Petition for Writ of Certiorari — Travelers Indemnity Co. v. Avondale Industries, Inc.

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B89. 1576.

N Supreme Court, U.8,

putanepinpreninempmmenencenss | FILED

| APR om

IN THE ae

Supreme Court of the United

October Term, 1989

THE TRAVELERS INDEMNITY COMPANY,

Petitioner,

AVONDALE INDUSTRIES, INC. and OGDEN CORPORATION,

Respondents,

- and -

COMMERCIAL UNION INSURANCE COMPANY, HIGHLANDS

INSURANCE COMPANY, AMERICAN MOTORISTS INSUR-

ANCE COMPANY, and NATIONAL UNION FIRE INSURANCE

COMPANY,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BARRY R. OSTRAGER

Counsel of Record for Petitioner

SIMPSON THACHER & BARTLETT

(a partnership which includes

professional corporations )

425 Lexington Avenue

New York, New York 10017-3909

(212) 455-2000

SETH A. RIBNER

KATHRYN A. CLOKEY

Of Counsel

Questions Presented

1. Whether a district court may invoke Rule 54(b) of the

Federal Rules of Civil Procedure to certify as “final” and appeal-

able its ruling on certain aspects of a claim when a full and final

resolution of that claim necessarily depends upon an adjudica-

tion of rights and obligations at issue in a third party action?

2. Whether the district court sitting in diversity trans-

gressed the institutional limits on its discretion by certifying for

immediate appeal a partial summary judgment that (i) conflicted

with a recent ruling of the forum state’s intermediate level appel-

late court; and (ii) involved important and controversial issues of

state law awaiting review by that state’s highest court?

Rule 29.1 Statement

The parent company of Petitioner The Travelers Indemnity

Company is The Travelers Corporation. The Travelers Corpora-

tion owns an interest in the following subsidiaries (excluding

wholly owned subsidiaries):

Company Name % Ownership

Applied Expert Systems, Inc. 27.5 %

La Metropole S.A. 98.83 %

ATALFA (UK) 23.5 %

Dillon, Read Limited 50.0 %

London & Hartford Corp. 50.0 %

Resource Information Management

Systems 20.0 %

ili

TABLE OF CONTENTS

PAGE

O8) yy 8 Gy) Oy | i

8 Ey ii

ee isco cer lauweeanevsneawauGs 3

PPE Si cccccecccccsevess Soe ee 3

FEDERAL RULE OF CIVIL PROCEDURE

EE ee pera 3

UR MEENOE MP BEERS GANGES on ccc ccecccccccsegecces 4

Ogden and Avondale Sue Only One of Five Insurers

that Provided Liability Coverage .................. 4

The District Court’s Ruling Granting Partial

Summary Judgment to Ogden and Avondale ....... 5

The District Court Enters a Partial Final Judgment ... 9

Proceedings in the United States Court of Appeals

EE ssn cvecceeeenenvvecseseua's 10

REASONS FOR GRANTING THE WRIT ............ 12

Conflicting Rule 54(b) Standards in the Federal

ee eae ay hey ees ks vee es 13

The Federal Courts Should Not Employ the

Rule 54(b) Certification Procedure In

Diversity Cases When the Applicable State

ee a eu eawn wal kbs2 + <0e 14

POINT I This Court Should Grant Certiorari To

Enforce the Limitations on Federal Appellate

Nee ea de awae'e 15

A. Because Resolution Of Petitioner’s Defense Obliga-

tions Necessarily Depended Upon The Adjudication

Of Petitioner’s Third-Party Defense Claims,

Certification Was Improper And The Second

Circuit Lacked Jurisdiction To Hear The

SEPP CPT eee eT CTT TPT TT TTR eTTee

B. Certification Was Improper Because There Was

No Final Resolution Of All Issues Relating To

To Petitioner’s Obligation To Pay Defense

Casts ..\..- aed ahe aed Cat saeee NTE can odes aos

POINT II This Court Should Grant Certiorari To

Enforce The Institutional Limits On A Federal

Court’s Discretion When Sitting In Diversity .........

Cin ccuvaesntvekdessicceaeebsceneevvees

Appendices

Opinion On Petition For Rehearing

United States Court Of Appeals

POE TS SOOO CIEE on ccc cc cececess

Opinion Of Cardamone, J.

United States Court Of Appeals

oe) fh re

Memorandum Opinion And Judgment

United States District Court For The

Southern District Of New York .............

Memorandum Opinion And Order

United States District Court For The

Southern District Of New York .............

Letter From Office Of The Clerk

United States Court Of Appeals

ee ee PE ng coc cccneenvcucness

TABLE OF AUTHORITIES

PAGE

Cases:

Acha v. Beame, 570 F.2d 57 (2d Cir. 1978) .............. 22

Aetna Casualty & Sur. Co. v. General Dynamics

Corp., No. 88-2220C (A) (E.D. Mo. Dec. 12, 1989) ..... 15

Aetna Casualty & Sur. Co. v. Gulf Resources & Chem.

Corp., 709 F. Supp. 958 (D. Idaho 1989) .............. 42

Albany Truck Rental Serv. v. New Hamphsire Merchant's

Ins. Co., 75 A.D.2d 426, 450 N.Y.S.2d 158 (3d Dep’t

POPPE EES er ote ee Or praia ok cos a ames 18

American Motonsts Ins. Co. vy. Levolor Lorentzen,

See, Bre Fae Tee CO OM, THO 6 ccc sv cccccnccccsees 15, 22

Arco Indus. v. Travelers Ins. Co., 730 F. Supp. 59

Ce NG MEE ab ebb cacugcansnceuueesabewee ssa 6

Automatic Liquid Packaging, Inc. v. Dominik, 852 F.2d

ED 5 0.5460 0ner teks waapeseteucsa’ 13, 21

Avondale Indus., Inc. v. Travelers Indem. Co., 123

Fe PE Es HE heed ecncdscdckssursvece ess 3, 10

Avondale Indus., Inc. v. Travelers Indem. Co., 697 F.

Sim. TIA GREIIN. T. TROD cccccccvesvescccsessenss 3, 7, 8

Avondale Indus., Inc. v. Travelers Indem. Co., 887 F.2d

Re as Se © 6 te wad as eienne cea eeeeeenss: se Ae

Avondale Indus., Inc. v. Travelers Indem. Co., 894 F.2d

og rrr er rer eer rr re 3, 11, 12

Blanchard v. Teledyne Movible Offshore, Inc., 612 F.2d 971

Ce es a dicsasaeeiaeuee ss ssaadnieekeveeers 24

Boeing Co. v. Aetna Casualty & Sur. Co., 113 Wash.

ee Pe hcccx desc sdbacverenaee sa: 7

Borden, Inc. v. Affiliated FM Ins. Co., 682 F. Supp. 927

(S.D. Ohio 1987), aff'd, 865 F.2d 1267 (6th Cir.),

Ce Ge, Tae as ee ec vb has eenseexenne 5

PAGE

C. D. Spangler Constr. Co. v. Industrial Crankshaft &

Eng’g Co., 326 N.C. 133, 388 $.E.2d 557 (1990) ........ 7

C.L. Hauthaway & Sons v. American Motorists Ins. Co.,

712 F. Supp. 265 (D. Mass. 1969) ..........ccccceeens 5

Campbell v. Westmoreland Farm, Inc., 403 F.2d 939

Ae eee 24

Catlin v. United States, 324 U.S. 229 (1945) .............. 16

Cedar Chem. Corp. v. American Universal Ins. Co.,

No. 87-2838-4B (W.D. Tenn. Sept. 13, 1989)........... 15

Central Quality Services Corp. v. Insurance Co. of N. Am.,

No. 87-CV-74473-DT (E.D. Mich. Sept, 6, 1989) ....... 6

Chesapeake Utils. Corp. v. American Home Assurance Co..,

POS F. Sapp. S5k, CD. GAGE TOURD. oo cc ccvcvcccencescess 7

Cold Metal Process Co. v. United Eng’g & Foundry Co.,

te ee ree se ae 17, 21

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967) .... 8

Consolidated Rail Corp. v. Fore River Ry., 861 F.2d

hese fo | ree Ate Aen py «arena 20, 24

Continental Ins. Cos. v. Northeastern Pharmaceutical

& Chem. Co., 811 F.2d 1180 (8th Cir. 1987),

rev'd on reh’g en banc, 842 F.2d 977, cert. denied,

Sew G Ge: GE 5. 6a vc adekU scene ale bahabeseanes 15

Continental Ins. Cos. v. Northeastern Pharmaceutical

& Chem. Co., 842 F.2d 977 (8th Cir. 1987) (en banc),

cert. denied, 109 S. Ct. 66 (1988). .............0...4.. 7, 8, 15

Cullen v. Margiotta, 811 F.2d 698 (2d Cir.), cert. denied,

ee Ge CE ks co cheer baa eneueaeeeseeeanes 13, 24

Curtiss-Wright Corp. v. General Elec. Co.,

oo re erm meer ay 16, 17, 21

a Ee |

Vil

PAGE

El-Marzouki Establishment v. Environmental Research

& Dev., Inc., 93 F.R.D. 661 (S.D.N.Y. 1982) ........... 25

Erie R.R. v. Tompkins, 304 U.S. 64 (1938) ............... 24

Explosives Supply Co. v. Columbia Nitrogen Corp.,

ee 7 fs, ts 3 eer 13

F L Aerospace v. Aetna Casualty & Sur. Co., 897 F.2d

I EE ck os vauaesadsetdy ees dniatesccces’ 5

Federal Deposit Ins. Co. v. Elefant, 790 F.2d 661

Cd vein ca teccuadevekceseihive nese. 17

Federal Ins. Co. v. Cablevision Sys. Dev. Co., 836 F.2d 54

SY ME cpanel oitnet ed beueeeuewe tees ener iawn 18

Federal Ins. Co. v. Susquehanna Broadcasting Co., 727

FP Se OU Bre kek severe seseveanededs 15

Fireman’s Fund Ins. Cos. v. Ex-Cell-O Corp., 662 F. Supp.

pp SY Orr Tye roe y eee ee ee 6

Fireman’s Fund Ins. Cos. v. Ex-Cell-O Corp., 685

P. ee ee Is FED ooo reve csccavrecsess. 20

General Accident Fire & Life Assurance Corp. v. Piazza,

4 N.Y.2d 659, 152 N.E.2d 236, 176 N.Y.S.2d 976 (1958). 18

Great American Ins. Co. v. Schaefers, 47 Misc.

2d 522, 262 N.Y.S.2d 953 (Sup. Ct. N.Y. Co. 1965) ..... 18

Gregonian v. Izvestia, 871 F.2d 1515 (9th Cir.), cert. denied,

Se es EE os n.00 0044 60u sus ceesdekeedeses os 13, 17

Harter Corp. v. Home Indem. Co., 713 F. Supp. 231

PO EE ace cacnccnevedaeveyaservevasees 6

Hayes v. Maryland Casualty Co., 688 F. Supp. 1513

SN 6 cei en saxksscdcnendvcsaseneseuecaws 5

Higgins Indus. v. Fireman’s Fund Ins. Cos., 730 F. Supp.

FES I FE ob es oir eds aanvencduiseysaensas 6

Vili

Indiana Harbor Belt R.R. v. American Cyanamid Co.,

S60 F.2d 1441 (7th Cir. 1968)... c ccc cece ccees 13

Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc.,

633 F.2d 1212 (6th Cir. 1980), cert. denied, 454 U.S.

Ge es sa wines bs 20

Intel Corp. v. Hartford Accident & Indem. Co., 692

fo Be Tt Re | 15

International Controls Corp. v. Vesco, 535 F.2d 742

ao adap eres es edakudee hiss chess 20

Jones Truck Lines v. Transport Ins. Co., No. 88-5723

(E.D. Pa. May 10, 1989), question to be certified to the

Supreme Court of Missoun, Nos. 89-1729/59

ya Ue tania daa e sce h see's 7, 15

Liberty Mutual Ins. Co. v. Wetzel, 424 U.S. 737 (1976) .... 16

Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348

(4th Cir. 1987), cert. denied, 484 U.S. 1008 (1988) ...... 7, 8

Maryland Casualty Co. v. Ormond, No. 87-3038

ee esac etnvewewerevseeces 15

Minontty Police Officers Ass'n v. City of South Bend,

po 13

Mornson-Knudsen Co. v. Archer, 665 F.2d 962

SE SEE ee Ae ee 13, 21

ODC Communications Corp. v. Wenruth Invs.,

Ee 17

Ogden Corp. v. Travelers Indem. Co., No. 88 Civ. 4269

BE Ee ee 11, 20

Panichella v. Pennsylvania R.R., 252 F.2d 452

SENSES ree A 25

Patrons Oxford Mut. Ins. Co. v. Marois, No.

KEN-89-284 (Me. Apr. 2, 1990)..................005. 6

~ ell

Pepper's Steel & Alloys, Inc. v. United States Fidelity &

Guar. Co., 668 F. Supp. 1541 (S.D. Fla. 1987) ......... 6

Powers Chemrco, Inc. v. Federal Ins. Co., 144 A.D.2d

445, 533 N.Y.S.2d 1010 (2d Dep’t 1988), aff'd, 74 N.Y.2d

916, 548 N.E.2d 1301, 549 N.Y.S.2d 650 (1989) ........ 12

Powers Chemco, Inc. v. Federal Ins. Co., 74 N.Y.2d

910, 548 N.E.2d 1301, 549 N.Y.S.2d 650 (1989) ....... 11, 12

Ray Indus. v. Liberty Mut. Ins. Co., 728 F. Supp. 1310

re er er errr 6

Record v. Royal Globe Ins. Co., 83 A.D.2d 154, 443

poe me Fr 20

Rudd Constr. Equip. Co. v. Home Ins. Co., 711

Ce er ry 22

Ryan, Klimek, Ryan Partnership v. Royal Ins. Co.,

pe oP Bk hg | rr T eT rer er rerree 6, 11

Sears, Roebuck & Co. v. Mackey, 351 U.S. 427

eR Ba Bi A epee ripe per rane ge Sameamare 13, 16-18, 22, 23

Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S.

SRS aerial a A eee ae ee eee 16

Shamley v. ITT Corp., 869 F.2d 167 (2d Cir. 1989) ....... 23

Spiegel v. Trustees of Tufts College, 843 F.2d 38

A aL a A 17, 22

State Farm Mut. Auto. Ins. Co. v. Taglianetti, 122

A.D.2d 40, 504 N.Y.S.2d 476 (2d Dep’t 1986) ......... 19

Technicon Elecs. Corp. v. American Home Assurance Co.,

141 A.D.2d 124, 533 N.Y.2d 91 (2d Dep’t 1988),

aff'd, 74 N.Y.2d 66, 542 N.Y.2d 1048, 544

ela lea icestaebeeseneecness 8

Technicon Elecs. Corp. v. American Home

Assurance Co., 74 N.Y.2d 66, 542 N.E.2d 1048, 544

RE x ocer cic eceresusteseeesa¢s 8, 10 ,11, 25

Travelers Indem. Co. v. Allied-Signal, Inc., 718 F. Supp.

EY HE so adee su aNeeaiuaei ve ree edeess 7

Troy Mills v. Aetna Casualty & Sur. Co., No. 89-311,

ee I aa elses ep seva eau eueeecsees 6

Unigard Mut. Ins. Co. v. McCarty’s, Inc., No. 83-1441

ee ee EE wie ere cco cies peda heen esse 7

United States Fidelity & Guar. Co. v. Thomas Solvent Co.,

683 F. Supp. 1139 (W.D. Mich. 1988) ............. i ig §

United States Fire Ins. Co. v. Smith Barney, Harris

Upham & Co., 724 F.2d 650 (8th Cir. 1983) .......... 20, 24

Weinberg v. Transamerica Ins. Co., 62 N.Y.2d 379,

465 N.E.2d 819, 477 N.Y.S.2d 99 (1984) ............... 19

Went ¥. ATA T Coa... S11 U5. BEPC) oc ccccccccvceys 8

Statutes and Rules

Og ae | er ee 2, 3, 9, 10, 12-17, 20, 21, 23

pid A PD re tre rrr rr 12

Ee Fe EE Fo 5 8 oc eo da eaes ken cenee eres 12

ee GPs Oe TE oo bb vs oe ceudkdvesavecceenes 3

es ED ho 6 545-5 eo ays a ek se eeeweewsoees 16

pogo Fa Bg ee eee 4

Other Authorities

J. Acton, Understanding Superfund, A Progress Report, Inst.

oe Ue errr re rer reer re 1

No.

IN THE

Supreme Court of the United States

October Term, 1989

THE TRAVELERS INDEMNITY COMPANY,

Petitioner,

AVONDALE INDUSTRIES, INC. and OGDEN CORPORATION,

Respondents,

-and-

COMMERCIAL UNION INSURANCE COMPANY, HIGHLANDS IN-

SURANCE COMPANY, AMERICAN MOTORISTS INSURANCE

COMPANY, and NATIONAL UNION FIRE INSURANCE COMPANY,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

As of March, 1989, there were 30,844 hazardous waste sites

in the Environmental Protection Agency (“EPA”) information

system. Some estimates place the total private and governmental

cost of cleanup at $500 billion. J. Acton, Understanding Super-

fund, A Progress Report, Inst. Civ. Just. 1-2, 61 (1989). The poten-

tial liabilities of the owners of these sites and the generators and

transporters of the wastes which fill them have created a major

litigation theater that is consuming enormous judicial resources.

There are now hundreds of pending pollution liability insur-

ance coverage disputes in which federal district courts are called

upon to interpret and apply the substantive insurance law of the

several states. Because of strong differences of opinion concern-

ing both environmental policy and the scope of coverage for pol-

luting conduct and cleanup costs, a number of federal courts have

declined to follow intermediate level state appellate decisions and

have freely disagreed with one another on the substantive law of a

particular state.

This case arises from the certification of a partial summary

judgment declaring that one of five insurers that provided liability

insurance coverage to Respondent policyholders had a duty to

defend pollution claims. The United States District Court for the

Southern District of New York entered a partial summary judg-

ment against Petitioner without addressing the interrelated de-

fense obligations of the other insurers. The district court wrote

large on controversial and unresolved issues of New York law,

while rejecting a recent intermediate level appellate decision, the

most reliable statement of New York law at that time. It then en-

tered a partial final judgment pursuant to Rule 54(b) of the Fed-

eral Rules of Civil Procedure even though the same insurance

coverage issues were on appeal to New York’s highest court. The

United States Court of Appeals for the Second Circuit exercised

jurisdiction notwithstanding the improper certification and af-

firmed the decision of the district court.

As a matter of law, the certification was improper because

the policyholders’ claims against Petitioner could not be finally

resolved independently of Petitioner’s claims against the other in-

surers. Guidance from this Court is necessary to resolve conflicts

between the Second Circuit and the Third and Seventh Circuits

on the legal severability of related claims for purposes of Rule

54(b). In addition, this Court should address the constraints on

the discretion of federal district courts sitting in diversity to enter

partial final judgments on unsettled issues of state law soon to be

resolved by that state’s highest court.

Opinions Below

The opinions of the United States Court of Appeals are re-

ported at 894 F.2d 498 (2d Cir. 1990) and 887 F.2d 1200 (2d Cir.

1989). The opinions of the United States District Court are re-

ported at 123 F.R.D. 80 (S.D.N.Y. 1988) and 697 F. Supp. 1314

(S.D.N.Y. 1988). The four opinions are reproduced in the appen-

dix hereto.

Jurisdiction

The opinion of the Second Circuit was entered October 18,

1989. The opinion of the Second Circuit denying rehearing but

modifying its prior opinion was entered January 10, 1990. This

Court’s jurisdiction is invoked pursuant to 28 U.S.C. § 1254(1)

(1982).

Federal Rule of Civil Procedure Involved

Rule 54(b) of the Federal Rules of Civil Procedure provides:

Judgment Upon Multiple Claims or Involving Multi-

ple Parties. When more than one claim for relief is pre-

sented in an action, whether as a claim, counterclaim,

cross-claim, or third-party claim, or when multiple par-

ties are involved, the court may direct the entry of a final

judgment as to one or more but fewer than all of the

claims or parties only upon an express determination

that there is no just reason for delay and upon an ex-

press direction for the entry of judgment. In the ab-

sence of such determination and direction, any order or

other form of decision, however designated, which adju-

dicates fewer than all the claims or the rights and liabili-

ties of fewer than ail the parties shall not terminate the

action as to any of the claims or parties, and the order or

other form of decision is subject to revision at any time

before the entry of judgment adjudicating all the claims

and the rights and liabilities of all the parties.

STATEMENT OF THE CASE

Petitioner The Travelers Indemnity Company (“Travelers”)

insured Ogden Corporation (“Ogden”) and its subsidiaries from

July 5, 1975 to December 1, 1984. Avondale Industries, Inc.

(“Avondale”), a former Ogden subsidiary, has been sued in a se-

ries of private lawsuits by persons residing near a waste oil recy-

cling facility and dumpsite near Denham Springs, Louisiana.

Each of the underlying complaints alleges that Avondale and oth-

ers generated and shipped hazardous waste to the dumpsite. The

plaintiffs in the private actions claim bodily injury and property

damage from pollutants regularly discharged during the two dec-

ades that the site was in operation. In addition, in January 1986,

Avondale received a “potentially responsible person” (“PRP”)

letter from the Louisiana Department of Environmental Quality

(the “DEQ”) naming Avondale as a person potentially responsi-

ble for cleaning up the dumpsite.

Ogden and Avondale Sue Only One of Five Insurers that

Provided Liability Coverage

On December 16, 1986, Avondale and Ogden [hereinafter

collectively referred to as Respondents] commenced a

declaratory judgment action against Travelers seeking a declara-

tion that Travelers has an obligation to defend and indemnify

Avondale in connection with the private actions and the DEQ

PRP letter. The district court had diversity jurisdiction over the

subject matter of the dispute. 28 U.S.C. § 1332 (1982). Travelers

filed its answer denying liability on March 9, 1987, and counter-

claimed for a declaration that Travelers has no duty to defend or

indemnify Avondale in connection with the private lawsuits or the

DEQ letter. Travelers also filed a third-party complaint against

the four other insurers that afforded coverage to Avondale during

the time periods in which the private plaintiffs claim their per-

sonal injuries and property damage occurred: Commercial Union

Insurance Company (“Commercial Union”), Highlands Insur-

ance Company (“Highlands”), American Motorists Insurance

Company (“American Motorists”) and National Union Fire In-

surance Company (“National Union”).

The District Court’s Ruling Granting Partial Summary

Judgment to Ogden and Avondale

On October 8, 1987, Respondents moved for partial sum-

mary judgment solely on the issues of Travelers obligation to de-

fend Avondale in the private lawsuits and in connection with the

DEQ PRP letter. The motion raised three unsettled issues of New

York insurance law:

1. whether the “sudden and accidental” pollution ex-

clusion clause in each Travelers policy barred coverage for

twenty years of industrial discharges at the Denham Springs

dumpsite;'

' Specifically, the pollution exclusion provides that Travelers insurance does not

apply:

to bodily injury or property damage arising out of the discharge, disper-

sal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic

chemicals, liquids or gases, waste materials or other irritants, contami-

nation or pollutants into or upon land, the atmosphere or any water-

course or body of water; but this exclusion does not apply if such dis-

charge, dispersal, release or escape is sudden and accidental.

In construing the precise language at issue here, federal courts have disagreed

with the interpretations of intermediate level state appellate courts. See F L

Aerospace v. Aetna Casualty & Sur. Co:, 897 F.2d 214 (6th Cir. 1990) (disagreeing

with intermediate level Michigan appellate decisions on proper interpretation

of pollution exclusion); C.L. Hauthaway & Sons v. American Motonists Ins. Co.,

712 F. Supp. 265, 268 (D. Mass. 1989) (disagreeing with intermediate level Mas-

sachusetts appellate court on proper interpretation of pollution exclusion); Bor-

den, Inc. v Affiliated FM Ins. Co., 682 F. Supp. 927, 929-30 (S.D. Ohio 1987) (dis-

agreeing with intermediate level Ohio appellate court on proper interpretation

of pollution exclusion), aff'd, 865 F.2d 1267 (6th Cir.), cert. denied, 110S. Ct. 68

(1989). The federal district courts have also disagreed with one another on the

proper construction of the pollution exclusion under the laws of their respective

states. Compare Hayes v. Maryland Casualty. Co., 688 F. Supp. 1513, 1515 (N.D.

Fla. 1988) (“sudden and accidental!” pollution exclusion bars coverage for

(Footnote continued on next page)

2. whether Travelers right and duty to defend any

“suit” under the terms of its general liability policies obliged

Travelers to defend Avondale in connection with the DEQ

PRP letter;2 and

3. whether governmentally mandated cleanup costs

are “damages” covered under the terms of Travelers general

liability policies.?

(Footnote continued from previous page)

—

routine discharges of waste) with Pepper’s Steel & Alloys, Inc. v. United States Fi-

delity & Guar. Co., 668 F. Supp. 1541, 1548-50 (S.D. Fla. 1987) (“sudden and acci-

dental” pollution exclusion applies only when the insured intends to harm the

environment), and Ray Indus. v. Liberty Mut. Ins. Co., 728 F. Supp. 1310, 1315-20

(E.D. Mich. 1989) (continuous discharge of pollutants over thirteen-year period

not “sudden and accidental”) with United States Fidelity & Guar. Co. v. Thomas

Solvent Co., 683 F. Supp. 1139, 1155-61 (W.D. Mich. 1988) (“sudden and acci-

dental” exception to pollution exclusion is ambiguous and not limited to events

that happen over a short period of time)

Here, too, federal courts have disagreed with one another and declined to fol-

low the lead of intermediate level state appellate courts. The federal district

courts of Michigan provide the most striking example. Compare Central Quality

Services Corp. v. Insurance Co. of N. Am., No. 87-CV-74473-DT, slip op. at

12-20 (E.D. Mich. Sept, 6, 1989) (PRP letter is not a “suit” under Michigan law)

and Harter Corp. v. Home Indem. Co., 713 F. Supp. 231, 232-33 (W.D. Mich.

1989) (same) and Arco Indus. v. Travelers Ins. Co., 730 F. Supp. 59, 65-8 (W.D.

Mich. 1989) (same) with Higgins Indus. v. Fireman’s Fund Ins. Cos., 730 F. Supp.

774 (E.D. Mich. 1989) (PRP letter is a “suit” under Michigan law) and Ray In-

dus. v. Liberty Mut. Ins. Co., 728 F. Supp. 1310, 1313-14 (E.D. Mich. 1989)(same)

and Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 662 F. Supp. 71, 75 (E.D. Mich.

1987) (same). Another federal district court applying New York law has de-

clined to follow the result reached herein. See Ryan, Klimek, Ryan Partnership v.

Royal Ins. Co., 728 F. Supp. 862, 866-68 (D.R.I. 1990).

General liability insurance policies typically provide that the insurer “will pay

on behalf of the insured all sums which the insured shall become legally obli-

gated to pay as damages because of .. . property damage.” See, e.g., Patrons Ox-

ford Mut. Ins. Co. v. Marois, No. KEN-89-284, slip op. at 4 (Me. Apr. 2, 1990).

Whether governmentally mandated environmental cleanup costs are “dam-

ages” in the context of liability insurance is perhaps the most hotly contested

and financially significant commercial law issue today. The four state supreme

courts that have addressed this question are evenly divided. See Marois, supra,

slip op. at 4-9 (expenses incurred by insured to meet state clean-up demands are

not “damages”), Troy Mills v. Aetna Casualty & Sur. Co., No. 89-311, order (N.H.

Feb. 13, 1990) (summarily affirming superior court decision holding that

(Footnote continued on next page)

The district court awarded partial summary judgment to Re-

spondents on the issue of Travelers duty to defend in a memoran-

dum opinion and order dated October 19, 1988. Avondale

Industries, Inc. v. Travelers Indemnity Co., 697 F. Supp. 1314

(S.D.N.Y. 1988). Its rulings on the three key issues of state envi-

ronmental coverage law were as follows:

First, the district court held that Travelers had a duty to de-

fend the private actions notwithstanding the pollution exclusion

because the underlying complaints did not allege that Avondale

intended to pollute and did not make specific allegations con-

cerning the manner in which Avondale’s particular shipments of

waste escaped. 697 F. Supp. at 1317. Significantly, this ruling was

at odds with the unanimous, two-week old decision of the Appel-

late Division of the Supreme Court of the State of New York in

(Footnote continued from previous page)

cleanup costs are not “damages” within the meaning of liability insurance poli-

cies); C. D. Spangler Constr. Co. v. Industrial Crankshaft & Eng'g Co., 326 N.C.

133, 388 S.E. 2d 557 (1990) (insured’s expenses in complying with cleanup orders

are “damages” within the meaning of liability insurance policies); Boeing Co. v.

Aetna Casualty & Sur. Co., 113 Wash. 2d 869, 784 P.2d 507 (1990) (CERCLA

response costs are “damages” within the meaning of liability insurance poli-

cies).

Federal courts cannot agree on how to interpret existing state law precedents.

Compare Avondale Indus. v. Travelers Indem. Co., 887 F.2d 1200, 1206-07 (2d

Cir. 1989) (cleanup costs are “damages” under New York law) with Travelers In-

dem. Co. v. Allied-Signal, Inc., 718 F. Supp. 1252, 1253 n.2 (cleanup costs are not

“damages” under New York law), and Maryland Casualty Co. v. Armco, Inc., 822

F.2d 1348 (4th Cir. 1987) (cleanup costs are not “damages” under Maryland

law), cert. denied, 484 U.S. 1008 (1988) with Chesapeake Utils. Corp. v. Anienican

Home Assurance Co., 704 F. Supp. 551, 558-61 (D. Del 1989) (cleanup costs are

“damages” under Maryland law); compare Continental Ins. Cos. v. Northeastern

Pharmaceutical & Chem. Co., 842 F.2d 977, 983-87 (8th Cir.) (en banc) (cleanup

costs are not “damages” under Missouri law), cert. denied, 109 S. Ct. 66 (1988)

with Jones Truck Lines v. Transport Inc., Co., No. 88-5723, slip op. at 11-21 (E.D.

Pa. May 10, 1989) (cleanup costs are “damages” under Missouri law), question to

be certified to the Supreme Court of Missouri, Nos. 89-1729/59 (3d Cir. Feb. 15,

1990) (Clerk’s letter reprinted in the appendix hereto), and Aetna Casualty &

Sur. Co. v. Gulf Resources & Chem. Corp., 709 F. Supp. 958, 961 (D. Idaho 1989)

(cleanup costs are not “damages” under Idaho law) with Unigard Mut. Ins. Co. v.

McCanty’s, Inc., No. 83-1441, slip op. at 48 (D. Idaho Aug. 4, 1989) (cleanup

costs are “damages” under Idaho law).

Technicon Electronics Corp. v. American Home Assurance Co.,

141 A.D.2d 124, 533 N.Y.S.2d 91 (2d Dep’t 1988), aff'd, 74 N.Y.2d

66, 542 N.E.2d 1048, 544 N. Y.S.2d 531 (1989), which squarely held:

[T]he logical and proper application of the pollution exclu-

sion depends solely upon the method by which the pollutants

entered the environment... . The relevant factor is not

whether the policyholder anticipated or intended the resul-

tant injury or damage, but whether the toxic material was

discharged into the environment unexpectedly and uninten-

tionally or knowingly and intentionally.

141 A.D.2d at 144, 533 N.Y.S.2d at 103-04 (citation omitted).

Next, the district court declined to follow the explicit ruling

of the Appellate Division in Technicon that an EPA PRP letter

did not constitute a “suit” within the meaning of liability insur-

ance policies and held that Travelers had a duty to “defend” the

DEQ PRP letter.‘

Finally, the district court rejected the reasoning of Maryland

Casualty Co. v. Armco, Inc., 822 F.2d 1348 (4th Cir. 1987), cert. de-

nied, 484 U.S. 1008 (1988), and Continental Ins. Cos. v. Northeast-

ern Pharmaceutical & Chem. Co., 842 F.2d 977 (8th Cir. 1987) (en

* The district court quoted the language from West v. A. T. & T. Co., 311 U.S. 223,

237 (1940), that a federal court shouid not disregard the decisions of intermedi-

ate state appeliate courts “unless it is convinced by other persuasive data that the

highest court of the state would decide otherwise."” 697 F. Supp. at 1320-21 (em-

phasis in original) See Commissioner v. Estate of Bosch, 387 U.S. 456, 465

(1967) However, the district court identified no other “persuasive data” that

the New York Court of Appeals would rule differently. By imposing a duty to

defend the DEQ PRP letter without any support beyond its own disagreement

with the Appellate Division, the district court redefined the Estate of Bosch and

West standard to eliminate the self-restraint those decisions demand from the

federal bench. See West v. A. T. & T. Co., supra, 311 U.S. at 236-37 (“There are

many rules of decision commonly accepted and acted upon by the bar and infe-

nor courts which are nevertheless laws of the state although the highest court of

the state has never passed upon them. In those circumstances a federal court is

not free to reject the state rule merely because it has not received the sanction of

the highest state court, even though it thinks the rule is unsound in principle or

that another is preferable.”).

banc), cert. denied, 109 S. Ct. 66 (1988), and held that under New

York 'aw, the costs of clean-up at the Denham Springs dumpsite

constituted “damages” within the meaning of Travelers liability

policies. 697 F. Supp. at 1318-20.

The District Court Enters a Partia! Final Judgment

Following the district court’s decision, Respondents moved

pursuant to Rule 54(b) of the Federal Rules of Civil Procedure for

entry of a final judgment on Travelers duty to defend. Travelers

opposed the entry of the partial final judgment on the following

grounds:

1. New York’s highest court would soon resolve the

central issues in the case and there was no reason for the

court to certify its ruling on Travelers defense obligations in

advance of a definitive ruling from the New York Court of

Appeals;

2. Asa matter of law, no final judgment could be en-

tered against Travelers in the main action without first adju-

dicating the defense obligations of the third-party

defendants; and

3. Travelers would face substantial prejudice from

the piecemeal adjudication of defense issues.

The district court dismissed Travelers objections and deter-

mined that there was “no just reason for delay” in entering a final

judgment that placed the entire defense burden upon Travelers.

Underscoring the district court’s decision to make the Rule 54(b)

certification was the court’s belief in the importance of its own

ruling. Specifically, the court stated:

[I]n view of the immensely important public policy questions

relating to environmental hazard and safety in Louisiana and

elsewhere that are fundamentally affected by liability, defense

and indemnification findings in actions like this, this Court

concludes that there is no just reason for delay and directs

the entry of partial final judgment upon its Opinion and Or-

der of October 19, 1989.

123 F.R.D. at 83 (emphasis in original).

The public policy questions at issue in this case are impor-

tant. However, the district court fundamentally misinterpreted

its role as a federal court sitting in diversity. Its obligation was to

apply state law and state policy, not to place the federal courts in

the vanguard of state policymaking. Absent a pressing reason for

certification, the district court’s obligation was to obtain the most

definitive exposition of New York law possible on unsettled issues

of state law before entering a final judgment. Instead, the district

court set in motion a process that required two opinions by the

Second Circuit to keep pace with developments in the state courts

and placed the federal courts in New York in conflict with the

New York Court of Appeals on a question of New York law.

Proceedings in the United States Court of Appeals for the Second

Circuit

Travelers argued its appeal before the Second Circuit on

April 10, 1989. In the interval between oral argument and the in-

itial disposition of Travelers appeal, the New York Court of Ap-

peals decided Technicon Electronics Corp. v. American Home

Assurance Co., 74 N.Y.2d 66, 542 N.E.2d 1048, 544 N.Y.S.2d 531

(1989). New York’s highest court affirmed the Appellate Divi-

sion’s ruling on the pollution exclusion and declined to reach the

issue of whether PRP letters are “suits.” Notwithstanding the

Court of Appeals ruling in conflict with the result in the district

court, the Second Circuit issued its decision approving the dis-

trict court’s Rule 54(b) certification and affirming the grant of

partial summary judgment. Avondale Industnes, Inc. v. Travelers

Indemnity Co., 887 F.2d 1200 (2d Cir. 1989).5 Following Travelers

petition for rehearing and a second decision from the New York

Court of Appeals, Powers Chemco, Inc. v. Federal Insurance Co.,

74 N.Y.2d 910, 548 N.E.2d 1301, 549 N.Y.S.2d 650 (1989), the Sec-

ond Circuit issued another opinion. Avondale Industries, Inc. v.

Travelers Indemnity Co., 894 F.2d 498 (2d Cir. 1990). That deci-

sion, dated January 10, 1990, denied Travelers petition for re-

hearing but substantively modified the Court’s prior opinion.

In its first opinion, the Second Circuit read the New York

Court of Appeals’ interpretation of the pollution exclusion just as

narrowly as the district court had construed the Appellate Divi-

sion’s earlier decision. The Second Circuit held that the pollu-

tion exclusion applies only when the insured itself discharges

waste. 887 F.2d at 1205. The federal appellate court thereby ex-

empted from the terms of the pollution exclusion all generators of

toxic substances that do not themselves discharge hazardous

waste directly into the environment. This ruling represented a

significant policy decision in conflict with New York’s policy to

prohibit “subsidized pollution.” See Ogden Corp. v. Travelers In-

dem. Co., No. 88 Civ. 4269, slip op. at 6 (S.D.N.Y. Sept. 22, 1989);

Technicon, supra, 74 N.Y.2d at 76, 542 N.E.2d at 1051, 544

N.Y.S.2d at 534; Act of June 25, 1971, ch. 765, 1971 N.Y. Laws

® The Second Circuit rejected Travelers objection to the Rule 54(b) certification

based upon the irrelevant observation that “the duty to defend and the duty to

indemnify are separate and distinct questions of fact and law.” 887 F.2d at 1203.

However, Travelers never contended otherwise. What Travelers argued both

before the district court and in the Second Circuit was that Avondale’s claim for

defense from Travelers could not be fully and fairly resolved without also adju-

dicating the defense obligations of the third-party defendants.

* In addition to the ruling on the pollution exclusion, the Second Circuit affirmed

the district court on the “suit” and “damages” issues. One federal district court

has already declined to follow the Second Circuit’s ruling on the “suit” question

in favor of the Appellate Division's Technicon rationale. See Ryan, Klimek,

Ryan Partnership v. Royal Ins. Co., 728 F. Supp. 862, 866-68 (D.R.I. 1990).

1230; Executive Memorandum, Environmental Pcilution—Prohi-

bition Against Insurance Coverage, 1971 N.Y. Laws 2485.

The Second Circuit’s approach could not stand after the

Court of Appeals decided Powers Chemco, Inc. v. Federal Insur-

ance Co., 74 N.Y.2d 910, 548 N.E.2d 1301, 549 N.Y.S.2d 650

(1989), and held: “Simply put, there is nothing in the language of

the pollution exclusion clause to suggest that it is not applicable

when liability is premised on the conduct of someone other than

the insured.” Jd. at 911, 548 N.E.2d at 1302, 549 N.Y.S.2d at 651.

Travelers petition for rehearing was pending at the time of

the Court of Appeals ruling in Powers Chemco. The petition fo-

cused largely on the certification issue and the Second Circuit’s

failure to address the Appellate Division’s decision in Powers

Chemco, Inc. v. Federal Insurance Co., 144 A.D.2d 445, 533

N.Y.S.2d 1010 (2d Dep’t 1988), aff'd, 74 N.Y.2d 910, 548 N.E.2d

1301, 549 N.Y.S.2d 650 (1989). The Second Circuit ultimately is-

sued an opinion denying Travelers petition for rehearing by dis-

tinguishing Powers Chemco on its facts. 894 F.2d 498 (2d Cir.

1990). However, the decision on rehearing modified the Second

Circuit’s prior opinion by retracting the ruling that the pollution

exclusion applies only when the insured is the “active polluter.”

Id. at 500.

Reasons for Granting the Writ

Petitioner respectfully submits that the Court should grant

the writ of certiorari for two reasons:

1. To provide the lower federal courts with practical

guidelines for determining when a partial final judgment

may be entered on one claim in an action involving multiple

claims and parties; and

2. Toenforce the institutional limits on the discretion

of a federal court sitting in diversity to use Rule 54b) to

preempt the decisions of state courts construing state law.

Conflicting Rule 54(b) Standards in the Federal Courts of

Appeal

Working only with this Court’s observation that some claims

are so “inherently inseparable” that a district court cannot prop-

erly certify judgment on any one of them, Sears, Roebuck & Co. v.

Mackey, 351 U.S. 427, 436 (1956), conflicting standards have been

developed by the lower federal courts to evaluate claims that are

legally and factually related. Noting the confusion surrounding

this issue and the “natural tendency [of Rule 54(b)] to generate

multiple appeals in the same case,” one court has suggested that

this Court reconsider its earlier Rule 54(b) decisions in light of the

ever increasing caseloads of the federal appellate courts. See Mi-

nority Police Officers Ass'n v. City of South Bend, 721 F.2d 197,

200-01 (7th Cir. 1983).

At one extreme, the Second Circuit holds that so long as

there are two distinct causes of action that involve some separate

legal and factual questions and can be separately enforced, the

district court may enter judgment under Rule 54(b). See Cullen v.

Margiotta, 811 F.2d 698, 711 (2d Cir.), cert. denied, 483 U.S. 1021

(1987). At the other extreme, in the Seventh Circuit, a district

court cannot enter final judgment if there is a significant factual

overlap between the adjudicated and unresolved claims. See Indi-

ana Harbor Belt R.R. v. American Cyanamid Co., 860 F.2d

1441, 1445 (7th Cir. 1988); Automatic Liquid Packaging, Inc. v.

Dominik, 852 F.2d 1036, 1037 (7th Cir. 1988). Intermediate stan-

dards have been adopted as well. See Gregorian v. Izvestiu, 871

F.2d 1515, 1520 (9th Cir.) cert. denied, 110 S. Ct. 237 (1989) (factual

and legal issues of adjudicated claims must be “substantially dif-

ferent” from those raised by reserved claim); Explosives Supply

Coa. v. Columbia Nitrogen Corp., 691 F.2d 486, 486-87 (11th Cir.

1982) (claims are separable if “neither the same issues nor facts

would be before the reviewing court more than once.”); Morrison-

Knudsen Co. v. Archer, 655 F.2d 962, 965-966 (9th Cir. 1981) (Ken-

nedy, J.) (claims legally and factually inseperable insofar as they

cannot be resolved without reference to each other).

As this case illustrates, in the decade since this Court last

addressed Rule 54 (b), some of the lower federal courts have be-

come so permissive in allowing piecemeal appeals that the circuit

courts are deciding cases where they lack jurisdiction. By im-

properly exercis -g jurisdiction over the appeal below, the Second

Circuit allowed the district court to enter final judgment on a

claim that was necessarily dependent upon the resolution of un-

adjudicated third-party claims.

The Federal Courts Should Not Employ the Rule 54(b)

Certification Procedure In Diversity Cases When the Applicable

State Law Is In Flux

In a fundamental misperception of its role in this diversity

case, the district court cited as its principal justification for find-

ing “no just reason for delay” the importance of the state law poli-

cies in issue. However, this very consideration mandated that the

district court refrain from entering a partial final judgment at a

time when state law was in flux and not susceptible to accurate

exposition by the federal courts.

The district court must have been cognizant that its predic-

tions of New York environmental coverage law were controversial

since it had declined to fo!low the most recent intermediate appel-

late decision that addressed these points. Instead of unnecessar-

ily triggering a race between the federal and state appellate

processes, the district court, at minimum, should have resolved

all issues pertaining to the insurers’ defense obligations in the

first- and third-party actions before entering final judgment.

Contrast the confrontational approach taken by the Second

Circuit with the deferential approach of the Third Circuit in ap-

plying state environmental coverage law. The Third Circuit dis-

missed for lack of appellate jurisdiction an appeal from a Rule

54(b) judgment on the “damages” and “suit” issues under New

York law in a case that is procedurally indistinguishable from this

one. See Amencan Motorists Ins. Co. v. Levolor Lorentzen, Inc.,

879 F.2d 1165 (3d Cir. 1989). In another case, when squarely faced

with a controversial decision that governmentally mandated

cleanup costs constitute “damages” under Missouri law, the

Third Circuit notified the parties that it will certify the question to

the Missouri Supreme Court. See Jones Truck Lines v. Transport

Ins. Co., No. 88-5723, slip op. at 11-21 (E.D. Pa. May 10, 1989),

question to be certified to the Supreme Court of Missouri, Nos.

89-1729/59 (3d Cir. Feb. 15, 1990) (reprinted in appendix hereto).’

In the current uncertain legal climate and in light of the great

number of pending cases, this Court should lay the ground rules

to prevent the federal courts from obstructing the orderly evolu-

tion of state law doctrine.

POINT I

This Court Should Grant Certiorari To Enforce the

Limitations on Federal Appellate Jurisdiction.

In an action with multiple parties or multiple claims for re-

lief, Rule 54(b) of the Federal Rules of Civil Procedure permits a

district court to enter final judgment on a single claim upon a

” In Continental Ins. Cos. v. Northeastem Pharmaceutical & Chem. Co., 811 F.2d

1180, 1188-89 (8th Cir. 1987), rev'd en banc, 842 F.2d 977, cert. denied, 109 S. Ct.

66 (1988) (“NEPACCO”), a panel of the Eighth Circuit held that governmental

suits to recover CERCLA cleanup costs sought “damages” under a liability pol-

icy and, therefore, were covered by liability insurance. After en banc considera-

tion, the Eighth Circuit reversed the panel decision and concluded that cleanup

costs are not “damages” under Missouri law. 842 F.2d at 985. The NEPACCO

decision has been a source of great controversy in the federal courts. See, e.g,

Aetna Casualty & Sur. Co. v. General Dynamics Corp., No. 88-2220C (A), slip op.

at 23-24(E.D. Mo. Dec. 12, 1989) (following NEPACCO); Cedar Chem. Corp. v.

American Universal Ins. Co., No. 87-2838-4B, slip op. at 6 (W.D. Tenn. Sept. 13,

1989) (same); Aetna Casualty & Sur. Co. v. Gulf Resources & Chem. Corp., 709 F.

Supp. 958, 961 (D. Idaho 1989) (same); Maryland Casualty Co. v. Ormond, No.

87-3038, slip op. (W.D. Ark. Jan. 6, 1989) (disagreeing with NEPACCO, but fol-

lowing decision); Federal Ins. Co. v. Susquehanna Broadcasting Co. , 727 F. Supp.

169, 173 (M.D. Pa. 1989) (disapproving NEPACCO); Intel Corp. v. Hartford

Accident & Indem. Co., 692 F. Supp. 1171, 1188-89 (N.D. Cal. 1988) (same).

finding that there is “no just reason for delay.”® The rule is de-

signed to achieve speedy resolution of claims that need not be ad-

judicated together while avoiding piecemeal appeals. See Sears,

Roebuck & Co. v. Mackey, 351 U.S. 427, 432 (1956).

Rule 54(b) limits the circumstances under which a district

court can enter partial final judgment in an action with multiple

claims or parties. This Court has highlighted the requirements of

the Rule:

(1) There must be a full disposition of a single, distinct

claim that is independent of the remaining claims in the mul-

tiple claim action. See Curtiss-Wright Corp. v. General Elec-

tric Co., 446 U.S. 1, 7 (1980); Seatrain Shipbuilding Corp. v.

Shell Oil Co., 444 U.S. 572, 582-83 (1980); Liberty Mutual In-

surance Co. v. Wetzel, 424 U.S. 737, 743 (1976); Sears, Roe-

buck & Co., supra, 351 U.S. at 436.

(2) The decision must be final for purposes of 28

U.S.C. § 1291 (1982) in that all issues relating to the claim

must be adjudicated. See Curtiss-Wnght Corp., supra, 446

US. at 7; Sears, Roebuck & Co., supra, 351 U.S. at 437; Catlin

v. United States, 324 U.S. 229, 233 (1945).

(3) The district court must consider the strong policy

against multiple appeals in a single action and the relation-

ship among the adjudicated and unadjudicated claims to de-

termine whether there is just cause to delay entry of

judgment until resolution of the remaining claims. Curtiss-

Wright Corp., supra, 446 US. at 8.

The relationship among the claims is relevant both to the le-

gal determination of whether a single claim has been finally adju-

* Rule 54(b) provides:

When more than one claim for relief is presented in an action, whether as a

claim, counterclaim, cross-claim, or third-party claim, or when multiple parties

are involved, the court may direct the entry of a final judgment as to one or

more but fewer than all of the claims or parties only upon an express determina-

tion that there is no just reason for delay and upon an express direction for the

entry of judgment.

. — ial

dicated and to the discretionary evaluation of whether there is no

just cause for delay. See Sears, Roebuck & Co., supra, 351 U.S. at

436 (claims may be so inherently inseparable or closely related

that they cannot be decided separately); Cold Metal Process Co. v.

United Engineering & Foundry Co., 351 U.S. 445, 452 (1956) (“the

relationship of the adjudicated claims to the unadjudicated

claims is one of the factors which the District Court can consider

in the exercise of its discretion”); Federal Deposit Ins. Co. v.

Elefant, 790 F.2d 661, 664-65 (7th Cir. 1986) (a “[c]laim under Rule

54(b) is defined with a view to avoiding double appellate review of

the same issues”).

On appeal from a Rule 54{b) judgment, the reviewing court

must determine de novo that there has been a final and complete

resolution of a single independent claim. See Curtiss-Wright Corp.

v. General Electric Co., 446 U.S. 1, 10 (1980); Gregorian v. Izvestia,

871 F.2d 1515, 1519 (9th Cir.), cert. denied, 110 S. Ct. 237 (1989);

Spiegel v. Trustees of Tufts College, 843 F.2d 38, 43 (1st Cir. 1988);

ODC Communications Corp. v. Wenruth Investments, 826 F.2d

509, 512 (7th Cir. 1987). If so, the reviewing court must honor the

certification absent an abuse of discretion by the district court in

assessing the equities. See Curtiss-Wright Corp., supre, 446 U.S. at

10.

The partial summary judgment in this case did not fully and

finally dispose of a claim separate and distinct from the claims in

the third-party actions. Nor did it support certification under

Rule 54(b) because certification virtually guaranteed multiple ap-

peals on the issue of defense.

A. Because Resolution Of Petitioner’s Defense Obligations

Necessarily Depended Upon The Adjudication Of Petition-

er’s Third-Party Defense Claims, Certification Was Im-

proper And The Second Circuit Lacked Jurisdiction To

Hear The Appeal.

As a legal and factual matter, Travelers defense obligations

are so “inherently inseparable” from those of the third-party de-

fendant insurers that the district court could not enter final judg-

ment on Travelers obligation to defend without resolving the

third-party claims. See Sears, Roebuck & Co. vy. Mackey, 351 U.S.

427, 436 (1956). Because there was no adjudication of a separate

claim, the district court improperly entered judgment and the

Second Circuit lacked jurisdiction over the appeal.

Respondent Avondale seeks defense costs from Petitioner

Travelers. Travelers, in turn, has brought a claim for reimburse-

ment of defense costs against Avondale’s other insurers. This

claim for reimbursement derives from the “other insurance”

clause found in each Travelers insurance contract in issue. This

clause provides:

This insurance shall apply in excess of all other liability in-

surance available to the insured, and in excess of all property

damage insurance available to the named insured, and then

shall apply only in the amount by which the applicable limit

of liability of this policy exceeds the sum of the applicable

limits of liability of all other such insurance, including any

deductible provisions thereof.

Pursuant to this clause, Petitioner is an excess insurer and pays no

defense costs to the extent the insured has purchased other pri-

mary insurance from the third-party defendants.®

The Travelers “other insurance” clause contains a second

provision which provides as follows:

Without waiving the [above-quoted clause], if any insurer af-

fording other insurance to the named insured denies primary

® Two of the third-party defendants, Commercial Union and Highlands, in con-

trast, have “pro rata” other insurance clauses in their contracts which contem-

plate a proportional allocation of defense costs among the primary insurers.

Under New York law, they, not Petitioner, must defend Avondale. See General

Accident Fire & Life Assurance Corp. v. Piazza, 4 N.Y.2d 659, 669, 152 N.E.2d

236, 241, 176 N. Y.S.2d 976, 983 (1958); Albany Truck Rental Serv. v. New Hamp-

shire Merchants Ins. Co, 75 A.D.2d 426 430-32, 430 N.Y.S.2d 188, 161-62 (3d

Dep't 1980); Great American Ins. Co. v. Schaefers, 47 Misc. 2d 522, 525, 262

N.Y.S.2d 953, 956-57 (Sup. Ct. N.Y. Co. 1965); cf. Federal Ins. Co. v. Cablevision

Systems Dev. Co., 836 F.2d 54, 57-58 (2d Cir. 1987) (applying other insurance

clauses in consecutive primary insurance policies).

liability under its policy, the company will respond under

this policy as though such other insurance were not available,

provided that the company shall be subrogated to all rights of

the insured to such other insurance and the insured shall do all

things necessary to enforce such rights.

(emphasis supplied).

The other primary insurers have, like Petitioner, denied li-

ability for defense and indemnity in connection with the private

actions and the state-sponsored cleanup in Louisiana. Under the

terms of the Travelers contracts in issue, therefore, Travelers has

contracted to “drop down” and provide a defense in exchange for

the insured’s ri ghts against the other insurers on the express con-

dition that the insured has protected Travelers subrogation rights.

Absent affirmative steps by Respondents to protect their rights

against the other insurers, Travelers is not obligated to provide a

defense.

Similarly, in addition to its rights under the “other insur-

ance” clause, Travelers is entitled to an apportionment of defense

costs based upon express contractual subrogation rights set forth

in Travelers policies'® as well as general equitable principles.

Travelers has no obligation to fund Avondale’s defense to the ex-

tent Avondale has not protected Travelers subrogation rights.

See Weinberg v. Transamerica Ins. Co.,62 N.Y. 2d 379, 382-83, 465

N.E.2d 819, 821, 477 N.Y.S.2d 99, 101 (1984) (insured’s failure to

protect the subrogation rights of its insurer precludes insured

from recovering benefits under policy); State Farm Mutual Auto.

Insurance Co. v. Taglianetti, 122 A.D.2d 40, 40-1, 504 N.Y.S.2d

'©Each Travelers policy in issue provides:

In the event of any payment under this policy, the company shall be subrogated

to all the insured’s rights of recovery therefor against any person or organiza-

tion (except to the extent such person or organization is entitled to coverage

under this policy) and the insured shall execute and deliver instruments and pa-

pers and do whatever else is necessary to secure such rights. The insured shall do

nothing after loss to prejudice such rights.

(emphasis supplied).

476, 476 (2d Dep’t 1986) (same); Record v. Royal Globe Insurance

Co., 83 A.D.2d 154, 158, 443 N.Y.S.2d 755, 757 (2d Dep’t 1981)

(same); cf. Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc.,

633 F.2d 1212, 1224-25 (6th Cir. 1980) (insured must bear portion

of defense costs for period during which it has no liability insur-

ance), cert. denied, 454 U.S. 1109 (1981); Firernan’s Fund Ins. Cos.

v. Ex-Cell-O Corp., 685 F. Supp. 621, 626 (E.D. Mich. 1987)

(same).

Whether Respondents took such steps is at issue in both the

main and third-party actions. In answering Petitioner’s third-

party complaint, each insurer raised as a defense that it had re-

ceived late notice of the underlying claims from the Respondents

and therefore had no insurance obligations with respect to those

claims. If the other insurers prevail on this defense, the district

court will find that Respondents failed to present diligently the

claims to its other insurers.’ Such a finding, in turn, would ex-

cuse Petitioner from all or part of its defense obligations by op-

eration of the above-quoted clauses in Travelers insurance

contracts.

Petitioner’s liability for defense costs necessarily depends on

Respondents’ rights against the third-party defendants and their

efforts to protect those rights. See International Controls Corp. v.

Vesco, 535 F.2d 742, 746-47 n.4 (2d Cir. 1976).'2 Two claims are

'' This is not just a theoretical possibility. In another hazardous waste coverage

dispute involving the same parties, a district court found that Avondale had

waived its rights under policies issued by American Motorists because Avon-

dale failed to provide timely notice. See Ogden Corp. v. Travelers Indemnity Co.,

No. 88 Civ. 4269, slip op. at 10-20 (S.D.N.Y. Sept. 22, 1989).

'2 Conversely, if the district court had adjudicated the third-party claims in favor

of Petitioner without resolving the claims in the complaint, it could not certify

the judgment under Rule 54(b). The obligations of the third-party defendants

to Petitioner do not accrue until it is determined that Petitioner has an obliga-

tion to defend Avondale. See Consolidated Rail Corp. v. Fore River Ry., 861 F.2d

322, 326 (1st Cir. 1988); United States Fire Ins. Co. v. Smith Barney, Harris Upham

& Co., 724 F.2d 650, 652-53 (8th Cir. 1983). Likewise, resolution of the third-

party claims may nullify, in whole or in part, Petitioner's duty to defend pursu-

ant to the main action.

not separate for Rule 54(b) merely because one is in the complaint

and the other is in the third-party complaint. See Curtiss-Wright

Corp. v. General Electric Co., 446 U.S. 1, 9 (1980); Automatic Liq-

uid Packaging, Inc. v. Dominik, 852 F.2d 1036, 1037 (7th Cir. 1988).

The construction and application of the contracts in the third-

party action bear directly on the certified claim and preclude in-

vocation of Rule 54(b). See Morrison-Knudsen Co. v. Archer, 655

F.2d 962, 965 (9th Cir. 1981) (Kennedy, J.). This case is thus dis-

tinguishable from Cold Metal Process Co. v. United Engineering &

Foundry Co., 351 U.S. 445 (1956), where the presence of an unad-

judicated compulsory counterclaim was not necessarily a bar to

relief on plaintiff's claim and accordingly did not preclude certifi-

cation.

Petitioner’s duty to pay defense costs, therefore, is not sepa-

rable from the defense obligations of the other insurers—obliga-

tions that the district court has reserved for later adjudication.

Because there has been no resolution of a single claim separate

and independent of the remaining claims, the district court could

not certify the disposition of Respondents’ motion for summary

judgment and the Second Circuit was without jurisdiction to hear

the appeal.

B. Certification Was Improper Because There Was No Final

Resolution Of All Issues Relating To Petitioner’s Obligation

To Pay Defense Costs.

Nor has there been a “final” disposition of Respondents’

claim for defense costs from Petitioner. There has been no reso-

lution of whether Respondents have preserved Petitioner's sub-

rogation rights, which is 2 condition precedent to Petitioner’s

defense obligation. Travelers has asserted that it has no obliga-

tion to provide Avondale the full defense ordered by the district

court if Avondale has failed to preserve Travelers subrogation

rights. This unresolved issue precludes entry of judgment pursu-

ant to Rule 54(b): “[t]he District Court cannot, in the exercise of

its discretion, treat as ‘final’ that which is not ‘final’ within the

meaning of [28 U.S.C.] § 1291.” Sears, Roebuck & Co. v. Mackey,

351 U.S. 427, 437 (1956) (emphasis in original). See Spiegel v. Trus-

tees of Tufts College, 843 F.2d 38, 43 (1st Cir. 1988); Rudd Constr.

Equip. Co. v. Home Ins. Co., 711 F.2d 54, 56 (6th Cir. 1983); Acha

v. Beame, 570 F.2d 57, 62 (2d Cir. 1978).

The Second Circuit’s failure to address the interlocutory

character of the order conflicts with the Third Circuit’s consid-

eration of an insurer’s duty to defend in Amertcan Motonsts Ins.

Co. v. Levolor Lorentzen, Inc. , 879 F.2d 1165 (3d Cir. 1989). In that

case, the district court improperly certified a judgment before it

had resolved all issues relating to the insurer’s duty to defend.

Specifically, the district court ruled on two of the same three sub-

stantive issues presented in this case (that the insurer had a duty

to defend a PRP letter and that an EPA cleanup proceeding

sought “damages” within the meaning of a liability policy) but re-

served judgment upon the applicability of the pollution exclusion.

As the Third Circuit observed, if the insurer is

successful in advancing the pollution exclusion, undeniably

the initial determination that it had a duty to defend will, re-

gardless of the form of any new order, be effectively revised

because the [prior order] granted Levolor’s motion for sum-

mary judgment “with respect to the issue of the obligation of

[the insurer] to provide a defense” and that obligation will no

longer exist.

Id. at 1170. Accordingly, the Third Circuit dismissed the appeal

for lack of appellate jurisdiction.

Here, too, the district court below improperly “made a certi-

fication in the midst of an ongoing controversy,” id. at 1171, by

failing to resolve all of Petitioner’s theories that limit its obliga-

tion to bear the full cost of Avondale’s defense. As in Levolor

Lorentzen where subsequent resolution of the pollution exclusion

issue in favor of the insurer could alter the “final” determination

of the insurer’s duty to defend, if the district court eventually de-

termines that Respondents untimely notified the other insurers of

the Louisiana claims, the court will have to reconsider its determi-

nation that Petitioner has a duty to provide Avondale a full de-

fense.

A judgment properly ordered pursuant to Rule 54(b) is final

for all purposes including appeal, execution and res judicata. See

Shamley v. ITT Corp., 869 F.2d 167, 170 (2d Cir. 1989). Thus, if the

Rule 54(b) certification stands, Petitioner may be forever pre-

cluded from asserting Respondent’s failure to protect Travelers

subrogation rights as a defense to plaintiffs’ claim, even if the dis-

trict court rules in the third-party action that Respondent failed

to notify timely the third-party defendants of the underlying

claims. Moreover, the third-party defendants may receive the

benefit of any intervening state decisions to the prejudice of Peti-

tioner.

POINT Il

This Court Should Grant Certiorari To Enforce The

Institutional Limits On A Federal Court’s Discretion

When Sitting In Diversity.

Provided there has been a final adjudication of a separate

and independent claim, entry of judgment is left to “the discretion

of the District Court as the one most likely to be familiar with the

case and with any justifiable reasons for delay.” Sears, Roebuck &

Co. v. Mackey, 351 U.S. 427, 437 (1956). In exercising that discre-

tion, however, a district court cannot disregard the institutional

limits on its authority as a federal court sitting in diversity.

After a year’s delay before ruling on Respondent’s motion

for summary judgment, the district court sought to resolve finally

Respondents’ claim for defense costs before the imminent and

authoritative consideration of identical legal issues by the New

York Court of Appeals. This constituted an abuse of discretion

because (1) it unnecessarily and precipitously forced federal ap-

pellate scrutiny in a rapidly developing area of state law, and (2) it

created the palpable danger that intervening state court decisions

will dictate an inconsistent resolution of identical legal issues in

the third-party action.

By certifying its order before resolving all claims concerning

defense, the district court compelled the Second Circuit to deal

with unsettled state law issues that were about to be addressed by

New York’s highest court. See Blanchard v. Teledyne Movible Off-

shore, Inc., 612 F.2d 971, 971-72 (Sth Cir. 1980) (setting aside certi-

fication because Supreme Court had granted certiorari in a case

that could dispositively resolve claim); Campbell v. Westrnoreland

Farm, Inc., 403 F.2d 939, 943 (2d Cir. 1968) ( “Tempting as it is to

decide this intriguing question of New York tort law, we respect-

fully decline the invitation.”). This abuse of discretion violated

the strong federal policies against multiple appeals and unneces-

sary adjudication of novel state law issues. Moreover, the entry of

partial final judgment in this period of rapid change in New York

state law has prejudiced Petitioner in its effort to enforce its con-

tractual and equitable subrogation rights in the main and third-

party actions.

Thus, Travelers had to brief and argue this case without the

benefit of the favorable Court of Appeals rulings and the Second

Circuit had to modify its initial disposition to catch up with evolv-

ing state law. As matters now stand, there are two bodies of New

York environmental coverage law—one state and one federal —

and litigants are faced with the prospect of conflicting substantive

results depending upon whether they are in federal or state court.

See Erie R.R. v. Tompkins, 304 U.S. 64 (1938).

Moreover, because the identical legal questions concerning

an insurer’s defense obligations are being litigated in the third-

party action, the Second Circuit likely will face a second appeal on

these issues. A plainer violation of the policy against multiple ap-

peals cannot be imagined. See Consolidated Rail Corp. v. Fore

River Ry., 861 F.2d 322, 325 (1st Cir. 1988); Cullen v. Margiotta, 811

F.2d 698, 710 (2d Cir.), cert. denied, 483 U.S. 1021 (1987); United

States Fire Ins. Co. v. Smith Barney, Harris Upham & Co., 724 F.2d

650, 652 (8th Cir. 1983); Panichella v. Pennsylvania R.R., 252 F.2d

452, 455 (3d Cir. 1958); El-Marzouki Estab. v. Environmental Re-

search & Development, Inc., 93 F.R.D. 661, 662 (S.D.N.Y. 1982).

Indeed, the pendency of the third-party claims underscores

the manifest prejudice that Petitioner will suffer as a result of the

certification. The third-party defendants may receive the benefit

of the most recent exposition of New York law by the highest state

court while Petitioner will be held to the district judge’s earlier

application of state law. Thus, the district court could rule in the

third-party action that pollution exclusions in the other insurance

contracts exclude coverage notwithstanding its inconsistent rul-

ing that the pollution exclusion was no bar to coverage in the main

action. This precipitous and piecemeal federal appellate consid-

eration of the full range of environmental coverage issues con-

trasts markedly with the cautious approach taken by the New

York Court of Appeals in Technicon. 74 N. Y.2d 66, 76, 542 N.E.2d

1048, 1051, 544 N.Y.S.2d 531, 534 (1989).

This is not a case where entry of final judgment fully resolved

the claims of two litigants or even materially advanced the resolu-

tion of the dispute. The partial final judgment did substitute

Travelers for Ogden as the entity paying counsel previously se-

lected by Avondale. However, in the event of an adverse judgment

after resolution of all defense issues or even after a decision on the

ultimate indemnification question, Travelers would have been in

position to reimburse Ogden, one of the nation’s largest corpora-

tions, for Ogden’s costs in funding Avondale’s defense, plus

interest.

Yet, the entry of final judgment has taxed fair and efficient

adjudication. The improper exercise of discretion resulted in

fragmented appeals, unnecessary federal court speculation on

evolving questions of state law, and possible inconsistent resolu-

tions of identical legal questions within a single action.

CONCLUSION

For all of the foregoing reasons, Petitioner respectfully re-

quests that this Court issue a writ of certiorari in this case to re-

view the decision of the United States Court of Appeals for the

Second Circuit.

Dated: New York, New York

April 10, 1990

Respectfully submitted,

/s/ Barry R. Ostrager

BARRY R. OSTRAGER

Counsel of Record for Petitioner

SIMPSON THACHER & BARTLETT

(a partnership which includes

professional corporations)

425 Lexington Avenue

New York, New York 10017 |

SETH A. RIBNER

KATHRYN A. CLOKEY

of Counsel

APPENDICES

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A-1

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

OPINION ON PETITION FOR REHEARING

No. 999—August Term 1988

(Argued April 10, 1989 Decided October 18, 1989)

(Petition for Rehearing Filed November 9, 1989

Decided January 10, 1990)

Docket No. 89-7035

AVONDALE INDUSTRIES, INCORPORATED and

OGDEN CORPORATION,

Plaintiffs-Appellees,

THE TRAVELERS INDEMNITY COMPANY,

Defendant-Third-Party

Plaintiff-Appellant,

COMMERCIAL UNION INSURANCE COMPANY,

HIGHLANDS INSURANCE COMPANY,

AMERICAN MOTORISTS INSURANCE COMPANY,

and NATIONAL UNION FIRE INSURANCE COMPANY,

Third-Party

Defendants-Appellees.

Before:

NEWMAN, CARDAMONE, AND WINTER

Circuit Judges

A-2

Petition for rehearing is filed by appellant, Travelers Indem-

nity Company, and amici, Insurance Environmental Litigation

Association and New York State Insurance Association, on the

basis of two opinions of the New York Court of Appeals filed over

one month after and one day before our opinion in Avondale In-

dustries, Inc. v. Travelers Indemnity Co., No. 89-7035, slip op. 6237

(2d Cir. Oct. 18, 1989).

Denied.

(Reported at 894 F.2d 498)

BARRY R. OSTRAGER, New York, New York (Simpson

Thacher & Bartlett, New York, New York, of counsel), for

Defendant-Appellant The Travelers Indemnity Company.

THOMAS W. BRUNNER, Washington, D.C. (Marilyn E. Kerst,

Frederick S. Ansell, Wiley, Rein & Fielding, Washington,

D.C., of counsel), filed a letter brief for Insurance Environ-

mental Litigation Association as Amicus Curiae.

PATRICK J. FOLEY, New York, New York, filed a memoran-

dum for New York State Insurance Association as Amicus

Cunae.

PER CURIA" 1:

Appellant, Travelers Indemnity Company (Travelers), and

amici, Insurance Environmental Litigation Association and New

York State Insurance Association, urge us to grant their petition

for rehearing in Avondale Industnes, Inc. v. Travelers Indemnity

Co., No. 89-7035, slip op. 6237 (2d Cir. Oct. 18, 1989), on the basis

of two cases handed down by the New York Court of Appeals,

which were not available at the time we decided Avondale. One is

Powers Chemco, Inc. v. Federal Insurance Co., No. 243 (N.Y. Ct.

App. Nov. 21, 1989), and the other is A. Meyers & Sons v. Zurich

A-3

American Insurance Group, 74 N.Y .2d 298 (1989). See Huddleston

v. Dwyer, 322 U.S. 232, 236-37 (1944); Vandenbark v. Owens-llli-

nois Glass Co., 311 U.S. 538, 543 (1941); see also Braniff Airways,

Inc. v. Curtiss-Wright Corp., 424 F.2d 427, 428-30 (2d Cir.), cert.

denied, 400 U.S. 829 (1970). Because we do not think these opin-

ions are contrary to Avondale, the petition for rehearing is denied.

Powers Chemco

In Powers Chemco the New York Court of Appeals held that

the defendant insurer was not obligated to indemnify the plaintiff

for cleanup expenses associated with its decontamination of

property purchased from a party who had allegedly buried,

dumped and discharged hazardous wastes onto the property be-

cause such damage fell wathin the coverage exclusion for pollution

damage that was not “sudden” and “accidental.” Avondale is fac-

tually distinguishable from Powers Chemco. In Powers Chemco,

the plaintiff seeking indemnification by the defendant insurer, by

entering into an interim consent decree with the New York State

Department of Environmental Conservation to decontaminate

the property, effectively admitted that the prior landowner had

engaged in intentional conduct that caused the pollution damage

at issue. In Avondale, to the contrary, neither the plaintiff—nor

any other party for that matter—has ever conceded that it en-

gaged in intentional conduct that resulted in pollution damage.

Without an admission—nor even an allegation of intentional con-

duct—we concluded in Avondale that the possibility that the pol-

lution damage was both sudden and accidental had not been

“clearly negate[d].”

Petitioners further note an apparent contradiction between

our reliance upon the fact that there was “no allegation that Avon-

dale itself continuously and intentionally polluted,” Avondale, slip

op. at 6250 (emphasis added), and the statement in Powers

Chemco that “there is nothing in the language of the pollution ex-

clusion clause to suggest that it is not applicable when liability is

A-4

premised on the conduct of someone other than the insured,”

Powers Chemco, slip op. at 2. This inconsistency does not furnish

grounds for rehearing because, in fact, in Avondale no party was

alleged to have or admitted to having engaged in intentional con-

duct that caused the pollution damage. We acknowledge that the

above-quoted statement suggests otherwise and therefore modify

the language in the opinion to read that there is “no allegation that

Avondale or any other party continuously and intentionally pol-

luted.”

As a second matter, petitioners direct attention to the Court

of Appeals’ finding of intentional conduct based upon the com-

plaint in Powers Chemco which alleged that the plaintiff's prede-

cessor “ (1) ‘bur[ied] drums containing the wastes,’ (2) ‘dump/[ed]

waste liquids ... ,’ and (3) discharg[ed] ‘wastes ....’” Powers

Chemco, slip op. at 2. From this they argue that we must find that

Avondale engaged in intentional conduct because of the

synonymity between the act of burying wastes alleged in Powers

Chemco and the acts of transporting and disposing of wastes al-

leged in Avondale.

We do not believe that the New York Court of Appeals’ hold-

ing in Powers Chemnco was meant to be read so broadly. The com-

plaint in that case alleged a consistent course of intentional

conduct by the plaintiff's predecessor—burying, dumping and

discharging wastes onto the property—which resulted in pollu-

tion damage. This obviously intentional course of conduct was

buttressed by the plaintiffs entering into a consent decree that

conceded it. It does not strike us that the New York court would

have held that the plaintiff's predecessor had engaged in inten-

tional conduct were the complaint to have alleged solely that the

prior owner had buried drums of hazardous wastes on the prop-

erty, without the additional charges of dumping liquids and dis-

charging wastes. Thus, the mere allegation in the Avondale

complaints that it transported and disposed of wastes without

more is insufficient in our view to establish that it engaged in in-

A-5

tentional conduct that caused pollution damage. The complaint

does not negate the possibility of intentional transportation and

burying of properly sealed drums containing wastes, followed by

sudden and accidental discharge from such drums.

Meyers

New York State Insurance Association argues that our

analysis in Avondale of the right to defend runs contrary to the

New York Court of Appeals’ hoiding in Meyers that the insurer

must defend where there is a “reasonable possibility” that the al-

legations in the underlying complaints support a duty to defend.

This argument is meritless. In Avondale we rely upon the same

line of cases as the court in Meyers, and there is no difference be-

tween our analysis of whether the “complaint in the underlying

action contains any allegations that arguably or potentially bring

the action within the protection purchased, ” Avondale, slip op. at

6248, and the Court of Appeals’ analysis of whether there is a

“reasonable possibility that the insured may be held liable for

some act or omission covered by the policy,” Meyers, 74 N.Y.2d at

302.

CONCLUSION

For the reasons stated, the New York Court of Appeals’

holdings in Powers Chemco and Meyers do not require a change in

our holding in Avondale. Hence, the petition for rehearing is de-

nied.

A-6

OPINION OF CARDAMONE, J.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 999—August Term 1988

(Argued April 10, 1989 Decided October 18, 1989)

Docket No. 89-7035

AVONDALE INDUSTRIES, INCORPORATED and

OGDEN CORPORATION,

Plaintiffs-Appellees,

¥.

THE TRAVELERS INDEMNITY COMPANY,

Defendant-Third-Party

Plaintiff-Appellant,

COMMERCIAL UNION INSURANCE COMPANY,

HIGHLANDS INSURANCE COMPANY,

AMERICAN MOTORISTS INSURANCE COMPANY,

and NATIONAL UNION FIRE INSURANCE COMPANY,

Third-Party Appellees.

Before:

NEWMAN, CARDAMONE, AND WINTER

Circuit Judges

A-7

Travelers Indemnity Company appeals from a judgment of

the United States District Court for the Southern District of New

York (Conboy, J.) entered on December 7, 1988 that granted

plaintiffs —appellees, Avondale Industries, Inc. and Ogden Cor-

poration, summary judgment and declared that appellant had a

duty to defend appellees in private actions and administrative

proceedings imiiiated against plaintiffs in the State of Louisiana.

Partial final judgment was entered pursuant to Fed. R. Civ. P.

54(b).

Affirmed.

(Reported at 887 F.2d 1200)

BARRY R. OSTRAGER, New York, New York (Seth A. Ribner,

Michael Bailey, Brian G. Hart, Simpson Thacher & Bartlett,

New York, New York; George A. McKeon, General Counsel,

Thomas L. Forsyth, Kathleen M. Hannon, Hartford, Con-

necticut, of counsel), for Defendant-Appellant The Travelers

Indemnity Company.

HUGH N. FRYER, New York, New York (Edward M. Joyce,

John P. Gasior, Fryer, Ross & Gowen, New York, New York,

of counsel), for Plaintiffs-Appellees Avondale Industries, Inc.

and Ogden Corporation.

RICHARD S. FELDMAN, Uniondale, New York (Emily H.

Levin, Rivkin, Radler, Dunne & Bayh, Uniondale, New

York, of counsel), for Third-Party Defendant-Appellee Com-

+ mercial Union Insurance Company.

Patrick J. Dwyer, New York, New York (Heidell, Pittoni, Murphy

& Bach, New York, New York, of counsel), filed a brief for

Third-Party Defendant-Appellee Highlands Insurance Com-

pany.

A-8

James M. Sweet, Philadelphia, Pennsylvania (Timothy C. Russell,

Jane R. Coleman, Paul McDonald, Drinker Biddle & Reath,

Philadelphia, Pennsylvania, of counsel), filed a brief for

Third-Party Defendant-Appellee American Motorists Insur-

ance Company.

Thomas W. Brunner, Washington, D.C. (James M. Johnstone,

Frederick S. Ansell, Wiley, Rein & Fielding, Washington,

D.C., of counsel), filed a brief for Insurance Environmental

Litigation Association as Amicus Curiae. .

James M. Sweet, Philadelphia, Pennsylvania (Timothy C. Russell,

Thomas S. Schaufelberger, Jane R. Coleman, Drinker Biddle

& Reath, Philadelphia, Pennsylvania, of counsel), filed a brief

for American Motorists Insurance Company as Amicus Cu-

riae.

Robert N. Sayler, Washington, D.C. (William F. Greaney, Eric C.

Bosset, Laura L. Sardo, Steven G. Bradbury, Covington &

Burling, Washington, D.C., of counsel), filed a brief for The

Chemical Manufacturers Association, CIBA-GEIGY Corpo-

ration, E.I. Du Pont De Nemours & Company, International

Business Machines Corporation, The Procter & Gamble Com-

pany and Richardson-Vicks, Inc. as Amici Cunae.

CARDAMONE, Circuit Judge:

Millions of tons of hazardous waste generated yearly are

stored, deposited, recycled or dumped, and eventually escape in-

fusing lakes, streams and underground waters; this toxic material

finally comes into contact with unprotected people who are its

victims. When its source is identified, the question becomes who

is to clean it up and who is to pay for the damages it caused. Ac-

cording to a recent study by the Rand Corporation, in the last

eight years only 34 of the 1,175 most egregious toxic waste dumps

were cleaned—and of the dumps cleaned, polluters paid less than

A-9

one-tenth of the cost. See N.Y. Times, Sept. 10, 1989, at A32, col.

1. This appeal confirms that the vast carelessness that created the

conundrum of hazardous waste, which has continued for dec-

ades, will not be quickly or easily remedied. One facet of the

problem is presented in this case: whether an insured may rely

upon its insurer to defend it in litigation arising from claims that

the insured improperly disposed of its toxic waste.

Appellant Travelers Indemnity Company (Travelers) ap-

peals from a December 7, 1988 judgment of the United States

District Court for the Southern District of New York (Conboy,

J.), entered pursuant to a memorandum opinion and order dated

October 19, 1988 granting partial summary judgment in a

declaratory judgment action instituted by appellees Avondale In-

dustries, Inc., a former subsidiary of Ogden Corporation (collec-

tively appellee or Avondale). The judgment declared that

Travelers had a duty to defend Avondale in private litigation in

Louisiana and in a public administrative proceeding instituted

against it by the State of Louisiana stemming from Avondale’s

disposal of hazardous waste products. Partial final judgment was

entered in favor of Avondale pursuant to Rule 54(b) of the Fed-

eral Rules of Civil Procedure.

BACKGROUND

Avondale is in the business of building and repairing com-

mercial and U.S. Navy ships in New Orleans, Louisiana. As a

part of its operations, it removes oil and chemical wastes from the

holds and fuel tanks of the ships and barges it services. These

petroleum products and chemical compounds, stored by it in

holding tanks, were from 1975 to 1979 blended and sold to Com-

bustion, Inc. Combustion transported the salvage oil from Avon-

dale’s plant to an oil recycling facility it owned near Baton Rouge,

Louisiana. There, Combustion processed and resold the “salvage

oil” that Avondale had sold it. The recycling facility and dump

site at Denham Springs, Louisiana is the subject of the present

A-10

litigation. This litigation was commenced by a series of lawsuits

brought by persons residing near the Denham Springs facility

who claimed personal injury and property damage caused by pol-

lutants emanating from the dump site.

Travelers insured Avondale from 1975 to 1984 under a com-

prehensive general lability insurance policy that provided

[Travelers] will pay on behalf of the insured all sums which

the insured shall become legally obligated to pay as damages

because of bodily injury or property damage to which this

policy applies caused by anoccurrence, . . . and[Trav-

elers] shall have the right and duty to defend any suit against

the insured seeking damages on account of such injury or

damage, even if any of the allegations of the suit are ground-

less, false or fraudulent, and may make such investigation

and settlement cf any claim or suit as it deems expedi-

ent

The policy also contained the following “pollution exclusion” and

“sudden and accidental” exception to the exclusion:

{Coverage shall not apply] to bodily injury or property dam-

age arising out of the discharge, dispersal, release or escape

of smoke, vapors, soot, . . . [or] toxic chemi-

cals . . . intoorupon land, the atmosphere or any wa-

tercourse or body of water; but this exclusion does not apply

if such discharge, dispersal, release or escape is sudden and

accidental. (emphasis supplied).

In 1986, Avondale was one of a number of defendants named

in the many private damage actions brought as a result of the

waste site owner’s allegedly tortious operations. These com-

plaints asserted that defendants’ containment measures were “in-

sufficient;” that defendants “generated” hazardous substances;

that defendants were culpable for the “escape” of hazardous ma-

terials. Importantly, there are no specific claims as to how the

A-11

waste allegedly was discharged or escaped into the environment,

or that Avondale—or any other defendant for that matter —inten-

tionally or knowingly polluted the waste site in Louisiana.

Additionally, in January 1986, Avondale received a letter

from the office of the Attorney General of Louisiana, issued at the

request of the Louisiana State Department of Environmental

Quality (DEQ). The DEQ letter notified Avondale of the Depart-

ment’s intention “to take immediate action to bring about the

prompt and thorough cleanup of a hazardous waste site in

Livingston Parish, commonly known as the Combustion, Inc. Oil

Recycling Facility and to recover all costs of remediation ex-

pended by the State... at that site.” The letter noted that appellee

was a “potentially responsible party” and demanded that it pro-

vide information with respect to the types of substances disposed,

the location of disposal at the site, as well as certain names and

dates. The DEQ letter also notified Avondale that willful disre-

gard of the DEQ requests would result in potential penalties of up

to $25,000 for each day that the information was not received, and

the waiver of certain defenses available under Louisiana law. Fi-

nally, the letter made a “demand” that Avondale “submit a plan

for remedial action at the site... or... pay to the Secretary the

full costs of a remedial action” incurred by the State. The letter

also required appellee, and other potentially responsible parties,

to attend a meeting or face having a suit instituted against it by

the Department.

Avondale notified Travelers of these developments and in-

voked the insurer’s contractual duty to defend it in both the pri-

vate and public actions. When Travelers was unresponsive,

Avondale turned to the courts.

PRIOR PROCEEDINGS

Avondale instituted this diversity action pursuant to 28

U.S.C. § 2201 (1982) seeking a judgment against Travelers declar-

A-12

ing that it is contractually obligated to defend and indemnify

Avondale in the underlying private and administrative proceed-

ings. Upon appellee’s motion for partial summary judgment on

its duty to defend claim, Judge Conboy held that Travelers’ duty

to defend extended to both the DEQ proceeding and the private

lawsuits. See Avondale Indus., Inc. v. Travelers Indem. Co., 697 F.

Supp. 1314, 1316-18 (S.D.N.Y. 1988) (private suits); id. at 1318-20

(DEQ action). Avondale subsequently moved for entry of a par-

tial final judgment pursuant to Fed. R. Civ. P. 54(b) following the

district court’s determination that Travelers was obligated to de-

fend.

Acknowledging that the duty to defend is distinct and sepa-

rable from any duty to indemnify, the trial court held that there

was no just reason to delay entry of final judgment. See Avondale

Indus., Inc. v. Travelers Indem. Co., 123 F.R.D. 80 (S.D.N.Y.

1988). In so doing, it rejected Travelers’ assertions that it would

be prejudiced in its actions against third-party defendants, which

Travelers had previously impleaded, and that a delay would not,

in any case, prejudice Avondale. Jd. at 83. Further, the district

judge rejected Travelers’ request that it await decision by the New

York Court of Appeals in a purportedly similar case concerning

an insurer’s duty to defend in Technicon Electronics Corp. v.

American Home Assurance Co., 141 AD2d 124 (2d Dep’t 1988),

aff'd, 74 NY2d 66 (1989). Travelers appeals the entry of the Rule

54(b) judgment. We affirm.

DISCUSSION

Three questions are presented for review: (1) whether the

certification of final judgment under Rule 54(b) properly issued;

(2) whether as a matter of law Travelers had a duty to defend

Avondale in the private damage actions; and (3) whether the

DEQ proceeding was a suit exposing Avondale to damages within

the meaning of the comprehensive general liability insurance pol-

icy requiring Travelers to defend that action.

A-13

I. Rule 54(b) Certification

A long standing common law rule holds that an appeal may

not be taken until all the matters in controversy in the trial court

are disposed of, so as to prevent a case from being appealed in

fragments. See Hohorst v. Hamburg-American Packet Co., 148

U.S. 262, 264-65 (1893). The rule against piecemeal appeals is

firmly embodied in Fed. R. Civ. P. 54(b) that today permits the

district court to “direct the entry of a final judgment as to one or

more but fewer than all of the claims or parties only upon an ex-

press determination that there is no just reason for delay and

upon an express direction for the entry of judgment.” To meet the

need for flexibility without weakening the salutary requirement of

finality before permitting an appeal, “the District Court is used as

a ‘dispatcher.’ ” Sears, Roebuck & Co. v. Mackey, 351 U.S. 427, 435

(1956). Under the Rule “upon an express determination that

there is no just reason for delay,” it may make “an express direc-

tion for the entry of judgment.” Fed. R. Civ. P. 54(b).

A district court issuing a partial judgment is required to ex-

plain its reasoning. Ansam Assocs., Inc. v. Cola Petroleum, Ltd.,

760 F.2d 442, 445 (2d Cir. 1985); Cullen v. Margiotta, 618 F.2d 226,

228 (2d Cir. 1980) (per curiam). In reviewing a Rule 54 judgment,

an appellate court must first assure itself respecting the separate-

ness of the claims or parties so as to prevent piecemeal appeals in

cases where the finality rule would ordinarily apply. On this as-

pect of an appeal the scope of review is broad. See 10 Wright-

Miller-Kane, Federal Practice and Procedure, § 2655, at 43 (2d ed.

1983). Once these juridical concerns are satisfied, the determina-

tion of the district court as to just cause for delay is entitled on

appeal to considerable deference, subject to reversal only for an

abuse of discretion. See Curtiss-Wright Corp. v. General Elec. Co.,

446 U.S. 1, 10 (1980).

Claims are separable “if they involve at least some different

questions of fact and law and could be separately enforced.” See

A-14

Cullen v. Margiotta, 811 F.2d 698, 711 (2d Cir.), cert. denied, 107 S.

Ct. 3266 (1987). It is well-settled that the duty to defend and the

duty to indemnify are separate and distinct questions of fact and

law. See Servidone Constr. Corp. v. Security Ins. Co., 64 NY2d 419,

424 (1985) (“The duty to defend is measured against the allega-

tions of pleadings[,] but the duty to pay is determined by the ac-

tual basis for the insured’s liability to a third person.”). We are

satisfied that the claim adjudicated, and upon which final judg-

ment was entered, was separable from the other claims presented.

Travelers does not seriously contend that the first require-

ment of Rule 54(b) is not fulfilled. Instead, it argues vigorously

that Avondale will suffer neither prejudice nor hardship should

there be any delay in the entry of final judgment. Travelers notes

that Avondale was at the time a subsidiary of Ogden Corpora-

tion, a large company that is purportedly providing for Avon-

dale’s defense in Louisiana, and argues that Avondale now seeks

merely to shift payment from its former parent to its insurer.

Avondale is actually exposed to no prejudice or hardship, appel-

lant continues, and it is Travelers that may be prejudiced in its

claims against other third-party defendants. Again, Travelers as-

serts that Rule 54(b) certification violated critical institutional

concerns regarding finality because the district court disregarded

a purportedly controlling state court precedent, a case then await-

ing appeal to the state’s highest court. We reject each of these

arguments.

First, Avondale could be prejudiced were it forced to await

final judgment on all its claims against Travelers. Beyond the cost

of defending itself in the Louisiana actions, an insured is entitled

to “litigation insurance” under New York law, as part and parcel

of the insurer’s duty to defend. See, e.g., Seaboard Sur. Co. v. Gil-

lette Co., 64 NY2d 304, 310 (1984), International Paper Co. v. Con-

tinental Casualty Co., 35 NY2d 322, 326 (1974). Moreover, a

unitary defense in the underlying actions would ameliorate possi-

bilities that Travelers would later object to appellee’s litigation

— eT

awe

ES ce a ll pens

A-15

strategy and the expenses Avondale incurred by defending itself.

The defense costs in Louisiana are likely to be substantial and

there is no reason that Avondale should delay having its insurer

step in and defend it. We see no prejudice to Travelers in dealing

with the other insurers.

Nor is there any affront to the institutional interests of the

federal courts. Travelers seems to suggest that in this diversity

case the district court either guessed at what the state law was or

disregarded it. Neither contention is true. As noted below, Tech-

nicon, the supposedly authoritative case, is distinguishable be-

cause the insured in that case conceded that it had intentionally

discharged industrial wastes. Hence, we conclude that the dis-

trict court did not abuse its discretion in certifying partial final

judgment under Rule 54(b).

II. Travelers’ Duty to Defend the Private Actions

We next consider whether under New York law and the sub-

ject policy, Travelers owed a duty to Avondale to defend it in the

private damage actions instituted in Louisiana. The law in this

area is well-settled. An insurer’s duty to defend and to indemnify

are separate and distinct, and the former duty is broader than the

latter. See Technicon, 74 NY2d at 73; Servidone, 64 NY2d at 424;

Seaboard, 64 NY2d at 310. The duty to defend rests solely on

whether the complaint in the underlying action contains any alle-

gations that arguably or potentially bring the action within the

protection purchased. Technicon, 74 NY2d at 73. So long as the

claims alleged against the insured rationally may be said to fall

within the policy coverage, the insurer must come forward and

defend. Id.

New York courts have held, in addition, that an insurer seek-

ing to avoid its duty to defend bears a heavy burden. “[BJefore an

insurance company is permitted to avoid policy coverage, it must

...eStablish[ ] that the exclusions or exemptions apply in the par-

A-16

ticular case, and that they are subject to no other reasonable in-

terpretation.” Seaboard, 64 NY2d at 311; see also Neuwirth v. Blue

Cross & Blue Shield, 62 NY2d 718 (1984) (mem.) (citations omit-

ted). To avoid the duty therefore the insurer must demonstrate

that the allegations in the underlying complaints are “solely and

entirely” within specific and unambiguous exclusions from the

policy’s coverage. See International Paper, 35 NY2d at 325.

Consequently, Travelers can be excused from its duty to de-

fend only if it can be determined as a matter of law that there is no

possible basis in law or fact upon which the insurer might be held

to indemnify Avondale. See, e.g., Villa Charlotte Bronte, Inc. v.

Commercial Union Ins. Co., 64 NY2d 846, 848 (1985) (mem.).

Comparison must be made de novo between the allegations con-

tained in the complaint or underlying action and the terms of the

policy. See National Grange Mut. Ins. Co. v. Continental Casualty

Ins. Co., 650 F. Supp. 1404, 1408 (S.D.N.Y. 1986); Seaboard, 64

NY2d at 310-11.

Travelers relies on the New York Court of Appeals’ recent

affirmance of the Appellate Division’s decision in Technicon re-

jecting a duty to defend under an identical “pollution exclusion.”

There Technicon operated a plant that manufactured blood ana-

lyzing machines. It was sued by private parties for personal inju-

ries suffered as a result of exposure to toxic chemicals allegedly

discharged by it into a stream. Technicon brought a declaratory

judgment action in New York to compel its insurers to undertake

their contractual duty to defend. Defendants asserted that a

clause in their respective policies excluding losses relating to the

discharge of pollutants unless such discharge is “sudden and ac-

cidental” relieved them of that duty. Technicon, 141 AD2d at 128.

Defendants argued that Technicon’s answer in the underlying ac-

tion had admitted that it had intentionally discharged toxins into

the creek for some six years, and therefore that the pollution ex-

clusion—and not the “sudden and accidental” exception to the

Bie.

;

A-17

exclusion—applied. This admission, defendants argued, made it

clear that the polluting was neither sudden nor accidental.

The Appellate Division held that, on the facts alleged in the

pleadings of the underlying action, defendants had no duty to de-

fend, and that the pollution exclusion exempted from coverage “li-

ability based on all intentional discharges of waste materials.” Id.

at 139. It explicitly distinguished those cases in which the dis-

charges alleged in the underlying complaint were in fact uninten-

tional.

In affirming the Appellate Division, New York’s highest

court stated that as a matter of law the conduct complained of

was not an accidental occurrence under the policy because Tech-

nicon conceded that it intentionally discharged toxic wastes from

its blood sampling equipment into a creek. Technicon, 74 NY2d

at 75.

In the instant case the district court distinguished the Appel-

late Division holding in Technicon. See 697 F. Supp. at 1317 n.4.

It noted that the eight underlying complaints filed against, inter

alia, Avondale alleged only that the site operator operated the site

from 1960 to 1982; that waste products were disposed of there;

and that the site contains hazardous waste, which the complaints

asserted had caused and will continue to cause injury to person

and property. Jd. at 1317. In distinguishing the present case from

Technicon, Judge Conboy noted that the complaint did not allege

how the discharge escaped, nor what Avondale did to contribute

to the seepage. There was no allegation that Avondale itself con-

tinuously and intentionally polluted. Jd. at 1317.

Examining the allegations of the underlying Louisiana com-

plaints it appears that Avondale is one of 70 named defendants.

The allegations charge all the defendants with “insufficient” con-

tainment measures; with “generating” hazardous waste; with

“knowledge” of the presence of toxins; with culpability for “es-

A-18

cape” of hazardous materials. None of these conclusory asser-

tions “clearly negate” the possibility that discharge or escape was

“sudden and accidental.” Hence, it seems plain that the New

York Court of Appeals’ affirmance of Technicon did nothing to

cast doubt on the district court’s conclusion. Travelers therefore

has a duty to defend the private actions.

III. Travelers’ Duty to Defend the Administracive Proceeding

Travelers’ policy requires it to defend “any swit against the

insured seeking damages on account of bodily injury or property

damage.” (emphasis supplied). Whether the administrative pro-

ceeding is a suit and whether the remedial costs expended by the

State of Louisiana that potentially may be assessed against Avon-

dale are damages—within the meaning of the policy—are the re-

maining questions that we must answer. Appellant Travelers and

amicus American Motorists Insurance Company (AMICO) ar-

gue that the proceeding is not a “suit” as the term is commonly

understood under an insurance policy, and that costs are not

damages. The district court came to a contrary conclusion. See

697 F. Supp. at 1318-20 (damages), 1320-23 (suit).

A. Suit

We have little trouble viewing this administrative proceeding

as a Suit. The demand letter commences a formal proceeding

against Avondale, advising it that a public authority has assumed

an adversarial posture toward it, and that disregard of the DEQ’s

demands may result in the loss of substantial rights by Avondale.

These strike us as the hallmarks of litigation, and are sufficiently

adversarial io constitute a suit under New York law and within

the meaning of the policy.

New York appears to have adopted a broad construction of

the word “suit.” Before arbitration was included within the

meaning of suit by the insurance industry, New York’s highest

court held that suit included arbitration, reasoning that the in-

A-19

Pat cS ca

: surer was aware that arbitration might be directed when it wrote

) the policy. See Madawick Contracting Co. v. Travelers Ins. Co., 307

N.Y. 111, 119 (1954). Plainly, Travelers as an insurer was aware of

the possibility of a suit regarding toxic chemicals as shown by the

pollution exclusion clause it included in the policy it drafted.

Although the Appellate Division in Technicon held that the

EPA administrative letter demand in that case was not a suit, 141

AD2d at 145-46, the Court of Appeals did not reach or decide the

issue. 74 NY2d at 76. Again, Technicon is distinguishable on this

issue too. There, in the appellate Division’s own words, “[t}he

EPA letter . . . merely informed Technicon of its potential li-

ability under CERCLA and that the EPA was interested in dis-

cussing Technicon’s voluntary participation in remedial

measures. The letter was an invitation to voluntary action . . . .”

141 AD2d at 146. A request to participate voluntarily in remedial

measures is not the same as the adversarial posture assumed in

the coercive demand letter that Avondale received in the instant

case.

Further, common sense argues that for Travelers to proffer a

defense now is better for it, Avondale, and the public interest in a

prompt cleanup of the hazardous waste. A judicial proceeding —

were Avondale to ignore the DEQ letter—plainly will sharply es-

calate the liability costs Avondale faces. Fundamental issues

involved in the administrative proceeding will obviously affect the

extent of contribution of the various generators of the waste. A

1987 Report of the Association of State Waste Management Offi-

cials found in the record indicates —consonant with what experi-

ence teaches—that a private remedial effort is quicker and less

expensive than a government sponsored program. See Develop-

ments— Toxic Waste Litigation, 99 Harv. L. Rev. 1458, 1505 (1986).

A-20

B. Damages

Having concluded that the administrative proceeding is a

suit, we turn next to damages. In New York, the terms of an insur-

ance policy have long been accorded “a natural and reasonable

meaning,” Doyle v. Allstate Ins. Co., 1 NY2d 439, 443 (1956), cor-

responding to “the reasonable expectation and purpose of the or-

dinary businessman.” Ace Wire & Cable Co. v. Aetna Casualty &

Sur. Co., 60 NY2d 390, 398 (1983); see Bird v. St. Paul Fire & Ma-

rine Ins. Co., 224 N.Y. 47, 51 (1918). If there is uncertainty con-

cerning its meaning, a policy is construed to embrace coverage.

Insurance Co. of No. Am. vy. Dayton Tool & Die Works Inc., 57

NY2d 489, 499 (1982); Thomas J. Lipton, Inc. v. Liberty Mut. Ins.

Co., 34 NY2d 356, 361 (1974); accord National Grange, 650 F.

Supp. at 1408. When an insurer that drafts the instrument wants

to exclude from coverage policy obligations it would otherwise as-

sume, it must do so in clear and unmistakable language. See Sea-

board, 64 NY2d at 311.

Travelers and amici strenuously urge that damages has a

precise meaning related only to remedies at law, and thus pre-

cludes a duty to defend actions that sound in equity or propose

only equitable relief. In particular, they cite two cases, Continen-

tal Ins. Cos. v. Northeastern Pharmaceutical & Chem. Co., 842 F.

2d 977 (8th Cir.) (en banc), cert. denied, 109 S. Ct. 66 (1988)

(NEPACCO), and Maryland Casualty Co. v. Armco, Inc., 822 F.2d

1348 (4th Cir. 1987), cert. denied, 108 S. Ct. 703 (1988). Both hold

that, under Missouri and Maryland law respectively, the term

damages does not include equitable relief—even when such is

monetary—associated with a cleanup of a waste site under

CERCLA. NEPACCO, 842 F.2d at 985-87; Armco, Inc., 822 F.2d

at 1352-54. They further argue that the Louisiana statute under

which the DEQ demand was issued only permits the State to re-

cover remedial and restorative expenses, relief that is equitable in

nature. They assert therefore that the district court incorrectly

held that the statute permitted the State to seek money damages

A-21

in lieu of equitable relief. Travelers and amici conclude that un-

der New York law remedial costs for the cleanup of a waste site do

not constitute damages. We disagree.

Here the term damages is not defined in Travelers’ policy.

Damages not being given any more limited definition in the policy

must be construed to include the remedial costs that may be im-

posed on Avondale by the State of Louisiana. Damages, as the

district court said, may “include funds necessary for restoration

of third parties’ properties.” 697 F. Supp. at 1319. In addition, a

number of other courts have held that cleanup costs are damages

under the same kind of policy. See, e.g., Port of Portland v. Water

Quality Ins. Syndicate, 796 F.2d 1188, 1194 (9th Cir. 1986) (policy

covers equitable cleanup costs when interpreted according to

usual meaning); American Motorists Ins. Co. v. Levelor Lorentzen,

Inc., No. 88-1994, slip op. at 7 (D.N.J. Oct. 14, 1988) (same result

under New York law), appeal dismissed, 879 F.2d 1165 (3d Cir.

1989); accord United States Fidelity & Guar. Co., 683 F. Supp. 1139,

1168 (W.D. Mich. 1988); Dayton Indep. School Dist. v. National

Gypsum Co., 682 F. Supp. 1403, 1411 n. 24 (E.D. Tex 1988); Cen-

tennial Insur. Co. v. Lumbermens Mut. Casualty Co., 677 F. Supp.

342, 349-50 (E.D. Pa. 1987).

We believe therefore that inasmuch as appellee might be

held liable for cleanup costs, appellant was obliged to defend.

Moreover, viewed from the insured’s perspective, we think an or-

dinary businessman reading this policy would have believed him-

self covered for the demands and potential damage claims now

being asserted in the DEQ administrative proceeding, see Allstate

Ins. Co. v. Klock Oil Co., 73 AD2d 486, 489 (4th Dept. 1980), par-

ticularly absent any specific exclusionary language in the policy.

C. Indemnification

Travelers has also raised the question of indemnification or

contribution from other insurers arguing that it is an excess car-

A-22

rier with respect to at least two other insurers. The district court

did not rule on this issue, only requiring Travelers to defend. As

Avondale had the clear right to choose which insurance company

it would name as a defendant, regardless of whatever rights Trav-

elers may have to demand defense costs from the other carriers,

we need not and do not on this appeal adjudicate Travelers’ rights

against the third-party defendants.

CONCLUSION

For all the reasons stated above, the judgment appealed

from is affirmed.

—

A-23

MEMORANDUM OPINION AND JUDGMENT

December 6, 1988

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

86 Civ. 9626 (KC)

AVONDALE INDUSTRIES, INC. and

OGDEN CORPORATION

Plaintiffs,

-against-

THE TRAVELERS INDEMNITY COMPANY,

Defendant

THE TRAVELERS INDEMNITY COMPANY,

Third-Party Plaintiff,

-against-

COMMERCIAL UNION INSURANCE COMPANY,

HIGHLANDS INSURANCE COMPANY,

AMERICAN MOTORISTS INSURANCE COMPANY,

and NATIONAL UNION FIRE INSURANCE COMPANY,

Third-Party Defendants.

(Reported at 123 F.R.D. 80)

KENNETH CONBOY, District Judge:

Plaintiff Avondale Industries, Inc. (“Avondale”) and Ogden

Corporation (“Ogden”) have moved for entry of final judgment

pursuant to Rule 54(b) of the Federal Rules of Civil Procedure

on this Court’s Memorandum Opinion and Order, dated

October 19, 1988. This Court concluded that defendant Travelers

Indemnity Company (“Travelers”) is obligated to defend the

Plaintiffs in both the private actions filed and the administrative

A-24

process initiated by the Louisiana Department of Environmental

Quality (“DEQ”) and granted partial summary judgment in favor

of the Plaintiffs.

DISCUSSION

Rule 54(b) of the Federal Rules of Civil Procedure provides

as follows:

“When more than one claim for relief is presented in [sic]

action, whether as a claim, counterclaim, cross-claim, or

third-party claim, or when multiple parties are involved, the

court may direct the entry of a final judgment as to one or

more but fewer than all of the claims or parties only upon an

express determination that there is no just reason for delay

and upon an express direction for the entry of judgment.”

The rule is designed to allow the district court to depart from

the usual principle that a final judgment is not entered prior to the

complete adjudication of all the claims of all the parties so that

the Court can provide relief where it is needed to avoid undue

hardship to the parties. Cullen v. Margiotta, 811 F.2d 698, 711

(2d Cir. 1987), cert. denied, 107 S.Ct. 3266 (1987). Accordingly, the

court may direct entry of a partial final judgment either (1) dis-

posing of claims of or against fewer than all of the parties or (2)

disposing of fewer than all of the claims. The Court, however,

must remain cognizant of the goals of judicial economy and the

policy against “piecemeal appeals.” See United States v.

McDonald, 435 U.S. 850, 852 (1977); Sears Roebuck & Co. v.

Mackey, 351 U.S. 427, 438 (1956).

When multiple claims are involved, a court should not enter

final judgment dismissing a given claim unless that claim is

“separable from the claims that survive.” Cullen, 811 F.2d at 711.

Claims are customarily regarded as “separable” if they embrace

“at least some different questions of fact and law and could be

separately enforced or if ‘different sorts of relief are sought.” /d.

A-25

(citations omitted); see 10 Wright, Miller, & Kane, Federal Prac-

tice & Procedure, section 2657, at 67 (1983) (claims are separable

when there is more than one possible recovery and the recoveries

are not mutually exclusive). Claims may be considered “separa-

ble” when these attributes exist, even if they have arisen out of the

same transaction or occurrence. Id. (emphasis added); see Cold

Metal Process Co. v. United Engineering & Foundry Co., 351 U.S.

445, 452 (1956); Sears, Roebuck & Co. v. Mackey, 351 U.S. 427,

436-37 & n. 9 (1956).

In the instant multi-claim case, the question is whether the

duty to defend is separable from the duty to indemnify. Under

New York law, “it is crystal clear that [Travelers’] duty to defend

is separate and distinct from [its] duty to indemnity.” National

Grange Mut. Ins. Co. v. Continental Cas. Ins. Co., 650 F. Supp.

1404, 1407 (S.D.N.Y. 1986) (emphasis added); Servidone Constr.

Co. v. Security Ins. Co. of Hartford, 64 N.Y .2d 419, 423-24, 477 N.E.

2d 441, 444-45, 488 N.Y.S.2d 139, 142 (1985); see Seaboard Surety

Co. v. Gillette Co., 64 N.Y.2d 304, 310, 476 N.E.2d 272, 274, 486

N.Y.S.2d 873, 875-76 (1984); Int'l Paper Co. v. Continental Cas.

Co., 35 N.Y.2d 322, 326, 320 N.E.2d 619, 621, 361 N.Y.S.2d 873,

876 (1974). The duty to defend is “heavier and broader” than the

duty to indemnify. See Servidone, 64 N.Y.2d at 423-24, 477 N.E.2d

at 444-45, 488 N.Y.S.2d at 142. The obligation to defend has been

termed “litigation insurance” as an insurer is required to provide

a defense to any action within the policy coverage, however

groundless, in which the insured may possibly be held liable for

damages. See National Grange, 650 F. Supp. at 1407-08. Further-

more, “the duty to defend is not contingent on the insurer’s ulti-

mate duty to indemnify should the insured be found liable, nor is

it material that the complaint against the insured asserts addi-

tional claims which fall outside the policy’s general coverage or

within its exclusory provisions.” See Seaboard Surety, 64 N.Y .2d

at 310, 476 N.E.2d at 274, 486 N.Y.S.2d at 875-76. Therefore, it

follows that the first part of the Rule 54(b) analysis is satisfied as

A-26

it is undeniably clear that Travelers’ duty to defend is distinct

from its duty to indemnify even though the two obligations arise

out of the same transaction or occurrence. Consequently, the fact

that the indemnity issue has not yet been settled is not dispositive

as Travelers suggests.

The second part of the rule permits this Court to direct that

partial final judgment be entered if it concludes that “there is no

just reason for delay.” Fed. R. Civ. P.54(b). This determination is

committed to the sound discretion of the district court. Cullen,

811 F.2d at 711. Travelers, in opposing the entry of partial final

judgment, states that this Court should postpone such entry as

Technicon Electronics Corp. v. The American Home Assurance

Co., No. 953E, slip op. (2d Dep’t Oct. 3, 1988), which this Court

distinguished in its October 19, 1988 Order, is “awaiting appeal to

the New York Court of Appeals.” (Travelers Memorandum of

Law at 7). Travelers also argues that a final judgment enforcing

its duty to defend will somehow prejudice its rights against the

third-party defendants. (Jd. at 6). Finally, Travelers contends

that Avondale will not suffer prejudice if the Court does not cer-

tify the Order.

First, Travelers does not in any way demonstrate that Tech-

nicon is indeed “awaiting appeal.” In addition, this Court does

not see any reason why Avondale should have to wait until some

indefinite future date to receive the defense to which it is entitled.

The private actions and the administrative process initiated by

the Louisiana DEQ against Plaintiffs require immediate atten-

tion. Plaintiffs should not have to bear either the sizable expense

or the burden of decision-making as it pertains to defense strat-

egy alone.

As regards Travelers’ claim that its rights against third-party

defendants will be prejudiced if this Court directs entry of final

judgment, to the extent that Travelers has asserted its rights this

Court has determined that its argument is without merit. See

A-27

Memorandum Opinion and Order, October 19, 1988, at 20-21. To

the extent that Travelers has not yet asserted its rights, if any, the

Court fails to see why plaintiffs should be prejudiced by such de-

lay.

Travelers’ final argument in opposition is that Plaintiff

Avondale will suffer no prejudice if a final judgment is not en-

tered. This argument is based on the allegation that Avondale’s

former corporate parent, Ogden, is paying for Avondale’s defense

and will continue to do so until September 30, 1993. Regardless of

whether Ogden may or may not be paying for the defense, this

Court has determined that it is Travelers’ obligation to defend

Avondale. Travelers’ argument simply begs the question of its

own obligations. As stated above, the duty to defend includes the

payment of expenses as well as taking on the burden of decision-

making regarding litigation strategy.

It is axiomatic that effective management of litigation in a

multi-front liability war such as plaintiffs here confront, is com-

plex and daunting. A case of this type goes through mutations,

sometimes daily. To suggest that the passage of time matters not

to the plaintiffs in such circumstances, and that enforcement of

the duty to defend can await another day, denigrates the profes-

sional obligation here found to have been undertaken. Moreover,

should this Court relegate the plaintiffs to an undetermined pe-

riod of watchful waiting for final judgment on its Order, it is con-

ceivable that Travelers might take issue with and disclaim

responsibility for any litigation decisions made by Plaintiffs in the

interim. Furthermore, it is not inconceivable that disputes might

later arise as to expenses Plaintiffs actually incurred in their de-

fense, and the extent to which such expenses were later recover-

able from Travelers.

In addition, entry of final judgment will! not prejudice Travel-

ers. Rather, such entry will actually benefit Travelers, since it

could then seek appeal of this Court’s Order. In the event that

A-28

Travelers chose not to appeal, the litigation would be advanced as

Travelers would become directly involved immediately in the de-

fense of the underlying actions.

Travelers suggests that if it chooses to appeal, there remains

the remote possibility that there could be two appeals with re-

spect to the various insurers’ obligations, since, Travelers states,

this Court will be called upon to determine the obligations of the

third-party defendant insurers, and that it is likely that such a de-

termination would be appealed. However, this Court believes

that there is no immediate prospect of an Order being entered as

to Travelers’ rights (if any) against third parties, and certainly,

that any appeal of such an Order is at this time entirely specula-

tive.

In light of the pending actions against Plaintiffs and the ag-

gressive manner in which both parties petitioned this Court for

determination of Travelers’ obligation to provide a defense for

Plaintiffs, and in view of the immensely important public policy

questions relating to environmental hazard and safety in Louisiana

and elsewhere that are fundamentally effected by liability, defense

and indemnification findings in actions like this, this Court con-

cludes that there is no just reason for delay and directs the entry

of partial final judgment upon its Opinion and Order of

October 19, 1988.

SO ORDERED

KENNETH CONBOY

United States District Judge

Dated: New York, New York

December 6, 1988

A-29

MEMORANDUM OPINION AND ORDER

October 19, 1988

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

86 Civ. 9626 (KC)

AVONDALE INDUSTRIES, INC. and

OGDEN CORPORATION,

Plaintiffs,

Vv.

THE TRAVELERS INDEMNITY COMPANY,

Defendant.

THE TRAVELERS INDEMNITY COMPANY,

Third-Party Plaintiff,

COMMERCIAL UNION INSURANCE COMPANY,

HIGHLANDS INSURANCE COMPANY,

AMERICAN MOTORISTS INSURANCE COMPANY,

and NATIONAL UNION FIRE INSURANCE COMPANY,

Third-Party Defendants.

(Reported at 697 F. Supp. 1314)

KENNETH CONBOY, District Judge:

Plaintiffs brought the instant action for a declaratory judg-

ment, pursuant to 28 U.S.C. section 2201 (1982), that the defen-

dant is obligated to defend and indemnify plaintiffs under

A-30

comprehensive general liability (“CGL”) insurance policies is-

sued by defendant to plaintiffs,’ covering the period 1975-1984.

See Complaint para. 6. Plaintiff Avondale currently is a defen-

dant in at least fourteen private damage actions in Louisiana

stemming from third parties’ allegedly tortious operation of a

hazardous or toxic waste disposal or storage site (the “site”) in

that state. Avondale is involved because it contracted with one of

the operators of the site to sell the operator, during the period De-

cember 1975 to October 1979, “salvage oil,” defined as “oil, resid-

ual fuel, cargo and other materials.” See Affidavit of R. Dean

Church, executed Oct. 5, 1987, at paras. 4,6. The private damage

actions allege that Avondale’s salvage oil contributed in an un-

specified manner to the creation of the pollution at the site.

Avondale also seeks defense and indemnification for actions

being taken by the Louisiana Department of Environmental

Quality (“DEQ”) to clean up the site. See Complaint Ex. B.

Jurisdiction is predicated on diversity of citizenship between

plaintiffs, Delaware corporations having their principal places of

business in Massachusetts (Avondale) and New York (Ogden),

and defendant, a Connecticut corporation having its principal

place of business in Connecticut. See 28 U.S.C. § 1332(a\1)

(1982). The action is before the court on plaintiffs’ motion for

partial summary judgment, pursuant to Fed. R. Civ. P. 56{a), that

defendant is obligated to defend them in both the private actions

and the process initiated by the State of Louisiana.

' Plaintiff Ogden Corporation is listed as named insured. See, e.g., Complaint Ex.

A. However, “[nJamed insured” includes Ogden’s subsidiaries. See id. § IV(1).

Plaintiff Avondale Industries, Inc. is a successor to a subsidiary of Ogden Cor-

poration named Avondale Shipyards, Inc. See Affidavit of R. Dean Church,

executed Oct. 5, 1987, at para. 2. Avondale Shipyards, Inc. existed during the

time period relevant to the underlying actions, and in fact is the company that

dealt with one of the owners of the waste site found to be polluted.

ee.

— —

A-31

LEGAL ANALYSIS

The court applies New York law to the contracts between

plaintiffs and defendant.? “[T]he duty of the insurer to defend the

insured[s] rests solely on whether the complaint[s] [against the in-

sureds] allege[ ] any facts or grounds which bring the action[s]

within the protection purchased.” Seaboard Surety Co.v. Gillette

Co., 64 N.Y.2d 304, 310 476 N.E.2d 272, 275, 486 N. Y.S.2d 873, 876

(1984) (emphasis added); see National Grange Mutual Ins. Co. v.

Continental Casualty Ins. Co., 650 F. Supp. 1404, 1408 (S.D.N.Y.

1986) (“Even if some of the allegations of the underlying com-

plaint are clearly outside the scope of the coverage contained in

the policy, the insurer is obligated to defend unless the allegations

as a whole preclude coverage.”); Utica Mutual Ins. Co. v. Cherry,

38 N.Y.2d 735, 736-37, 343 N.E.2d 758, 758, 381 N.Y.S.2d 40, 40

(1975) (mem.) (insurer’s duty to defend triggered where underly-

ing complaint asserts alternative grounds for relief, and only

some of those grounds are within the policy’s coverage), aff'g 45

A.D.2d 350, 353, 358 N. Y.S.2d 519, 522 (2d Dep’t 1974). “The duty

to defend arises not from the probability of recovery but from its

possibility, no matter how remote. Any doubt as to whether the

ailegations state a claim covered by the policy must be resolved in

favor of the insured as against the insurer.” George Muhlstock &

Co. v. American Home Assurance Co., 117 A.D.2d 117, 122, 502

N.Y.S.2d 174, 178 (ist Dep’t 1986).

2 Some of the third-party defendants to the action, who are not parties to this

motion, urge that the court make no choice of law determination at this time.

They submit that they will argue at the appropriate time that their contracts of

insurance with the plaintiffs are governed by Louisiana law. Assuming that a

true conflict of laws exists, the court stresses that it has not determined what law

should apply to those other contracts. Indeed, it may be constitutionally imper-

missible to apply New York law to those other contracts. See Phillips Petroleum

Co. v. Shutts, 472 U.S. 797, 820-22 (1985) (in nationwide class action concerning

leases, application of forum law to claims over which forum had developed no

state interests, when forum law conflicted with that of interested states, was

“sufficiently arbitrary and unfair as to exceed constitutionai limits”).

A-32

A. The Private Lawsuits

The eight underlying complaints provided to the court, see

Complaint Ex. C-G; Plaintiffs’ Motion For Partial Summary

Judgment Ex. L-N,3 allege, in substance, the following relevant

facts: the site operator operated the site from the 1960s until at

least 1982; Avondale was one of many companies whose waste

products were disposed of at the site; and, the site contains haz-

ardous or toxic waste. Significantly, there are no allegations as to

how the waste escaped or seeped, nor as to Avondale’s culpable

actions that contributed to the occurrence. While Avondale may

have continuously generated these waste products, it does not fol-

low necessarily, and the private actions certainly have not alleged,

that Avondale continuously, by its own actions or through the ac-

tions of an agent, intentionally polluted.* All of Avondale’s prod-

ucts may have been properly stored, and escaped in a single

incident. This is a factual matter that will be determined at the

trial(s) of the underlying actions.

For purposes of this motion only, the court assumes that de-

fendant’s offered construction of the meaning of the word “sud-

den” in plaintiffs’ policies is correct. See American Motonsts Ins.

Co. v. General Host Corp., 667 F. Supp. 1423, 1428 (D. Kan. 1987)

(“Even if ‘sudden’ is not limited to an instantaneous happening, it

still must be on brief notice, and must be unexpected. No use of

the word ‘sudden’ or ‘suddenly’ could be consistent with an event

which happened gradually or over an extended time, nor could it

be consistent with an event which was anticipated or predict-

3 The court has been informed that six additional private lawsuits have been

filed. See Letter from Hugh N. Fryer to Hon. Kenneth Conboy (Oct. 14, 1988).

4 The absence of any such allegation distinguishes this action from EAD Metal-

lurgical, Inc. v. Aetna Casualty & Surety Co., No. CIV-86-1027E, slip op.

(W.D.N.Y. July 12, 1988), in which the insured allegedly directly polluted. See

id., slip op. at 1. Also distinguishable is Technicon Electronics Corporation v.

American Home Assurance Company, __ A.D.2d__, No. 953E, slip op. (N.Y. 2d

Dep't Oct. 3, 1988), in which the insured conceded that it had intentionally dis-

charged industrial wastes. See id., slip op. at 3.

A-33

able.”). Contra Broadwell Realty Servs. v. Fidelity & Casualty Co.,

218 N.J. Super. 516,__ , 528 A.2d 76, 83-86 (App. Div. 1987) (reject-

ing argument that “sudden” has a temporal meaning, and holding

that it means only “unexpected and unintended”). Even under

this more restrictive view, there is a question of fact whether the

dispersal of Avondale’s waste product comes within the policies.

See discussion supra at 4-5.

The existence of factual disputes, material to the issue of in-

demnification, in the underlying private lawsuits requires the

court to hold that as a matter of law, the defendant has failed to

demonstrate “that there is no possible factual or legal basis on

which the insurer miyht eventually be obligated to indemnify [the

insureds] under any provision contained in the polic{ies].” Villa

Charlotte Bronte, Inc.v. Commercial Union Ins. Co., 64 N.Y.2d

846, 848, 476 N.E.2d 640, 641, 487 N.Y.S.2d 314, 315 (1985) (mem.).

The defendant’s assertion that Avondale was an active, continu-

ous polluter is a conclusion that is not established on the underly-

ing pleadings. The matter outside the pleadings submitted by the

defendant is irrelevant to the determination of its duty to defend;

such matter is relevant only to its duty to indemnify.

The defendant argues that summary judgment is inappropri-

ate because there is an extant factual dispute as to the parties’ in-

tent in drafting the pollution exclusion clause to the insurance

contracts, citing Olin Corporation v. Insurance Company of North

America, 603 F. Supp. 445 (S.D.N.Y. 1985), and County of Broome

v. Aetna Casualty & Surety Company, slip op. (N.Y. Sup. Ct. June

24, 1988). Each of those cases denied motions for partial sum-

mary judgment because a factual question existed whether the in-

surer was obligated under the policy to indemnify the insured.

See Olin Corp., 603 F. Supp. at 448-49; County of Broome, slip op.

at 11. However, the Circuit Court of Appeals for the District of

Columbia has held that the holdings of Olin Corporation and

County of Broome are “simply inconsistent with New York law.”

Abex Corp. v. Maryland Casualty Co., 790 F.2d 119, 129 n.44 (D.C.

A-34

Cir. 1986) (applying New York law) (discussing Olin Corp.); see,

e.g., Villa Charlotte Bronte, Inc., discussed supra at 6. The court

declines to follow Olin Corporation and County of Broome. “Only

disputes over facts that might affect the outcome of the suit under

the governing [substantive] law will properly preclude the entry of

summary judgment.” Anderson v. Liberty Lobby, 477 U.S. 242, 248

(1986). “[W]hether the parties intended Travelers [sic] policies to

provide limited pollution coverage for sudden, accidental pri-

mary discharges of pollutants or some broader insuring obliga-

tion that extends to Avondale’s continuous waste disposal

activity, ” see Defendant’s Memorandum of Law in Opposition, at

39, is immaterial to resolving the question of the defendant’s duty

to provide the plaintiffs with a defense, because the underlying

complaints are so ambiguous that a claim within the purchased

coverage is alleged under the more restrictive interpretation.

The court concludes that the defendant is obligated to pro-

vide a defense for the plaintiffs in the private lawsuits.

B. The Department of Environmental Quality Demand

The policies of insurance contain the standard section on li-

ability, including the following relevant language: “[T]he [insurer]

shall have the right and duty to defend any suit against the insured

seeking damages [because of bodily injury or property damage]

on account of such injury or damage.” The defendant raises two

objections to plaintiffs’ request that it defend them with respect

to the administrative process begun by the Louisiana Depart-

ment of Environmental Quality to clean up the site. First, the de-

fendant claims that cleanup costs are not “damages,” so that the

policies provide no coverage. Second, the defendant argues that

the administrative process is not a “suit” that it is required to de-

fend.

aah DBS

A-35

1. Whether the proceeding by the Louisiana DEQ raises

any claim coming within the policies’ coverage as

damages

The cases are split on the question whether waste site

cleanup costs constitute “damages’ under CGL policies, or

whether such costs are “restitutional,” and therefore not covered.

Compare United States Fidelity & Guaranty Co. v. Thomas Solvent

Co., 683 F. Supp. 1139, 1163-65, 1168-71 (W.D. Mich. 1988) (ap-

plying Illinois law) (“While . . . claims [for cleanup costs] might be

characterized as seeking ‘equitable relief,’ the cleanup costs are

essentially compensatory damages for injury to common property

and for that reason the insurer has a duty to defend.”), vacated on

other grounds, id. at 1174-77 (W.D. Mich. 1988) and New Castle

County v. Hartford Accident & Indemnity Co., 673 F. Supp. 1359,

1362, 1364-1366 (D. Del. 1987) (applying Delaware law) (“an ordi-

nary definition of the word ‘damages’ makes no distinction be-

tween actions at law and actions in equity”) and Broadwell Realty

Servs., 218 N.J. Super. at __ , 528 A.2d at 81-83 (recognizing “that

the cost of complying with an injunctive decree does not ordinar-

ily fall within” the definition of “damages,” yet holding that cer-

tain cleanup expenses are covered by CGI policy) with

Continental Ins. Cos. v. Northeastern Pharmaceutical & Chem.

Co., 842 F.2d 977, 978, 984-87 (8th Cir.) (en banc) (applying Mis-

souri law) (5-3 majority holding that cleanup costs are in the na-

ture of equitable relief, and therefore “are not claims for

‘damages’ under . . . CGL policies”), petition for cert. filed, 56

U.S.L.W. 3850 (U.S. May 27, 1988); Maryland Casualty Co. v.

Armco, Inc.,822 F.2d 1348, 1351-54 (4th Cir. 1987) (applying

Maryland law) (“damages” has a “legal, technical meaning”

which excludes “the costs . . . of complying with the directives of a

regulatory agency”), cert. denied, __ U.S. ___ , 108 S. Ct. 703 (1988).

New York trial courts have split in the same manner. Compare

Kutsher’s Country Club Corp. v. Lincoln Ins. Co., 119 Misc. 2d 889,

889-93, 465 N.Y.S.2d 136, 137-39 (Sup. Ct. 1983) (cleanup costs

A-36

constitutes “property damage” within CGL policy) with County of

Broome, slip op. at 20-21 (costs involved in “remedial program”

are not covered by CGL policy). The Second Department did not

address the issue in its decision in Technicon Electronics Corpora-

tion. See __. A.D.2d at __, slip op. at 18-19.

In New York, the terms of an insurance policy are to be ac-

corded “a natural and reasonable meaning.” Doyle v. Allstate Ins.

Co., 1 N.Y.2d 439, 443, 136 N.E.2d 484, 487, 154 N.Y.S.2d 10, 13

(1956). Moreover, the terms are construed according to “the rea-

sonable expectation and purpose of the ordinary businessman.”

Ace Wire & Cable Co. v. Aetna Casualty & Surety Co., 60 N.Y.2d

390, 398, 457 N.E.2d 761, 764, 469 N.Y.S.2d 655, 658 (1983); see

Bird v. St. Paul Fire & Marine Ins. Co., 224 N.Y.47, 51, 120 N.E. 86,

87 (1918).

In light of the foregoing precedent from the New York Court

of Appeals, the court concludes that that court would find that

cleanup costs do come within the CGL’s coverage as “damages.”

As a general matter, such costs may extend to include funds nec-

essary for restoration of third parties’ properties. See, e.g., Broad-

well Realty Servs., 218 N.J. Super. at ___, 528 A.2d at 82-83

(differentiating between expenditures for prevention of damage

to other parties’ properties and expenditures for damage to in-

sured’s property). Specifically, the relevant Louisiana statute

speaks of liability for a “pollution source,” La. Rev. Stat. Ann. §

30:1149.46(A) (West Supp. 1988), which “means the site or loca-

tion of a discharge or potential discharge, including such sur-

rounding property necessary to secure or quarantine the area.” Id. §

30:1133(10) (West Supp. 1988) (emphasis added); see id §

30:1149.42(8) (West Supp. 1988) (referring to the definition in sec-

tion 30:1133). The court expects that Louisiana's DEQ would re-

quire parties to contribute towards the cleanup of others’

properties, if they constitute part of a “pollution source.”

—————————

A-37

The average businessman does not differentiate between

“damages” and “restitution;” in either case, money comes from

his pocket and goes to third parties. See United States Fidelity &

Guaranty Co., 683 F. Supp. at 1168 (“the insured ought to be able

to rely on the common sense expectation that property damage

within the meaning of the policy includes a claim which results in

causing him to pay sums of money because his acts or omissions

affected adversely the rights of third parties”). The average busi-

nessman would consider himself covered for cleanup expendi-

tures applicable to others’ properties. Cases such as Armco Inc.,

which apply a “legal, technical meaning” to the word “damages,”

see id. at 1352, are inapposite to this case, to which New York law,

mandating construction according to “the reasonable expectation

and purpose of the ordinary businessman,” applies.

The court notes that New York cases have held that cleanup

costs for real property are properly recoverable as a form of

“damages.” See Jenkins v. Etlinger, 55 N.Y.2d 35, 38-40, 432

N.E.2d 589, 590-91, 447 N. Y.S.2d 696, 697-98 (1982) (“the proper

measure of damages for permanent injury to real property is the

lesser of the decline in market value and the cost of restoration”);

Seifert v. Sound Beach Property Owners Ass'n, 60 Misc. 2d 300, 305,

303 N.Y.S.2d 85, 90 (Sup. Ct. 1969) (work undertaken to restore

property to its prior condition “is a proper element of damage”);

Mullen v. Jacobs, 58 Misc. 2d 64, 67-68, 71-72 294 N.Y.S.2d 636,

640, 643-44 (Sup. Ct. 1968) (expense incurred in removing debris

from real property is a proper element of damages recoverable

from tort-feasor). While these cases did not attempt to differenti-

ate “damages” from “restitution,” and did not concern insurance

coverage for pollution cleanup, nevertheless they support the con-

clusion that the reasonable businessman would consider himself

covered for such expenditures. If courts employ such language,

surely it is appropriate for a businessman to consider himself to

be covered for these expenditures.

A-38

Alternatively, even assuming the New York Court of Ap-

peals would hold that cleanup costs are entirely restitutionary,

and therefore not covered, the defendant would still be obligated

to provide the plaintiffs with a defense in the administrative pro-

ceeding (assuming that such proceeding is a “suit”). This is be-

cause the state of Louisiana could elect to recover damages rather

than restitution, or because a Louisiana court might decide that

damages are appropriate, rather than restoration. The statute

certainly contemplates the possibility that the state might recover

damages, see La. Rev. Stat. Ann. § 30:1149.42(9Xa\xiii) (West

Supp. 1988) (authorizing secretary of department of environ-

mental quality to take any action, besides those otherwise enu-

merated, deemed “necessary to restore the site or remove the

hazardous substance”) (emphasis added), and Louisiana courts

would likely recognize the general principle that in the discretion

of the court compensatory damages may be awarded in lieu of

equitable relief. See Dyer & Moody, Inc. v. Dynamic Constructors,

Inc., 357 So. 2d 615, 618-19 (La. Ct. App. 1st Cir. 1978) (trial court

did not commit error in awarding money judgment as compensa-

tory damages in lieu of mandatory injunction); Freestate Indus.

Dev. Co. v. T. & H., Inc., 188 So. 2d 746, 748 (La. Ct. App. 2d Cir.

1966) (“The jurisprudence has established the principle that in

the discretion of the court compensatory damages may be

awarded in lieu of injunctive relief.”). Because the state of Louisi-

ana possesses this option, the defendant is obligated under New

York law to provide a defense.

In Doyle v. Allstate Insurance Company, the New York Court

of Appeals held that an insurer was obligated to defend its in-

sured against an action seeking injunctive relief only, because the

possibility existed that a court of equity might “grant damages in

addition to or as an incident of some other special equitable re-

lief.” 1 N.Y.2d at 441-44, 136 N.E.2d at 485-87, 154 N.Y.S.2d at

11-14. Thus, the defendant is obligated, as the possibility exists,

even if unstated, and even if remote, that the plaintiffs might be

se ee

A-39

held responsible for damages to others’ properties through the

cleanup process.

2. Whether the Administrative Process Constitutes a Suit

There had been conflicting New York trial court precedents

on the question whether an administrative process such as that

initiated by the Louisiana DEQ is a “suit” which triggers the cov-

erage of the CGL policy. Compare Technicon Elec. Corp. v.

American Home Assurance Co., No. 08811/85, slip op. at 1-2, 4-5

(N.Y. Sup. Ct. Feb. 18, 1986) (governmental cleanup proceeding is

a “suit” requiring insurer to provide a defense) with County of

Broome, slip op. at 20-21 (governmental cleanup proceeding is not

a “suit” requiring insurer to provide a defense). However, Tech-

nicon Electronics Corporation was recently reversed by the Appel-

late Division, Second Department. See Technicon Elec. Corp. v.

American Home Assurance Co., _. A.D.2d __, No. 953E, slip op.

at 18-20 (N.Y. 2d Dep’t Oct. 3, 1988). The court did conclude, in

dicta only, that such a proceeding is not a “suit” requiring a de-

fense by the insurer.

The Second Department relied on three cases in making its

determination —-Detrex Chemical Industries, Incorporated v. Em-

ployers Insurance, 681 F. Supp. 438 (N.D. Ohio 1987), City of Evart

v. Home Insurance Company, slip op. (Mich. Ct. App. Aug. 5,

1987), and County of Broome v. Aetna Casualty Company, slip op.

(N.Y. Sup. Ct. June 24, 1988). The court held that the demand

letter sent Technicon Electronics Corporation by the Environ-

mental Protection Agency

merely informed Technicon of its potential liability under

{relevant federal law] and that the EPA was interested in dis-

cussing Technicon’s voluntary participation in remedial

measures. The letter was an invitation to voluntary action on

Technicon’s part and is not the equivalent of the commence-

ment of a formal proceeding within the meaning of the sub-

ject comprehensive general liability policies.

A-40

Technicon Elec. Corp., No. 953E, slip op. at 19-20.

Decisions :endered by lower state courts are not controlling

on federal courts construing state law when, as here, the state’s

highest court has not ruled on the issue. See Commissioner of In-

ternal Revenue v. Estate of Bosch, 387 U.S. 456, 465 (1967). Such

decisions are “dat[{a] for ascertaining state law which is not to be

disregarded by a federal court unless it is convinced by other per-

suasive data that the highest court of the state would decide other-

wise.” Id. (emphasis in original) (quoting West v. A.T. & T. Co.,

311 U.S. 223 (1940)).

None of the three cases cited by the Second Department is

persuasive to this court. County of Broome turned on the determi-

nation that the governmental administiative process did not con-

stitute a suit for damages, see id., slip op. at 21, a conclusion at

odds with the court’s conclusion that cleanup costs are damages.

See discussion supra at 8-13.

Critical to the court’s decision in Detrex Chemical Industnes

was the equation of a governmental demand letter with other

forms of “claims,” to which the insurer is not obligated to provide

a defense. See 681 F. Supp. at 442-46. The two cases cited by the

court to make the general point are distinguishable from govern-

mental demand letters in a crucial, and to this court determina-

tive, fact. In both Fisher v. Hartford, 329 F.2d 352 (7th Cir. 1964)

and Marvel Heat Corp. v. Travelers Indemnity Co., 325 Mass. 682,

92 N.E.2d 233 (1950), there was nothing the party asserting the

claim against the insured could do between the occurrence of the

tort and the initiation of a lawsuit that would adversely affect the

insured’s rights, because the claims were for common law torts.

See Fisher, 329 F.2d at 353 (personal injury); Marvel Heat Corp..

325 Mass. at _, 92 N.E.2d at 233 (property damage). On the other

hand, as the court in Detrex Chemical Industnes acknowledged,

the government has discretion in choosing responsive action in

combatting pollution sites. See 681 F. Supp. at 446-47. By choos-

A-41

ing a more expensive option, the government can adversely affect

the insured’s rights.

Thus, the analogy drawn by the court in Detrex Chemical In-

dustries is not apt. Adverse consequences can befall an insured

during the administrative pollution cleanup process. The acting

governmental agency could select «. more expensive responsive

action. Under the Comprehensive Environmental Response,

Compensation and Liability Act of 1980, Pub. L. No. 96-510 (codi-

fied as amended at 42 U.S.C.A. §§ 9601-9675) (West 1983 &

Supp. 1987), a party may at least challenge the selected response

as being arbitrary or capricious. See 42 U.S.C.A. § 9613(jX2)

(West Supp. 1987). The Louisiana statute appears to offer defen-

dants no such opportunity. See La. Rev. Stat. Ann. § 30:1149.46

(West Supp. 1988) (“Finding of liability by the court”); id. §

30:1147 (West Supp. 1988) (“Defenses”). Thus, the need to be rep-

resented is acute at the time the demand letter is received.

The court notes also that the district court in Detrex Chemi-

cal Industnes reconsidered its original decision. See 681 F. Supp.

at 459-60 (N.D. Ohio 1988). On reconsideration, the court held

that the insurer’s duty to defend would be triggered by the govern-

ment’s issuance of a remedial order. See id. at 460. This court

believes that such a position “shuts the barn door after the horses

have gotten out.” The adverse consequence to the insured occurs

when the government chooses a remedial plan more expensive

than an otherwise acceptable plan. Thus, the need for representa-

tion is greatest before the remedial plan is formulated, when the

government is accepting input from the responsible parties. See,

e.g., Complaint Ex. B at 2-3 (Letter from Louisiana Department

of Justice to Avondale Shipyards Inc. demanding that the com-

pany submit a remedial plan of its own, and inviting the company

to participate in a meeting designed to “coordinate the submis-

sion of a plan”).

The third case relied on by the Second Department, City of

Evart, “held that the requirement of a suit was ‘clear and unambi-

A-42

guous’ and that the duty to defend extended only to ‘suits, not alle-

gations, accusations or mere claims which have not been

embodied in a suit.’” Technicon Elec. Corp., No. 953E, slip op. at

19. City of Evart may be authority within Michigan, but see Fire-

man’s Fund Ins. Co. v. Ex-Cell-O Corp., 662 F. Supp. 71, 75

(E.D.Mich. 1987) (relying on another Michigan precedent, United

States Aviex Co. v. Travelers Ins. Co., 125 Mich. App. 579, 336

N.W.2d 838 (Mich. Ct. App. 1983), to hold “that a ‘suit’ includes

any effort to impose on the policyholder a liability ultimately en-

forceable by a court”), but it is not binding in New York. Its

precedential value is further eroded by its characterization of a

demand letter as a “mere claim ].” As already stated, a recipient

of a demand letter can be adversely affected by ignoring the letter.

See discussion supra at 15-17. Lastly, there is precedent in New

York for interpreting the term “suit” flexibly.

The plaintiffs submit the case of Clarke v. Fidelity & Casualty

Co., 55 Misc. 2d 327, 285 N.Y.S.2d 503 (Sup. Ct. 1967), for the

proposition that, under New York law, once an insured has re-

ceived notice of the institution of “juridical process” that might

eventually lead to a judgment, a “suit” requiring the insurer to de-

fend has been stated. Plaintiffs point out that the Louisiana stat-

ute expressly provides that the secretary of DEQ may institute a

lawsuit to compel recovery of costs from any liable parties. See

La. Rev. Stat. Ann. § 30:1149.45(B) (West Supp. 1988).

In Clarke, the insured was “vouched in” to a lawsuit. See 55—

Misc. 2d at 333-35, 285 N.Y.S.2d at 508-10. This process notified

the insured that another party, involved in a lawsuit, would have

the insured be bound by judgment in that lawsuit without actually

impleading the insured, and for that reason, the other party was

offering the insured the opportunity to control the defense of the

litigation. See id., 285 N.Y.S.2d at 508-10. The court stated that

use of the vouching-in process would not make the insured “any

the less proceeded against by way of the juridical process generi-

cally defined in the insurance contract as a ‘suit.’” See id. at 336,

A-43

285 N.Y.S.2d at 510. The court concluded that the procedure con-

stituted a “litigious process which is in fact a ‘suit’ within the

meaning of the” insurance policy. See id., 285 N.Y.S.2d at 510; see

also Continental Casualty Co. v. Cole, 809 F.2d 891, 897-99 (D.C.

Cir. 1987) (“Clarke focused on the substance of the action against

the insured rather than on its form, recognizing that an insured

who is being ‘proceeded against,’ albeit in an unorthodox fashion,

is no less entitled to a defense than his insured contemporaries

who are legally attacked in a more conventional manner.”).

There is a distinction between Clarke and the process in-

volved in this action. The vouching-in procedure used in Clarke

sufficed to give a judgment obtained in a lawsuit binding effect

against the insured. See 55 Misc. 2d at 333-35, 285 N.Y.S.2d at

508-10. On the other hand, there was no pending judicial pro-

ceeding filed by the Louisiana DEQ against anyone at the time

plaintiffs filed this declaratory judgment action. However, the

plaintiffs had received a “demand letter” from the DEQ, requir-

ing the submission of a remedial plan. See Complaint Ex. B.

The distinction is insignificant. The relevant statute author-

izes the secretary to take remedial action before instituting suit,

which he may then use to “recover[ ]” expenditures. See La. Rev.

Stat. Ann. § 30:1149.45(C) (West Supp. 1988). Thus, action may

be undertaken which binds the insured before suit is filed. Since

damages may be determined before the parties arrive in court, the

administrative process is part of a “litigious process” that triggers

the obligation to defend. See New Castle County, 673 F. Supp. at

1366 (demand letter “legaliy obligated” insured to incur cleanup

costs); Ex-Cell-O Corp., 662 F. Supp. at 75 (demand letter consti-

tuted “an effort to impose on the policyholders a liability ulti-

mately enforceable by a court’). The promise to defend would be

partially illusory if the insured were provided with a defense only

as to liability, and not as to damages.

From the foregoing discussion, it should be clear that it is

misleading to characterize a demand letter such as we have in this

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case as seeking “voluntary participation in remedial measures.”

Technicon Elec. Corp., No. 953E, slip op. at 19-20. First, failure to

respond can lead to adverse consequences. Second, the court has

not found any authority holding that the governmental agency is

bound to accept a recipient’s volunteered plan. Thus, representa-

tion is necessary to convince the government to accept one reme-

dial plan rather than another. For all of the foregoing reasons, the

court opines that the New York Court of Appeals would hold that

receipt of a demand letter from a governmental environmental

agency in such particular circumstances as we have in this case is

a “suit” requiring the insurer to defend.

C. Defendant’s Other Objections

The defendant objects that it is not obligated to defend any

proceeding against the plaintiffs unless and until coverage is

found as a certainty, citing cases from New Jersey. See Hartford

Accident & Indemnity Co. v. Aetna Life & Casualty Ins. Co., 98 N.J.

18, __, 483 A.2d 402, 405-08 (1984) (per curiam); Burd v. Sussex

Mutual Ins. Co., 56 N.J. 383, __, 267 A.2d 7, 9-14 (1970). The New

Jersey rule is that if the insurer disputes the obligation to indem-

nify, its obligation to defend is translated “into one to reimburse

the insured if it is later adjudged that the claim was one within the

policy covenant to pay.” Burd, 56 NJ. at __, 267 A.2d at 10, quoted

in Hartford Accident & Indemnity Co., 98 N.J. at __, 483 A.2d at

406. It is felt that this avoids placing the insurer’s counsel in a

conflict between insurer and insured. See Hartford Accident & In-

demnity Co., 98 N.J. at __, 483 A.2d at 407; Burd, 56 NJ. at __, 267

A.2d at 10-11.

This objection is not well-grounded. New York, while recog-

nizing the concern of conflicted counsel, deals with the problem

arising under such circumstances differently. “If any such con-

flict of interest arises, as it probably will, the selection of the attor-

neys to represent the assureds should be made by them rather

than by the insurance company, which should remain liable for

the payment of the reasonable value of the services of whatever

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attorneys the assureds select.” Prashker v. United States Guaran-

tee Co., 1 N.Y.2d 584, 593, 136 N.E.2d 871, 876, 154 N.Y.S.2d 910,

917 (1956); see Utica Mutual Ins. Co. v. Cherry, 45 A.D.2d 350, 355,

358 N.Y.S.2d 519, 524 (2d Dep’t 1974) (noting that the problem

recognized by Burd and other cases is disposed of in New York by

the rule established in Prashker), aff'd mem., 38 N.Y.2d 735, 343

N.E.2d 758, 381 N.Y.S.2d 40 (1975). Thus, in New York the obli-

gation is to defend, even if the interests of insured and insurer

conflict.

Lastly, the defendant argues that it is an excess insurer, and

that other insurers are primary insurers for these actions. Thus,

the defendant contends it is not obligated to provide the plaintiffs

with a defense.

This objection is without merit. The CGL policies state that

“if any insurer affording other insurance to the named insured{s]

denies primary liability under its policy, [Travelers] will respond

under this policy as though such other insurance were not avail-

able.” £.g., Ex. G to Affidavit of Robert P. Carroll, executed Oct.

28, 1987, at Condition 5. The third-party defendants, other insur-

ers named by the defendant, have all denied primary liability. Ac-

cording to its contract, these denials obligate the defendant.

CONCLUSION

The defendant is obligated to provide the plaintiffs a defense

for both the private actions filed and the administrative process

initiated by the Louisiana Department of Environmental Quality.

Therefore, the plaintiffs’ motion for partial summary judgment is

granted in all respects.

SO ORDERED.

Dated: New York, New York

October 19, 1988

KENNETH CONBOY

United States District Judge

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Letterhead of

OFFICE OF THE CLERK

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

February 15, 1990

(Ellen Rosen Rogoff, Esquire William E. McGrath, Jr., Esquire

(Bennett G. Picker, Esquire Golden, Rothschild, Spagnola

Bolger, Picker, Hankin & DiFazio

& Tannenbaum 1011 Route 22, P.O. 897

1800 J.F. Kennedy Boulevard Somerville, NJ 08876-0897

Philadelphia, PA 19103 ;

Douglas Y. Christian, Esquire

Reed, Smith, Shaw & McClay

2500 One Liberty Place

Philadelphia, PA 19103

RE: Jones Truck Lines v. Transport Insurance Co.

Nos. 89-1729/59

Dear Counsel:

The Court will certify to the Missouri Supreme Court a ques-

tion regarding the interpretation of the term “damages” under

Missouri law in the insurance contracts at issue. Counsel are di-

rected to confer immediately to see if they can agree on the spe-

cific question as it should be submitted. If they cannot agree, then

appeliant will submit the proposed form of the question within 5

business days of this letter and appellee will sumit the proposed

A-47

form of the question within 10 business days of this letter.

Very truly yours,

SALLY MRVOS, Clerk

By:

Chief Deputy Clerk

MEF/af

cc: For Your Information Only:

Shelley A. Woods, Esquire

William H. Allen, Esquire

Francis P. Newell, Esquire

Thomas W. Brunner, Esquire

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.