Indiana Law Review


Who Pays for Environmental Damage: Recent
Developments in CERCLA Liability and Insurance

Coverage Litigation

George Pendygraft*

George M. Plews**
James W. Clark***
Peter C. Wright****

I. Introduction

On October 17, 1986, the Superfund Amendments and Reau-
thorization Act of 1986 ("SARA") was signed into law as the first
major revision of the Comprehensive Environmental Response, Com-
pensation, and Liability Act ("CERCLA").^ Among other things,
CERCLA established a fund (the "Superfund")^ to be used for the
cleanup of facilities^ from which there have been a release"^ or a

Partner, Baker & Daniels, Indianapolis. A.B. (summa cum laude) Franklin College
(1968); Ph.D. University of Kentucky (1972); J.D. Columbia University (1975).

**Partner, Baker & Daniels, Indianapolis. A.B. (magna cum laude) Princeton Uni-
versity (1974); B.A. (with honours) Worcester College, Oxford University (1976); M.A.

(1981); J.D. (cum laude) Harvard University (1979).

***Associate, Baker & Daniels, Indianapolis. B.A. (magna cum laude) Indiana Uni-
versity (1982); J.D. (cum laude) University of Michigan Law School (1985).

****Associate, Baker & Daniels, Indianapohs. A.B. (summa cum laude) Wabash
College (1981); J.D. (summa cum laude) Indiana University (1986).

The authors gratefully acknowledge the contributions of Steven L. Householder,

General Counsel for Inland Container Corporation.

The authors represent insureds seeking insurance coverage.

'CERCLA, Pub. L. No. 96-510, 94 Stat. 2767 (1980) (codified at 42 U.S.C.A. §§
9601-0675 (Supp. 1987)).

H2 U.S.C.A. § 9611 (Supp. 1987).
H2 U.S.C.A. § 9601(9) (Supp. 1987):

(9) The term "facility" means (A) any building, structure, installation, equipment,

pipe or pipehne (including any pipe into a sewer or publicly owned treatment
works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container,

motor vehicle, rolling stock, or aircraft or (B) any site or area where a hazardous

substance has been deposited, stored, disposed of, or placed, or otherwise come
to be located; but does not include any consumer product in consumer use or

any vessel.

M2 U.S.C.A. § 9601(22) (Supp. 1987):
(22) The term "release" means any spilling, leaking, pumping, pouring, emitting,

emptying, discharging, injecting, escaping, leaching, dumping, or disposing into

the environment (including the abandonment or discarding of barrels, containers,

and other closed receptacles containing any hazardous substance or pollutant or

117



118 INDIANA LAW REVIEW [Vol. 21:117

threatened release of a hazardous substance^ into the environment.^

In addition, CERCLA authorized suits by the United States or by
any other person to recover cleanup costs'' from responsible par-

contaminant), but excludes (A) any release which results in exposure to persons

solely within a work place, with respect to a claim which such persons may
assert against the employer of such persons, (B) emissions from the engine

exhaust of a motor vehicle, rolling stock, aircraft, vessel, or pipeline pumping

station engine, (C) release of source, byproduct,or special nuclear material from

a nuclear incident, as those terms are defined in the Atomic Energy Act of

1954 [42 U.S.C.A. § 2011 et seq.], if such release is subject to requirements

with respect to financial protection established by the Nuclear Regulatory Com-
mission under section 170 of such Act [42 U.S.C.A. § 2210], or, for the

purposes of section 9604 of this title or any other response action, any release

of source byproduct, or special nuclear material from any processing site des-

ignated under section 7912(a)(1) or 7942(a) of this title, and (D) the normal

application of fertilizer.

=42 U.S.C.A. § 9601(14) (Supp. 1987):

(14) The term "hazardous substance" means (A) any substance designated pur-

suant to section 1321(b)(2)(A) of Title 33, (B) any element, compound, mixture,

solution, or substance designated pursuant to section 9602 of this title, (C) any

hazardous waste having the characteristics identified under or listed pursuant to

section 3001 of the Solid Waste Disposal Act [42 U.S.C.A. § 6921] (but not

including any waste the regulation of which under the Solid Waste Disposal Act

[42 U.S.C.A. § 6901, et seq.] has been suspended by Act of Congress), (D)

any toxic pollutant Hsted under section 1317(a) of Title 33, (E) any hazardous

air pollutant Usted under section 112 of the Clean Air Act [42 U.S.C.A. §

7412], and (F) any imminently hazardous chemical substance or mixture with

respect to which the Administrator has taken action pursuant to section 2606

of Title 15. The term does not include petroleum, including crude oil or any

fraction thereof which is not otherwise specifically listed or designated as a

hazardous substance under subparagraphs (A) through (F) of this paragraph,

and the term does not include natural gas, natural gas liquids, liquefied natural

gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic

gas).

'See 42 U.S.C.A § 9601(8) (Supp. 1987):

(8) The term "environment" means (A) the navigable waters, the waters of the

contiguous zone, and the ocean waters of which the natural resources are under

the exclusive management authority of the United States under the Magnuson
Fishery Conservation and Management Act [16 U.S.C.A. § 1801 et seq.], and
(B) any other surface water, ground water, drinking water supply, land surface

or subsurface strata, or ambient air within the United States or under the

jurisdiction of the United States.

The costs and damages recoverable under 42 U.S.C.A. § 9607(a)(4) are:
(A) all costs of removal or remedial action incurred by the United States

Government or a State or an Indian tribe not inconsistent with the national

contingency plan; (B) any other necessary costs of response incurred by any

other person consistent with the national contingency plan; (C) damages for

injury to, destruction of, or loss of natural resources, including the reasonable

costs of assessing such injury, destruction, or loss resulting from such a release;



1988] ENVIRONMENTAL LAW 119

ties.^ CERCLA has already had a great impact in the State of Indiana
as evidenced by the large number of sites that have been subject to
CERCLA enforcement actions or that have or are involved in CER-
CLA settlement negotiations.^ These sites are but a small fraction of
the potential CERCLA sites as evidenced by the number of sites
located within Indiana that are listed on the National Priorities List
("NPL").io

SARA does a great deal more than simply reauthorize CERCLA.
For one thing, the new Superfund will contain $8.5 billion compared

with $1.6 billion that Congress originally authorized for the Superfund.^'

SARA will also have the effect of making cleanups more expensive to
undertake and possibly very much more expensive due to a variety of
factors: standards contained in other federal environmental laws may
operate as cleanup standards;'^ different and more stringent state stan-

and (D) the costs of any health assessment or health effects study carried out

under section 9604(i) of this title. 42 U.S.C.A. § 9607(a)(4). These amounts

will be referred to hereafter as "environmental damages."

*42 U.S.C.A. § 9607(a) (1983); see infra note 9. Regarding private rights of action

under CERCLA, see Belthoff, Private Cost Recovery Actions Under Section 107 of
CERCLA, 11 CoLUM. J. Envtl. L. 141 (1986); Cross, The Dimensions of a Private Right
of Action Under Superfund, 19 Conn. L. Rev. 193 (1987); Gaba, Recovering Hazardous

Waste Cleanup Costs: The Private Cause of Action Under CERCLA, 13 Ecology L.Q.
181 (1986); Mauhs, Judicial Limitations on the CERCLA Private Right of Action, 15
Envtl. L. 471 (1985); Seng, The Quasi-Contractual Nature of Cost-Recovery Actions

Under CERCLA, 5 Va. J. Nat. Resources L. 85 (1985); Note, Private Right of Action
to Recover Cleanup Costs from Superfund, 49 Alb. L. Rev. 616 (1985); Note, Private

Cost Recovery Actions Under CERCLA, 69 Minn. L. Rev. 1135 (1985); Note, The Case
Against Waste in Private Liability Actions Under CERCLA, 60 N.Y.U.L. Rev. 888 (1985);
Comment, Private Response-Cost Recovery Actions Under CERCLA, 34 U. Kan. L. Rev.
109 (1985).

The Indiana Department of Environmental Management lists the follov^ing Super-
fund sites in Indiana (December 1986): Allen County—Fort Wayne Reduction; Bartholomew
County—Tri State Plating, Old City Dump #1; Boone County—Environ-Chem (ECC),
Northside Sanitary Landfill, Wedzeb Enterprises; Elkhart County—Main Street Well Field;
Grant County—Marion Bragg Dump; Hamilton County—Firestone; Hancock County

—

Norman Poer Farm; Jackson County—Seymour Recycling Corp.; Knox County—Prestohte;
Lake County—Lake Sandy Jo, (Martell) Ninth Avenue Dump, Midco I, Midco II, American
Chemical Services; LaPorte County—Fisher Calo, Waste, Inc. (Dis-Pos-Al); Marion County

—

Reilly Tar and Chemical Corporation, Southside Landfill; Monroe County—Bennett Stone
Quarry, Lemon Lane Landfill, Neal's Landfill; Owen County—Neal's Dump; St. Joseph
County—Douglass Rd. Landfill; Vigo County—International Minerals and Chemical; Whi-
tley County—Wayne Waste Oil.

"The National Priorities List, at 40 C.F.R. § 300 Appendix B (1986).
"Atkeson, Goldberg, Ellrad, III, & Connors, An Annotated Legislative History of

the Superfund Amendments and Reauthorization Act of 1986 (SARA) in Superfund
Deskbook 3 n. 24 (citing Conference Committee Report at 318, 320-21) Envtl. L. Inst.

1986) [hereinafter Superfund Deskbook].

'M2 U.S.C.A. § 9621(d) (Supp. 1987).



120 INDIANA LAW REVIEW [Vol. 21:117

dards may apply; '^ certain health assessments will be needed; ^"^ and most
importantly, permanent cleanup solutions will be emphasized. '^ Even

before the passage of SARA, the Environmental Protection Agency
("EPA") had a very strong hand in litigation against the potentially
responsible parties and under SARA that hand has been strengthened
considerably, by both institutionaHzing some of EPA's enforcement and

settlement policies into the statute and by giving the agency additional

powers and protections.^^ It is also worth noting that the State of Indiana

in the last legislative term adopted legislation that has been dubbed the

state's '*mini-Superfund."''^

In light of the changes made to CERCLA by SARA, this article
will explore two areas of the law that are important to practitioners in

Indiana and their clients who may be involved in CERCLA litigation.
The first section of this article will address the parties responsible for

CERCLA response costs. The second section of the article will address
the issues that arise between liability insurers and insureds as the insureds

seek insurance coverage for CERCLA response costs.

II. CERCLA Liability Issues

The four classes of responsible parties (or "covered persons") from

whom cleanup costs may be recovered are defined by section 107(a) of
CERCLA.

(1) The owner or operator of a vessel'^ or a facility;

(2) Any person who, at the time of disposal of any hazardous
substance, owned or operated any facility at which such haz-
ardous substances were disposed of;

(3) Any person who arranged for the disposal of hazardous
substances at any vessel or facility owned by another person
and containing such hazardous substances; and

(4) Any person who accepted any hazardous substances for
transport to sites selected by such person.'^

'H2 U.S.C.A. § 9621(e) and (0 (Supp. 1987).

'M2 U.S.C.A. § 9604(0(6) (1983).

'H2 U.S.C.A. § 9621(b) (Supp. 1987).

'^SuPERFUND Deskbook, supra note 11, at 3.

"IND. Code §§ 13-7-8.7-1 to -6 (Supp. 1987).
''See 42 U.S.C.A. § 9601(28) (1983): (28) "The term 'vessel' means every description

of watercraft or other artificial contrivance used, or capable of being used, as a means

of transportation on water."

'H2 U.S.C.A. § 9607(a) (1983) ("Section 107(a)"):

Notwithstanding any other provision or rule of law, and subject only to the

defenses set forth in subsection (b) of this section —(1) the owner and operator



1988] ENVIRONMENTAL LAW 121

Each covered person is jointly and severally liable^° for all environ-

mental damages at a site, unless he can prove by a preponderance of

of a vessel or a facility, (2) any person who at the time of disposal of any
hazardous substance owned or operated any facility at which such hazardous

substances were disposed of, (3) any person who by contract, agreement, or
otherwise arranged for disposal or treatment, or arranged with a transporter

for transport for disposal or treatment, of hazardous substances owned or

possessed by such person, by any other party or entity, at any facility or

incineration vessel owned or operated by another party or entity and containing

such hazardous substances, and (4) any person who accepts or accepted any
hazardous substances for transport to disposal or treatment facilities, incineration

vessels or sites selected by such person, from which there is a release, or threatened

release which causes the incurrence of response costs, of a hazardous substance,

shall be liable for — (A) all costs of removal or remedial action incurred by
the United States Government or a State or an Indian tribe not inconsistent

with the national contingency plan; (B) any other necessary costs of response

incurred by any other person consistent with the national contingency plan; (C)

damages for injury to, destruction of, or loss of natural resources, including

the reasonable costs of assessing such injury, destruction, or loss resulting from

such a release; and (D) the costs of any health assessment or health effects

study carried out under section 9604(i) of this title. The amounts recoverable

in an action under this section shall include interest on the amounts recoverable

under subparagraphs (A) through (D). Such interest shall accrue from the later

of (i) the date payment of a specified amount is demanded in writing, or (ii)

the date of the expenditure concerned. The rate of interest on the outstanding

unpaid balance of the amounts recoverable under this section shall be the same

rate as is specified for interest on investments of the Hazardous Substance

Superfund established under subchapter A of chapter 98 of Title 26. For
purposes of applying such amendments to interest under this subsection, the

term "comparable maturity" shall be determined with reference to the date on

which interest accruing under this subsection commences.

^°A covered person is jointly and severally liable for all environmental damages unless

he can "prove that the environmental injury is divisible and there is a reasonable basis

for apportioning the harm." United States v. Miami Drum Services, Inc., No. 85-0038,
(S.D. Fla. Dec. 12, 1986); see also United States v. Bliss, No. 84-200(c)(l), slip op. (E.D.

Mo. Aug. 7, 1987); United States v, Dickerson, 640 F. Supp. 448 (D. Md. 1986); State
of Idaho V. Bunker Hill Co., 635 F. Supp. 665 (D. Idaho 1986); State of Colorado v.

Asarco, Inc., 608 F. Supp. 1484 (D.C. Colo. 1985); United States v. Shell Oil Co., 605

F. Supp. 1064 (D.C. Colo. 1985); United States v. Conservation Chem. Co., 589 F. Supp.

59 (W.D. Mo. 1984); United States v. Northeastern Pharmaceutical and Chem. Co., 579

F. Supp. 823 (W.D. Mo. 1984); United States v. A&F Materials Co., Inc., 578 F. Supp.
1249 (S.D. 111. 1984); United States v. Wade, 577 F. Supp. 1326 (E.D. Pa. 1983); United

States V. Chem-Dyne Corp., 572 F. Supp. 802 (S.D. Ohio 1983); see generally Brennan,
Joint and Several Liability for Generators Under Superfund: A Federal Formula for Cost
Recovery, 5 UCLA. J. Envtl. L. & Pol'y 101 (1986); Price, Dividing the Costs of
Hazardous Waste Site Cleanups Under Superfund: Is Joint and Several Liability Appro-
priate?, 52 U.M.K.C.L. Rev. 339 (1984); Note, The Comprehensive Environmental Re-

sponse,Compensation and Liability Act of 1980: Is Joint and Several Liability the Answer
to Superfund?, 18 New Eng. L. Rev. 109 (1982-83); Note, Environmental Law — Joint



122 INDIANA LAW REVIEW [Vol. 21:117

the evidence that the environmental damages were caused solely by

(1) an act of God; (2) an act of war; or (3) an act or omission of

a third party. ^^ Courts have unanimously concluded that the standard

and Several Liability Under CERCLA, 57 Temple L.Q. 885 (1984); Note, Joint and Several
Liability Under Superfund, 13 Loy. U. Chi. L.J. 489 (1982); Note, Joint and Several

Liability for Hazardous Waste Releases Under Superfund, 68 Va. L. Rev, 1157 (1982);

Casenote, Joint and Several Liability Under Superfund: The Plight of the Small Volume

Hazardous Waste Contributor, 31 Wayne L. Rev. 1057 (1985).
^'42 U.S.C.A. § 9607(b) (1983). The full text of § 9607(b) reads as follows:

There shall be no liability under subsection (a) of this section for a person

otherwise liable who can establish by a preponderance of the evidence that the
release or threat of release of a hazardous substance and the damages resulting

therefrom were caused solely by —(1) an act of God; (2) an act of war; (3)
an act or omission of a third party other than an employee or agent of the

defendant, or than one whose act or omission occurs in connection with a

contractual relationship, existing directly or indirectly, with the defendant (except

where the sole contractual arrangement arises from a published tariff and ac-

ceptance for carriage by a common carrier by rail), if the defendant establishes
by a preponderance of the evidence that (a) he exercised due care with respect

to the hazardous substance concerned, taking into consideration the characteristics

of such hazardous substance, in light of all relevant facts and circumstances,

and (b) he took precautions against foreseeable acts or omissions of any such

third party and the consequences that could foreseeably result from such acts

or omissions; or (4) any combination of the foregoing paragraphs.

It is currently unclear whether the only defenses available to a covered person are

those set forth in section 107(b)(3). See 42 U.S.C.A. § 9607(a) (Supp. 1987) (imposing

liability "subject only to the defenses set forth in subsection (b) of this section"); see

also United States v. Tyson, 17 Envtl. L. Rep. (Envtl. L. Inst.) 20527, 20531 (E.D. Pa.

1986) ("Congress intended that responsible parties within the coverage of section 107(a)

should be strictly liable subject only to the affirmative defenses relating to causation which

are set forth in section 107(b)."); United States v. Ward, 618 F. Supp. 884, 897 (D.C.N.C.

1985) (strict liabihty under section 107(a) "is subject only to the defenses listed in section

107(b)"); United States v. Argent Corp., 14 Envtl. L. Rep. (Envtl. L. Inst.) 20616 (D.N.M.

1984). But see Mardan Corp. v. C.G.C. Music, Ltd., 600 F. Supp. 1049, 1056 n. 9 (D.

Ariz. 1984):

Because subsection (a) of Section 190 states that liability is "subject only to

the defenses set forth in subsection (b) of this section," Mardan contends that
the defenses listed in subsection (b) are exclusive. Mardan's argument does not
withstand close analysis. As defendants have suggested, Mardan's interpretation
would result in defendants being held liable even if they had already paid

Mardan's Section 107(a) claim in a prior lawsuit since res judicata, payment,

and accord and satisfaction are not listed as defenses in subsection (b). Similarly

under Mardan's interpretation of the statute, defendants would not be able to

raise such defenses as statute of limitations, waiver, laches, etc. For the foregoing

reasons, the defenses listed in subsection (b) cannot be considered as exclusive.

See also United States v. Conservation Chem. Co., 619 F. Supp. 162, 204 (W.D. Mo.

1985) ("Equitable defenses are proper under CERCLA in determining liability, the nature
of the remedy and the amount of damage").



1988] ENVIRONMENTAL LA W 123

of liability imposed under section 107(a) is strict liability. ^^

Although SARA did not directly amend section 107(a), its provisions
have nevertheless had a major impact on the coverage of section 107(a).

This section will address three areas in which SARA and judicial in-
terpretation of CERCLA have had a major impact on liability under
Section 107(a):23 (1) the liability of owners of contaminated property;

(2) the individual liability of corporate officers for acts by or on behalf

of a corporation; and (3) the Hability of creditors of covered persons.

Finally, this section will apply the concepts developed in these areas to

a consideration of potential Hability under section 107(a) arising out of

a trust's ownership of contaminated property.

A. Landowner Liability

Among the covered persons under section 107(a) are the current and
former owners of contaminated property.^ Former owners may be held

^^See, e.g., J.V. Peters & Co. v. Administrator, 767 F.2d 263 (6th Cir. 1985); State
of New York v. Shore Realty Corp., 759 F.2d 1032 (2d Cir. 1985); United States v.
Miami Drum Services, Inc., No. 85-0038, slip op. (S.D. Fla. Dec. 12, 1986); United States
V. Dickerson, 640 F. Supp. 448 (D. Md. 1986); In re T.P. Long Chemical, Inc., 45 B.R.
278 (Bankr. N.D. Ohio 1985); United States v. Conservation Chem. Co., 589 F. Supp.

59 (W.D. Mo. 1984); United States v. Northeastern Pharmaceutical and Chem. Corp.,
579 F. Supp. 823 (W.D. Mo. 1984); United States v. Price, 577 F. Supp. 1103 (D.N.J.

1983); United States v. Ottati & Goss, Inc., 16 Envtl. L. Rep. (Envtl. L. Inst.) 20763
(D.N.H. 1985); United States v. Ward, 16 Envtl. L. Rep. (Envtl. L. Inst.) 20127 (E.D.N.

C. 1985); United States v. Argent Corp., 14 Envtl. L. Rep. (Envtl. L. Inst.) 20616 (D.N.M.

1984); United States v. South Carohna Recycling and Disposal, Inc., 14 Envtl. L. Rep.

(Envtl. L. Inst.) 20272 (D.S.C. 1984); United States v. Tyson, 17 Envtl. L. Rep. 20527

(E.D. Pa. 1986).

"Regarding liability under section 107(a), see generally Giblin, & Kelly, Judicial
Development of Standards of Liability in Governmental Enforcement Actions Under the

Comprehensive Environmental Response, Compensation and Liability Act, 33 Clev. St.

L. Rev. 1 (1984); Hinds, Liability Under Federal Law for Hazardous Waste Injuries, 6
Harv. Envtl. L. Rev. 1 (1982); Lotz, Liability Issues Under CERCLA, 23 A.F. L. Rev.
370 (1982); Tripp, Liability Issues in Litigation Under the Comprehensive Environmental

Response, Compensation and Liability Act, 52 U.M.K.C. L. Rev. 364 (1984); Warshauer

& Stansel, Analyzing the Relationship Between the Civil, Governmental, and Criminal
Obligations and Liabilities for Hazardous Waste, 22 Tort & Ins. L.J. 37 (1986); Comment,
Personal Liability for Hazardous Waste Cleanup: An Examination of CERCLA Section
107, 13 B.C. Envtl. Aff. L. Rev. 643 (1986); Note, CERCLA Defendants: The Problem
of Expanding Liability and Diminishing Defenses, 31 Wash. U.J. Urb. & Contemp. L.
289 (1987).

^See generally Levitas & Hughes, Hazardous Waste Issues in Real Estate Transactions,
38 Mercer L. Rev. 581 (1987); Moskowitz, & Hoyt, Enforcement of CERCLA Against
Innocent Owners of Property, 19 Loy. L.A.L, Rev. 1171 (1986); Note, Successor Landowner
Suits for Recovery of Hazardous Waste Cleanup Costs: CERCLA Section 107(a)(4), 33
UCLA. L. Rev. 1737 (1986).



124 INDIANA LAW REVIEW [Vol. 21:117

liable only if hazardous substances were disposed of at the property

during their ownership. ^^ Current owners may be liable even if no
hazardous substances were disposed of at the property during their

ownership. 2^ In either case, liability is based solely upon ownership of

the contaminated property, regardless of the landowner's lack of knowl-

edge of or participation in any hazardous waste activity.
^'^

This Hability scheme can give rise to particularly harsh consequences

when a landowner leases property to a tenant that engages in operations
resulting in the release of a hazardous substance. The owner/lessor

becomes a "covered person" and is strictly, jointly, and severally Uable

for all environmental damages resulting from the release.^^ The landowner

could argue that, because the environmental damages were caused by

the lessee's actions, the landowner should be entitled to rely on the third

party defense of section 107(b)(3). ^^ The third party defense is unavailable,

however, if the third party was the landowner's employee or agent, or

was one whose "act or omission occur [red] in connection with a con-

tractual relationship, existing directly or indirectly, with the [land-

owner]. "^^ The term "contractual relationship" includes the relationship

''See 42 U.S.C.A. § 6907(a)(2) (Supp. 1987). Former owners who had actual knowledge
that their property was contaminated may be subject to liability as a current owner if
they transferred ownership without disclosing the property's contaminated condition. See

42 U.S.C.A. § 9601(35)(C)(Supp. 1987), which provides:

(C) Nothing in this paragraph or in section 9607(b)(3) of this title shall diminish

the liability of any previous owner or operator of such facility who would
otherwise be Hable under this chapter. Notwithstanding this paragraph, if the

defendant obtained actual knowledge of the release or threatened release of a

hazardous substance at such facility when the defendant owned the real property

and then subsequently transferred ownership of the property to another person

without disclosing such knowledge, such defendant shall be treated as liable

under section 9607(a)(1) of this title and no defense under section 9607(b)(3) of

this title shall be available to such defendant.

'^See 42 U.S.C.A. § 9607(a)(1) (Supp. 1987); United States v. Tyson, 17 Envtl. L.

Rep. (Envtl. L. Inst.) 20527, 20531 (E.D. Pa. 1986) ("The current owner of a facility is

within section 9607(a)(1) even if it never operated the facility as a hazardous waste dump
site and even if no hazardous wastes were dumped at the facility during its period of

ownership."); see also cases cited in Superfund Deskbook, supra note 11.

''See, e.g.. United States v. Cauffman, 15 Envtl. L. Rep. (Envtl. L. Inst.) 20161

(CD. Cal. 1984).
'^See, e.g.. United States v. Cauffman, 15 Envtl. L. Rep. (Envtl. L. Inst.) 20161

(CD. Cal. 1984); United States v. Argent Corp., 14 Envtl. L. Rep. (Envtl. L. Inst.)
20616 (D.N.M. 1984); United States v. South Carolina RecycHng and Disposal, Inc., No.

80-1274-6, slip op. (D.S.C Aug. 28, 1984) (sublessor may also be an "owner" under
107(a)(1)). The lessee will also be liable under 107(a)(1) as an "operator."

''See 42 U.S.C.A. § 9607(b)(3) (1983).
^°42 U.S.C.A. § 9607(b)(3) (1983).



1988] ENVIRONMENTAL LAW 125

between lessor and lessee, ^^ and the owner/lessor is therefore barred

from this defense.

The term * 'contractual relationship" also includes the relationship

between the purchaser and seller of contaminated property. ^^ Prior to

SARA, it was therefore possible that an innocent purchaser of real estate
might become subject to Hability for environmental damages under CER-
CLA. SARA has ameliorated this harsh result. It is now clear that an
"innocent" landowner—one whose only connection to his property's
contamination is his deed to the contaminated property—is not liable
under CERCLA. To establish his "innocence," the landowner must
prove by a preponderance of the evidence: (1) that he acquired the

property after it became contaminated, (2) that at the time he acquired

the property, he had no reason to know that any hazardous substance
contaminated the property, (3) that the landowner "is a government

entity which acquired the [property] by escheat, or through any other

involuntary transfer or acquisition, or through the exercise of eminent

domain authority by purchase or condemnation, [or] (4) [that the land-

owner] acquired the property by inheritance or bequest.""

The landowner must also prove that he exercised due care with

respect to the hazardous substance concerned and that he took precautions

against the foreseeable acts or omissions of third parties and the con-

sequences that could foreseeably result from such acts or omissions. ^"^

Although SARA now protects an "innocent" landowner from liability
under section 107(a), a purchaser may not become an innocent landowner
by remaining deliberately ignorant of the acquired property's contami-

nation. A purchaser cannot claim that he had "no reason to know"
that the property was contaminated unless he can establish by a pre-

ponderance of the evidence that, at the time he acquired the property,

he made "all appropriate [inquiries] into the previous ownership and
uses of the property consistent with good commercial or customary

practice in an effort to minimize Hability.""

^'See 42 U.S.C.A. § 9601(35)(A) (Supp. 1987), which provides in relevant part that

"[t]he term 'contractual relationship', for the purpose of section 9607(b)(3), includes, but

is not limited to, land contracts, deeds, or other instruments transferring title or possession

. . .
:' See also United States v. Argent Corp., 14 Envtl. L. Rep. (Envtl. L. Inst.) 20616

(D.N.M. 1984).

"5ee supra note 31.

"42 U.S.C.A. § 9601(35)(A) (Supp. 1987). The Conference Report on SARA explains,
however, that one who inherits property with actual knowledge of its contamination may
not rely on the innocent landowner defense. See H.R. Conf. Rep. No. 962, 99th Cong.,

2d Sess. 187 (1986).

3M2 U.S.C.A. § 9601(35)(A) (Supp. 1987), 9607(b)(3)(a), 9607(b)(3)(b) (1982).

M2 U.S.C.A. § 9601(35)(B) (Supp. 1987).



126 INDIANA LAW REVIEW [Vol. 21:117

For purposes of the preceding sentence, the court shall take into

account any specialized knowledge or experience on the part of

the defendant, the relationship of the purchase price to the value

of the property if uncontaminated, commonly known or rea-
sonably ascertainable information about the property, the ob-

viousness of the presence or likely presence of contamination at

the property, and the ability to detect such contamination by

appropriate inspection. ^^

The conference report on SARA provides some helpful guidance
regarding the nature of the inquiry required to become an innocent

landowner. 3'^First, the duty to inquire "shall be judged as of the time

of acquisition."^^ Second, landowners "shall be held to a higher standard

as public awareness of the hazards associated with hazardous substance

releases has grown. "^^ Third, landowners engaged in commercial trans-

actions will "be held to a higher standard than those who are engaged
in private residential transactions. ""^^ Fourth, property heirs and devisees

have a duty to inquire, but the standard of inquiry is lower than for

those engaged in private transactions. Also, heirs who acquire property
without knowledge of the inheritance have no duty to inquire.'*'

B. The Corporate Context

A number of courts have held corporate officers individually liable
under section 107(a) for environmental damages resulting from acts by

or on behalf of a corporation. In such cases, the individual defendants

have been held personally liable based upon the nature and extent of

their involvement with the corporation's hazardous waste activities. Con-

sequently, such cases are highly fact specific.

In United States v. Northeastern Pharmaceutical & Chemical Co.
("NEPACCO"),'*^ the Eighth Circuit Court of Appeals found NEPAC-
CO's president ("Michaels") and vice president ("Lee") individually

liable under Section 107(a)(3), which imposes hability on "any person""^^

'^Id.

"Joint Explanatory Statement of the Committee of Conference, Conference

Report 99-962, p. 187.

''Id.

'Hd.

"^Id.

''Id.

«810 F.2d 726 (8th Cir. 1986).

''See 42 U.S.C.A. § 9601(21) (Supp. 1987): (21) "The term 'person' means an

individual, firm, corporation, association, partnership, consortium, joint venture, com-

mercial entity. United States Government, State, municipality, commission, political sub-

division of a State, or any interstate body,"



1988] ENVIRONMENTAL LAW 127

who arranges for the disposal of hazardous substances."^ NEPACCO
arose out of the Company's disposal of hazardous wastes at a site known
as the

*

'Denny farm." Lee, as vice president and a major shareholder

of the Company, was directly responsible for arranging the disposal of

the Company's hazardous wastes, assisting in the selection of the Denny
farm site, and supervising the Company's contract with the operator of

the site. Michaels was the Company's founder, president, and a major

stockholder, and had the capacity and responsibility to control the

Company's hazardous waste activities, to direct negotiations concerning

waste disposal, and to prevent and abate the damage resulting from the

Company's hazardous waste activities.'*^ Noting that *Hhe term 'per-

son' includes both individuals and corporations and does not exclude

corporate officers or employees,"'*^ the court rejected the individual

defendants' argument that they could not be held individually liable

because they had acted solely as corporate officers on NEPACCO's
behalf:

Lee argues that he cannot be held individually liable for NE-
PACCO's wrongful conduct because he acted solely as a cor-
porate officer or employee on behalf of NEPACCO. The liability
imposed upon Lee, however, was not derivative but personal.
Liability was not premised solely upon Lee's status as a corporate

officer or employee. Rather, Lee is individually liable under

CERCLA § 107(a)(3), 42 U.S.C. §9607(a)(3), because he per-
sonally arranged for the transportation and disposal of hazardous

substances on behalf of NEPACCO and thus actually participated
in NEPACCO's CERCLA violations.^^

The court also held that the individual defendants could be held

liable without regard to whether it would be appropriate to pierce the

corporate veil:

Lee can be held individually liable because he personally par-

ticipated in conduct that violated CERCLA; this personal liability
is distinct from the derivative liability that results from "piercing

the corporate veil." "The effect of piercing a corporate veil is
to hold the owner of the corporation liable. The rationale for

piercing the corporate veil is that the corporation is something

less than a bona fide independent entity." . . . Here, Lee is

liable because he personally participated in the wrongful conduct

^See Al U.S.C.A. § 9607(a)(3) (Supp. 1987).

^'NEPACCO, 810 F.2d 726.
^Id. at 744.

''Id.



128 INDIANA LAIV REVIEW [Vol. 21:117

and not because he is one of the owners of what may have
been a less than bona fide corporation/^

Finally, the court also found that, for purposes of section 107(a)(3),

it was irrelevant that the individual defendants did not own or possess
the hazardous substances disposed at the Denny farm site:

It is the authority to control the handling and disposal of

hazardous substances that is critical under the statutory scheme.

The district court found that Lee, as plant supervisor, actually

knew about, had immediate supervision over, and was directly

responsible for arranging for the transportation and disposal of

the NEPACCO plant's hazardous substances at the Denny farm
site. We believe requiring proof of personal ownership or actual
physical possession of hazardous substances as a precondition

for liability under CERCLA Section 107(a)(3), 42
U.S.C. §9607(a)(3), would be inconsistent with the broad re-

medial purposes of CERCLA.'*^

In United States v. Conservation Chemical Co.,^^ a district court in

Missouri held the Company's president and majority stockholder
("Hjersted") individually Hable under sections 107(a)(1) and (2). Hjersted

was the Company's founder, and president, and at all times owned at
least ninety-three percent (93%) of its stock. In addition, Hjersted, acting

as a chemical engineer and the Company's sole "technical person," was

primarily responsible for the Company's environmental controls. Finally,

Hjersted controlled the Company's fiscal matters and was closely involved

in the Company's day-to-day operations.
The court analyzed the concept of "owner or operator"^^ and con-

cluded that "a person who owns an interest in the facility and is actively

'^^Id. (citations omitted).

'^Id.

^"628 F. Supp. 391 (W.D. Mo. 1985).
''See 42 U.S.C.A. § 9601(20) (Supp. 1987):

(20)(A) The term "owner or operator" means (i) in the case of a vessel, any

person owning, operating, or chartering by demise, such vessel, (ii) in the case

of an on shore facility or an offshore facility, any person owning or operating

such facility, and (iii) in the case of any facility, title or control of which was

conveyed due to bankruptcy, foreclosure, tax delinquency, abandonment, or

similar means to a unit of State or local government, any person who owned,
operated, or otherwise controlled activities at such facility immediately before-

hand. (B) In the case of a hazardous substance which has been accepted for

transportation by a common or contract carrier and except as provided in section
9607(a)(3) or (4) of this title, (i) the term "owner or operator" shall mean such
common carrier or other bona fide for hire carrier acting as an independent
contractor during such transportation, (ii) the shipper of such hazardous substance



1988] ENVIRONMENTAL LAW 129

participating in its management can be held liable for the disposal of

hazardous waste. ''^^ Based upon Hjersted's "high degree of personal

involvement in the [company's] operation and decision-making process,""

the court found him individually liable.

In State v. Shore Realty Corp. /"^ the Second Circuit Court of Appeals

held the defendant corporation's majority shareholder and chief executive

officer (**LeoGrande") individually liable as an owner or operator under

Section 107(a). Shore Realty Corp. resulted from extensive contamination

at a hazardous waste disposal facility owned and operated by the de-
fendant corporation. The court found that LeoGrande had incorporated

the corporation solely for the purpose of purchasing the contaminated

property and that '*[a]ll corporate decisions and actions were made,

directed, and controlled by him."^^ The court rejected LeoGrande'

s

argument that he could not be held individually liable without piercing

the corporate veil and concluded that "an owning stockholder who
manages the corporation, such as LeoGrande, is liable under CERCLA
as an * owner or operator'."^^

In State v. Bunker Hill,^'^ a district court in Idaho relied upon similar

principles in holding a parent corporation liable as an owner or operator

of its subsidiary's facility. Although the court cautioned that "care must

be taken so that 'normal' activities of a parent with respect to its

shall not be considered to have caused or contributed to any release during such

transportation which resulted solely from circumstances or conditions beyond

his control. (C) In the case of a hazardous substance which has been delivered

by a common or contract carrier to a disposal or treatment facility and except
as provided in section 9607(a)(3) or (4) of this title (i) the term "owner or

operator" shall not include such common or contract carrier, and (ii) such
common or contract carrier shall not be considered to have caused or contributed
to any release at such disposal or treatment facility resulting from circumstances

or conditions beyond its control. (D) The term "owner or operator" does not

include a unit of State or local government which acquired ownership or control

involuntarily through bankruptcy, tax delinquency, abandonment, or other cir-

cumstances in which the government involuntarily acquires title by virtue of its

function as sovereign. The exclusion provided under this paragraph shall not

apply to any State or local government which has caused or contributed to the

release or threatened release of a hazardous substance from the facility, and

such a State or local government shall be subject to the provisions of this

chapter in the same manner and to the same extent, both procedurally—and
substantively,—as any nongovernmental entity, including liability under section
9607 of this title.

"628 F. Supp. at 418.

"Id. at 420.

'"759 F.2d 1032 (2d Cir. 1985).

"M at 1038.
'"•Id. at 1052.

"635 F. Supp. 665 (D. Idaho 1986).



130 INDIANA LAW REVIEW [Vol. 21:117

subsidiary do not automatically warrant finding the parent an owner or

operator, "^^ the court rejected the parent's contention that only the

subsidiary, and not the parent, could be an owner and operator of the

facility:

Defendant Gulf was in a position to be, and was, intimately

familiar with hazardous waste disposal and releases at the Bunker

Hill facility; had the capacity to control such disposal and

releases; and had the capacity, if not total reserved authority,

to make decisions and implement actions and mechanisms to
prevent and abate the damage caused by the disposal and releases
of hazardous wastes at the facility. As noted previously in this
opinion, approval from Gulf was necessary before more than
Five Hundred Dollars ($500) could be spent on pollution matters

and before capital expenditures could be made. Gulf at times

controlled a majority of Bunker Hill's board of directors and

Gulf obtained weekly reports of day-to-day aspects of Bunker

Hill operations. With respect to Congress' intent that those who
bore the fruits must also bear the burdens of hazardous waste

disposal, it must be noted that Bunker Hill's authorized capital

was a mere Eleven Hundred Dollars ($1100) while Gulf received

Twenty-Seven Million Dollars ($27,000,000) in dividends from

Bunker Hill. Gulf fully owned Bunker Hill.

The court finds that the evidence presented is sufficient to
impose liability on Gulf as an owner or operator for purposes

of Section 107(a)(2), 42 U.S.C.A. § 9601(a){2).'^

Despite the fact specific nature of these cases, certain consistent

themes have emerged. First, courts have consistently upheld the principle

that corporate officers may be held individually liable if they exercise
sufficient control over corporate activities.^ The decided cases, however.

'Hd. at 672.

'''Id

^See cases cited and accompanying text supra notes 42-59. See also United States

V. Ward, 618 F. Supp. 884, 894 (E.D.N.C. 1985) ("A corporate officer of a company
who exercises authority for the company's operations and participates in arranging for
the disposal of hazardous wastes is liable under 107(a)(3) for cleanup costs."); United

States V. Mottolo, 605 F. Supp. 898 (D.N.H. 1985) (individual defendant who was president,
treasurer, and sole shareholder of corporation may be held individually liable under
CERCLA 107(a)(3) without piercing corporate veil); United States v. Carolawn, 14 Envtl.
L. Rep. (Envtl. L. Inst.) 20699, 20700 (D.S.C. 1984) ("[Tjo the extent that an individual

has control or authority over the activities of a facility from which hazardous substances

are released or participates in the management of such a facility, he may be held liable
for response costs incurred at the facility, notwithstanding the corporate character of the

business."). But see United States v. Wade, 577 F. Supp. 1326 (E.D. Pa. 1983) (insufficient

evidence to hold president of corporation individually liable under CERCLA 107(a)(4)).



1988] ENVIRONMENTAL LAW 131

have all involved individuals who were shareholders and officers in close
corporations, and were, therefore, extensively involved in day-to-day

corporate management. However, individual liability should not be im-

posed upon the executive officers of a major publicly held corporation,

since such officers would lack the intimate knowledge and operational

control possessed by the officers of a close corporation.

Second, courts have interpreted CERCLA to impose liability for
cleanup upon those who benefit from the activities which result in
contamination.^' It is clear that the shareholder-officers of a closely held

corporation benefit in a direct and immediate way from the corporation's
activities, but it is far less clear that the shareholder-officers of a major,

pubHcly held corporation benefit analogously. This distinction militates

against the imposition of liabiHty upon shareholder-officers in publicly

held corporations, to the extent that the shareholder-officers do not

actually participate in hazardous waste activities.

Third, individual liability has consistently been premised more upon
operational control than upon ownership. Although the corporate officers
thus far held liable have all been shareholders, the courts have focused

upon the individuals' operational control of corporate decision-making

to a far greater extent than upon their ownership interest.^^ This point
is underscored by the fact that courts have imposed liability without

regard to the propriety of piercing the corporate veil.

Finally, courts will likely employ a similar analysis to impose liability

upon parent corporations for their subsidiaries' waste management prac-
tices. If a parent corporation becomes too entangled with its subsidiary's

activities, the parent will likely be deemed an owner or operator under

Section 107(a).

^'See United States v. Mirabile, 15 Envtl. L. Rep. (Envtl. L. Inst.) 20994, 20995

(E.D. Pa. 1985) (citing Congressional ''intent to impose cleanup costs on those who bore
the fruits of hazardous waste disposal and who were involved in the planning and
implementation of the disposal practices"); United States v. Shell Oil Co., 605 F. Supp.

1064, 1072 (D. Colo. 1985) (quoting S. Rep. No. 96-848, 96th Cong., 2d Sess. at 98

(1980)):

[SJociety should not bear the costs of protecting the public from hazards produced

in the past by a generator, transporter, consumer, or dumpsite owner or operator

who has profited or otherwise benefited from commerce involving these substances
and now wishes to be insulated from any continuing responsibilities for the
present hazards to society that have been created.

See also United States v. Northeastern Pharmaceutical and Chem. Co., 579 F. Supp. 823,
848 (1984) ("Congress has determined that the persons who bore the fruits of hazardous
waste disposal also bear the costs of cleaning it up.").

"Apparently, no reported decision has based individual liability under 107(a) solely

on an individual's ownership of stock.



132 INDIANA LAW REVIEW [Vol. 21:117

C Lender Liability

A secured creditor of a covered person may also become subject to
liability under Section 107(a)." The statutory definition of "owner or
operator" provides a limited exemption from liability for a secured

creditor:

"Owner or operator" means . . . (ii) in the case of an on shore
facility or an offshore facility, any person owning or operating

such facility .... Such term does not include a person, who,
without participating in the management of a vessel or facility,

holds indicia of ownership primarily to protect his security interest

in the vessel or facility. ^"^

In United States v. Mirabile,^^ a Pennsylvania district court held that

American Bank and Trust Company ("AB&T") was not liable under
Section 107(a) for the cleanup of property subject to AB&T's mortgage.
In Mirabile, AB&T advanced a loan to Turco Coatings, Inc. ("Turco"),
which operated a paint manufacturing facility (the "Turco facility"),

and secured the loan with a mortgage on the Turco facility. When Turco
defaulted on the loan, AB&T foreclosed on its mortgage and was highest
bidder at the resulting foreclosure sale. Before AB&T took legal title
to the Turco facility, however, AB&T assigned its bid to the defendant
Mirabile, who accepted a deed to the property. When the Turco facility
was subsequently found to be contaminated, the United States sued

Mirabile under CERCLA to recover its response costs. In turn, Mirabile
joined AB&T as a third party defendant.

The Mirabile court considered the secured creditor exemption and

concluded:

[T]he exemption plainly suggests that provided a secured creditor

does not become overly entangled in the affairs of the actual

owner or operator of a facility, the creditor may not be held
liable for cleanup costs. The difficulty arises, of course, in

determining how far a secured creditor may go in protecting its

^'Regarding lender liability under CERCLA, see Burcat, Environmental Liability of
Creditors Under Superfund, 33 (No. 2) Prac. Law. 13 (1987); Burcat, Environmental

Liability of Creditors: Open Season on Banks, Creditors, and Other Deep Pockets, 103

Banking L.J. 509 (1986); Murphy, The Impact of "Superfund" and other Environmental

Statutes on Commercial Lending and Investment Activities, 41 Bus. Law. 1133 (1986);
Vollman, Double Jeopardy: Lender Liability Under Superfund, 16 Real Est. L.J. 3 (1987);
Comment, The Impact of the 1986 Superfund Amendments and Reauthorization Act on
the Commercial Lending Industry: A Critical Assessment, 41 U. Miami L. Rev. 879 (1987).

«42 U.S.C.A. § 9601(20)(A) (Supp. 1987).

"15 Envtl. L. Rep. (Envtl. L. Inst.) 20994 (E.D. Pa. 1985).



1988] ENVIRONMENTAL LAW 133

financial interests before it can be said to have acted as an

owner or operator within the meaning of the statute.^^

The court noted that other decisions had addressed the individual liability

of corporate officers under Section 107(a),^^but concluded that these

decisions were inapplicable because they involved defendants who were
intimately involved in the management of closely held corporations.

Corporate officers in a closely held corporation actively participated in

the day-to-day operations of the corporation's business. In Mirabile, the

secured creditor's participation in the corporation's business was limited

to financial decisions. The court considered this distinction important^^

and stated: "The participation which is critical is participation in op-
erational, production, or waste disposal activities. Mere financial ability

to control waste disposal practices of the sort possessed by the secured

creditors in this case is [insufficient to impose liability]. "^^ Because AB&T
had not participated in the day-to-day operation of the Turco facility,

the court held AB&T not liable as an owner or operator under Section
107(a).^o

In United States v. Maryland Bank & Trust Co.,^^ the court reached
the opposite conclusion, based upon a slightly different set of facts and

a different reading of the secured creditor exemption. In Maryland Bank
& Trust, the debtor owned and operated a waste disposal facility in
Cahfornia, Maryland (the ''CMD site"). Maryland Bank & Trust Com-
pany ("MB&T") advanced a loan to the debtor to purchase the CMD
site, and secured the loan with a mortgage on the site. When the debtor
defaulted on the loan, MB&T instituted a foreclosure action, purchased
the property at a foreclosure sale, and took title to the property. Four

years later, the site was discovered to be contaminated by hazardous

wastes disposed of prior to MB&T's ownership. EPA then brought suit
against MB&T to recover its CERCLA response costs. ^^

The court rejected MB&T's contention that it was exempted from
liabihty by the secured creditors exemption, and distinguished Mirabile

by noting that MB&T had actually taken title to the property and had
held title for more than four years, whereas in Mirabile the bank took

"^Id. at 20995.

"See supra notes 42-56 and accompanying text.
*«15 EnvtI. L. Rep. (Envtl. L. Inst.) at 20995.

"•"Id.

""The Mirabile court noted that its ruling was: limited to financial institutions which

provide funds to entities which dispose of hazardous waste as a result of their business

operations. It may be that a different test would be appropriate for financiers of entities
whose sole business is that of hazardous waste disposal.

^'632 F. Supp. 573 (D. Md. 1986).
'^Id.



134 INDIANA LAW REVIEW [Vol. 21:117

only equitable title and reconveyed the property after only four months.

More importantly, however, the Maryland Bank & Trust court took a
different view of the secured creditor exemption than did the Mirabile

court. The Maryland Bank & Trust court concluded that the exemption
does not protect creditors who take legal title to contaminated property:

MB&T purchased the property at the foreclosure sale not to
protect its security interest, but to protect its investment. Only

during the life of the mortgage did MB&T hold indicia of
ownership primarily to protect its security interest in the land.

Under the law of Maryland (and twelve other states), the mort-

gagee financial institution actually holds title to the property

while the mortgage is in force .... Congress intended by this

exception to exclude these common law title mortgagees from
the definition of '*owner" since title was in their hands only

by operation of the common law. The exclusion does not apply
to former mortgagees currently holding title after purchasing the

property at a foreclosure sale, at least when, as here, the former

mortgagee has held title for nearly four years, and a full year

before the EPA clean-up.''^

The court also based its decision upon the policy underlying CERCLA:

The interpretation of Section 101(20)(A) urged upon the court

by MB&T runs counter to the policies underlying CER-
CLA. Under the scenario put forward by the bank, the federal
government alone would shoulder the cost of cleaning up the

site, while the former mortgagee-turned-owner, would benefit

from the clean-up by the increased value of the now unpolluted
land. At the foreclosure sale, the mortgagee could acquire the

property cheaply. All other prospective purchasers would be faced

with potential CERCLA liability, and would shy away from the
sale. Yet once the property has been cleared at the taxpayers

expense and becomes marketable, the mortgagee-turned-owner

would be in a position to sell the site at a profit. In essence,

the defendant's position would convert CERCLA into an in-
surance scheme for financial institutions, protecting them against

possible losses due to the security of loans with polluted prop-

erties. Mortgagees, however, already have the means to protect

themselves, by making prudent loans. Financial institutions are

in a position to investigate and discover potential problems in

their secured properties. For many lending institutions, such

''^Id. at 579 (citations omitted).



1988] ENVIRONMENTAL LAW 135

research is routine. CERCLA will not absolve them from re-
sponsibility for their mistakes of judgment.''^

In summary, two clear themes emerge from an analysis of Mirabile

and Maryland Bank & Trust. First, a secured creditor may become
subject to liability as an owner or operator if it involves itself in the

debtor's operations. This conclusion is consistent with an underlying

theme of CERCLA that liability be imposed upon those with operational
control of hazardous waste activities. ^^

Second, a lender that takes actual title to contaminated property

(e.g., through a foreclosure sale) may become subject to liability as an
owner. This conclusion is consistent with the apparent purpose of the

secured creditor exemption,^^ and is also consistent with an underlying

theme of CERCLA that those who benefit from hazardous waste activities
should also bear the burden. ^^ Lenders would therefore be wise to

undertake a commercially reasonable investigation before taking title to

potentially contaminated collateral.^^

D. Potential Section 107(a) Liability of Trustees and Beneficiaries

Some interesting issues arise when the foregoing principles are applied
to the potential CERCLA liability of parties to a trust. Assume, for
example, that Settlor establishes an inter vivos trust''^ on behalf of

Beneficiary and that the corpus of the trust consists of commercial real

estate. Assume further that Settlor appoints Trustee to manage the trust
on Beneficiary's behalf and that Beneficiary is to receive income from

the trust until he reaches twenty-one (21) years of age, at which time

he is to receive legal title to the trust property. Finally, assume that

after the trust is established but before Beneficiary takes legal title, the

property is discovered to be contaminated as a result of the disposal

of hazardous wastes prior to the establishment of the trust. Who is
responsible for cleanup of the property: Settlor, Trustee, Beneficiary,

all three of them, or none of them?

'^Id. at 580.

"See United States v. Northeastern Pharmaceutical and Chem. Co., 579 F. Supp.

823, 848 (W.D. Mo. 1984)(CERCLA was designed to insure, so far as possible, that the
parties responsible for the creation of hazardous waste sites be liable for the response

costs in cleaning them up."); cf. supra notes 42-62 and accompanying text.

''*See supra note 64 and accompanying text.

"See supra note 61 and accompanying text.

^*See supra notes 35-41 and accompanying text.

^'For a discussion of various aspects of inter vivos trusts, see 1 W. Fratcher, Scott
ON Trusts §§ 19, 31, 32 (4th ed. 1987).



1 36 INDIANA LA W REVIE

W

[Vol . 21:117

Settlor no longer holds any legal or equitable interest in the property. ^°

Assuming that Settlor is not currently involved in the operation of the

property or the disposal of hazardous waste at the property, Settlor

could be liable only as a former owner of the property. ^^ Settlor's liability

would therefore depend upon whether hazardous wastes were disposed

of at the property during his ownership^^ and, if so, whether he could

establish an innocent landowner defense. ^^

Trustee has legal title to the property^'^ and the authority to exercise

control over its disposition and use.^^ However, Trustee holds legal title

only to enable him to manage the property on Beneficiary's behalf, and

^°The analyses of Settlor's potential liability would likely follow a different path if

the Settlor retained some equitable interest in the trust property or the power to revoke

the trust. In such a case Settlor might well be found to be a current owner or operator.

For example, in United States v. Carolawn, 14 Envtl. L. Rep. (Envtl. L. Inst.) 20698

(D.S.C. 1984), the court denied a defendant corporation's motion for summary judgment
on the issue of its liability as an owner or operator under 107(a). The corporation obtained

title to contaminated property from a trustee-in-bankruptcy and almost simultaneously

transferred title to three individual defendants. The court rejected the corporation's con-

tention that it was nothing more than a conduit in the transfer of title:

The facts regarding the transfer of title to the Fort Lawn property and the
degree of COCC's continuing interest and control are somewhat cloudy. This
Court certainly cannot say that, based on the record presently before it, there

is no room for controversy and that the government could not prevail under
any circumstances . . . Possession of title, or the lack thereof, is not necessarily

dispositive with respect to the questions of ownership or control. "While a

certificate of title is an indicium of ownership, and may establish the person
entitled to possession, such a certificate is not conclusive evidence of ownership."

Justice V. Fabey, 541 F.Supp. 1019, 1023 n.4 (E.D. Pa. 1982) (citations omitted);

see also Hemme v. Stein, 218 P. 853 (Okla. 1923) ("Title and rights in real
property may not always be as appears by the record." Id. at 854.) Thus, at
the very least, further inquiry concerning whether COCC retained a legal or
equitable interest in the property after the transfer is necessary before the court

can determine whether COCC is liable under CERCLA Section 107(a) as an
owner of the Fort Lawn site.

Id. at 20698-99. For a discussion of settlor as beneficiary, see 2 W. Fratcher, Scott
ON Trusts § 114 (4th ed. 1987), For a discussion of a settlor's power to modify or

terminate a trust, see 4 A. Scott, Scott on Trusts §§ 330, 331 (3d ed. 1967).

^'See 42 U.S.C.A. § 9607(a)(2) (Supp. 1987). If Settlor had previously generated

wastes disposed at the property, arranged for disposal of wastes at the property or

transported wastes to the property for disposal. Settlor might also be subject to hability.

See 42 U.S.C.A. § 9607(a)(2), (3) (Supp. 1987).

^^See 42 U.S.C.A. § 9607(a)(2) (Supp. 1987).

"See supra notes 35-41 and accompanying text.

^'^See 1 W. Fratcher, Scott on Trusts § 2.6 (4th ed. 1987) ("A trust is created
only where title to property is held by one person for the benefit of another.").

*Tor a discussion of a trustee's powers and duties with respect to the administration

of a trust, see 2A W. Fratcher, Scott on Trusts §§ 163A-185 (4th ed. 1987); 3 A.
Scott, Scott on Trusts §§ 185A-196 (3d ed. 1967 and 1985 Supp.).



1988] ENVIRONMENTAL LAW 137

it is not at all clear that Trustee benefits in any meaningful way from
"ownership" of the property.*^ Beneficiary is the beneficial owner of

the property^"^ and, as between Trustee and Beneficiary, is clearly the

party who benefits from ownership. On the other hand. Beneficiary may
have no authority whatever to control the disposition or use of the

property before he takes legal title.

Neither Beneficiary nor Trustee fits neatly into the owner or operator

pigeonhole; each has good arguments that the other should be responsible.

However, a facility can clearly have more than one owner or operator

under CERCLA.^^ Therefore, a court might resolve this apparent conflict
by holding Trustee and Beneficiary liable. ^^

Trustee may be able to escape liability by asserting the third party
defense of Section 107(b)(3). ^° This defense may prove successful with
respect to the third parties responsible for contamination of the property,

because Trustee would presumably have no contractual relationship with

them.^^ It may not prove successful with respect to Settlor, however,
because Trustee may be deemed to have a contractual relationship with
Settlor by virtue of the trust agreement.^^ With respect to Settlor, there-

fore. Trustee might be barred from the third party defense unless he

undertook a commercially reasonable investigation before he accepted

title to the property as Trustee.^^

Beneficiary might also escape liability by asserting the third party

defense. Beneficiary could argue that the contamination was caused solely

by Settlor, Trustee, or other parties with whom Beneficiary had no
contractual relationship. On the other hand, it could be argued that
Beneficiary does stand in a contractual relationship with both Settlor

^^See supra note 82 (A trustee may receive compensation for his services). See 3 A.
Scott, Scott on Trusts § 242 (3d ed. 1967). It is not at all clear, however, that such

a "benefit" is in any way meaningful for purposes of CERCLA. Cf. supra notes 50-53
and accompanying text.

*Tor a general discussion of trust beneficiaries and their interest in trust property,

see 2 W. Fratcher, Scott on Trusts §§ 112-131 (4th ed. 1987). A beneficiary's equitable
interest may cause a beneficiary to be deemed an owner or operator. Cf. supra note 77.

^^See, e.g.. United States v. South Carolina Recycling and Disposal, Inc., No. 80-

1274-6, slip op. (D.S.C. Aug. 28, 1984) (both property owner and lessee who subleased
property deemed "owners" under 107(a)).

''Cf. United States v. Price, 577 F. Supp. 1103, 1109 (D.N.J. 1983) ("[T]he liability

provisions are of no help if 'a financially responsible owner of the site cannot be located'").

^42 U.S.C.A. § 9607(b)(3) (1983).

"See id.

'^Regarding a trustee's duty to comply with the terms of a trust, see 2A W. Fratcher,
ScoTT ON Trusts § 164.1 (4th ed. 1987). Regarding the requirement of a written mem-
orandum, see 1 W. Fratcher, Scott on Trusts §§ 38-52.1 (4th ed. 1987).

'^See supra notes 36-41 and accompanying text. Regarding a trustee's right to disclaim,

see 1 W. Fratcher, Scott on Trusts § 35 (4th ed. 1987).



138 INDIANA LAW REVIEW [Vol. 21:117

and Trustee as a third party beneficiary of the trust agreement. ^"^ If so,

Beneficiary would be barred from the third party defense unless he

conducted an investigation of the property before accepting his inheri-

tance.^^

A court might seek to mitigate these harsh results by limiting a
Section 107(a) recovery to the value of the trust assets, but it is unclear

how such a principle would be derived from CERCLA. Since contam-
inated property might be completely valueless, this principle could deny

Section 107(a) plaintiffs any recovery at all. Finally, such a Hmitation

on liability would create a powerful incentive for covered persons to

place contaminated property in trust, in order to shield themselves from

liability.

As this example makes clear, fundamental concepts in CERCLA
remain ill-defined, and CERCLA's application is problematic outside the
paradigm cases apparently contemplated by Congress. The uncertainties

inherent in Section 107(a) will certainly provoke further litigation before

any clear answers develop.

IIL Insurance Coverage for Environmental Cleanups

A. Introduction

CERCLA remedial actions and cleanups often impose large and
unexpected cost responsibilities on private parties. Increasingly, '*poten-

tially responsible parties" ("PRPs") have looked to their general liability

insurers to obtain coverage for CERCLA claims. Businesses typically
seek to invoke the insurer's obligation to defend^ and to indemnify for

^'^But see 1 W. Fratcher, Scott on Trusts §14 (4th ed. 1987) (distinguishing trust
and contract for benefit of third party).

^'Regarding a beneficiary's right to disclaim, see id. at 36.

'^This article will not address the insurer's "duty to defend," which is the obligation

to the insured to provide an attorney or attorneys' fees and reimbursement of other costs

associated with the defense of actions that are or may be covered by a liability insurance
policy. The majority of jurisdictions hold that the duty to defend an insured is broader

than the duty to indemnify the insured for amounts paid in judgment or settlement of

an action. As one court has stated:
[It] is crystal clear that the insurer's duty to defend is separate and distinct

from the duty to indemnify. The duty to defend is contractual and one that is

heavier and broader than the duty to indemnify. The obligation to defend has

been deemed "litigation insurance" as well as "Hability insurance." Thus the

insurer is required to provide a defense to any action, however groundless, in

which there exists any possibility that the insured may be held liable for damages
where facts are alleged within the coverage of the policy.

National Grange Mutual Ins. Co. v. Continental Casualty Ins. Co., 650 F. Supp. 1404,



1988] ENVIRONMENTAL LAW 139

liability imposed on the insured^'' under comprehensive general liability

pohcies ("CGL") and other similar excess and umbrella liability insurance
policies. Insurers typically have responded to notice of such claims with

'^reservation of rights letters"^^ and in some cases have denied coverage

for the CERCLA claims altogether, A declaratory judgment action con-
cerning defense and coverage between insured and insurer often follows.

Recently there has been an explosion of such coverage litigation. As

little as two years ago, there were barely ten reported decisions in the

United States directly addressing environmental insurance coverage is-

sues. ^^ Today there are over fifty such decisions, and scores of enormous

coverage cases presently are being litigated. ^^ Many jurisdictions lack
appellate court decisions resolving the issues that are typically disputed

between insured and insurer in environmental claims. Indiana only has

one appellate decision directly addressing any of the major issues in this

area and that case had limited significance due to its unusual facts. ^°^

1407 (S.D.N.Y. 1986) (citations omitted).

Typically courts will use a "comparison test" to determine whether its duty to defend

has been triggered. This test looks at the allegations in a complaint filed against an insured

in an attempt to determine whether there are any allegations for which there could be

coverage under the policy regardless of the merits of the claim. See, e.g., Jonesville

Products, Inc. v. Transamerica Ins. Group, 156 Mich. App. 508, 402 N.W.2d 46, 47

(1986); American States Ins. Co. v. Maryland Casualty Co., 587 F. Supp. 1549, 1551

(E.D. Mich. 1984). If such an allegation is made, the courts will usually find that there

is a duty to provide a defense to the insured unless it appears "as a matter of law" that

there would be no coverage under the policy for the actions of the insured. See also

Travelers Indem. Co. v. Dingwell, 414 A.2d 220 (Me. 1980).

^^The insurer's duty to indemnify is the obligation to reimburse the insured for any

monies that the insured is obligated to pay as "damages" which are the result of a

covered occurrence.

^*A "reservation of rights" letter usually tells the insured that the insurer beheves

there are potential grounds to deny coverage for the claim the insured has made. "[A]

reservation of rights ... to be effective, must be communicated to the insured. It must

fairly inform the insured of the insurer's position and must be timely, although delay in

giving notice will be excused where it is traceable to the insurer's lack of actual or

constructive knowledge of the available defense." 14 G. Couch, Couch on Insurance
(2d Rev. ed.) § 51:88 (1982).

The reservation of rights letters received by insureds who file environmental claims generally
allege one or more of the following grounds: (1) lack of a covered "occurrence," (2)
lack of bodily injury or property damage occurring during the policy period, (3) lack of

"property damage" where reimbursement for government-imposed remedial costs is sought

or (4) absence of coverage due to a "pollution exclusion."

''lO Chemical & Radiation Waste Lit. Rep. (CCH) 30 (1985).
•'"For example, Westinghouse Electric Corporation and one of its subsidiaries recently

sued 155 property and Uability insurers who represented all property and liability insurers
(including successors) for the companies from 1948 to the present. 1 Toxic Law Rep.
(BNA) 97 (June 24, 1987).

'"Barmet of Indiana, Inc. v. Security Ins. Group, 425 N.E.2d 201 (Ind. Ct. App.



140 INDIANA LAW REVIEW [Vol. 21:117

This article will outline some major issues in environmental insurance

coverage disputes and assess trends in recent decisions in these areas.

B. Standard CGL Policy Terms

Policies covering only environmental injuries are quite rare. Typically,

insureds have claimed coverage for environmental claims under a CGL
pohcy. The language of the main body of virtually all CGL policies is
identical because it is based on insurance industry forms. Policies are

individualized by the addition of particular endorsements. Coverage under

this type of policy is triggered by a happening or event that meets the

policy's definition of an "occurrence." A standard definition of an
"occurrence" in the CGL policies typically involved in current claims
is "an accident, an event, or a continuous or repeated exposure to

conditions which results, during the policy period, in bodily injury or

property damage neither expected nor intended by the Insured. "'^^ The
occurrence need not take place and no claim needs to be filed during

the period that the policy is in effect, but an event that qualifies as an

occurrence must cause either "property damage" or "bodily injury"
during the period of time the policy is in effect.

"Property damage" typically is defined as:

(a) physical injury to or destruction of tangible property,

including the loss of use thereof at any time resulting therefrom,

or

(b) loss of use of tangible property which has not been

physically injured or destroyed, provided such loss of use is

caused by an occurrence during the policy period. ^^^

1981). There are a number of environmental insurance coverage cases presently in Indiana's

state and federal lower courts that may decide many of the issues discussed in this Article.
For example, in August, 1987, Great Lakes Chemical Corporation sued 15 of its insurers

in state court in Tippecanoe County seeking a declaration that these insurers are obligated

to pay defense and indemnification costs for certain environmental claims. Great Lakes

Chem. Corp. v. Northwestern Nat'l Ins. Co. of Milwaukee, et. al., now pending as Cause
No. 23C018711CP263 in the Fountain Circuit Court. Conversely, insurance companies

sometimes initiate similar actions. In Auto-Owners (Mutual) Ins. Co. v. J & B Metal
Finishing, Inc., et. al.. Cause No. 87-1038C Division, filed September 29, 1987, a liability

insurer seeks similar declaratory relief from such obligations under its policies (The authors

represent the insureds seeking insurance coverage.).

'"^United Pacific Ins. Co. v. Van's Westlake Union, Inc., 34 Wash. App. 708, 664

P.2d 1262, (1983). See also D. Day & S. Ray, Annotated Comprehensive Liability
Policy 3 (Defense Research Institute [hereinafter DRI] 1984); A. Reichenberger, The
General Ldvbility Insurance Policies - Analysis of 1973 Revisions (DRI, Vol. 1974

No. 1 Jan. 1974) (a copy of this Article is on file in the offices of the Indiana Law
Review).

'o^United Pacific Ins. Co. v. Van's Westlake Union, Inc., 34 Wash. App. 708, 664

P.2d 1262 (1983).



1988] ENVIRONMENTAL LAW 141

A Standard definition of * 'bodily injury" includes "bodily injury, sickness
or disease sustained by any person which occurs during the policy

period. "i«'*

Covered occurrences are subject to certain express exclusions from

coverage found in another portion of the standard form CGL policy.
The most significant exclusion for environmental claims is the so-called

"pollution exclusion." This commonly provides:
This insurance does not apply:

(f) to bodily injury or property damage arising out of the

discharge, dispersal, release or escape of smoke, vapors, soot,

fumes, acids, alkalis, toxic chemicals, liquids or gases, waste

materials or other irritants, contaminants or pollutants into or

upon land, the atmosphere or any water course or body of water;

but this exclusion does not apply if such discharge, dispersal,

release, or escape is sudden and accidental. '^^

C Existence of an Occurrence
The first issue that must be addressed to determine whether there

is coverage under a CGL policy is whether there has been an "occur-
rence." The historical background behind the inclusion of the requirement

of an "occurrence" in the standard CGL policy is revealing. Insurers
often insist that the requirement of an "occurrence . . . neither expected

or intended by the Insured" bars coverage for claims arising from

intentional release or deposit of wastes, especially repeated releases or

deposits over a long period of time, where it was reasonably foreseeable

that these wastes might damage the environment.
At least with respect to environmental claims, however, contem-

poraneous industry commentary on the 1966 CGL policy does not support
the insurers' present contention that there was any intent to avoid

coverage, even for extended pollution claims. At an insurance industry

meeting in 1965 G.L. Bean, Assistant Secretary, Liberty Mutual Insurance

Company, gave a precisely contrary assessment, stating that when the
new CGL policy went into effect:

[I]t is in the waste disposal area that a manufacturer's basic

premises-operation coverage is liberalized most substantially.

Smoke, fumes, or other air or steam pollution have caused an

endless chain of severe claims for gradual property damage. The

waste disposal cases have been difficult ones, because when the

"^Acands, Inc. v. Aetna Casualty & Surety Co., 764 F.2d 968, 971 (3d Cir. 1985).
'"^'Barmet, 425 N.E.2d at 202.



142 INDIANA LAW REVIEW [Vol. 21:117

injury or damage first starts to emerge, no corrective action is
taken in many cases, because the manufacturer is reluctant to
admit his waste disposal is causing it. This is probably an honest

doubt. When the case is pinpointed, it may or may not be easy
to make a quick elimination of the cause. The cost of an
alternative method of waste disposal may be terrifically expensive
or might even force the manufacturer out of business, and even

if it can be made, it may take months to convert. '°^

Lyman Baldwin, Secretary of Underwriting for the Insurance Com-
pany of North America, amplified this understanding in 1966:

Let us consider how this would apply in a fairly commonplace
situation where we have a chemical manufacturing plant which,
during the course of its operations, emits noxious fumes that

damage the paint on buildings in the surrounding neighborhood.
Under the new policy there is coverage until such time as the

insured becomes aware that the damage was being done. If he

continues the operation causing the damage, coverage would not

apply subsequent to the time of his becoming aware of the

damage. Naturally, if he could reasonably have anticipated that

the damage would ensue there would be no coverage at all for

it certainly would not have been unexpected. ^*^^

Plainly insurers contemplated continued coverage for volitional releases

or deposits even over an extended period of time, of pollutants, and

the "occurrence" requirement was not added to block such claims.

In the face of such comments and further contemporaneous industry

commentary and representations concerning the
*

'pollution exclusion,"

added in 1970 and discussed below, it is clear that insurers will have

a difficult time proving an intention in 1966 to exclude coverage of

most current environmental claims. As discovery proceeds in coverage
cases, more examples of exactly contradictory evidence—that the new
CGL policy plainly was intended to cover such claims—are surfacing.

^'^New Comprehensive Guaranty and Automobile Program, The Effect on Manufac-

turing Risks, paper presented at Mutual Insurance Technical Conference, November IS-

IS, 1965 at 6 (a copy is on file in the office of the Indiana Law Review). Mr. Bean
made a similar point in a 1966 paper on the new policy, citing the following as covered
liabilities: "gradual BI or gradual PD resulting over a period of time from exposure to
the insured's waste disposal. Examples would be gradual adverse effect of smoke, fumes,

air or stream pollution, contamination of water supply or vegetation." Id. For this and

other aspects of the drafting history of the CGL policy, see generally Anderson & Luppi,
Environmental Risk Insurance: You Can Count On It, 1987 Risk Management 68.

'"^Anderson & Luppi, supra note 106, at 72.



1988] ENVIRONMENTAL LAW 143

There is nothing extraordinary in finding coverage for claims arising

from volitional conduct that results in a tort. Most tort insurance covers

this type of conduct. Claims arising from truly unintentional or non-

volitional acts are rare. What is typical is a lack of intention of con-
sequences, such as injury from the negligently driven automobile, not

the lack of an intention to drive the automobile in the fashion in which

it was driven.

Courts in many jurisdictions have found that there has been an
occurrence under a CGL policy resulting from pollution claims where
the damage occurred as a result of intentional, long-term discharge of

pollutants. '°^ A handful of courts have denied coverage in long-term
discharge cases on the basis that there was no occurrence because the

insured's acts relating to the pollution event or events were either intended

or expected; however, those decisions generally involve facts in which

the insured clearly was or should have been aware of the adverse

environmental effects of its actions when the actions occurred.*^ Like

many other jurisdictions, Indiana courts have not squarely confronted
the issue of whether claims for pollution caused by damage resulting

from "innocent" long-term activities are covered.''^

The judicial interpretation of the phrase * 'expected or intended" as

applied in typical environmental situations makes it evident that the

standard definition of "occurence" was pollution claims. On the one
hand, waste generator insureds contend that although the insured intended

to dispose of its waste at what later becomes a CERCLA cleanup site,
the insured neither intended nor expected any eventual harm, and there-

fore its deposits constituted occurrences. On the other hand, insurers
argue that when the generator deposited its wastes usually over a period
of several years, it did so intentionally. Futhermore, it was reasonably

'°»5ee, e.g., Benedictine Sisters v. St. Paul Fire & Marine Ins. Co., 815 F.2d 1209,
1211 (8th Cir. 1987) (applying South Dakota law); Industrial Steel Container Co. v.

Fireman's Fund Ins. Co., 339 N.W.2d 156, 159 (Minn. Ct. App. 1987); Shapiro v. Public
Service Mut. Ins. Co., 19 Mass. App. 648, 477 N.E.2d 146, (1985) ("Thus even [where

we] view the escape of oil from Shapiro's tank as a foreseeable consequence of an unknown
but 'natural progressive condition,' i.e., corrosion, we would not conclude that the escape

was 'nonaccidental'"). The Shapiro court distinguishes the facts of its case from Barmet

of Indiana, Inc. v. Security Ins. Group, 425 N.E.2d 201 (Ind. Ct. App. 1981), "[W]here

the insured knew that its pollution control system mcilfunctioned on a regular and frequent

basis and the insured had received numerous complaints concerning its polluting, the

discharge of emissions was not sudden and accidental.") Id.

'"'See, e.g., American States Ins. Co. v. Maryland Casualty Co., 587 F. Supp. 1549

(E.D. Mich. 1984).

"°Barmet of Indiana, Inc. v. Security Ins. Group, 425 N.E.2d 201 (Ind. Ct. App.

1981). This case cites no other Indiana decision construing either the pollution exclusion

or a CGL policy in an environmental claim.



144 INDIANA LAW REVIEW [Vol. 21:117

foreseeable at the time of deposit, and therefore expected, that the

hazardous materials might one day escape and contaminate the envi-

ronment. But courts in most jurisdictions have found that reasonable

foreseeability is not alone a sufficient basis for the insurer to argue that

the insured expected or intended the resulting damage.^'* In contrast,

the court may find a lack of an occurrence if the insurer can show that
the insured was aware that property damage was taking place or that
human health was being threatened and the insured did nothing to
correct the situation, or that an insured is in the business of disposing

of hazardous waste. '^^

Moreover, although Barmet offers no guidance on the occurrence

issue, Indiana's general liability insurance law plainly requires that policy

exclusions for intentional conduct are to be construed to exclude only

conduct where harmful consequences are intended, and not merely the

conduct itself. A leading case construed a clause in a homeowner's policy
excluding coverage for '^bodily injury or property damage caused in-

tentionally by or at the direction of the insured" for its activities. '^^ In

Home Insurance Co. v. Neilsen,^^"^ the insured sought coverage for an
alleged assault; the insurer refused coverage on the basis that an assault

was an intentional act. The Neilsen court acknowledged the general rule
in Indiana that *'in an action for assault and battery, a person will be

presumed as a matter of law to have intended the natural and probable

consequences of his wrongful act."'^^ But in the context of insurance

coverage, the court required a more specific intent before an insured's

conduct would come within an exclusion for "intentional" acts.^'^ The
court held that the exclusions would apply only where the insurer could

show '*an actual intent to injure" or that the nature and the character

of the act is such that *'the intent to cause harm to the other party
must be inferred as a matter of law."^^^

This requirement that an insurer show intent to cause specific harm
as opposed to merely foreseeable harm in order to deny coverage is

'''See, e.g., Benedictine Sisters v. St. Paul Fire & Marine Ins. Co., 815 F.2d 1209,
1211 (8th Cir. 1987); Industrial Steel Container Co. v. Fireman's Fund Ins. Co., 399
N.W.2d 156 (Minn. Ct. App. 1987); and United States Fidelity and Guaranty Co. v.
Armstrong, 479 So. 2d 1164 (Ala. 1985).

"^Steyer v. Westvaco Corp., 450 F. Supp. 384, 388 (D. Md. 1978); American Mutual
Liab. Ins. Co. v. Neville Chem. Co., 650 F. Supp. 929, 933 (W.D. Pa. 1987) (applying

Pennsylvania law and citing Techalloy Co. v. Reliance Ins. Co., 338 Pa. Super. 1, 47

A.2d 820 (1984)); Great Lakes Container Corp. v. National Union Fire Ins. Co., 727

F.2d 30 (1st Cir. 1984).

"^Home Ins. Co. v. Neilsen, 165 Ind. App. 445, 332 N.E.2d 240 (1975).
"'Id.

"'Id. at 448, 332 N.E.2d at 242.

"^Id. at 449, 332 N.E.2d at 243.

"'Id. at 451, 332 N.E.2d at 244.



1988] ENVIRONMENTAL LAW 145

amplified by the decision in Indiana Lumberman's Mutual Insurance

Co. V. BrandumJ^^ There, the Indiana Court of Appeals found coverage

for injuries and damage to a woman and a utility company after the
insured intentionally rammed his vehicle into a vehicle occupied by his
fiancee and another man causing that vehicle to hit and injure the woman
and do damage to the utility pole. The court ruled that because the

insured only intended to injure the occupants of the car he hit and not

the other parties, there was coverage for the other parties' injuries.''^

Thus, Indiana insureds should prevail on the question of whether

there has been an occurrence even where there has been a gradual deposit

or release of hazardous wastes into the environment. The history of the
*

'occurrence" requirement favors coverage for such claims. At a minimum
that requirement is ambiguous which leaves insurers vulnerable to well

established precedent construing ambiguity in favor of coverage. It is

indisputable that the phrase
*

'expected" or "intended" is at least sus-

ceptible to a construction requiring a conscious intent to do the harm
actually suffered and not just to do the act leading to the harm. Courts

throughout the United States and the Indiana Supreme Court recently

and emphatically have strictly construed ambiguous language against the

insurer who drafted the policy and in favor of coverage. Moreover, the
majority of cases in other jurisdictions squarely confronting the question

have found an occurrence unless it can be shown that the insured intended

to dispose of hazardous substances illegally or the insured was aware

of a high degree of probability that its hazardous waste would pose an

environmental problem.

These holdings are consistent with general Indiana insurance law.

In Indiana, the insurer cannot avoid its duty to indemnify solely upon
its basis that the act which produced the circumstances giving rise to

liability was volitional and not fortuitous. The insurer also must dem-
onstrate that specific harmful consequences of the insured's act were

intended.

D. Trigger of Coverage

A second critical issue in environmental coverage disputes between
insurers and insureds is when coverage is "triggered," or when the
covered "bodily injury" or "property damage" occurred. ^^^ This timing
is important because it determines what coverages will be available to

help pay for indemnification or defense costs. Depending upon the
"trigger of coverage" theory adopted by the jurisdiction, a single pohcy

"«419 N.E.2d 246 (Ind. Ct. App. 1981).

"'/cT. at 248.

'^Eli Lilly and Co. v. Home Ins. Co. 462 N.E.2d 467, 470 (Ind. 1986).



146 INDIANA LAW REVIEW [Vol. 21:117

or a number of policies might apply. Courts have developed, primarily
in asbestos and certain delayed manifestation drug exposure cases, various

major theories to determine the appropriate trigger for insurance cov-

erage.

The **exposure" theory determines that an injury occurs and coverage

is triggered at the point where exposure to the body occurs, even though

the injury could not then be diagnosed and the cumulative effects of

the damage have not yet manifested themselves as a recognized disease. ^^^

Under the '* manifestation" theory, an actionable injury occurs at

the time an injury first manifests itself, even if the cause of the injury

occurred sometime earUer. An injury is manifest when it would be
observable and therefore readily diagnosable.^^^ The '*injury-in-fact"

theory requires the fact finder to decide when an '^injury" occurred. '^^

This theory is based on the premise that the term * 'injury" is not

ambiguous but has a plain meaning that converts this issue into a factual

one.

The ''multiple trigger" theory also is known as the Keene theory
because it was first decisively articulated in Keene Corp. v. Insurance

Co. of North America. ^^ The court in Keene held that asbestos injuries

was progressive and constituted a single continuous harm, therefore,

each insurer whose policy was in effect at any time during the period

of exposure, exposure-in-residence,^^^ or manifestation of the injury is

jointly and severally liable for the entire harm. The Keene approach

has been discussed and adopted in two recent pollution cases. Pacific

Indemnity Co. v. Bunker Hill Co.,^^^ and National Standard Insurance

Co. V. Continental Insurance Co.^^'' In both cases the courts decided.

^^^See, e.g., Ducre v. The Executive Offices of Halter Marine, Inc., 752 F.2d 976

(5th Cir. 1984) (applying Louisiana law), reh'g denied en banc, 758 F.2d 651 (5th Cir.

1985); Porter v. American Optical Corp., 641 F.2d 1128 (5th Cir. 1981) (applying Louisiana

law), cert, denied, 454 U.S. 1109 (1981), reh'g denied 455 U.S. 1009 (1982); Insurance

Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980),

aff'd on rehearing, 657 F.2d 814 (1981), cert, denied, 454 U.S. 1109 (1981).

'^^See, e.g., Eagle-Picher Indus. Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12 (1st Cir.

1982), cert, denied, 460 U.S. 1028 (1983).

^^^See American Home Products Corp. v. Liberty Mutual Ins. Co., 748 F.2d 760 (2d
Cir. 1984).

'^667 F.2d 1034 (D.C. Cir. 1981).

'""Exposure-in-resident" is the concept that with a long developing condition such

as asbestosis "the body [repeatedly] incurs microscopic injury as asbestos fibers become

lodged in the lungs and as the surrounding tissue reacts to the fibers thereafter." Keene,

687 F.2d at 1042.

'2«Civ. No. 79-2010, slip op. (D. Idaho July 3, 1^84).

'"CA-3-81-1015-D, slip op. (N.D. Tex. Oct. 4, 1983). See Anderson & Luppi, supra
note 106, at 72 for contemporaneous insurance industry commentary making it plain that

insurers believed a multiple trigger approach should apply to pollution claims.



1988] ENVIRONMENTAL LAW 147

as the National Standard court stated, "that all insurers on the risk

between the initial exposure and the time of the manifestation are

obligated to defend" the insured against bodily injury claims. '^^

In Eli Lilly and Co. v. Home Insurance Co.,^^^ the Indiana Supreme
Court adopted the multiple trigger approach. Home Insurance involved
a large number of DES products liability claims made against Eli Lilly
and Company for which Lilly was seeking insurance coverage from its
liability insurers. The plaintiffs in such cases generally allege injuries

from exposure to DES many years prior to manifestation of any injury.
The Indiana Supreme Court stated a strong insurance law and public

policy preference for the coverage trigger theory that would most likely

meet insureds' reasonable expectations of coverage:

In order to achieve the objectives of Indiana law, of giving

effect to the policies' dominant purpose of indemnity, we hold
that coverage is triggered at any point between ingestion of DES
and the manifestation of DES-related disease. This holding com-

ports with the rule of interpretation that courts should strive to

give effect to the reasonable expectations of the insured. ^^^

The multiple trigger theory should apply to Indiana insureds' pol-

lution claims. ^^* The similarities between a DES drug case and the. typical
fact pattern in pollution cases are striking. Each involve claims from

prolonged exposure to foreign substances resulting in a delayed mani-

festation of injury. Each involyes the insured's reasonable expectations

of coverage throughout the period of its activities. AppHcation of the

multiple trigger theory in pollution claims cases will serve the same

policies and objectives of the law that guided the Indiana Supreme Court

in Home Insurance. To apply any other trigger theory would be in-
consistent with Home Insurance, would defeat the reasonable expectations
of insureds in Indiana, and would not serve the public interest of Indiana

in making the maximum amount of funds available to pay legitimate
claims for any harm to Indiana residents and natural resources.

E. Coverage for Cleanup Costs as Property Damage

A4hird crucial issue in environmental insurance disputes is whether
costs of cleanups required by governmental agencies are covered "prop-

erty damage" under a CGL policy.

'2»National Standard Ins. Co. v. Continental Ins. Co., CA-3-81-1015-D, slip op. at

6 (N.D. Tex. Oct. 4, 1983).

'^'482 N.E.2d 467 (Ind. 1985).

''°Id. at 471.

'^'Development in the Law, Toxic Waste Litigation, 99 Harv. L. Rev. 1458, 1581-83

(1986); Note, The Applicability of General Liability Insurance to Hazardous Waste Disposal,

57 S. Cal. L. Rev. 745, 758-59 (1984); Anderson & Luppi, supra note 106, at 72.



148 INDIANA LAW REVIEW [Vol. 21:117

7. What Qualifies as '^Property Damage*'?—Courts have divided
over whether governmentally imposed cleanup costs are covered, but a

clear majority favor inclusion of such costs as '^property damage. "'^^

In Lansco, Inc. v. Department of Environmental Protection^^^ one of

the first and leading decisions in this area, the New Jersey court declared
that the insurer's argument that

*

'property damage'' be construed only

as "measurable damage to identifiable physical property" was ''without
merit." '3^ The court determined the insurer was obligated to pay the

cleanup costs associated with a spill of oil from Lansco's facility because

Lansco "could have reasonably expected to be indemnified for any

liability arising out of the operation of its business which was not

specifically excluded. "'^^ The court also noted that the New Jersey spill
law mandating cleanup of spills "fixed as a measure of damages the

cost of eliminating the harmful substance from the waters of the State.

Hence, the cost of cleanup determines the amount Lansco became legally

'"5ee, e.g.. Continental Ins. Cos. v. Northeastern Pharmaceutical Chem, Co., 811

F.2d 1180, 1184-87 (8th Cir. 1987), petition for reh'g en banc granted, 815 F.2d 51 (8th

Cir. 1987); New Castle v. Hartford Accident and Indemnity Co., No. 85-436 JLL, slip
op. at 15-19 (D. Del. Nov. 2, 1987); Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 662

F. Supp. 71, 76 (E.D. Mich. 1987) ("damages" in CGL policies encompass "money spent
to clean up environmental contamination" in CERCLA case); Gloucester v. Maryland
Casualty Co., 661 F. Supp. 394 (D.N.J. 1987); Powers Chemco, Inc. v. Federal Ins. Co.,

No. 8462/85, slip op. at 4 (N.Y. Sup. Ct. Nassau County, Apr. 3, 1987) ("It is the

Court's opinion that the cost of complying with the [Department of Environmental

Conservation] order insofar as they can be attributed to restoring the groundwater and

environment to its pre-contamination state and preventing future contamination constitutes

damages within the meaning of the policy."); Consolidated Rail Corp. v. Certain Un-

derwriters at Lloyds, No. 84-2669, slip op. at 11 (E.D. Pa. June 3, 1986); Independent

Petrochemical Corp. v. Aetna Casualty & Sur. Co., No. 83-3347, slip op. (D.D.C. May
2, 1986) (cleanup costs in CERCLA action from alleged dioxin contamination constitute
damages for purposes of liability insurance coverage); Port of Portland v. Water Quahty

Ins. Syndicate, 549 F. Supp. 233 (D. Or. 1982), affd in part, rev'd in part, 796 F.2d

1188 (9th Cir. 1986); Bankers Trust Co. v. Hartford Accident and Indemnity Co., 518

F. Supp. 371 (S.D.N.Y. 1981); Chemical Applications Co. v. Home Indemnity Co., 425
F. Supp. 777 (D. Mass. 1977); United States Aviex Co. v. Travelers Ins. Co., 125 Mich.

App. 579, 336 N.W.2d 838 (1983); Lansco, Inc. v. Department of Envtl Protection, 138
N.J. Super. 275, 350 A.2d 520 (N.J. Super. Ct. Ch. Div. 1975), affd, 45 N.J. Super.

433, 368 A.2d 363 (App. Div. 1976) cert, denied, 73 N.J. 57, 372 A.2d 322 (1977);

Kutsher's Country Club Corp. v. Lincoln Ins. Co., 119 Misc. 2d 889, 465 N.Y.S.2d 136

(Sup. Ct. 1983); Waste Management of the Carolinas, Inc. v. Peerless Ins. Co., 72 N.C.

App. 80, 323 S.E.2d 726 (1984), rev'd on other grounds, 315 N.C. 688, 340 S.E.2d 374

(1986).

'"138 N.J. Super. 275, 350 A.2d 520 (1975), affd, 45 N.J. Super. 433, 368 A.2d

363 (App. Div. 1976), cert, denied, 73 N.J. 57, 372 A.2d 322 (1977).
'^^38 N.J. Super, at 282, 350 A.2d at 524.



1988] ENVIRONMENTAL LAW 149

obligated to pay and the amount for which it is entitled to indemni-

fication, "^^e

Recently, the Eighth Circuit in Continental Insurance v. Northeastern

Pharmaceutical Chemical Co. decided that under Missouri law, both the

state and the federal governments suffered
*

'property damage" by reason

of the pollution involved and that the cost of cleaning up the environ-

mental damage imposed upon the insured was properly indemnifiable

by the insurer as ''property damage" under a standard CGL policyJ^^
The court first determined that not only private individuals who own
land, but also the government of the United States and the government

of the State of Missouri have an interest in the contaminated property

sufficient to have stated a claim for "property damage. "'^^ The court

justified its conclusion that environmental pollution fell within the stan-

dard CGL poUcy's definition of "property damage" in part by looking
to the policy's "pollution exclusion" which the court noted "itself states

that 'property damage' may result from the discharge of pollutants. "^^^

The court also agreed with Lansco that cleanup costs were the equivalent

of damages that might be imposed after a trial. *^°

Similarly, the court in United States Aviex Co. v. Travelers Insurance

Co.,'"^' rejected the insurer's contention that mandated cleanup costs are

equitable relief and not damages required to be indemnified under a

CGL policy. The Aviex court responded that this was a distinction
without a difference:

If the state were to sue in court to recover traditional

"damages," including the state's cost incurred in cleaning up

the contamination, for the injury to the groundwater, [the in-

surer's] obligation to defend against the lawsuit and to pay

damages would be clear.

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

cost of clean-up itself and the suing plaintiff to recover those

costs. The damage to the natural resources is simply measured

in the cost to restore the water to its original state. ^'•^

'''Id. at 284, 350 A.2d 525.
'"811 F.2d 1180 (8th Cir. 1987).

'''Id. at 1185-86.

''^Id. at 1186-87 (citing Port of Portland v. Water Quality Ins. Syndicate, 549 F.

Supp. 233, 235 (D. Or. 1982)).

"^Id. at 1188.

'^'125 Mich. App. 579, 336 N.W.2d 838 (1983).
''^Id. at 589-90, 336 N.W.2d at 843 (citing Lansco, 138 N.J. Super. 275, 350 A.2d

520 (1975)).



150 INDIANA LAW REVIEW [Vol. 21:117

A few courts have expressed a contrary view, holding that cleanup
costs and any costs associated with injunctive reHef are not legal "dam-
ages," but are equitable relief not covered by the CGL policy. A federal
district court in Maryland in Maryland Casualty Co. v. Armco, Inc,^'^^

granted an insurance company summary judgment in its declaratory
judgment action on the duty to defend a CERCLA action against the
insured. The court ruled that the CERCLA action was an equitable
action and **[t]raditionally, courts have found no insurance coverage for

costs of complying with an injunction even in cases where the suits

could have been brought for damages. '^^"^ The court upheld the insurance

company's position that the CGL policy intended to draw the line '*at
the historic division between law and equity. "^"^^

The district court in Maryland Casualty was upheld on appeal by
the Fourth Circuit. '"^^ Judge Chapman, writing the opinion for the court,
stated that "[t]he best approach in construing the term '*damages" as

contained in this insurance contract is to afford it the legal, technical

meaning . . . ."^''^ The court expressed concern that if * 'damages" were

given a broad reading by the court, it would permit *'any obligation to

pay" to be covered by the insurance contract. ^"^^

Judge Chapman also recently wrote the majority opinion in Mraz
V. Canadian Universal Insurance Co.^"^^ which reversed a frequently cited

lower court decision^^^ which had found that the insurer had the duty

to defend the insured in a government cleanup action. The Fourth Circuit

found that the response costs sought by the government under CERCLA
were an '^economic loss" and therefore not a loss within the policy's

definition of property damage. ^^' It is noteworthy that the Mraz case
involved costs expanded to prevent future harm to the environment and
not costs of cleanup of past harm.

There is little to recommend the minority view that cleanup costs
are not property damage. It is not supported by the history of the CGL
policy. When it was rewriting the CGL policy in 1966, the insurance
industry added a provision that required the insured to undertake and

pay for cleanup. William J. Obrist of the General Accident Group,

described the proposed provision as follows: "At his own expense, the

•^^643 F. Supp. 430 (D. Md. 1986), affd, 822 F.2d 1348 (4th Cir. 1987).
"^643 F. Supp. at 434 (citations omitted).

'''Id. at 435.

"^822 F.2d 1348 (4th Cir. 1987).

'''Id. at 1352.

'''Id.

'^'804 F.2d 1324 (4th Cir. 1986).

"oMraz V. Canadian Universal Ins. Co., 616 F. Supp. 1173 (D. Md. 1985).
'''Mraz, 804 F.2d at 1329.



1988] ENVIRONMENTAL LAW 151

named insured must promptly take all reasonable steps to prevent other
bodily injury or property damage from arising out of the same or similar

conditions."^" But this requirement was removed from the CGL policy
in 1973.'" Some companies added an endorsement requirement policy-
holder cleanup, but most CGL policies appHcable to current environ-
mental claims do not contain any such requirement. Because this express

exclusion was once included and then removed, the appropriate inference

is that insurers anticipated, at least after 1973, that there was coverage

for such costs. *^^

Second, irrespective of the drafting history, coverage of such costs

makes sound legal and policy sense. Mraz and Maryland Casualty place
too much emphasis upon traditional formal pleading rules without sub-
stantive significance. As several courts have held, the plain meaning of
**property damage,*' what an ordinary, reasonable, policy holder would

expect to have covered in a liability insurance policy, would include

such cleanup costs. '^^ This is especially true because these policies are

represented as comprehensive general liability policies. '^^ Moreover, to

the extent there is any ambiguity in the phrase **property damage," it

must be construed against the drafter-insurer and in favor of indemnity

for the insured. '^^

There is no principled distinction between costs incurred by private

parties in a CERCLA-imposed cleanup and damages awarded against
the same parties after the government or some other private party does
the same cleanup. Liability under CERCLA and similar statutes is liability
for the costs of cleanup, not merely the actions involved, and is a

traditional damage hability. In addition, CERCLA is intended to dis-
courage litigation and to encourage private party cleanups, which gen-

erally are much more economical than government-conducted cleanups.
Those purposes are frustrated if insurance policies are construed to

provide coverage only for a traditional damage award obtained after
someone else has done the cleanup.

F. Application of the ''Pollution Exclusion**

The **pollution exclusion" is the last hurdle to coverage for envi-

ronmental claims. The exclusion in the CGL policy purports to exclude

•"W. J. Obrist, quoted in Anderson & Luppi, supra note 106, at 69.
'"Reichenberger, supra note 102, at 12.

'^"Anderson & Luppi, supra note 106, at 69.
'"See, e.g.. Queen City Farms, Inc. v. Aetna Consol. Sur. Co., No. 86-2-06236-0,

slip op. at 6-7 (Wash. S. Ct. Kings Cty. Sept. 4, 1987) Port of Portland v. Water Quality

Ins. Syndicate, 796 F.2d 1188, 1194-95 (9th Cir. 1986).

'"National Screen Service Corp. v. United States Fidelity & Guar. Co., 364 F.2d
275, 279-80 (2d. Cir. 1965), cert, denied, 385 U.S. 958 (1966).

'"Eli Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 471 (Ind. 1985).



152 INDIANA LAW REVIEW [Vol. 21:117

pollution claims, but it '*does not apply if such discharge, disposal,

release or escape is sudden and accidental.*' Even if the insured can

demonstrate that the claim it made with the insurer involved an occurrence
that caused either property damage or bodily injury during the policy
period, the insurer may still contend that the pollution exclusion releases
the insurer from its duty to indemnify the insured.

The critical language in the exclusion is the exception for ''sudden
and accidental" pollution. Many more recently issued CGL policies have
incorporated "absolute" pollution exclusions, which purportedly abso-

lutely exclude coverage for claims caused by pollution because these

modified exclusions do not contain the "sudden and accidental" clause. ^^^

To date, most courts have found that the pollution exclusion does
not effectively exclude most environmental claims. A number of courts
have held the language of the pollution exclusion is fundamentally

ambiguous or insignificant, and have therefore found coverage. These

courts have followed two basic lines of reasoning in finding coverage.

The first is that the phrase "sudden and accidental" is by itself am-

biguous, and should be construed to find coverage. ^^^ The second is that
the pollution exclusion is nothing more than a restatement of the def-
inition of occurrence, and allows coverage except in cases in which the

pollution and damage from the pollution is expected or intended. ^^^

The ambiguity in the phrase "sudden and accidental" is patent.

Insurers contend that "sudden and accidental" should be construed in

a temporal sense, meaning immediate or swift. But insureds point to

the ordinary dictionary definitions of unexpected or unanticipated. The

"unexpected or unanticipated" interpretation of the phrase makes sense

on two levels—both the pollution event and its harmful consequences
can be unexpected or unintended. In contrast, the "immediate or swift"

interpretation makes no sense at all if applied at the damage level. Why
should delayed manifestation from a pollution event not be covered,

but damage appearing immediately or swiftly be covered? The temporal
construction would bar coverage on many claims, conversely the un-
expected or unanticipated construction is much more likely to lead to

'^^Chesler, Rodburg, Smith, Patterns of Judicial Interpretation of Insurance Coverage

for Hazardous Waste Site Liability, 18 Rutgers L.J. 9, 21 n.362 (1986). This article

presents a comprehensive and cogent discussion of the decisions in this area of the law.

'"See Buckeye Union Ins. Co. v. Liberty Solvents & Chem. Co., 17 Ohio App. 3d
127, 477 N.E.2d 1227, 1234 (1984); Molton, Allen and Williams, Inc. v. St. Paul Fire

and Marine Ins. Co., 347 So. 2d 95 (Ala. 1977). This case limited the pollution exclusion

to industrial pollution. This consideration has not been followed by courts in other

jurisdictions.

'*°Jackson Township Mun. Util. Auth. v. Hartford Accident and Indem. Co., 186
N.J. Super. 156, 451 A.2d 990 (1982). See also City of Northglenn v. Chevron USA,
Inc., 634 F. Supp. 217, 222 (D. Colo. 1986).



1988] ENVIRONMENTAL LAW 153

the conclusion that there is liabihty coverage. Faced with this ambiguity

most courts have resolved the issue in favor of indemnity and insureds.

Two landmark New Jersey cases have laid the framework for the
majority view favoring the converse for most pollution events. First, in

Lansco, Inc. v. Department of Environmental Protection^^^ the court

identified the ambiguities in the language of the exclusion and found

coverage where the event of pollution was neither expected nor intended

by the insured.

In Jackson Township Municipal Utility Authority v. Hartford Ac-

cident and Indemnity Co., New Jersey reaffirmed the presence and
consequences of the exclusion's ambiguity:

If there exists a problem of construction of the policy, that is,

if the controlling language will support two meanings, one fa-

vorable to the insured and the other favorable to the insurer,

the interpretation sustaining coverage must be applied. ^^^

The court summarized and embraced the expansion of the ambiguity,

identified in Lansco:

Thus, almost unanimously, the courts in other jurisdictions go

one step beyond Lansco ... in finding that the pollution clause

is ambiguous. In Lansco the occurrence was sudden and acci-

dental because the event was unexpected, whereas in each of

the other cases the court held the occurrence to be sudden and

accidental because the result or injury was unexpected or un-

intended. ^^^

As the Jackson court pointed out, the interpretation of the phrase
** sudden and accidental" to mean unanticipated or unintended is con-
sistent with the definition of a covered '* occurrence" in the poHcy.

Indeed, **when viewed in light of the case law cited, the clause can be

interpreted as simply a restatement of the definition of 'occurrence'

—

that is, that the policy covers claims where the injury was 'neither

expected nor intended'. "^^ Viewing the facts from the standpoint of

the insured, the court stated that '*the function of depositing the waste

may have been intentional but it was never expected or intended that
the waste would seep into the aquifers resulting in damage and injury

'^'138 N.J. Super. 275, 350 A.2d 520 (1975), aff'd, 145 N.J, Super. 433 (App. Div.

1976), cert, denied, 73 N.J. 57, 372 A.2d 322 (1977).
'"186 N.J. Super. 156, 161, 451 A,2d 990, 992 (1982) (citing Mazzilli v. Accident

& Casualty Ins. Co. of Winterthur, 35 N.J. 1, 170 A.2d 800 (1961)).
'^^Jackson, 186 N.J. Super, at 164, 451 A.2d at 994.



154 INDIANA LAW REVIEW [Vol. 21:117

to Others. "•^^ The court found it irrelevant that the seepage into the
groundwater was gradual rather than sudden because the seepage was

unexpected. *^^ The Jackson court identified by example the types of

cases in which the pollution exclusion would apply:

The chemical manufacturer or industrial enterprise who dis-
charges, disburses or deposits hazardous waste material knowing,

or who may have been expected to know, that it would pollute,
will be excluded from coverage by the clause. The industry, for

example, which is put on notice that its emissions are a potential

hazard to the environment and who continues those emissions
is an active polluter excluded from coverage. *^^

The Jackson court's equation of the pollution exclusion with the

requirement in the definition of occurrence that the damage be neither

expected nor intended is supported by mounting evidence concerning the

drafting and regulatory history of the exclusion. The exclusion was drafted

and submitted to the various state insurance commissioners in 1970. The

Mutual Insurance Rating Bureau, an insurance industry association which

helped draft and submit the exclusion, wrote memoranda to the insurance
commissioners which set forth the purpose of the exclusion: "This

endorsement is actually a clarification of the original intent, in that the

definition of occurrence excludes damages that can be said to be expected

or intended."'^* The memoranda stated that the exclusion was being
added only to clarify that expected or intended pollution was not covered.

The regulators took the insurers at their word. West Virginia's

insurance commissioner, for example, expressly relied upon these repre-
sentations in approving the exclusion. In an order dated August 19,

1970, the Commissioner ruled:

(1) The said companies [INA, Travelers, American Home,
St. Paul and American States] and rating organizations have

represented to the Insurance Commissioner, orally and in writing,

that the proposed exclusions . . . are merely clarifications of

existing coverage as defined and limited in the definitions of the

term 'occurrence', contained in the respective policies to which

said exclusions would be attached;

(2) to the extent that said exclusions are mere clarifications

of existing coverages, the Insurance Commissioner finds that

'^Id.

'''Id.

'**Mutual Insurance Rating Bureau, Submission to West Virginia Commissioner of

Insurance, July 30, 1970, quoted in Anderson & Luppi, supra note 106, at 70.



1988] ENVIRONMENTAL LAW 155

there is no objection to the approval of such exclusions. ^^^

Thus, it is clear that the insurance industry represented the exclusion

as nothing more than a restatement of the requirement in the definition

of occurrence that a covered loss be unexpected and unintended. Recently,

courts have expressly rehed upon this drafting history to buttress the

majority authority restricting the pollution exclusion to active polluters. ^^^

In Kipin Industries, Inc. v. American Universal Insurance Co., for

example, insurers sought to use the exclusion to escape coverage for

claims—including CERCLA claims—made against non-active polluters,
companies which had contracted for waste disposal with a firm which

allegedly had mishandled the wastes. The Ohio Court of Appeals neatly

summarized the limited application of the exclusion:

The claim must be construed strictly against the insurer because

it is ambiguous in meaning and its subject matter is an exclusion

from what is stated to be comprehensive coverage against liability.

We find in the record before us a 1970 circular to the members
of the Insurance Rating Board that in discussing [the pollution

exclusion], states that the clause is intended to clarify the def-

inition of "occurrence" so as to exclude coverage for expected

or intended results. [The pollution exclusion] does not bar cov-

erage in this case.^^^

Kipin and similar decisions make it plain that courts are increasingly
inclined to make insurers adhere to their contemporaneous portrayal of
this exclusion as nothing more than a clarification that the intentional

** active" polluter is not covered, but that non-active polluters—the great
majority of CERCLA claimants—are covered.

Numerous decisions have applied a similar distinction to find coverage
for innocent as opposed to knowing or intentional pollutants. This

approach was first adopted in Niagara County v. Utica Mutual Insurance

Co..^''^ Niagara involved the Love Canal claims. In that case, the court

found that the pollution exclusion was ambiguous and that it did not

'^'August 19, 1970 Order of the Insurance Commissioner of the State of West Virginia

in a proceeding entitled "Pollution and Contamination: Exclusion Filings," Administrative

No. 70-4, p. 3 & 1 quoted in Anderson & Luppi, supra note 106, at 70.
'™Kipin Industries, Inc. v. American Universal Ins. Co., No. A-8505288, slip op.

(Ohio Ct. App., Aug. 12, 1987); See also Broadwell Realty Servs., Inc. v. Fidelity &
Casualty Co. of New York, 218 N.J. Super. 516, 528 A.2d 76 (N.J. Super. Ct. App.,
Div. 1987).

'''Kipin, slip op. at 8-9.

"n03 Misc.2d 814, 427 N.Y.S.2d 171 (1980), aff'd, 80 A.D.2d 415, 439 N.Y.S.2d

538 (1981), appeal dismissed, 54 N.Y.S.2d 608, 427 N.E.2d 1191, 443 N.Y.S.2d 1030

(1981).



156 INDIANA LAW REVIEW [Vol. 21:117

apply to the insured, the county government. The court held that the

exclusion should apply only to an "active polluter," a culpable party,

as opposed to a party who is liable because of the strict liability that
attaches to the improper disposition of hazardous materials under federal

and state law. The court in United Pacific Insurance Co. v. Van's

Westlake Union, Inc.,^''^ similarly found coverage by applying the '^active

polluter" doctrine from Niagara County.

In light of the extensive and continually expanding authority^^"* and

evidence limiting appHcability of the pollution exclusion, most insureds

should have little difficulty overcoming insurers' present efforts to re-

construct the exclusion. While there are some decisions in which the

pollution exclusion has operated to disallow coverage, ^^^ those cases clearly

are a minority view. Moreover, in a number of these decisions there

was not an occurrence because the insured either intended or expected

the damage, which means the court should have ended its inquiry before

reaching the pollution exclusion.

The only Indiana appellate decision construing the pollution exclusion

is such a special intentional pollution case. In Barmet of Indiana, Inc.

V. Security Insurance Group, ^^^ the Indiana Court of Appeals found that

the emissions from the insured's plant were neither sudden nor accidental

because the insured's pollution control system malfunctioned on a regular

and frequent basis. The insured was on notice of the regular escape of

gases due to neighbors' complaints. The court was not impressed by the

insured's claim that the emissions were either unforeseeable or unpre-

'^'34 Wash. App. 708, 664 P.2d 1262 (1983).

''^See, e.g.. Fireman's Fund Ins. Co. v. Ex-Cell-O Corp., 662 F. Supp. 71 (E.D.

Mich. 1987); Payne v. United States Fidelity and Guaranty Co., 625 F. Supp. 1189, 1193

(S.D. Fla. 1985); United States Fidelity and Guaranty Co. v. Armstrong, 479 So. 2d 1164,

1168 (Ala. 1985); Molton, Allen and Williams, Inc. v. St. Paul Fire and Marine Ins.

Co., 347 So. 2d 95 (Ala. 1977); Reliance Ins. Co. of Illinois v. Martin, 126 111. App.

3d 94, 467 N.E.2d 287 (1984); Willett Truck Leasing Co. v. Liberty Mut. Ins. Co., 88

111. App. 3d 133. 410 N.E.2d 376 (1980); Jonesville Products, Inc. v. Transamerica Ins.

Group, 156 Mich. App. 508, 402 N.W.2d 46, 48 (1986); Autotronic Systems, Inc. v.

Aetna Life and Casualty, 89 A.D.2d 401, 456 N.Y.S.2d 504 (1982); Niagara County v.

Utica Mut. Ins. Co., 80 A.D.2d 415, 439 N.Y.S.2d 538, appeal denied, 54 N.Y.S.2d 831

(1981); Allstate Ins. Co. v. Klock Oil Co., 73 A.D.2d 486, 426 N.Y.S.2d 603 (1980);

United Pacific Ins. Co. v. Van's Westlake Union, Inc., 34 Wash. App. 708, 664 P.2d

1262 (1983).

'^'5ee, e.g., Fischer & Porter Co. v. Liberty Mutual Ins. Co., 656 F. Supp. 132,
139-40 (E.D. Pa. 1986) (citing Great Lakes Container Corp. v. National Union Fire Ins.

Co., 727 F.2d 30, 33-34 (1st Cir. 1984)); American States Ins. Co. v. Maryland Casualty

Co., 587 F. Supp. 1549, 1552-53 (E.D. Mich. 1984); Techalloy Co. v. Reliance Ins. Co.,

487 A.2d 820 (Pa. Super. Ct. 1984).

•M25 N.E.2d 201 (Ind. Ct. App. 1981).



1988] ENVIRONMENTAL LAW 157

dictable.^^^ Under these special facts, the Indiana court was persuaded

that the pollution exclusion provision applied to deny coverage.

The Barmet decision highlights the critical requirement in Indiana's

general insurance law discussed above that before an insurer can deny

coverage for an intentional act, it must show that the insured knew or

had reason to know that its act would cause harm.*''^ The Barmet insured
could foresee and expect that harm might come from its air pollution,
even if it probably did not intend for the vapors to blow onto a highway

and cause an automobile accident. Thus, under Indiana law, there was

a basis for the insurer to deny liability because some harm was fore-
seeable.

Barmet has little significance in the typical circumstances usually

confronting insureds and insurers in CERCLA cases. The insureds in
Barmet were clearly **active" polluters. Typical CERCLA insureds' first
notice of a pollution problem is a PRP notification letter from the EPA.
Barmet plainly is no support for any contention that the pollution

exclusion should operate in Indiana to deny coverage in the vast majority

of cases in which the insured is not on notice that its operation is

causing pollution.

IV. Conclusion

CERCLA liability can arise in a surprisingly wide variety of situa-
tions. Such Uability can be imposed not only upon companies engaged

in hazardous waste management, but also upon those companies' share-

holders, directors, officers, and employees. CERCLA liability can arise
from mere ownership of contaminated property, and can also arise from

the purchase and sale of contaminated property. Even creditors of

responsible parties may be exposed to CERCLA Uabihty.
It is not yet possible to define with precision the limits of respon-

sibility under CERCLA, but it is clear that the scope of liability is
expanding. It is hoped that the application of CERCLA's liability pro-
visions will become clearer as the Hmiting principles discussed in this

article become more fully developed.

Federal and state courts in Indiana have not yet decided critical

questions concerning liability coverage for environmental cleanup costs.

Indiana courts should utilize the rapidly developing law concerning these

issues in other jurisdictions and Indiana's own already well established
general insurance law principles to decide these questions. Indiana courts

should have little difficulty in holding that an occurrence has taken place

in a typical environmental claim. They may look to prior Indiana in-

''Ud. at 203.

''*See supra notes 119-24 and accompanying text.



158 INDIANA LA W REVIEW [Vol. 21:117

surance decisions which hold that an **occurrence" takes place where

the damage or harm was not actively intended by the insured. The courts
of this state would be in step with the majority of environmental insurance
coverage decisions by finding an occurrence in these circumstances.

In an analogous pharmaceutical case, Indiana's Supreme Court al-

ready had adopted the multiple trigger rule for determining which insurers

are liable with respect to a particular bodily injury claim. ^"^^ The multiple
trigger rule should extend to most environment claims, which typically

share vital characteristics with pharmaceutical claims—alleged injury from

exposure to a foreign substance. The public policies and precedents cited
by the Indiana Supreme Court supporting adoption of the multiple

environmental trigger rule in the bodily injury context should be equally

persuasive in adopting the same trigger of coverage rule for environmental

property damage claims.

Indiana's courts also should hold that government mandated cleanup

costs are properly
*

'property damages" as defined by the standard CGL
policy. That holding would be consistent with both the history of the

CGL policy and the majority of cases addressing this issue in other
jurisdictions. There is no principled reason to limit the protection of a

comprehensive general liability policy so that cleanup costs are not

covered.

Finally, the pollution exclusion, based on its drafting history and
the sound reasoning of many other courts in other jurisdictions, should
not be applied in cases other than those involving an insured engaged

in active and intentional pollution. In the typical circumstances of a

non-active polluter, named as a PRP in a CERCLA action, the vast
majority of jurisdictions find the pollution exclusion to be ambiguous

or redundant to the definition of occurrence, and tend to find in favor

of the insured to avoid defeating their reasonable expectations of com-
prehensive liability insurance. Indiana courts should affirm coverage for

environmental damage which the insureds neither intended nor expected.

'Eli Lilly and Co. v. Home Ins. Co., 482 N.E.2d 467 (Ind. 1985).