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holding that the "with respect to" language utilized in the agreement "falls short of the mark" to achieve broad coverage
Summary of this case from Innovative Biodefense, Inc. v. VSP Techs., Inc.Opinion
No. 03 Civ. 0637 (HB).
July 28, 2004
OPINION ORDER
Frazer Exton Development, LP ("FED") brought this declaratory judgment action against defendants Kemper Environmental, Ltd. ("Kemper"), the insurer, and Marsh USA, Inc. ("Marsh"), the insurance broker, seeking clarification as to the boundaries of the environmental insurance policy it purchased from Kemper. On January 20, 2004, this Court denied all motions for summary judgment because material issues of disputed fact predominated. FED seeks (1) reformation of the policy, to conform the final policy to the terms of the policy as bound, (2) a declaration that all of the environmental investigation and remediation costs incurred by FED are covered by the policy; (3) a finding that Kemper is liable to FED under the Pennsylvania Bad Faith Statute, 42 Pa. C.S.A. § 8371; and (4) a determination that Marsh is liable in negligence for any shortfalls in coverage. Kemper cross-claims against Marsh for (a) indemnification, (b) contribution, or (c) apportionment. A bench trial was held on January 26 through January 28 and January 30, 2004, and the parties' post-trial memoranda of law were not fully-submitted until May 5, 2004. For the following reasons, the Court finds that the insurance policy at issue here provides broad coverage (1) for any remedy that the EPA may issue, not just the remedial actions outlined in Alternative B, and (2) for all investigative costs.
"A declaratory judgment action presents an actual controversy if `the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" In re Prudential Lines Inc., 158 F.3d 65, 70 (2d Cir. 1998) (citing Maryland Cas. Co. v. Pacific Coal Oil Co., 312 U.S. 270, 273 (1941). "Where the contingent event upon which the controversy rests is unlikely to occur, the controversy lacks `sufficient immediacy and reality' to warrant declaratory relief." In re Prudential Lines Inc., 158 F.3d at 70 (citing Certain Underwriters at Lloyd's v. St. Joe Minerals Corp., 90 F.3d 671, 675 (2d Cir. 1996). Here, FED has already expended considerable costs for investigation (over $1.8 million), and Kemper asserts that the policy does not cover these investigation costs. Further, based on cost projections, it is highly likely that FED will incur costs in excess of the $3.5 million self-insured retention at which point it would be too late to secure alternative insurance. Therefore, this declaratory judgment action is clearly ripe for resolution.
Reference to Volume I of the trial transcript (January 26 through 28) is made as "Tr. at ___" and reference to Volume II of the trial transcript (January 30) is made as "Tr.2 at ___."
I. FINDINGS OF FACT
In 1992, the United States Environmental Protection Agency ("EPA") designated the Cyprus Foote Mineral Company ("CFM") Lithium Ore Processing Facility ("CFM Site"), located in East Whiteland Township, Pennsylvania, a "Superfund Site" by placing it on the National Priorities List, in accordance with the U.S. Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. § 9601, et seq. ("Superfund Law"). (Declaration of Ronald G. Fender ("Fender Decl.") at ¶¶ 1-2.) CFM then hired Environmental Resources Management, Inc. ("ERM"), an environmental consulting firm, to investigate the site and perform a Remedial Investigation/Feasibility Study ("RIFS"), that serves as a "preliminary step in the development of a remedy to be approved by EPA to remediate a Superfund site, which is to be set forth in a Record of Decision ("ROD")." ( Id. at ¶ 3.) After negotiations with Ronald Fender ("Fender"), a partner at ERM, and Daniel Sevick ("Sevick"), then ERM's Chief Financial Officer ("CFO"), CFM agreed to sell the site to ERM. ( Id. at ¶¶ 6-7.) ERM agreed to create a "limited partnership to acquire the CFM Site and assume the Superfund obligations." ( Id. at ¶ 7; see also Declaration of Daniel M. Sevick ("Sevick Decl.") at ¶ 9.) FED is the limited partnership that ERM created to acquire the Site. (Sevick Decl. ¶ 9.) The partnership between FED and ERM became effective October 23, 1998. (Jack Loew ("Loew") Deposition ("Loew Dep.") at 145:10-11.) Because the Site was a "Superfund Site" and the EPA had not yet approved a remedy for the Site, FED determined that "cost cap" insurance coverage would best suit its needs. (Fender Decl. ¶ 8; Sevick Decl. ¶ 6.)
Pursuant to a Pennsylvania statute, passed in 1995, known as the Pennsylvania Land Recycling and Environmental Remediation Standards Act (" PLRERSA"), Pennsylvania has encouraged the remediation of environmentally contaminated properties, known as "brownfields" properties, by applying more flexible environmental standards and a less rigorous regulatory approval process. (Fender Decl. ¶ 4.)
"The cost cap policy covers the insured for cleanup costs, as defined in the remedial study, that are above the anticipated cost of cleanup. The policy is designed to address the risk and uncertainty associated with beginning an environmental remediation project . . . The policy attaches above the expected cleanup costs (self-insured retention) . . . Typically, substantial analytical data, agency-approved work plans, sophisticated cost estimates and formal contractor quotations are necessary to underwrite cost cap policies." Andrew L. Kolesar Jacqueline M. Kovilaritch, ENVIRONMENTAL LAW ISSUE: Buying and Selling Brownfield Properties: A Practical Guide for Successful Transactions, 27 N. Ky. L.Rev. 467, 487 (2000).
On December 18, 1997, ERM sent Kemper revised cost estimates, for two separate probable remedies — Alternatives A and B — both of which included the express caveat that "[e]stimated costs are based on conceptual evaluation of the potential remedial alternative and are subject to change based on future investigations and evaluations." (Pl. Exh. 23.) Alternative A had a projected cost estimate of $2,540,000 and Alternative B had a projected cost estimate of $3,380,000. ( Id.) Investigation costs were not itemized on either Alternative A or B. ( Id.) However, Kemper's environmental underwriting specialist, Scott Alan Baker ("Baker"), explained that he understood that "there was a possibility that the remedial alternatives would change to ongoing investigations." (Tr. at 205:22-206:25.) Fender recalled "shar[ing] what we thought it would cost to respond to agency comments" ( Id. at 59:16-17), but could not remember whether FED ever provided Kemper with a written itemization of investigation costs ( Id. at 59:13-19).
Prior to FED's creation, Sevick retained Marsh to assist ERM in attaining a cost cap insurance policy from Kemper for the CFM Site. (Sevick Decl. ¶ 11; Tr. at 119:23-120:4.) Marsh assigned its employee, Jon Peeples ("Peeples") to broker the FED policy because Peeples was a specialist in environmental policies. ( Id.) Although Marsh contends that FED was not its client — as ERM had retained Marsh prior to FED's existence, Sevick testified that Peeples knew "the basic elements of the deal between FED and CFM." ( Id. at ¶ 11.) Peeples admitted on cross-examination that during the course of his representation, he learned that "there was going to be an entity created to acquire the site." (Tr. at 220:20-221:3.) And, Peeples admitted that FED "was the first named insured on the policy." ( Id. at 221:7-8.) Further, shortly after receiving a premium invoice from Marsh, by letter dated November 5, 1998, in the amount of $310,500, Sevick remitted payment to Marsh, on behalf of FED. (Sevick Decl. ¶ 30.) Therefore, FED was Marsh's client.
Because the EPA had not yet (and still has not yet) chosen a remedy for the Site, Sevick communicated to Peeples that he wanted "cost cap" coverage that would "insure against the risk of cost overruns for all of our environmental costs to get from where FED would be at the time it acquired the CFM Site to a completed remedy with EPA signoff . . . we specifically needed protection against the risks that the remedy would change, that additional investigation may be required, that we would discover more or different contaminants at the Site, and that the environmental standards for the Site would change." (Sevick Decl. ¶ 11.) It is undisputed that Peeples understood that FED sought to insure the risk that the remedial alternatives that it had submitted to Kemper could change, and "believed at the time that [he] brokered this policy that the policy covered that risk[.]" (Tr. at 250:4-17.) Richard Sheldon ("Sheldon"), Kemper's Director of Industrial Facilities and Risk Management, actually explained to Peeples that the policy would cover such a risk. ( Id. at 250:25-251:2.) As a result, and because "nothing on the policy excluded that coverage," Peeples was confident that the policy was as broad as everyone had discussed. ( Id. at 252:15-20.)
Sevick also testified that he explained to Peeples — the conduit of information to Kemper — that "we needed coverage F to apply once we closed on the deal." ( Id. at 91:10-15.) Coverage F pertains to ENVIRONMENTAL CLEAN UP COSTS. (Pl. Exh. 11.) Peeples fully understood — and still believes that the policy achieved such coverage — namely, that Coverage F incepted on October 31, 1998, at the onset of the policy. ( Id. at 254:1-6.) It is also clear from Peeples' testimony that Marsh understood that "investigation costs were to be included within the coverage of this policy. . . . [t]hat was what was relayed to Kemper. That was also relayed to [Peeples] by Mr. Sevick." ( Id. at 221:21-22; 225:15-22.) Peeples also explained that investigation costs are defined as part of Coverage F (ENVIRONMENTAL CLEANUP COSTS), which are themselves included in the definition of COST OVERRUNS, "the amount of ENVIRONMENTAL CLEAN UP COSTS for a COVERED PROJECT. ( Id. at 224:6-18.)
While ENDORSEMENT No. 8 to the final policy, inter alia, delays the onset of several coverage parts, neither it nor any other endorsement alters the inception of Coverage F. (Pl. Exh. 11.)
ENVIRONMENTAL CLEAN UP COSTS are defined as "expenses incurred for the investigation, removal, disposal or treatment of POLLUTION CONDITIONS pursuant to ENVIRONMENTAL STANDARDS." (Pl. Exh. 11.) POLLUTION CONDITIONS are then defined as "a discharge, dispersal, release, seepage, migration, escape or presence of smoke, vapors, odors, soot, fumes, acids, alkalis, toxic, chemicals, liquids or gases, electromagnetic fields (EMF), waste materials, including medical, infectious and pathological wastes, or other irritants, contaminants or pollutants into or upon land or structures thereupon, the atmosphere or any watercourse or body of water (including groundwater), from or at a COVERED LOCATION." ( Id.) (emphasis added.)
Sevick explained that FED chose the Brownfields Restoration Development ("BRD") policy as a template "specifically because it included investigation cost[s]. . . ." ( Id. at 86:9-11; Pl.Exh. 24.) Further, according to Peeples, he believed that "[t]he policy would react whether the contamination was discovered onsite or offsite" ( id. at 255:7-8), and therefore conveyed this understanding to Sevick. ( Id. at 12-19.) Although Sheldon testified that it was his understanding that "coverage for the policy would be linked to the cost estimates for a specific workplan" (Sheldon Decl. ¶ 7), when pressed to explain, Sheldon did not contend that coverage would be limited to the tasks identified, but rather stated that "[t]he costs typically that the work plan includes become the retention amount on the policy form, and at that point that is where the limits attach and so on and so forth." (Tr. at 57:14-16.)
Based on ERM's revised cost estimates for the then anticipated probable remedies, Kemper issued a quotation, dated January 8, 1998, setting out the general parameters of its coverage proposal. (Pl. Exh. 3.) In this quotation, Kemper wrote that "[i]nitially, only Coverage F — ENVIRONMENTAL CLEAN UP COSTS CONTAINMENT will apply under the policy. Further, this coverage part will not apply until the formal commencement of the project, pursuant to USEPA approval of same." (Pl. Exh. 3.) Notably, however, the draft policies that followed omitted this limiting language regarding the onset of Coverage F. (Pl. Exh. 4-5, 8, 10.) The onset of Coverage F is of critical importance as this coverage part is arguably the portion that covers pre-ROD investigation costs.
Kemper's expert, David J. Dybdahl ("Dybdahl") testified that "a $16,500,000 cost cap policy with a $3.5 million self-insured retention and with a ten-year policy term would be expected to cost significantly more than the $300,000 premium charged by Kemper." (Dybdahl Decl. ¶ 5(a).) Therefore, Dybdahl stated that "[i]t is [his] opinion based on the premium paid for the Policy, that the buyer and the brokers knew or should have known they were purchasing a policy that was very restrictive in the coverage it was providing." ( Id.) Dybdahl, however, conceded that Kemper was new to the environmental insurance market, and was "an aggressive company in pricing policies," which entailed bidding "premiums that were significantly lower than its competitors." (Tr. at 338:9-22.) The FED policy may have been the first that Kemper issued on a Superfund Site. (Tr. 2 at 13:19-24.) And, Scott Baker ("Baker"), Kemper's environmental underwriting specialist who worked on the FED policy, had only been with Kemper for a few months when he priced the policy, and prior to joining Kemper, had "no insurance background whatsoever." (Tr. at 195:7-14.) Baker admitted that his pre-quote correspondence with Fender was targeted at assuring himself that there were no additional anticipated remediation costs for which he had not accounted. ( Id. at 205:13-17.) Baker understood that ERM's anticipated costs for probable remedies did not comprise a workplan ( id. at 204:9-15) and also realized that "E.P.A. could, in its discretion, select either one or some combination or some wholly different remedy for the site." ( Id. at 203:1-3.)
On the same day that Baker received the cost estimates from Fender, December 18, 1997, he sent a facsimile back to Fender, requesting "additional information regarding the cleanup cost estimate at the subject site" because "very little information has been supplied to Kemper to-date." (Def. Exh. 56.) However, before receiving any additional information, Kemper issued a quotation. By the time that Baker left Kemper, later that December, he had not received any written responses to his demand for additional information. (Tr. at 207:7-15.) While Jack Frost ("Frost") filled Baker's role ( id. at 18:16-20), Frost did not recall assuming any involvement with the FED policy. ( Id. at 209:15-22.)
During the negotiation period, prior to coverage being bound, the parties exchanged various draft policies, namely one dated January 9, 1998, a second dated May 19, 1998, and a third dated September 28, 1998. (Joint Pre-Trial Order ("JPTO") ¶¶ 3-4, 6-7; Pl. Exhs. 4-5, 7-9), each reflecting the current state of the agreement. Sevick reviewed each draft and provided comments about each to Marsh. (Tr. at 120:12-19.) Each draft defined "COVERED PROJECT(S)" in Item XI of the Declarations, as "Remediation of Former CFM Lithium Ore Processing Facility, Exton, PA." (Pl. Exhs. 4-5, 7-9.) On October 26, 1998, Peeples sent a facsimile to Sheldon, requesting that he "consider binding coverage . . . effective October 31, 1998, subject to the terms and conditions quoted to date. . . ." (Pl. Exh. 1) (emphasis added.) Kemper bound coverage on October 26, 1998, "subject to the terms and conditions of Kemper Environmental's quote for the above-captioned and subsequent correspondence" (Pl. Exh. 2) (emphasis added) and provided a copy of the Binder to Sevick. (Tr. at 122:17-25.) The binder noted that "[a]s we discussed, binding is subject to confirmation that the planned remedial action at the site has not changed since out [sic] last underwriting review of same; and disclosure of any known losses or claims regarding the covered location." ( Id.) Sheldon explained that Kemper requested this confirmation in order to ensure that it would not be insuring a known risk. (Tr.2 at 44:17-25-45:1-24.) If Kemper learned that the remediation plan or the cost estimates had changed, "it could reevaluate at a minimum, but possibly exclude." ( Id. at 45:10-14.) Notably, the Binder did not contain a description of COVERED PROJECTS. Sevick reviewed the Binder and instructed Marsh to change FED's structure from "LLC" to "LP" and to add "the description of the property that was attached to the contracts which is what's in the town hall saying 27 acres of this. It's the survey documents to identify what the property was." (Tr. at 125:23-126:2.)
A binder is "[a]n insurer's memorandum giving the insured temporary coverage while the application for an insurance policy is being processed or while the formal policy is being prepared." Black's Law Dictionary 161 (7th ed. 1999).
The only quote that Kemper had provided was embodied in its January 8, 1998 letter; therefore, this letter and all correspondence subsequent to January 8, 1998 are instructive as to the parameters of the coverage. (Pl. Exh. 3.) Kemper argued at trial that it issued a subsequent quote on September 28, 1998, which was identical to the January 8, 1998 quote. However, while the January 8, 1998 quote was signed by Rick Ringenwald ("Ringenwald"), the September 28, 1998 quote was unsigned. And, Kemper provided no proof that this second unsigned quote was ever forwarded to FED or Marsh. (Tr.2 at 24:17-18; 30:5-23.) Peeples testified that he was unable to locate the September 28, 1998 quote in Marsh's files. Therefore, the Court finds that the January 8, 1998 quote is the quote referenced in the Binder. Post-binder, Kemper issued a fourth draft policy, dated October 28, 2004, which contained the identical description of COVERED PROJECT(S) as in all prior drafts. (Pl. Exh. 10.)
As of the date of trial, there were only minimal differences between the plan currently being considered by the EPA and the alternatives submitted to Kemper in 1997. (Tr. at 75:7-20.)
Peeples understood that "it was the custom and practice in the insurance industry for an insure[r] to issue a policy that conforms to the binder" and also knew that "the insure[r] does not have the latitude to unilaterally deviate from the binder when issuing the policy." (Tr. at 244:2-9.) It is undisputed that Peeples and Sevick communicated on November 3, 1998, and during this conversation, Sevick confirmed that the likely remedy was still Alternative B, and the corresponding cost estimates had not changed. (Peeples Aff. ¶ 6, Exh. C.) In his contemporaneous notes, Peeples also commented that a "copy of final contract w/attachments will be sent directly to Kemper — refer to schedule of property be [sic] legal description attached to contract." (Peeples Aff. Exh. C.)
On the same day, in order to convey Sevick's confirmations, Peeples sent a facsimile to Sheldon, without copying anyone at FED, stating, inter alia, that "[t]he project description should remain as previously identified, with the exception of referring to the scope of work as attached to the contract." (Pl. Exh. 38.) The contract referred to by Peeples was a draft of "the property transfer agreement between CFM and FED" (Tr. at 266:11-13; Pl. Exh. 35.) Notably, the draft contract did not reference the "scope of work" to be performed, and Peeples acknowledged that "as between CFM and Frazer Exton that Frazer Exton was agreeing to perform whatever remedy E.P.A. directed it to[ ]." (Tr. at 270:4-7.) Peeples agreed that "it was not [his] intent to tell Kemper to restrict the coverage in any way from what it had bound. . . ." (Tr. at 249:3-6.) Notably, Sheldon testified that he did not recall having seen the transfer agreement, and was therefore unsure whether this document was the contract referred to in Peeples' November 3, 1998 facsimile. (Tr.2 at 53:9-17.)
Kemper issued the final policy on or about November 6, 1998, but did not forward it to Marsh until on or about February 17, 1999. (Tr.2 at 53:20, 21-23.) When Peeples received the final policy, he noted that the definition of the term COVERED PROJECT(S) was different than it had been in all prior drafts and in the Binder, and read: "Remediation of the Former Cyprus Foote Mineral Company Lithium Ore Processing Facility, Exton, West Whiteland Township, PA, and as per the associated remediation plan and related costs developed by Environmental Resources Management and on file with the underwriter." (Tr. at 262:17-18; Pl. Exh. 11.) Sheldon testified that he was unaware whether the new language had appeared in any prior quote, draft, or correspondence, was unsure who designed the new language, and did not recall speaking to either Peeples or Sevick about the language. (Tr.2 at 50:17-52:3.) Because Peeples "believed at the time that [he] still had the expansive coverage that [his] client sought. . . .", and therefore did not deem the change material, he did not discuss the change with anyone at Kemper or FED (Tr. at 262:19-263:23.) Instead, four months after receiving the policy, on March 16, 1999, Peeples simply forwarded it to Sevick and instructed him to "[p]lease review and call me with any questions or concerns." (Pl. Exh. 12.) Although it was Marsh's practice to highlight unexpected changes in a policy that could affect coverage, because Peeples did not find the change in COVERED PROJECT(S) to be unexpected, and therefore did not believe that it would affect coverage, he did not make note of it in his cover letter to Sevick. (Tr. at 265:13-22.) Because Sevick was not keyed to search for altered terms, he merely scanned the policy to ensure that "LLC" had been changed to "LC", and failed to notice the change in the definition of COVERED PROJECT(S). (Sevick Decl. ¶¶ 31-32.) Sevick never provided any comments to Peeples on the Final Policy. (Tr. at 127:14-19.)
Peeples testified that Marsh had a discussion with Sevick in November, wherein the parties discussed that "this program [of insurance] had always been based on [FED's] conceptual I saw nothing through this that changed that program based on the conceptual." (Tr. at 266:1-5.)
The final policy also contained several endorsements, which served to expand coverage. First, under ENDORSEMENT No. 2, the policy excluded several occurrences which heretofore would not have been covered. Namely, ENDORSEMENT No. 2 provided coverage for:
a. discovery, during the POLICY PERIOD, of POLLUTION CONDITIONS not identified in the COVERED PROJECT;
b. discovery, during the POLICY PERIOD, of increased levels or increased quantities of POLLUTION CONDITIONS;
c. changes to ENVIRONMENTAL STANDARDS.
(Pl. Exh. 11.)
P. Stephen Finn ("Finn"), the expert hired by FED to render an opinion regarding the reasonableness of the costs incurred and expended for the investigation and remediation of the Site, concluded that the costs incurred by FED and the proposed remedy are reasonable. (Finn Decl. ¶¶ 8, 11, 14.) Finn also concluded that "based upon EPA's Proposed Plan for remediation of the Site, the cost of the Proposed Remedy, and the anticipated project schedule, that the total costs will exceed $3.5 million by October 31, 2008." ( Id. ¶ 16.) Neither Kemper nor Marsh disputed the reasonableness of FED's expenditures nor the cost projections made by Finn.
II. CONCLUSIONS OF LAW
A. Coverage for Investigation and Remediation Costs Incurred by FED To Date1. Standard for Interpreting an Unambiguous Contract
In order to determine what meaning to give to the Final Policy, the Court must determine whether the Policy is ambiguous, and only resort to extrinsic evidence when "a contract term could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." World Trade Ctr. Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 184 (2d Cir. 2003) (internal quotations and citations omitted).
[T]he cardinal principle for the construction and interpretation of insurance contracts — as with all contracts — is that the intentions of the parties should control. Unless otherwise indicated, words should be given the meanings ordinarily ascribed to them and absurd results should be avoided. . . . the meaning of particular language found in insurance policies should be examined "in light of the business purposes sought to be achieved by the parties and the plain meaning of the words chosen by them to effect those purposes."World Trade Ctr. Props., L.L.C., 345 F.3d at 184 (citing Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir. 1986)). Aside from the obvious ambiguity in the altered definition of COVERED PROJECT, the remainder of the Policy is clear and straightforward, and therefore does not require resort to extrinsic evidence.
Kemper bound coverage on October 26, 1998, "subject to the terms and conditions of Kemper Environmental's quote for the above-captioned and subsequent correspondence" (Pl. Exh. 2) (emphasis added.) The Final Policy defined the COVERED PROJECT as the remediation of the Site, as per the associated remediation plan and related costs developed by Environmental Resources Management and on file with the underwriter. (Pl. Exh. 11.) Read in conjunction, the Final Policy certainly incorporated the December 18, 1997 letter, revising the cost estimates for Alternatives A and B, and Kemper's January 8, 1998 quotation. Additional correspondence, subsequent to January 8, 1998, is also integrated. Because the parties reasonably disagree over the interpretation of COVERED PROJECT(S), correspondence prior to January 8, 1998 may be instructive as to the parties' intentions with regard to the definition of COVERED PROJECT(S).
2. Broad Coverage or Only Identified Actions of Alternative B
Before discussing Kemper's alleged unilateral change to the wording of the Final Policy, it is important to determine the scope of coverage provided by the draft policies, and the October 26, 1998 Binder. It is undisputed that Kemper knew that FED wished to procure insurance to cover its remediation of the CFM Site. It is also undisputed that, at the time when ERM/FED signed the Final Policy — and even at the time of trial — the EPA had not yet issued a ROD. And, Sheldon informed Peeples that the proposed policy would cover the risk that the EPA would chose a different remedy. Therefore, it would have been odd, to say the least, for FED, or Marsh as its agent, to have agreed to coverage that was merely conjectural and only insured remediation activity that FED surmised the EPA would require.
Further, the Court finds Kemper's argument, through its expert witness Dybdahl, that "based on the premium paid for the Policy, the buyer and the brokers knew or should have known they were purchasing a policy that was very restrictive in the coverage it was providing" (Dybdahl Decl. ¶ 5(a)), to be unavailing, if not incredible. First, Kemper was a novice in the environmental insurance field. The FED policy may well have been its first on a Superfund Site. Second, Kemper was known to be "an aggressive company in pricing policies." (Tr. at 338:9-22.) Third, Baker, the individual at Kemper who priced the policy, had only worked at Kemper for a few months at the time, and prior to joining Kemper, had "no insurance background whatsoever." ( Id. at 195:7-14.) To me at least, with this background, the low premium quote was reasonable, and provides little if any support for Kemper's argument favoring narrow coverage.
Interestingly, all of the policy drafts preceding the November 6, 1998 Final Policy defined COVERED PROJECT(S) broadly as "Remediation of Former CFM Lithium Ore Processing Facility, Exton, PA." The second draft policy, issued on May 19, 1998, literally crossed-out the portion of the definition of COVERED PROJECT(S) that stated "(exact Remedial Action Plan To Be Determined)." (Pl. Exh. 5.) And, the Binder noted that coverage was subject only "to the terms and conditions of Kemper Environmental's quote for the above-captioned and subsequent correspondence." (Pl. Exh. 2.) The only quote issued by Kemper was contained in its January 8, 1998 letter. Although the quotation was based on Alternative B — FED's best estimate of what the EPA would require — neither the quote nor any subsequent correspondence limited coverage to only the remedial actions expressly delineated in Alternative B. Therefore, prior to the issuance of the Final Policy, the insurance was set to cover any remediation that the EPA would eventually mandate. After binding coverage on October 26, 1998, Kemper issued the Final Policy on or about November 6, 1998.
The deletion of this parenthetical was either the result of (1) a decision that Alternative B was the best approximation of what the EPA would require, and was therefore the plan from which Kemper was supposed to base its estimates, or (2) a decision that a specific workplan was not possible as the EPA had not yet issued a ROD. There is simply no indication in the record that this deletion occurred because an " exact Remedial Action Plan" had been "Determined," to which the insurance would be limited. (Pl. Exh. 5) (emphasis added.)
On all draft policies, and on the final policies, there were clear exclusions, such as for, inter alia, "Absolute Asbestos," "Employer Liability," and "Hostile Acts." By concluding that Kemper had agreed to cover any remedy that the EPA required, the Court does not mean to override these express exclusions.
The parties expend considerable effort discussing (1) the difference in the definition of COVERED PROJECT(S) between the Binder and the Final Policy, (2) whether the difference was unilateral (i.e. not authorized by FED), and (3) whether the Court should reform the Final Policy in lieu of the alteration. However, because the "alteration" is immaterial to the breadth of coverage, reformation is unnecessary, and the scope of the policy remains as broad as anticipated. The final policy defined COVERED PROJECT(S) as "Remediation of the Former Cyprus Foote Mineral Company Lithium Ore Processing Facility, Exton, West Whiteland Township, PA and as per the associated remediation plan and related costs developed by Environmental Resources Management and on file with the underwriter." Although the language in the Final Policy could be stretched to tailor the coverage to only those items expressly included in Alternative B, because at the time of the Final Policy, and still today, there is no workplan, this reading is not plausible.
Sheldon testified that he was unaware whether the new language had appeared in any prior quote, draft, or correspondence, was unsure who designed the new language, and did not recall speaking to either Peeples or Sevick about the language. Therefore, from Kemper's perspective, the language change must have been immaterial. It appears that on November 3, 1998, in preparation for the issuance of the Final Policy, Peeples communicated with Sevick in order to ensure that FED still believed that Alternative B was the likely remedy and remained confident in its associated cost estimates. Peeples noted during the November 3 conversation that a "copy of final contract w/attachments will be sent directly to Kemper — refer to schedule of property be legal description attached to contract." On the same day, Peeples sent a facsimile to Sheldon, confirming Sevick's representations by explaining that "[t]he project description should remain as previously identified, with the exception of referring to the scope of work as attached to the contract." Kemper admitted that it only requested these confirmations in order to ensure that it was not insuring a known risk — not to limit coverage. (Tr.2 at 44:17-25.) "[I]t was not [Peeples'] intent to tell Kemper to restrict the coverage in any way from what it had bound." Peeples did not read the language change to have any affect on the breadth of coverage.
The only contract to which Sevick could have been referring was the property transfer agreement between CFM and FED, which notably, made no mention of the scope of work to be performed by FED.
Further, that the law requires the Court to ascribe meaning to all terms contained within a contract, whenever possible ( see Goodheart Clothing Co. v. Laura Goodman Enters., Inc., 962 F.2d 268, 272 (2d Cir. 1992); Restatement Second of Contracts § 203(a) (1981)), counsels against interpreting the "alteration" as a limitation. In the section of the Final Policy listing Exclusions to coverage, Kemper expressly bars coverage of "Known Condition(s)," defined as "based upon or arising from POLLUTION CONDITIONS existing prior to the inception of this Policy, and reported to or known by any officer, director, partner or other employee responsible for environmental affairs of the INSURED unless all of the material facts relating to the POLLUTION CONDITIONS were disclosed to the Company in the application and other supplemental materials and information prior to the inception of this Policy." Clearly, if, as Kemper argues, coverage was limited to the actions set forth in Alternative B, this provision would be nonsensical and redundant. Known yet undisclosed POLLUTION CONDITIONS would, by definition, not be included on Alternative B, and would therefore not be subject to coverage. The wording change, allegedly inserted unilaterally by Kemper, did not serve to limit the scope of coverage in any matter material to this dispute.
3. Investigation Costs
The plain meaning of the Final Policy, in conjunction with the prior communications among the parties, and the testimony proffered at trial, which stressed that FED chose the BRD policy as a template expressly because it included investigation costs (Tr. at 86L9-11) make evident that pre-ROD investigation costs are covered by Coverage F, the ENVIRONMENTAL CLEAN UP COSTS CONTAINMENT portion of the Policy.
The Final Policy unambiguously covers pre-ROD investigation costs. Notably, Coverage F applies to COST OVERRUNS, "subject to the Limits of Liability [$16.5 million] and Retention Amount [$3.5 million]." (Pl. Exh. 11.) COST OVERRUNS are "the amount of ENVIRONMENTAL CLEAN UP COSTS for a COVERED PROJECT which exceeds the Retention Amount designated in Item VII of the Declarations." ( Id.) As discussed at length supra, while the Final Policy defined the COVERED PROJECT (differently than all prior drafts) — by adding that the remediation was "as per the associated remediation plan and related costs developed by Environmental Resources Management and on file with the underwriter — this alteration was immaterial as it was not intended to limit the coverage to only those actions specifically listed in Alternative B. ENVIRONMENTAL CLEAN UP COSTS are defined as "expenses incurred for the investigation, removal, disposal or treatment of POLLUTION CONDITIONS pursuant to ENVIRONMENTAL STANDARDS." ( Id.) POLLUTION CONDITIONS are in turn defined as "a discharge, dispersal, release, seepage, migration, escape or presence of smoke, vapors, odors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, electromagnetic fields (EMF), waste materials, including medical, infectious and pathological wastes, or other irritants, contaminants or pollutants into or upon land or structures thereupon, the atmosphere or any watercourse or body of water (including groundwater), from or at a COVERED LOCATION." ( Id.) ENVIRONMENTAL STANDARDS are defined as "1. any legislatively or administratively enacted law, rule, regulation or order applicable within the jurisdiction in which the COVERED LOCATION(S) lie(s) including any government action pursuant thereto; or 2. the American Society of Testing and MaterialsGuide to Risk-Based Corrective Action or any subsequent amendments thereto." ( Id.) The COVERED LOCATION here is the "Former Cyprus Foote Mineral Company Lithium Ore Processing Facility, Exton, West Whiteland Township, PA, as described in further detail in the Property Transfer and Assignment and Assumption Agreement between Frazier Exton Development, L.P. and Cyprus Foote Mineral Company, Dated October 1998." ( Id.)
The POLICY makes explicit that while there is no coverage for anything "arising out of or attributable to changes of any kind to the COVERED PROJECT," the POLICY does cover (1) the "discovery, during the POLICY PERIOD, of POLLUTION CONDITIONS not identified in the COVERED PROJECT;" (2) the "discovery, during the POLICY PERIOD, of increased levels or increased quantities of POLLUTION CONDITIONS;" and (3) "changes to ENVIRONMENTAL STANDARDS." (Pl. Exh. 11.) Clearly, this distinction makes evident that the Policy covers investigation costs from pollutants migrating "from or at" the CFM Site.
Finally, although different portions of the Policy incepted at different times, the portion covering investigation costs, Coverage F, commenced on October 31, 1998. (Pl. Exh. 11.) Endorsement Number 8 defines the delayed effective dates of different coverage provisions, but does not discuss Coverage F. Rather, Item III of the Declarations provides that the POLICY PERIOD for all sections not discussed in Endorsement Number 8, of which Coverage F is one, commences October 31, 1998. ( Id.) While Kemper's January 1998 quotation letter envisioned that Coverage F would not incept until EPA approval, none of the draft policies or the Final Policy carried this limitation. (Pl. Exh. 4-5, 8, 10-11.) Therefore, further negotiations between the parties must have concluded that a delay in the inception of Coverage F was untenable. The Final Policy covers pre-ROD investigation costs incurred on or after October 31, 1998.
For example, Coverage C, which covers ENVIRONMENTAL CLEAN UP COSTS, applies retroactively and for the remainder of the POLICY PERIOD, once Kemper receives and accepts a ROD from the EPA. (Pl. Exh. 11.)
Because I find that the Final Policy provides the breadth of coverage that FED sought, FED's claim against Marsh, sounding in negligence, is moot.
C. FED's Claim Against Kemper Under the Pennsylvania's Bad Faith Statute
1. Choice of Law Provision
FED also brings a claim against Kemper, pursuant to Pennsylvania's bad faith statute, 42 Pa. C.S.A. § 8371, for Kemper's alleged bad faith denial of coverage. It is undisputed that the Final Policy included a choice of law clause, mandating that: "In the event that the INSURED and the Company dispute the meaning, interpretation or operation of any term, condition, definition or provision of this Policy, or the fulfillment by the INSURED or the Company of any other obligations with respect to the Policy, resulting in litigation, arbitration or other form of dispute resolution, the INSURED and the Company agree that the law of the State of New York shall apply notwithstanding the State of New York's choice of law rules." (Pl. Exh. 11) (emphasis added.) While FED does not contest the applicability of this choice of law provision to claims arising out of the Policy, it argues that the provision does not apply to tort claims such as the Pennsylvania bad faith claim, that are separate and distinct from the Policy. I find that the clause requires the application of New York law only to disputes over the contract itself — not to tort actions one step removed from the underlying contract.
In diversity actions, such as this one, New York law determines which state's law should be applied to the underlying claims. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 497 (1941) (federal courts apply the law of the forum state to resolve conflict of law issues in diversity actions). Under New York law, "[a] contractual choice of law provision . . . does not bind the parties with respect to non-contractual causes of action." Plymack v. Copley Pharm., Inc., 93 Civ. 2655, 1995 U.S. Dist. LEXIS 15104, at *16 (S.D.N.Y. Oct. 11, 1995); see also BBS Norwalk One, Inc. v. Raccolta, Inc. 60 F. Supp.2d 123, 129 (S.D.N.Y. 1999) ("a contractual choice-of-law provision does not ordinarily bind the parties as to tort claims."). "[F]or a choice of law provision to apply to claims for tort arising incident to the contract [such as the Pennsylvania Bad Faith claim], the express language of the provision must be `sufficiently broad' as to encompass the entire relationship between the parties." Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996) (quoting Turtur v. Rothschild Registry Int'l, Inc., 26 F.3d 304, 309-10 (2d. Cir. 1994)).
Therefore, the Court must determine whether the choice of law provision herein is "sufficiently broad" to "encompass the entire relationship between the parties" — which the Court finds it is not. In order to achieve broad coverage, parties utilize choice of law provisions that employ expansive language such as "arising out of or relating to" the contract ( Turtur v. Rothschild Registry Int'l, 26 F.3d 304, 310 (2d Cir. 1994)) or "arising directly or indirectly from the Agreement." ( Bon Jour Group, Ltd. v. Elan-Polo Inc., 96 Civ. 6705, 1997 U.S. Dist. LEXIS 10283, at *6 (S.D.N.Y. July 16, 1997). While this language is not the only script for achieving broad coverage, it is clear that the "with respect to" language utilized in the FED policy falls short of the mark. The bad faith claim is not asserted "with respect to" the contract, but rather is claimed "with respect to" Kemper's behavior in response to FED's provision of notice of a likely claim under the contract, and in particular, its denial of coverage. Kemper, a sophisticated business entity, could have, but did not, insist upon a broader choice of law provision. Therefore, the choice of law clause does not dictate which law applies to FED's tort claim against Kemper.
With regard to tort claims, when the law of the forum state conflicts with the law of a sister state, New York courts apply an "interests" analysis in order to determine which state's law applies. Brink's Ltd. v. South African Airways, 93 F.3d 1022, 1031 (2d Cir. 1996). This analysis requires the Court to "examine the purposes and policies of the conflicting laws in the context of the facts of the case." Id. "If conflicting conduct-regulating laws are at issue, the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders." Id. (citing Cooney v. Osgood Mach., Inc., 81 N.Y.2d 66, 72 (1993)). In such cases, "the significant contacts are, almost exclusively, the parties' domiciles and the locus of the tort." Schultz v. Boy Scouts of America, Inc., 65 N.Y.2d 189, 197 (1985). In this case, since New York does not have a law regulating bad faith practices in claims handling — and Pennsylvania does — the laws conflict. And, because it is undisputed that FED and the CFM Facility are located in Pennsylvania, and the Binder and Final Policy were sent to both Marsh and FED in Pennsylvania and were negotiated in Pennsylvania, and Kemper fails to allege that New York or any other state has a closer nexus to the tort, the Court will apply Pennsylvania law to the bad faith claim.
2. Liability Under Pennsylvania's Bad Faith Statute
Pennsylvania's bad faith statute, 42 Pa. C.S. § 8371, creates a statutory remedy for the bad faith conduct of insurers. The statute provides that:
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith towards the insured, the court may take all of the following actions:
(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.42 Pa. C.S. § 8371. In order to establish bad faith, FED must establish that Kemper (1) "lacked a reasonable basis for denying benefits," and (2) "knew or recklessly disregarded its lack of a reasonable basis." Kilmer v. Connecticut Indem. Co., 189 F. Supp.2d 237, 247 (M.D. Pa. 2002) (citing Terletsky v. Prudential Property Cas. Ins. Co., 649 A.2d 680, 688 (Pa.Super. 1994)).
"Bad faith" on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.Terletsky, 649 A.2d at 688 (quoting Black's Law Dictionary 139 (6th ed. 1990)).
FED has failed to establish that Kemper's insistence on a narrower interpretation of the Policy amounted to bad faith. FED cites only to the following as evidence of Kemper's bad faith: (1) Kemper's reliance on an unsigned and unsent quote, (2) Kemper's reliance on correspondence and preliminary negotiations that FED argues are not incorporated into the Binder, (3) Kemper's refusal to provide FED with a complete copy of the underwriting file because of a concern over the disclosure of trade secrets, (4) Kemper's insistence on a narrow interpretation of the Policy, and (5) Kemper's failure to reform the Policy to conform to the negotiations and intents of the parties. These allegations, even if proven, do not suffice, in this Court's view, to establish Kemper's bad faith. Although I am not striking any medals for Kemper's conduct in this matter, FED has failed to establish that Kemper's actions were unreasonable, and that its beliefs, even if misguided, were irrational. The bad faith statute is not so broad as to equate an insurer's failure at trial with its classification as an actor in bad faith. The bad faith statute must be read liberally enough to allow insurers to defend claims that they reasonably believe — even incorrectly — are unfounded.
B. Kemper's Claims Against Marsh for Indemnification, Contribution, or Apportionment
Kemper asserts that if the Court determines that the policy is as broad as FED argues, Marsh is liable for indemnification, contribution, or apportionment. These claims fall outside of the choice of law provision as they pertain to the fulfillment by the broker, not the "INSURED or the Company," of an "obligation with respect to the Policy." (Pl. Exh. 11.) Pennsylvania is the only state, alleged by the parties to have any nexus to this dispute. However, "[i]n a conflicts of law analysis, the first consideration is whether there is any actual conflict between the laws of the competing jurisdictions. If no conflict exists, then the court should apply the law of the forum state in which the action is being heard." Excess Ins. Co. Ltd. v. Factory Mut. Ins. Co., 769 N.Y.S.2d 487, 489 (1st Dep't 2003). Because no conflict exists between Pennsylvania and New York law with regard to the general standards for indemnification, contribution, and apportionment ( see, e.g., Orsini v. Kugel, 9 F.3d 1042, 1049 (2d Cir. 1993) (citations and internal quotations omitted); Assicurazioni Generali, S.p.A. v. Terranova, 83 Civ. 1490, 1984 U.S. Dist. LEXIS 22477, at *5 (S.D.N.Y. Oct. 25, 1984); Rosado v. Proctor Schwartz, Inc., 494 N.Y.S.2d 851, 853-54 (1985); Padro v. Bertelsman Music Group, 718 N.Y.S.2d 296, 298 (1st Dep't 2000); Colyer v. K Mart Corp., N.Y.S.2d 758, 759 (4th Dep't 2000); Berg Chilling Sys., Inc. v. Hull Corp., 369 F.3d 745, 754 (3d Cir. 2004); Gen. Acc. Ins. Co. v. Fed. Kemper Ins. Co., 682 A.2d 819, 821 ( Pa. Super. 1996)), the Court will apply New York law.
Curiously, Kemper neglected to mention these legal claims in its post-trial brief. However, assuming arguendo that Kemper did not mean to abandon these claims, the Court will address each seriatim.
Indemnification is available when one party is "compelled to pay for another's wrong." American Transtech v. U.S. Trust Corp., 933 F. Supp. 1193, 1202 (S.D.N.Y. 1996). "A right to indemnifcation [sic] may arise in New York either out of an express agreement for indemnification or out of an agreement necessarily implied by law under the circumstances." Assicurazioni Generali, S.p.A., 1984 U.S. Dist. LEXIS 22477, at *5. "Generally, an implied agreement will be found only where a person without fault has been held legally liable for damages caused by the fault of another." Id. (internal quotations and citations omitted); Orsini, 9 F.3d at 1049 ("Indemnification is not available to a party who was himself partially at fault.") (citations and internal quotations omitted). Under New York law, a right to contribution exists when two or more entities are subject to liability for damages arising out of the same injury. See N.Y.C.P.L.R. § 1401; Dole, 331 N.Y.S.2d at 387. "The theory of contribution at common law is that one who is compelled to pay more than his aliquot share of an obligation upon which several persons are equally liable is entitled to contribution from the others to obtain from them payment of their respective shares." Too, Inc. v. Kohl's Dep't Stores, Inc., 213 F.R.D. 138, 141 (S.D.N.Y. 2003) (citing Green Bus Lines v. Consol. Mut. Ins. Co., 426 N.Y.S.2d 981, 989 (2d Dep't 1980)). Finally, "apportionment may be claimed among persons who are subject to liability for damages for the same . . . injury . . ." Doundoulakis, et al. v. Town of Hempstead, et al., 42 N.Y.2d 440, 451 (1977).
In order for Kemper to be entitled to indemnification from Marsh, Kemper would have had to establish that Marsh is fully at fault for the difference in coverage, and in order for Kemper to deserve apportionment or contribution from Marsh, Kemper would have had to establish that Marsh was at least partly to blame for the disparity. As discussed at length supra, the policy that Kemper issued provides broad coverage to insure against whatever remedy the EPA chooses, and explicitly covers pre-ROD investigation costs. While Kemper may wish that the coverage was narrower, or may even have believed at the time that it was issuing more limited coverage, wishing is not enough. Kemper failed to prove that Marsh knew of both FED's and Kemper's requirements and intentions, yet failed properly to convey the necessary information in either or both directions. Therefore, these avenues of fault-sharing are simply unavailable to Kemper.
III. CONCLUSION
The Final Policy issued by Kemper for the CFM Site, without reference to reformation, provides cost-cap coverage for (1) whatever remedy the EPA may issue — not just the remedies embodied in Alternative B, and (2) all pre-ROD investigation costs incurred after the October 31, 1998 inception of the Policy. Therefore, both FED's claim for reformation, and its claim against Marsh for negligence, are denied as moot. Kemper is not liable under Pennsylvania's bad faith statute, yet may not look to Marsh for contribution, indemnification, or apportionment. The Clerk of the Court is directed to close all pending motions and remove this case from my docket.