739,030. The policy contained coverage for known contamination (Coverage K) and Unknown Pollution (Coverage L). The policy also contained coverage for third party claims with an aggregate value $10MM (Coverage A).

The policy contained an endorsement that excluded from Coverage A claims arising from Pollution Conditions that were subject of an approved Remedial Plan or that were otherwise covered under Coverages K or L but for the erosion of the SIR, exhaustion of the applicable limit of liability, or termination of coverage under Coverage K or L. However, the endorsement also provided that the exclusion did not apply to Pollution Conditions that were not related Pollution Condition which covered under Coverages K or L.

The plaintiff commenced remediation under the Remedial Action Work Plan and after it exceeded the SIR, defendant accepted coverage under Coverage K. The defendant paid the cost overruns up to the Coverage K policy limit of $2MM. In December 2004, plaintiff’s contractors discovered a previously unknown layer of materials beneath clean fill and a previously unknown underground storage tank filled with debris. The contractor also discovered contamination below a previously unknown foundation. The Connecticut Department of Environmental Protection (CTDEP) instructed the plaintiff to remediate the newly discovered contamination and plaintiff sent the CTDEP letter to defendant as notice of a Claim.

AIG claims adjuster sent a letter to plaintiff denying coverage under Coverages K and L on the ground that the coverage limits had been exhausted. One month later, the claims adjuster also denied coverage for Coverage A on the basis of the endorsement. In response, Plaintiff pointed out the defendant had overlooked the language in the endorsement that the exclusion would not apply to Pollution Conditions that were not the same or related to the contamination in the Remedial Action plan but would have been covered under Coverage K or L but for the exhaustion of the applicable limit of liability. The defendant advised plaintiff that the CTDEP letter was not a "Claim" because it did not constitute a demand. The defendant also stated that Coverage A did not apply because the pollution conditions were not unrelated to those that would have been covered under Coverages K or L.

After further correspondence did not resolve the dispute, plaintiff commenced an action for breach of contract and breach of the covenant of good faith and fair dealing. On defendant’s motion to dismiss, the court dismissed the tort claim for breach of the duty of good faith but refused to dismiss the claim for consequential damages, and that the request for attorneys' fees in the prosecution of this action is dismissed. The court said the purpose of the policy was to ensure that the business conducting the remediation had the financial resources to conduct and finish the remediation if the costs exceeded the SIR and to pay third-party claims for clean-up costs. The court said the plaintiff purchased the insurance so that it could avoid financial pressure on its business for funding the remediation. Plaintiff bargained for this policy not only so that it could be paid the policy amount, but so that it also could have "the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe. Under the circumstances, the court said, it should have been foreseeable and understood by the defendant that it would have to respond in damages for damages to plaintiff's business if it breached its obligations under the contract. For example, the court pointed out, the site was being remediated for the purpose of redeveloping the site. By delaying and failing to investigate,  plaintiff contended that the site was further on the road to redevelopment and no longer open or easily inspected, resulting in further foreseeable harm in the form of increased costs and difficulty of proof. Thus, the court said the plaintiff had sufficiently pled that consequential damages were within the contemplation of the parties as a probable result of the breach of the policy.