New Jersey Court Denies Reimbursement for Defense Costs

by Cole Schotz
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In a recent unpublished opinion, a New Jersey Appellate Division court upheld the lower court’s dismissal of an insurance coverage action for environmental contamination. In Spartan Oil Company v. New Jersey Property-Liability Insurance Guaranty Association, decided June 8, 2012, Spartan Oil had purchased and subsequently renewed a commercial vehicle insurance policy from Planet Insurance Company for coverage for its fleet of vehicles used to deliver heating oil.  In the early 1990s, during the coverage period, Spartan delivered heating oil to a tenant leasing property owned by Morristown Associates. Spartan’s drivers pumped heating oil from its vehicles into an external intake pipe located on the property, and the fuel traveled through an internal feed line to an underground tank under the basement. Unbeknownst to Spartan, the fuel line was corroded and the oil spilled through holes that had developed in it, causing environmental contamination on the property.  The contamination was not discovered until 2003.

In 2006, Morristown Associates filed suit against several oil delivery companies, including Spartan, alleging violations of the New Jersey Spill Compensation and Control Act and Water Pollution Control Act, as well as common law negligence.  Spartan was successful in its summary judgment motion because the statute of limitations had expired. 

Planet Insurance Company’s successor, Reliance Insurance Company, was insolvent. Spartan had thus filed a notice of a claim with the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”), seeking defense and indemnity costs. PLIGA denied Spartan’s claim for coverage based on the pollution exclusion provision of the policy, which stated that the insurance coverage did not apply to property damage “arising out of the actual . . . discharge of . . . pollutants” “[a]fter the pollutants . . . are moved from the covered ‘auto’ to [the] place where they are finally delivered.’”

Spartan then filed a declaratory judgment action seeking reimbursement for its defense costs, which exceeded $200,000.  The lower court ruled in favor of PLIGA after determining that the pollution occurred after the oil was delivered, and therefore, the pollution exclusion applied.

 Spartan appealed arguing that the trial court erred in looking beyond the face of the complaint filed by Morristown Associates and considering additional facts.  Relying on a recent NJ Supreme Court case, the Appellate Division reviewed both the complaint in the underlying action and the insurance policies.  Based on this review, it rejected Spartan’s argument that the complaint alleged that Spartan was negligent during the delivery of the heating oil to the property and held that the pollution exclusion did not apply.  Although the allegations in the compliant did not  specify whether Spartan’s negligence occurred during delivery or after the oil was “finally delivered,” the Appellate Division considered the common definition of “deliver” to conclude that “the delivery of the oil occurred upon the fuel entering the property and heating system of Spartan’s customer . . . . At that point, Spartan no longer had possession or control of the oil. It had been transferred into the possession of [the tenant].”  Therefore, because “Spartan had already and ‘finally’ delivered the oil before the contamination occurred, the pollution exclusion applied and the insurance policies did not cover liability for the contamination.”

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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