Philadelphia, Monday, June 23, 1997

The Legal Intelligencer

THE OLDEST LAW JOURNAL IN THE UNITED STATES

INSURER MUST IMMEDIATELY BE TOLD
OF SUITE TO TRIGGER DEFENSE COVERAGE
Cahn Upholds Pollution Exclusion

Defendants Gain Confidence
By Shannon P. Duffy
U.S. Courthouse Correspondent

A Federal judge has ruled that a group of insurers has no duty to pay $1.3 million in legal costs incurred by a shoe manufacturer in defending a toxic waste suit because the company waited until trial was already underway before notifying the insurance companies of the claim.

"This is clearly a case in which the insurance companies, if given the opportunity for early control over the litigation, might have chosen a different strategy to resolve the case," Chief U.S. District Judge Edward N. Cahn wrote.

In his 49-page opinion in Hyde Athletic Industries Inc. v. Continental Casualty Co. et., al., Cahn made several significant rulings on Pennsylvania insurance law and the exclusion clause insurers routinely use to avoid covering most pollution litigation.

Most significantly, Cahn rejected the claim that the insurance industry conspired to mislead state regulators and the public in order to win approval of the exclusion for all but "sudden and accidental" pollution claims.

Cahn said Hyde "ha[s] not presented the court with a shred of evidence that the Pennsylvania Insurance Department, a sophisticated regulatory agency, reasonably relied on [the insurance industry's] statements contrary to the plain language of the pollution exclusion text."

The ruling is a major victory for attorney John Gerard Devlin, who represented the Greater New York Mutual Insurance Co. which had been "spiked" by Hyde to bear the brunt of its legal costs in defending third party counterclaims in a CERCLA suit brought by the United States.

The suit, which began in 1994, involved the Dorney Road Landfill in Lehigh County, which had been used as a municipal landfill from 1958 to 1978. The government sued 10 "potentially responsible parties," but 63 additional defendants were added in counterclaims.

SNEAKER POLLUTION
Hyde, which manufacturers Saucony brand sneakers at a factory in Kutztown, was added to the suit in 1992. The claim against Hyde said that its leather scraps - which had been hauled to the landfill for years - contained chromium which had leached into the ground water.

Ultimately, the 10 original defendants settled with the government for $1.2 million and a promise to pay future oversight costs, expected to top $20 million.

But the third-party suit went to trial before Cahn. In the end, Cahn decided that Hyde was a responsible party and should bear a 0.44 percent share of the estimated $22.7 million remediation costs at the site, or about $100,000.

For Hyde and its trial lawyer, Joseph J. McGovern of Obermayer Rebmann Maxwell & Hippel, the ruling was arguably a significant victory because Cahn decided that Hyde should bear just a fraction of the cleanup costs.

But Hyde had spent $1.3 million in legal fees to get that good result, and was hoping to recover its losses in a suit against its insurance companies.

Hyde sued two insurers - Continental and Greater New York - for coverage under comprehensive general liability policies. It also named four insurers that provided excess or umbrella coverage. But Devlin argued that GNY had no duty to defend because the pollution exclusion clause in its policy "unequivocally excluded any reasonable possibility of coverage."

The exclusion clause says that pollution claims are covered only if the "discharge, dispersal, release or escape is sudden and accidental."

3RD CIRCUIT HAS SPOKEN
Cahn found that the 3rd Circuit has already held that an identical exclusion was "unambiguous."

As a result, Cahn said, GNY had the burden of proving that the exclusion applied, but Hyde had the burden of establishing that the "sudden and accidental" exception should be imposed.

Hyde argued that "arranging for the disposal of trash is not the equivalent of discharging pollutants within the meaning of the polluter's exclusion."

But Cahn said, "this argument…has been rejected by the courts of this circuit."

Instead, Cahn said, "whether the damage is caused by the insured's discharge or some other entity (either the hauler of the waste or some other user of the landfill) is irrelevant."

Hyde also argued that the discharges of chromium were sudden and accidental because the chemicals were not released from the shoe leather until it came in contact with battery acid.

But Cahn said "the damage caused by (the) purported sudden and accidental releases of chromium simply cannot be separated from the damage caused by years of pollution."

Cahn also rejected the expert witness's testimony on that point, saying he found inconsistencies between his affidavits and deposition.

LATE NOTICE
Having ruled in favor of the insurers, Cahn said he didn't have to go any further, but that for completeness he would also comment on the insurers' late notice argument.

Devlin argued that Hyde received notices as early as 1988 from the government that it was a potential target in the Dorney Road Landfill litigation, but never tendered them to GNY.

Even when Hyde was added as a defendant and began litigating, Devlin said GNY was never asked to defend the case. Instead, he said, it was not until after McGovern took over the case in March 1995 that GNY was first notified of Hyde's claim. Cahn agreed, saying Hyde's notice to GNY was "unquestionably late."

The policies contained "notice provisions" Cahn said, which required Hyde to detail notice of any occurrences that might lead to lawsuits "as soon as possible" and to "immediately" forward any documents to the insurance companies. Hyde violated those provisions by conducting settlement discussions, making crucial litigation decisions and ultimately deciding to proceed to trial without ever notifying its insurers, Cahn found.

(Copies of the 49-page opinion in Hyde Athletic Industries Inc. v. Continental Casualty Co., PICS NO. 97-1370, are available from The Legal Intelligencer.)