Opposition Brief — Ellett Bros. v. United States Fidelity & Guaranty Co.

Supreme Court, U.S.

F FILED

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No. 01-1728 cieeeno

CLERK

In the id

Supreme Court of the Anited States

EL.tett Brotuers, INC.,

Petitioner,

¥.

Unrrep STATES FIDELITY AND GUARANTY COMPANY,

FIDELITY AND GUARANTY INSURANCE UNDERWRITERS, INC.,

St. PauL Mercury INSURANCE COMPANY,

Respondents.

On Petition For Writ Or CERTIORARI

To Tue UNtrep States Court OF APPEALS

For Tue Fourts Cimcult

RESPONDENTS' BRIEF IN OPPOSITION

TO PETITION FOR WRIT OF CERTIORARI

WALTER J. ANDREWS JOHN E. JOHNSTON, JR.

COUNSEL OF RECORD LAuREL R.S. BLAIR

Lon A. BERK LEATHERWOOD WALKER

MICHAEL S. LEVINE Topp & MANN P.C.

SHAW PiTTMAN LLP 300 East McBEE AVENUE

1650 Tysons BLvp. GREENVILLE, SC 29601

McLean, VA 20155 (864) 242-6440 ~

(703) 770-7900

Counsel for Respondents, United States Fidelity and Guaranty

Company, Fidelity and Guaranty Insurance Underwriters, Inc.,

St. Paul Mercury Insurance Company

BECKER GALLAGHER LEGAL PUBLISHING, INC.,

CINCINNATI, OHIO 800-890-5001

QUESTION PRESENTED -

Petitioner, Ellett Brothers, Inc. (“Ellett Brothers”), a

distributor of handguns, is a defendant in four lawsuits that

seek to change the manner in which Ellett Brothers markets,

sells and distributes handguns (the “Underlying Lawsuits”).

Ellett Brothers tendered each of the four Underlying Lawsuits

to its general liability insurers, including United States

Fidelity and Guaranty Company, Fidelity and Guaranty

Insurance Underwriters, Inc. , and St. Paul Mercury Insurance

Company (collectively “St. Paul”), seeking a defense and

indemnification. The District Court for the District of South

Carolina held that there was no duty to defend any of the

Underlying Lawsuits because none of those suits sought

“damages” as required by the material contracts for liability

insurance. The Fourth Circuit affirmed.

The Petition raises the following issue:

Did the Court of Appeals for the

Fourth Circuit reversibly err in

concluding that, under South Carolina

law, sums paid by an insured to

prevent future injuries are not

“damages” under contracts for general

liability insurance.

TABLE OF CONTENTS

QUESTION FPIREGEMSEEE co ccuboawes eee case es i

TABLE OF AUTHRAMGEEEED os «3526s Oe dee ep ess iV

STATEMENT OF Tee A eo he ae Lee 2

I. THE UNDERLYING LAWSUITS ............. 2

A. The Municipal Complaints .......... 2

B. The NAACP Complamt............ 2

Il. THE CONTRACTS FOR INSURANCE ..........- 3

Ill. | THE CLAIM FOR COVERAGE .............. 4

REASONS FOR DENYING CERTIORARI ........

I. THERE IS NO FEDERAL QUESTION OR

CONSTITUTIONAL EARME . 0 ok cect essscces 6

te ee

Il. NEITHER THE DISTRICT COURT NOR THE

FOURTH CIRCUIT VIOLATED ERIE........... 6

A. The Fourth Circuit Applied

State Substantive Law, Not

Federal Common Law............. 6

1. Braswell Establishes The

“Default Rule” Expressed In

MN 3 AAR ee Es

li

2. Other Decisions Under South

Carolina Law Further Confirm

That The “Default Rule” In

Ellett Is A Rule Of State

Substantive Law ............ 11

CONCLUSION ..... Me Bee iy cat Pe 14

APPENDIX

Appendix 1

Helena Chemical Co. v. Allianz Underwriters

Ins. Co., No. 96-CP-03-43 (S.C. Ct. Common

Pleas, Allendale County, March 28, 2001) .... 1b

Appendix 2

Scheper v. United States Fidelity and Guaranty

Co., No. 90-CP-07-879 (S.C. Ct. Common

Pleas, Beaufort County, October 29, 1991). . 26b

TABLE OF AUTHORITIES

Cases

Braswell v. Faircloth,

387 S.E.2d 707 (S.C. Ct. App. 1989)

ee iy ag are anne ng naan Sete te ee te

C.D. Spangler Constr. Co. v.

Indus. Crankshaft & Eng’g Co.,

hE EE CR BD kc eae cane 13

Cincinnati Ins. Co. v. Milliken,

857 F.2d 979 (4th Cir. 1988) .......... 10, 13

Ellett Brothers, Inc. v. USF&G,

275 F.3d 384 (4th Cir. 2001) ....... 6, 7,9, 10

Erie R.R. Co. v. Tompkins,

We Ue GR x 8 hh ek eae ee as 5, 6, 7, 14

Gooding v. Wilson,

gS eh er rrr eae rere 8

Helena Chemical Co. v. Allianz Underwriters Ins. Co.,

No. 96-CP-03-43 (S.C. Ct. Common Pleas,

Allendale County, March 28, 2001) ...... 11, 14

Maryland Casualty Co. v. Armco, Inc.,

822 F.2d 1348 (4th Cir. 1987) ............ 13

Mraz v. Canadian Universal Ins. Co.,

S04 F.26 1325 40 Cie. 1966)... 2. eee 13

iV

Scheper v. United States Fidelity and Guaranty Co..,

No. 90-CP-07-879 (S.C. Ct. Common Pleas

Beaufort County, October 29, 1991) .. 12, 13, 14

- Six Cos. of Cal. v. Joint Highway Dist. No. 13,

Due Chae COP GE Vo dk a es os POR 8

Spangler Const. v. Indus. Crankshaft,

388 S.E.2d 557 (N.C. 1990) ............. 13

Stoner v. N.Y. Life Ins. Co.,

311 U.S. 464 (1940)... le. 8

Other

supmeme Court R.10. wv vv cnc cana pea Ae

RESPONDENTS UNITED STATES FIDELITY AND

GUARANTY COMPANY, FIDELITY AND

GUARANTY INSURANCE UNDERWRITERS, INC..,

AND ST. PAUL MERCURY INSURANCE

COMPANY’S BRIEF IN OPPOSITION TO ELLETT

BROTHERS, INC.’S PETITION FOR WRIT OF

CERTIORARI

STATEMENT OF THE CASE

Ellett Brothers commenced this action against St. Paul

and others, seeking a declaration that, pursuant to certain

contracts for liability insurance, St. Paul is obligated to defend

and indemnify Ellett Brothers with respect to four Underlying

Lawsuits. [Petition p. 2]. The first three lawsuits (the

“Municipal Complaints”) have been consolidated and are

pending in California state court. The fourth lawsuit,

commenced by the NAACP, is pending in New York federal

district court.

The district court awarded summary judgment in favor

of St. Paul, finding that St. Paul was not obligated to defend

Ellett Brothers in any of the Underlying Lawsuits because,

under South Carolina law, contracts of general liability

insurance do not cover claims for equitable relief aimed at

preventing future injuries. [Pet’r App. pp. 20a - 24a]. The

United States Court of Appeals for the Fourth Circuit affirmed

that judgment, finding that under South Carolina law, the

relief sought by the California municipalities and the NAACP

does not constitute covered “damages,” but rather, amounts

only to equitable and prophylactic relief beyond the scope of

Ellett Brothers’ insurance. [Pet’r App. pp. 4a - 16a].

I. THE UNDERLYING LAWSUITS.

A. The Municipal Complaints.

The City of San Francisco, the City of Los Angeles,

and the County of Los Angeles, commenced three lawsuits

against Ellett Brothers and other gun manufacturers and

distributors (the “Gun Industry Defendants”). These

Municipal Complaints are based on substantially similar

allegations. The Municipal Complaints allege that Ellett

Brothers and other Gun Industry Defendants employ a

distribution system designed to facilitate the acquisition of

handguns by criminals, minors and others not authorized or

intended to use, sell, or possess handguns.

The Municipal Complaints in general contain three

causes of action. First, they allege that Ellett Brothers and the

other Gun Industry Defendants’ conduct created a continuing

public nuisance. The Municipal Complaints each seek an

abatement of the conduct that allegedly created and

perpetuates this nuisance. The Municipal Complaints also

contend that Ellett Brothers and other Gun Industry

Defendants violated the California Business and Professions

Code and unlawfully created and maintain public and private

nuisances. Finally, the complaints by the County of Los

Angeles and the City of San Francisco also contend that Ellett

Brothers and other Gun Industry Defendants violated the

California Business and Professions Code in connection with

the marketing and sale of firearms. The municipalities do not

seek any compensatory relief for these claims.

B. The NAACP Complaint.

Like the Municipal Complaints, the NAACP

Complaint alleges that Ellett Brothers and other Gun Industry

Defendants created and maintain an allegedly=iilegal

secondary market for guns. The NAACP Complaint requests

injunctive relief, in the form of an order directing that each

Gun Industry Defendant establish, implement, and enforce

various mandatory safety measures. The only monetary

demand in the NAACP lawsuit is a request for an order

requiring the Gun Industry Defendants to institute and

contribute to a fund for the education, supervision, and

regulation of approximately 16,000 gun dealers. The NAACP

does not seek compensatory relief. In fact, paragraph 63 of

the NAACP Complaint explicitly states that it is not

requesting legal damages.

Il. THE CONTRACTS FOR INSURANCE.

At issue are fourteen contracts between Ellett Brothers

and St. Paul for commercial general liability insurance,

commercial umbrella liability insurance, and/or excess

umbrella liability insurance (the “St. Paul Contracts”). The

St. Paul Contracts state that St. Paul will pay “those sums that

the insured becomes legally obligated to pay as damages

because of ‘bodily injury’ or ‘property damage’ to which the

insurance applies” and provide that St. Paul will have the

“right and duty to defend the insured against any ‘suit’

seeking those damages.” [Petition p. 2]. The Contracts

further provide, however, that “[n]o other liability to pay

sums or perform acts or services is covered unless explicitly

provided for under SUPPLEMENTARY PAYMENTS -

COVERAGES A AND B.” The St. Paul Contracts define

“bodily injury” to mean “bodily injury, sickness or disease

sustained by a person, including death resulting from any of

these at any time.” The St. Paul Contracts define “property

damage” as “ a. [pJhysical injury to tangible property . . . or

_. . b. [loss of use of tangible property that is not physically

injured.”

The St. Paul Contracts also provide coverage for

certain other amounts that Ellett Brothers might become

obligated to pay. These other amounts are set forth expressly

in the Contracts’ Supplementary Payments provision. The

Supplementary Payments provision provides coverage, “with

respect to any claim or ‘suit’ we defend,” for prejudgment

and post-judgment interest, and costs and attorneys fees.

Likewise, the St. Paul Contracts provide coverage for

personal injuries and advertising injuries as well as for

medical payments. Those coverages, however, are not at

issue in this appeal and no other coverage is afforded under

the Contracts.

Ill. THE CLAIM FOR COVERAGE.

Facing the potential for a significant increase in

business and operating costs in the event that the underlying

plaintiffs prevail, Ellett Brothers tendered the Underlying

Lawsuits to St. Paul and certain other general liability insurers

seeking a defense and indemnification in each of those

lawsuits. Coverage was denied because the Underlying

Lawsuits seek only equitable and prophylactic relief, not

“damages.” Ellett Brothers then filed this lawsuit to

determine the parties’ respective rights and obligations under

the applicable insurance contracts. Thereafter, Ellett Brothers

moved the district court to certify to the South Carolina

Supreme Court the question of whether the claims asserted in

the four Underlying Lawsuits constitute claims for “damages”

under the insurance contracts. On October 25, 2000, the

district court denied that motion because the “damages” issue

under South Carolina law was settled. [Pet’r App. pp. 25a -

26a]. Ellett Brothers then moved to dismiss its own claim for

indemnification against St. Paul and Ellett Brothers’ other

insurers. The district court permitted both dismissals. .

4

Thereafter, the district court awarded summary judgment in

favor of St. Paul, finding that St. Paul was not obligated to

defend Ellett Brothers in any of the Underlying Lawsuits

because, under South Carolina law, contracts of general

liability insurance do not cover claims for equitable relief

aimed at preventing future injuries. [Pet'r App. pp. 20a -

24a]. That finding necessarily resolved all substantive issues

remaining in the case.

The Fourth Circuit affirmed the judgment of the

district court, finding that under South Carolina law, the relief

sought by the California municipalities and the NAACP does

not constitute covered “damages,” but rather, amounts only

to equitable and prophylactic relief beyond the scope of Ellett

Brothers’ insurance. [Pet’r App. pp. 4a - 16a]. Ellett

Brothers petitioned for rehearing and rehearing en banc. Both

petitions were denied. [Pet’r App. pp. 1a - 3a].

REASONS FOR DENYING CERTIORARI

Ellett Brothers contends that the Fourth Circuit failed

to properly analyze and apply South Carolina law in light of

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

Brothers further contends that the Fourth Circuit ignored

South Carolina law and instead created out of whole cloth a

“default rule” of federal common law.' Ellett Brothers

misreads the Fourth Circuit’s opinion. A proper reading of

| Ellett Brothers’ reference to a “default rule” is a reference to

the Fourth Circuit’s statement in Ellett that, absent evidence of the

parties’ intent to expand the definition of “damages” in a contract

for general liability insurance to include amounts paid in equity, the

Court will construe the term “damages,” in accordance with South

Carolina law, to mean legal damages only. See Ellett Brothers,

Inc. v. United States Fidelity & Guaranty Company, 275 F.3d 384

(4th Cir. 2001).

that opinion illustrates that the Fourth Circuit appropriately

applied South Carolina law as required by Erie. Certiorari,

therefore, should be denied.

RR THERE IS NO FEDERAL QUESTION OR

CONSTITUTIONAL ISSUE.

The only question raised by Ellett Brothers is one of

state law. There is no federal question. There likewise is no

constitutional issue, as Ellett Brothers concedes. [Petition p.

1]. This Court, therefore, only should exercise review if it

finds that the Fourth Circuit misapplied the prevailing law of

South Carolina. Sup. Ct. R. 10. There has been no such

misapplication. Review, therefore, is not warranted.

II. NEITHER THE DISTRICT COURT NOR THE

FOURTH CIRCUIT VIOLATED ERIE.

The Fourth Circuit’s opinion in Ellett is consistent with

and compelled by every known material decision under South

Carolina law. Ellett Brothers, therefore, has not presented a

compelling reason for this Court to exercise discretionary

jurisdiction over this appeal.

A. The Fourth Circuit Applied State

Substantive Law, Not Federal

Common Law.

There is no misapplication of state law or violation of

the federal court’s duties and responsibilities under Erie.

Ellett Brothers erroneously contends that the Fourth Circuit

violated Erie’s prohibition against the creation of federal

common law. The Fourth Circuit in no way violated this

rule. The Fourth Circuit followed what is self-evident upon

a reading of relevant South Carolina case law - that South

6

Carolina’s own courts have developed a body of state

substantive law from which a “default rule” of contract

interpretation can be gleaned.

The “default rule” cited by the Fourth Circuit in Ellett

is nothing more than an expression of the present state of

South Carolina law on the “damages” issue. A review of

South Carolina decisions on that issue confirms this. Ellett

Brothers’ characterization of the rule applied in Ellett as a rule

of federal common law is just wrong.

e Braswell Establishes The

“Default Rule” Expressed In

Ellett.

For more than twelve years, courts of South Carolina

have held that amounts paid by an insured that go to prevent

future injuries, as opposed to compensating for actual injuries,

do not constitute “damages” under contracts for liability

insurance. Indeed, this is exactly what the South Carolina

Court of Appeals held in Braswell v. Faircloth, 387 S.E.2d

707 (S.C. Ct. App. 1989), where the court distinguished

amounts that the insured would pay to remediate damaged soil

from amounts that the insured would pay to prevent the

contamination of other soil. See Braswell, 387 S.E.2d at

711.”

In Braswell, the South Carolina Court of Appeals

affirmed a trial court’s finding that monies spent to prevent

future injuries or harm do not constitute “damages” under

South Carolina law because “damages” are amounts paid as

a result of actual injury or damage. Braswell, 387 S.E.2d at

710. In Braswell, the policyholder sought coverage for two

things: (1) the cost of removing drums of chemicals to prevent

them from spilling; and (2) the cost of cleaning up chemicals

that already had spilled. Jd. Coverage was afforded only for

the costs associated with the latter. Jd. at 711. No coverage

was afforded for amounts necessary to prevent damage that

had not yet occurred. Id. The Braswell court explained:

2 Braswell is controlling authority on the “damages” issue under

South Carolina law. Although Braswell is a decision from an

intermediate appellate court, Braswell is precedential authority

because the “damages” issue has not been addressed by South

Carolina’s highest court. Without a decision from the state’s

highest court, federal courts must abide by the decisions of

intermediate state appellate courts barring convincing evidence to

the contrary. See, e.g., Gooding v. Wilson, 405 U.S. 518, 526 n.3

(1972) (noting that federal courts must follow holdings of state

intermediate appellate courts); Stoner v. N.Y. Life Ins. Co., 311

U.S. 464, 467 (1940) (affirming earlier holding that federal courts

“must follow the decisions of intermediate state courts in the

absence of convincing evidence that the highest court of the state

would decide differently.”); Six Cos. of Cal. v. Joint Highway Dist.

No. 13, 311 U.S. 180, 188 (1940) (state law by an intermediate

appellate state court must be accepted by federal courts in absence

of convincing evidence that the law of the state is otherwise).

There is no evidence to the contrary and, in fact, all other known

material decisions from courts of South Carolina support Braswell.

Moreover, Ellett Brothers concedes that Braswell is binding

authority. [See Petition p. 22].

The major portion of the judgment constituted

costs for removal of stored waste. These

stored wastes had not leaked. . . . These

removal costs are preventative in nature. No

damages have yet occurred. We agree with

the trial court that these costs are not covered

under a general comprehensive liability policy.

Id. at 710.

Ellett Brothers ignores this critical distinction. Indeed,

the unedited relevant language from Braswell, which is quoted

by Ellett Brothers only in piecemeal form [see Petition p. 21],

plainly illustrates the distinction:

Upon the facts of this case we find an

occurrence causing property damage did result

but only as to the spill of the 1000 gallons of

chemicals and only as to the $6643.72 in

damages directly related to the contamination

of the land by this spill. The other costs

constituting the federal court judgment are not

covered under the insurance policy.

Id. at 711 (emphasis added.) Thus, of the more than

$187,000.00 at issue in Braswell, the court found that only

$6,643.72 actually constituted “damages” covered by general

liability insurance. The remainder of the judgment was

preventative and, thus, not covered. ,

The distinction recognized in Braswell is critical

because it sets forth the basis for the rule enunciated by the

Fourth Circuit in Ellett, that amounts paid to prevent future

injuries are not “damages.” Contrary to Ellett Brothers’

contention, the district court’s and the Fourth Circuit’s

reliance upon Cincinnati Ins. Co. v. Milliken, 857 F.2d 979

(4th Cir. 1988) as the basis for that rule was fully consistent

with South Carolina law, because the court in Braswell

expressly confirmed that Milliken is a correct statement of

South Carolina law with respect to amounts that are spent to

prevent future injury. See Braswell, 387 S.E.2d at 711.

Moreover, whether the Fourth Circuit erred in deciding

Milliken (which it did not) is of no moment now, since that

decision has since been ratified by Braswell as a correct

prediction of South Carolina law. Id.

Braswell confirms, therefore, that costs that are

preventative in nature are not “damages” in the context of

general liability insurance under South Carolina law.

Braswell further confirms and clarifies that the Milliken Court

correctly predicted how South Carollina courts would view the

distinction between amounts that compensate for past injury

- “damages” - and amounts paid to prevent future injuries

that have not happened, and may never happen. Jd. at 711.°

> Concurring with the Fourth Circuiit majority in Ellett v. U.S.

Fidelity & Guar. Co., Judge Michael recognized Braswell’s

clarification. As Judge Michael explained it, the issue under South

Carolina law is not whether the underlyiing relief is labeled as legal

or equitable, but whether the purpose of the relief is to compensate

for past injuries. Ellett, 275 F.3d at 391.(Michael, J., concurring).

Where the purpose is compensation for an actual injury, the relief

may be covered; where it is to prevent ffuture injury, it is not. Jd.

The distinction, however, between Judge Michael’s view and the

majority’s view is a distinction withoutt a difference in this case

because, here, there is no coverage for the Underlying Lawsuits

under either view. The Underlying Lawsuits do not seek legal

“damages.” They likewise do not seek compensation for past

injuries. Either way, the lawsuits are not covered.

10

2. Other Decisions Under South

Carolina Law Further Confirm

That The “Default Rule” In

Ellett Is A Rule Of State

Substantive Law.

Braswell is not the only decision under South Carolina

law that recognizes a distinction between legal “damages” and

other amounts that an insured might become obligated to pay.

Indeed, while Braswell may be the only reported decision

_ from a South Carolina state court to address the “damages”

issue under South Carolina law, two unreported decisions also

provide resolute guidance as to how South Carolina courts

interpret the term “damages” in the context of general liability

insurance.

In Helena Chemical Co. v. Allianz Underwriters Ins.

Co., No. 96-CP-03-43 (S.C. Ct. Common Pleas, Allendale

County, March 28, 2001) [Resp. App.1, p.1b], the Court

reiterated that South Carolina law continues to distinguish, for

purposes of general liability insurance coverage, amounts paid

by a policyholder as compensation for an injury and amounts

paid for some other purpose. In Helena Chemical, the court

held that amounts spent by the policyholder to remediate a

public harm were not “damages” covered under the

policyholder’s general liability insurance contract. Helena

Chemical, slip op. at 8. The court reasoned that the

unambiguous language of Helena’s general liability insurance

policies plainly illustrates that coverage is not available for

every cost or expense that Helena might incur. Jd. Rather,

the obligation must be one to pay “damages” to a third party

because of injury to that party. Jd. Amounts paid by Helena

because of the manner in which it ran its business do not

satisfy those criteria. /d. The Helena Chemical court

explained:

11

The “as damages” or “for damages” language

is consistent with the basic nature of these

insurance policies. These policies are liability

policies. They do not cover every cost or

expense that a company may have to pay

because the company must comply with the

law. Businesses must absorb many such

expenses on a daily basis during the course of

operations. Rather, these policies cover

liabilities for damages to third parties or to

third-party property.

There is a plain, ordinary and popular meaning

to the term “damages.” People understand

that when a person pays “damages,” they are

paying them to another person on account of

legal liability for harm to that person or their

property.

Id. at 8-9 (emphasis in original).

In another unreported decision, the South Carolina

Court of Common Pleas, Beaufort County, reached a similar

conclusion finding that response costs under CERCLA were

equitable in nature and, thus, not “damages.” Scheper v.

United States Fidelity and Guaranty Co., No. 90-CP-07-879

(S.C. Ct. Common Pleas, Beaufort County, October 29,

1991). [Resp. App. 2, p.26b]. In Scheper, the Court

awarded summary judgment to the insurer, finding that claims

asserted against the policyholder for reimbursement of

environmental response costs are not claims for “damages.”

Scheper, slip op. at 8. The court reasoned that, under South

Carolina law, environmental response costs are equitable

amounts, and thus not “damages” under a contract for general

liability insurance. Jd. In reaching that conclusion, the South

12

Carolina court cited with approval the Fourth Circuit’s

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

1348 (4th Cir. 1987), which was followed by Milliken and

which held that a claim for environmental response costs was

one for injunctive and other equitable relief, not for damages.

Id. at 9. The Scheper court likewise approved of Milliken,

supra, and Mraz v. Canadian Universal Ins. Co., 804 F.2d

1325 (4th Cir. 1986) (also holding that amounts paid in equity

are not “damages”). Jd.

Moreover, the Scheper decision expressly rejected

decisions from other jurisdictions that fail to recognize the

distinction between claims for damages and claims for other

forms of relief - including, for example, C.D. Spangler

Constr. Co. v. Indus. Crankshaft & Eng’g Co., 388 S.E.2d

557 (N.C. 1990), which is relied upon by Ellett Brothers in its

Petition. [See Petition pp. 16, 19]. As Scheper explains,

Spangler and much of the other foreign authority relied upon

by Eliett Brothers is immaterial because South Carolina law

on the “damages” issue is settled:

This court is aware of decisions to the

contrary. See, e.g., Spangler Const. v. Indus.

Crankshaft, 388 S.E.2d 557 (N.C. 1990).

However, in South Carolina, the unambiguous

term “damages” in the USF&G policies does

not encompass coverage for response costs

asserted by EPA in its claim against Plaintiffs.

Therefore, USF&G has no obligation to defend

or indemnify Plaintiffs in connection with the

underlying claims in this case. Accordingly,

the first basis of my decision granting

summary judgment is that USF&G has neither

coverage nor a duty to defend because cleanup

costs incurred pursuant to CERCLA do not

13

constitute covered “damages” under the

policies at issue.

Id. at 11-12.

In sum, Braswell, Helena Chemical, and Scheper all

demonstrate that, under South Carolina law, the term

“damages,” without more, does not include equitable or

prophylactic relief. The federal “default rule” championed by

Ellett Brothers, therefore, is a false characterization of South

Carolina common law. The Fourth Circuit was correct. Erie

has not been violated. No further review is required.

CONCLUSION

The Fourth Circuit correctly concluded that there is no

coverage for the Underlying Lawsuits because they seek only

equitable relief aimed at the prevention of future injuries.

They do not seek “damages.” Ellett Brothers’ Petition,

therefore, should be denied.

Respectfully submitted,

Walter J. Andrews

Counsel of Record

Lon A. Berk

Michael S. Levine

SHAW PITTMAN LLP

McLean, VA 22102

(703) 770-7900

i4

John E. Johnston, Jr.

Laurel R.S. Blair

LEATHERWOOD WALKER

TODD & MANN P.C.

300 East McBee Avenue

Greenville, SC 29601

(864) 242-6440

Counsel for Respondents,

United States Fidelity and Guaranty

Company, Fidelity and Guaranty

Insurance Underwriters, Inc., and St.

Paul Mercury Insurance Company

APPENDIX 1

IN THE COURT OF COMMON PLEAS

FOURTEENTH JUDICIAL CIRCUIT

Case No. 96-CP-03-43

STATE OF SOUTH CAROLINA

COUNTY OF ALLENDALE

HELENA CHEMICAL COMPANY,

Plaintiff,

)

)

)

)

V. )

)

ALLIANZ UNDERWRITERS )

INSURANCE COMPANY, et al. )

Defendants. )

)

ORDER GRANTING

SUMMARY JUDGMENT

This is an insurance coverage dispute arising out of

pesticide contamination at three South Carolina pesticide

facilities. The plaintiff is Helena Chemical Company

(“Helena”), a pesticide seller and formulator. It is a named

insured or additional insured under certain insurance policies

Ib

issued by the various defendant insurance carriers.' Helena

seeks in this action to recover its own costs and expenses

incurred primarily by hauling away and disposing of soil,

contaminated with pesticide residues and chemicals, found on

or immediately adjacent to its property. The defendant

insurance companies have filed motions asking this Court to

grant summary judgment on the following grounds:

1) That Defendants do not have a duty to defend

Helena or to reimburse Helena for its out-of-pocket costs in

cleaning up the contamination on and alongside its properties

because Helena’s costs of cleaning up the property are not

sums that policyholder is legally obligated to pay “as

damages,” and therefore are not covered by these insurance

policies;

2) That Defendants do not have a duty to

indemnify or defend Helena because the policies exclude

coverage for the pollution at issue;

3) That as to the Fairfax facility, Defendants do

not have a duty to indemnify or defend Helena because

Helena failed to provide them with timely notice regarding

pollution problems at that site;

; Those companies are Insurance Company of North America

(INA), ACE Property & Casualty Insurance Company (formerly

CIGNA Property & Casualty Insurance Company, formerly known

as Aetna Insurance Company) (ACE P&C), Central National

Insurance Company of Omaha (as to certain policies issued through

Cravens, Dargan, Pacific Coast, managing general agent) (Central

National), and Company, Lexington Insurance Company, and

Allianz Underwriters.

2b

4) That Helena cannot maintain a claim for

coverage against its excess level carriers because the excess

policies’ minimum attachment points cannot be reached given

the costs that would be allocated to each year as required by

Joe Harden Builders v. Aetna Cas. & Sur. Co., 326 S.C.

231, 236, 486 S.E.2d 89, 91 (S.C. 1997) and Spartan

Petroleum Co. v. Fed. Mut. Ins., 162 F.3d 805, 811 (4" Cir.

1998);

5) That Defendants were not required to provide

a defense to Helena because in connection with the cleanups

at issue, there were no suits filed against Helena triggering an

obligation to defend;

6) That Helena’s bad faith claims must be

dismissed because each of the Defendants had one or more

reasonable bases for believing that they did not owe Helena

coverage for its cleanup claims.

The parties have submitted lengthy briefs, supporting

affidavits, deposition testimony and documents addressed to

these motions. The Court heard extensive argument on the

motions at a hearing on February 20, 2001.

Summiary judgment is appropriate where the pleadings

and tendered evidence show that there is no genuine issue as

to any material fact and that the moving party is entitled to

judgment as a matter of law. Rule 56, SCRCP. In

determining whether the party opposing summary judgment

has raised a triable issue of fact, the evidence should be

viewed in the light most favorable to the nonmoving party.

For the reasons set forth below, the Court finds that

considering the evidence in the light most favorable to

Helena, Helena has raised no triable issue and the Defendants

are entitled to summary judgment on the first two motions,

3b

| :

which address the “as damages” language and the pollution

exclusion. The issues raised by those motions are dispositive

of the case, including the “bad faith” claim. Therefore, the

Court finds it umnecessary to decide the Defendants’

remaining summary judgment motions (3, 4, & 5 listed

above).

FACTS

I. THE INSURANCE POLICIES

Helena Chemical Company is in the business of,

among other things, formulating, packaging and selling

pesticides. Helena is a named insured and additional insured

under certain liability policies issued by Defendants, generally

for one year periods, in the 1970s and 1980s. Some of these

policies were first-layer primary policies; in many years,

Helena or its parent company also had excess policies that sit

in various layers above the primary policies.

The policies at issue are liability policies, as

distinguished, for example, from first-party property damage

policies, business risk policies or other kinds of policies that

might specifically provide coverage for damages or costs

incurred in connection with damages to one’s own property.

All of the policies at issue in this case contain the same

general coverage description, requiring the insurance

companies to reimburse only those sums that the policyholder

owes or has paid “as damages.” Specifically, each insurance

policy specifies that the carrier will pay on behalf of the

insured (or reimburse) those sums that the insured is legally

obligated to pay as damages because of property damage.

4b

The insuring agreement of several of the primary

policies state that the carrier will:

pay on behalf of the Insured all sums which

Insured shall become legally obligated to pay

as damages because of . . . property damage

. . . to which this insurance applies, caused by

an OCCUITeNCce. . . |

The insuring agreement of certain of excess policies states the

matter similarly, specifying that the carrier agrees to pay:

all sums which the Insured shall be obligated

to pay by reason of liability . . . for damages

. . . on account of property damage...

All of the policies also contain a provision expressly

excluding coverage for pollution. Most of the policies state,

with some minor variation, that they do not apply:

to personal injury or property damage arising

out of the discharge, dispersal, release or

escape of smoke, vapors, soot, fumes, acids,

alkaloids, toxic chemicals, liquids or gases,

waste materials or other irritants, contaminants

or pollutants into or upon land, the atmosphere

or any water course or body of water; but this

exclusion does not apply if such discharge,

release or escape is sudden and accidental.

Other policies, such as the London Market excess policies

(and those that follow form to those policies), state that there

is no coverage for personal injury, bodily injury or property

damage caused by “seepage, pollution or contamination”

unless that “seepage, pollution or contamination is caused by

5b

a sudden, unintended and unexpected happening during the

period of [the policy.]” These pollution exclusions, therefore,

eliminate coverage for pollution unless the pollution falls

within the exception to that general exclusion.

Il. THE CONTAMINATION AND CLEANUP FOR

WHICH HELENA SEEKS TO RECOVER ITS

EXPENSES

Helena has operated at least three pesticide

formulation and sales facilities in South Carolina — in Fairfax,

Cameron, and Mayesville. Pesticide dust and liquid and

related chemicals were ultimately found on and immediately

adjacent to the sites. After contamination with the United

States Environmental Protection Agency (“EPA”) or the

South Carolina Department of Health and Environmental

Control (“DHEC”), Helena incurred costs cleaning up such

contamination, primarily by arranging for the soil from the

sites to be hauled away and disposed of at appropriate

facilities. In this action, Helena seeks to recover from its

liability insurers its out-of-pocket costs for that clean-up - an

amount somewhat in excess of ten million dollars.

A. The Fairfax Site

The Fairfax site is located on 13.5 acres near Highway

321 South in Fairfax, South Carolina. Pesticide information

began in approximately 1956 when Mitchell Insecticide

moved its pesticide formulation operations to the site,

including grinding and bagging the pesticides. The company

formulated about 5 million pounds of dry pesticides per year

until the company was sold to new owners in approximately

1962. Mitchell Insecticide continued formulating dry

pesticides and expanded the facilities to formulate liquid

pesticides. In approximately 1965, Blue Chemical Company

6b

bought the business and continued its operations as its own

business, formulating both dry and liquid pesticides. In

approximately 1970, Helena formally merged with Blue

Chemical Company. After the merger, Mr. Blue, a former

principal of Blue Chemical, became an officer of Helena. —

Helena continued manufacturing pesticides at the site until

1978. Helena currently operates the facility as a retail sales

outlet and warehouse for agricultural chemicals.

Environmental authorities of both the State of South

Carolina, DHEC, and EPA began investigating the

contamination at the site in the early 1980s. The record

evidence shows that contaminated soil at the Fairfax site was

found where routine loading and unloading of chemicals,

pesticide formulation and waste disposal (i.e., landfilling)

took place. The Final Remedial Investigation Report

prepared by Helena’s environmental consultant,

Environmental and Safety Designs, Inc., and submitted to the

EPA, states that:

Pesticide distribution in soils is strongly

focused north and northwest of the liquid

formulation building, a large building that was

used for the formulation of liquid pesticides by

the former operators. The formulation of

liquid pesticides generates liquid wastes in the

form of “washouts” of mixing vessels between

chemical formulations. While current industry

practice is to containerize these washouts for

reuse, it is unlikely that this was done in the

1960s and early 1970s . . . Contamination

distribution on the Site, both in soil and

groundwater, strongly suggest [sic] the pipe

discharge and direct discharges from the liquid

formulation building.

7b

|

Id. At page 6-1 (footnote omitted). A second site of pesticide

contaminants was an area used as a landfill, a disposal

location, at the site. See id. at page 6-2. Finally, the report

states that a third source of the pesticides on the ground,

closely related to the warehouse structures, was “fugitive

emissions and losses associated with handling dry pesticides.”

Id.

Over a number of years, Helena communicated with

DHEC and EPA about the pesticide contamination at the

Fairfax site. In 1985, EPA began considering placing the site

on the National Priorities List. EPA informed Helena in 1989

that it considered Helena to be responsible for contamination

at the site under the Comprehensive Environmental Response,

Compensation and Liability Act, 42 U.S.C. §§ 9601 ef seq.

(“CERCLA”), as amended by the Superfund Amendments

and Reauthorization Act of 1986 (“SARA”), P.L. 99-499.

As a result of DHEC and EPA involvement, Helena

undertook to remove and dispose of the _pesticide-

contaminated soil at the site.

The total cost of these soil removal efforts at the site

was approximately $9 million, most of which was for hauling

away the contaminated soil from Helena’s property for

disposal, although the disposal also involved some soil along

the boundary and in a bordering drainage ditch. In

connection with the possibility of contaminated groundwater

in a shallow aquifer under the property, Helena also began a

“pump and treat” operation with associated costs of

approximately $378,062. Finally, Helena paid the

government $50,000 to obtain a “credit” for the replacement

of wetlands in lieu of cleaning up wetlands found to be

contaminated on and adjacent to its site. (Under certain

circumstances, rather than clean up a wetland area, the

8b

company can pay money toward purchase of replacement

wetlands elsewhere).

Helena seeks to recover all these costs under the

Defendants’ insurance policies.’

B. The Cameron Site

The Cameron facility is located on U.S. 176 in

Cameron, Calhoun County. It operated as an agricultural

chemical formulation and distribution facility from the time it

was built in approximately 1969 until the late 1970s. Raw

materials were transported to the site by truck and rail. The

record evidence shows that contaminated soil was ultimately

found around the facility’s formulation, storage, and

loading/unloading areas.

DHEC informed Helena in 1994 that it considered

Helena to be responsible under CERCLA for contamination

at the site. Helena completed a removal and disposal of

pesticide-contaminated soils in 1995. Helena spent about $1

. In addition, in connection with this site, Helena added to

this case by its Second Amended Complaint a claim for coverage

arising from two private lawsuits brought against Helena known as

the Hetrick and Barnes suits. Those suits appear to allege, among

other things, that the contamination from Helena’s sites damaged

the plaintiffs’ property. Those suits have not proceeded very far.

Because, unlike the clean up cost matters, Hetrick and Barnes are

suits seeking damages, the primary insurance carriers have

reimbursed Helena for its defense costs in those cases, subject to a

reservation of rights. Those costs have been minimal thus far. At

oral argument, Helena advised the Court that proceedings in those

cases were effectively stayed until this Court decided these

summary judgment motions.

9b

million hauling away soil from this facility. It seeks to

recover these costs under the policies.

c. The Mayesville Site

Helena’s Mayesville facility is located on Highway 76

East in Sumter County. In 1995, DHEC allegedly found

pesticide contamination in a ditch adjacent to the facility and

asked Helena to initiate a remediation plan. Helena spent

approximately $282,000 at Mayesville, virtually all of it the

result of removing contaminated soil from the ditch. It seeks

to recover these costs under the policies.

CONCLUSIONS

I. HELENA’S INVESTIGATION AND CLEANUP

COSTS ARE NOT “DAMAGES” COVERED BY

THE POLICIES

The first issue is whether Helena can recover the out-

of-pocket expenses that it incurred in investigating and

cleaning up the pesticide contamination on and around its

property. In view of the plan and clear language of the

insurance policies, the Court holds that it cannot.

As noted above, the insuring clause of the policies

defines what the carriers are responsible to pay. It specifies

that the carrier will pay those sums which the policyholder is,

inter alia, obligated to pay “as damages” or “for damages”

because of property damage covered by the policies.

The plain language of the insurance policies states that

reimbursement is not available for every cost or expense of

the policyholder, or even for every obligation for which a

policyholder may be legally obligated “to pay” money. To

10b

the contrary, coverage is available only for money that

Helena is “legally obligated” to pay “as damages” or “for

damages” on account of property damage. The “as damages”

or “for damages” language is consistent with the basic nature

of these insurance policies. These policies are liability

policies. The do not cover every cost or expense that a

company may have to pay because the company must comply

with the law. Businesses must absorb many such expenses on

a daily basis during the course of operations. Rather, these

policies cover liabilities for damages to third parties or to

third-party property.

There is a plain, ordinary and popular meaning to the

term “damages.” People understand that when a person pays

“damages,” they are paying them to another person on

account of legal liability for harm to that person or their

property. By way of illustration, the two private party

lawsuits discussed above, brought by nearby landowners

seeking money for alleged damage to their property, are

lawsuits that could give rise to Helena owing money “as

damages” or “for damages.”

Conversely, people would not ordinarily understand

that expenditures made by a business to take steps to comply

with government health, safety or environmental regulations

or directives, including the costs of cleaning up the pollution

at one’s own facilities, are “damages.” Rather, people would

understand such costs and expenses as the expense of doing

business in a civilized society. People would not understand

that a company that has to pay such costs to comply with

government requirements is paying itself “damages.” Those

out-of-pocket costs simply are not paid as damages in

response to some liability. This Court is bound to respect the

plain, ordinary and popular meaning of the term “damages”

11b

a

and to give the words of the insurance policy their proper

meaning.

Helena argues that it spent money at the three sites

because of a legal obligation. Helena argues that if it failed

to comply with the government directives, it could have been

liable for statutory penalties, including punitive damages, or

that EPA would have cleaned up the sites itself. Helena

argues that, as a result, its costs to clean up the site should be

covered under the policies. The Court finds Helena’s

argument unpersuasive.

Government rules and regulations that require a

landowner to perform some duty or to undertake such action

may be costly. Moreover, if a company fails to do its duty it

may have to pay penalties or be subject to other enforcement

mechanisms. But that does not make the cost of complying

with such requirements “damages.” Where a company must

clear its property of contaminants to meet government

requirements, or to prevent contamination to others, it will

necessarily incur costs. But whether the landowner cleans up

its property as it goes along, or whether it waits for the

government to tell it to do so, the out-of-pocket costs of

complying with such a government mandate to clean up one’s

pollution are not “damages.”* Helena cannot recover its out-

, The cases note that where the responsible party fails to

comply with a cleanup direction, the EPA may step in and conduct

the cleanup itself - and then obtain reimbursement from the

responsible party. The cases finding that cleanup costs - known as

response costs - are not “damages” do not distinguish between the

direct cleanup costs and reimbursement of EPA, where EPA steps

in. Company Cincinnati Ins. Co. v. Milliken, 857 F.2d 979 (4*

Cir. 1988) (monies to be paid to reimburse government for its costs

performing CERCLA cleanup are not “damages”) and Scheper v.

12b |

of-pocket costs from its insurers under these policies. In fact,

the concept of paying “damages” to oneself is anomalous.

These conclusions are consistent with South Carolina

case law. The Court finds the reasoning of the Scheper case,

decided in 1991, persuasive. Scheper v. United States Fid. &

Guar. Co., No. 90-CP-07-879 (C.C.P. Beaufort Cty., Nov.

1, 1991). In Scheper, the court declined to allow a

manufacturer whose property had been placed on the National

Priorities List to recover the costs of an EPA cleanup under

insurance policies similar to these. The court held that the

costs of the government-imposed cleanup actions, whether

conducted by the government or by the policyholder, are not

“damages” covered by the insurance policies.

The court in Scheper explained that the “insurer did

not agree to pay “all sums which the insured shall become

legally obligated to pay, but rather. ‘all sums which the

insured shall become legally obligated to pay as damages.’”

If the term “damages” were to be given “broad boundless

connotations . . . then the term ‘damages’ in the contract. .

. would become mere surplusage because any obligation to

pay would be covered.’” /d. at 9 (citation omitted). Instead,

the court ruled, “in South Carolina, the unambiguous term

‘damages’ . . . does not encompass coverage for response

United States Fid. & Guar. Co, No. 90-CP-07-879 (C.C.P.

Beaufort Cty., Nov. 1, 1991) (same) with Sangama Weston, Inc. v.

National Surety Corp., No. 6:89-642-21 (D.S.C. Oct. 28, 1992)

(insured’s out-of-pocket expenses to meet government cleanup

demands are not “damages”) and Patrons Oxford Mut. Ins. Co. v.

Marois, 573 A.2d 16 (Me. 1990) (same). The basic legal

obligation in both cases is first upon the responsible party to clean

up the pollution, which is not a situation that involves covered

damages.

13b

costs asserted by EPA in its claim against the Plaintiffs.” Jd.

at 11-12. Asa result, the carrier had no duty to indemnify or

defend the policyholder. /d.

In its order granting summary judgment to the

insurance carrier, the court in Scheper cited the reasoning of

the United States Court of Appeals for the Fourth Circuit in

two cases where it considered whether cleanup costs were

covered by the “as damages” provision. In Cincinnati Ins.

Co. v. Milliken, the federal court applied South Carolina law

to resolve whether CERCLA cleanup costs are covered under

a comprehensive general liability policy, and found that “[iJn

the insurance context the word ‘damages’ is not ambiguous.

It means legal damages.” 857 F.2d 979, 980 (4" Cir. 1988).

In Maryland Casualty Co. v. Armco, 822 F.2d 1348 (4" Cir.

1987), the federal court emphasized that coverage is provided

only for liability “as damages” on account of property

damage. Cleanup efforts, required by the government or

even undertaken by the government, are not “damages”

legally payable to a specific person or persons. 822 F.2d at

1353-54.

In Braswell v. Faircloth, 387 S.E.2d 707 (S.C. Ct.

App. 1989), the South Carolina Court of Appeals expressly

followed the reasoning of the Fourth Circuit in Milliken and

Armco. In Braswell, the policyholder was the /essee of

certain property. The lessor sued the lessee seeking costs it

had incurred in cleaning up its property at the government’s

direction. The Court of Appeals held that the property

owner/lessor had suffered damages from property damage, in

the amount of $6,643 in out-of-pocket expenses, which it

sought to recover as damages from the lessee. Accordingly,

the Court of Appeals allowed the lessee to recover those

damages paid to the lessor under its insurance policy.

14b

But the court went on to hold that the bulk of the cost

incurred, primarily to avoid future damage to the property by

removing various storage tanks from the site, was not

damages from property damage, 387 S.E.2d at 719-11. The

court noted that the “costs of complying with a government

directive” to clean up one’s property are simply not

recoverable under an insurance policy that provides coverage

for sums that the policyholder must pay “as damages.” /d.

In reaching its conclusion, the Court of Appeals in

Braswell explicitly recited and adopted the persuasive

authority and reasoning of the Fourth Circuit in Milliken. The

Court of Appeals noted that in Armco an “insurer was not

obligated to defend or indemnify its policyholder under a

comprehensive general liability policy where the underlying

action was a suit by the federal government to seek

compliance with the directives of regulatory agencies.” 387

S.E.2d at 711. The Court of Appeals also explained that in

Milliken “an insurer was not obligated to defend or indemnify

its policyholder in a suit by the federal government to recover

the response costs of removing hazardous wastes.” 387

S.E.2d at 711. The Court of Appeals then specifically

applied the principles described in those cases, denying the

policyholder’s request to recover certain costs based on the

“authority of Armco and Milliken.” Id.

Helena argues that Braswell actually supports its

recovery in this case because the Court of Appeals did allow

the policyholder - the lessee - to recover $6,643 from its

insurance carrier. Helena has misread that case. The limited

claim that the Court of Appeals found reimbursable in

Braswell was an example of a typical third-party damages

claim. Specifically, because the lessee had damaged the

lessor’s property, the lessor could sue the lessee and claim as

damages the cleanup costs that the lessee had caused it to

15b

incur. The amount that the lessee was obligated to pay the

lessor as damages for property damage was recoverable by

the lessee from its insurer. In other words, the Court of

Appeals found an ordinary damages claim to be reimbursable

under the policies. As the South Carolina Court of Appeals

made clear, its ruling was an application of, and fully

consistent with, the holding and reasoning of Milliken and

Armco.

This Court recognizes the precedential authority of

Braswell and finds the result in Braswell consistent with the

plain and popular meaning of the words of the insurance

policies. The Court also emphasizes that while it recognizes

that Scheper, Armco and Milliken are not binding precedent,

the reasoning set forth therein is persuasive. See also

Sangamo Weston Inc. v. National Surety Corp., Civ. A. No.

6:89-642-21, at 5-6 (D.S.C. Oct. 28, 1992) (costs to remove

“contaminating waste pursuant to a directive of the United

States” are not compensable under the third-party liability

policies). In the face of this line of cases analyzing the South

Carolina law over at least 10 years, and consistently finding

cleanup costs are not to be “damages” in circumstances like

these, Helena has offered no contrary South Carolina

authority .*

. There are also cases outside of South Carolina supporting

the proposition that “damages” as set forth in comprehensive

general liability policies do not encompass government ordered

cleanup costs. See, e.g. Patrons Oxford Mut. Inc. Co. v. Marois,

573 A.2d 16 (Me. 1990). In fact, other jurisdictions have drawn

the same distinction made in Braswell between the costs of cleanup

imposed as a government requirement, which are not recoverable,

and the situation presented where one private party sues another to

recover cleanup costs as an element of damages. Compare City of

Edgerton v. General Casualty Co., 517 N.W.2d 463 (Wis. 1994),

16b

Finally, at oral argument, Helena said that it was

possible that there would be additional claims filed against it

in the future, including claims by third parties in which those

third parties sought damages. If such claims emerge, they

presumably would: not be barred by the “as damages”

provision. Each claim would have to be examined as it

arises.

Accordingly, Defendants have neither a duty to

indemnify nor a duty to defend Helena because the cleanup

costs it incurred as a result of government regulations,

directives or requirements are not “damages” recoverable

under the policies. Helena’s out-of-pocket costs in cleaning

_ up these sites are not “damages” recoverable under these

insurance policies. For all of the above reasons, this Court

grants Defendants’ Motion for Summary Judgment on

Helena’s Claim for Reimbursement of Cleanup Expenses.

Il. THE POLLUTION EXCLUSION’ BARS

COVERAGE FOR HELENA’S CLAIMS

The second issue reached by this Court is whether the

pollution exclusions in the insurance policies bar Helena’s

claims. The Court concludes that they do.

cert. Denied, 115 S. Ct. 1360 (1995) (cleanup costs are not

damages) with General Casualty Company of Wisconsin v. Hills,

561 N.W. 2d 718 (Wis. 1997) (private party suit to recover costs

from the property holder is a suit for damages). This Court is also

aware that courts in other jurisdictions have reached a different

conclusion. However, in the Court’s view, under South Carolina

laws, the term “damages” in the insurance policies at issues is

unambiguous an does not encompass coverage for a policyholder’s

investigation and cleanup costs.

17b

All of the policies at issue contain provisions expressly

excluding coverage for pollution unless the discharge, release

or escape is sudden and accidental. The London Market

excess policies (and those that follow form to those policies),

state that there is no coverage for personal injury, bodily

injury or property damage caused by “seepage, pollution or

contamination” unless that “seepage, pollution or

contamination is caused by a sudden, unintended and

unexpected happening during the period of [the policy].”

This case involves pollution at the three South

Carolina sites. Pesticide contamination was found at the three

sites where the formulating, loading and unloading of

pesticides took place, as well as in a landfill area at the

Fairfax site and in drainage ditches adjacent to Helena’s

properties. This contamination was the subject of the

cleanups at issue. The pollution exclusion, therefore, applies

unless the claims fall under the exception to the pollution

exclusion. In Greenville County v. Insurance Reserve Fund,

the South Carolina Supreme Court held that the word

“sudden” in the pollution exclusion does not mean, abrupt,

but does mean “unexpected.” 443 S.E.2d 552, 553 (S.C.

1994).

The carriers provided evidence that various operations

at the site, in the course of the grinding, formulation and

unloading of pesticides, resulted in the discharge of pesticides

onto the soil. In contrast, Helena provided no evidence

whatsoever of any accidental or unexpected events producing

the pollution at issue. In fact, Helena argued that none of its

employees can recall seeing or hearing about any unexpected,

unintended or accidental release of either the liquid pesticides

or pesticide dust. The record shows that many current and

former Helena employees, and the employees and owners of

the predecessor companies, testified specifically that they

18b

have no knowledge of any such events at the three facilities.

Helena offered no evidence about the cause of the

contamination. Instead, Helena would ask the jury to

speculate about the cause of the pollution on the site and to

conclude, based on conjecture, that the pollution at the site

got there from some unidentified accident or unexpected

event. In the absence of the tender of any evidence, Helena

has, therefore, not met its burden on summary judgment of

raising a factual issue on the applicability of the pollution

exclusion as defined in Greenville County.°

: At oral argument, Helena said that the burden should be on

the defendants to prove that the exception to the exclusion does not

apply. This assertion is incorrect. The burden is on the carriers to

show that the exclusion applies in the first instance; they have met

thai burden because the fact that this case involves pollution is

conceded. The burden is then on the policyholder to show that the

exception to the pollution exclusion applies. See e.g., St. Paul Fire

& Marine Ins. Co. v. Warwick Dyeing Corp., 26 F.3d 1195, 1199-

1200 (1* Cir. 1994) (. . . “[T]he insured bears the burden in

establishing that an exception to a pollution exclusion has been

satisfied.”) (emphasis in original); see also Ostrager & Newman,

Handbook on Insurance Coverage Disputes (9" ed. 1998) §

10.02(a)(1) and additional cases cited therein (although it is

generally the carrier’s burden to show the applicability of an

exclusion, it is the policyholder’s burden to show the applicability

of an exception to an exclusion, such as the “sudden and accidental”

exception).

But even if the burden to produce evidence that the

exception does not apply properly place was on the carriers, the

Carriers have met that burden by offering evidence of ordinary,

expected releases of small amounts of pesticides as part of the

routine operation of the facility. Helena has not introduced any

contrary evidence showing that pollution was actually the product

of unexpected, accidental events.

19b

Moreover, this Court finds that even if the burden

were on the insurance carriers to show that the discharges

were not unexpected or not accidental, the carriers met that

burden convincingly. Defendants provided evidence that

pesticide contamination resulted from the incidental releases

of pesticide during the routine operations of grinding pesticide

into dust, loading, unloading, bagging and formulating

pesticides. Defendants presented deposition testimony of

several witnesses, Charles Hooks, Bobby Pace, James Blue,

and William Mitchell, each of whom had significant

involvement with the sites at different times throughout their

history. Each of these witnesses acknowledged that small

quantities of pesticide were discharged in the course of

various routine pesticide operations. Mr. Pace testified that

pesticides are released into the air in the process of grinding

dry pesticides. Mr. Mitchell testified that there was escape

during the bagging operations. Mr. Hooks and Mr. Blue

testified that liquid pesticide was released onto the ground in

small amounts in unloading liquid pesticides.

Defendants’ submissions also included a report by

Helena’s own environmental consultants to EPA describing

that some of the pesticide contamination in the soil at the

Fairfax site was the product of “fugitive emissions associated

with handling dry pesticides,” as well as from other facts such

as “pipe discharge and direct discharges from the liquid

formulation building” and an area used as a landfill at the site.

That report also observes in one respect that standards have

changed over time so that releases of small amounts of

pesticides - washouts - that might have been treated as

routine or acceptable in the 1950s, 1960s and 1970s may not

be acceptable under modern standards. The sites were in

operation for many years. The expectable small releases of

pesticides that contaminated the soil are not covered under the

pollution exclusion. E.g. Virginia Properties, Inc. v. Home

20b

Ins. Co., 74 F.3d 1131, 1134-35 (11" Cir. 1996). In light of

the carriers’ convincing presentation, Helena’s failure to

present evidence of an unexpected or accidental release of

pollutants highlights that there is no triable issue of fact for a

jury on this point.

Helena asserted that it had a policy requiring

employees to be careful in handling pesticides. Moreover,

Helena insists that if there were spills, its policy would

require that they be cleaned up. As a factual matter, the fact

that Helena had a general policy of care does not refute the

testimony of various Helena officials and employees that there

were, in fact, small releases of pesticides while Helena was

operating the facilities. Moreover, the Helena “policy” did

not pertain to the practices at the sites in the 1950s, 1960s,

and in 1970, prior to Helena’s presence there. The defendant

Carriers submitted evidence, however, that small, expected,

routine releases of pesticides took place in the day-to-day

processing of these pesticides at these sites throughout these

earlier periods of use. The insurers are not disputing that if

there were a spill of significance, that it might have been

cleaned up (though Helena provided no evidence of such

spills). Rather, the evidence offered by the carriers refers to

the small releases of pesticides that were acknowledged by the

witnesses to accompany operations.

Helena has taken the position that if it did not know

what had taken place at the Fairfax facility before it started

operations there, then any preexisting releases of pollutants

could be “unexpected” by it. Specifically, Helena argued that

21b

if it did not know that the landfili was there when it acquired

the property, the landfill would be “unexpected” by Helena.°

Helena’s argument is insufficient as a matter of law

and somewhat misdirected as a matter of fact.

First, to clarify the issue as a factual matter, before

1970, all three sites were operated by Blue Chemical

Company. The record shows that Helena entered into a

formal merger with Blue Chemical Company in 1970,

acquiring all of its assets and liabilities. As such, there does

not seem to be any basis for Helena attempting to separate

itself from the knowledge and practices of Blue Chemical,

with which it merged. Mr. Blue was one of those who

testified about the routine releases of small amounts of

contaminants as part of the transfer of liquids at the sites.

Moreover, with regard to the Fairfax facility, Blue Chemical

purchased the business of Mitchell Insecticide in 1965.

Helena would seem to be charged with the knowledge of all

of its predecessors in interest. In addition, there was

testimony of witnesses of continued routine discharges even

after Helena took over.

Second, holding aside the factual problems with

Helena’s position, Helena is wrong legally. The pollution

exclusion does not revolve around the particular

policyholder’s knowledge, but rather around whether the

discharge was itself unexpected or accidental.

° Helena’s argument in this regard focused on dumping at the

landfill. Much of the pollution at the site was not related to the

landfill. The site had been operated in the 1950s and through the

1960s as a pesticide formulation facility. The evidence showed that

operations released pesticides onto the soil.

22b

——— ;

For its theory that it is not responsible for intentional

or expected pollution by its predecessor, unless Helena knew

of the pollution by the predecessor, Helena has called this

Court’s attention to Horry County v. Insurance Reserve Fund,

2001 WL 137617 (S.Ct. Ct. App. Feb. 20, 2001). That case

did not involve a pollution exclusion, but rather a different

provision of the insurance policies which defines an

“occurrence.” That provision of the insurance policy, the

occurrence definition, makes the issue whether the accident

was “expected [or] intended from the standpoint of the

insured.” The provision quoted in Horry states that an

“occurrence” is:

an accident, including continuous or repeated

exposure to conditions, which result[s] in

personal injury or property damage neither

expected no intended from the standpoint of

the insured.

Id. at *3. The occurrence definition thus makes the issue

whether the occurrence was expected from the vantage point

of the insured. If this Court had been asked to apply the

“occurrence” definition of the insurance policy, which it has

not, Helena’s argument that the pollution was not expected

from its standpoint because it took place at the site before it

came there might have some relevance.’

: Helena also tendered to the Court the opinion of an expert

about how the pollution exclusion should be interpreted, arguing

that prior intentional pollution could be an “accidental event in

relation to the new owner.” But Defendants called to my attention

the fact that when the expert was asked in deposition about whether

he was talking about the pollution exclusion or the occurrence

definition, he stated that he was not referring to the pollution

exclusion but was referring to the occurrence definition. Therefore,

23b

That is not the case with the pollution exclusion, which

is the provision of the insurance policy at issue here. The

pollution exclusion asks whether the discharges were expected

or accidental at all, not whether they were expected or

accidental from the unique vantage point of the insured. The

case law called to my attention by Defendants reflects the

plain language of the policies on these points. E.g., Powers

Chemco Inc. v. Federal Ins. Co., 548 N.E.2d 1301, 1301

(N.Y. 1989); Stamford Wallpaper Co., Inc. v. TIG Ins., 138

F.3d 75, 80 (2™ Cir. 1998). In Powers Chemco, the court

rejected a policyholder’s contention that since it was not the

actual polluter, but merely inherited the problem from the

prior landowner, the pollution exclusion clause could not bar

its claim for cleanup costs. The court said: “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.”

548 N.E.2d at 1302. Similarly, in Stamford Wallpaper, the

court rejected the argument that the pollution exclusion did

not apply because another party did the dumping of wastes

into a landfill, noting that the policies:

clearly intended to exclude from coverage

damages arising from the discharge of

pollutants onto land, regardless of the nature

of the discharge and regardless of whether the

actual polluter was [the policyholder] or a

third party, so long as the discharge was not

‘sudden and accidental.’

even if the Court were to consider the statement of an “expert”

construing the unambiguous meaning of the insurance policy, the

opinion presented by Helena was not addressed to the proper point.

24b

138 F.3d at 80. For all of the above reasons, this Court

grants Defendants’ Motion for Summary Judgment Based on

The Pollution Exclusion in the Insurance Policies.

Ill. THE CARRIERS ACTED IN GOOD FAITH IN

CONTESTING THE COVERAGE

In addition to its claim for coverage, Helena has also

made a bad faith claim and claim for punitive damages.

Under South Carolina law, the existence of a reasonable basis

for denying or withholding coverage precludes a bac-faith

claim. Crossley v. State Farm Mut. Auto Ins. Co., 415

S.E.2d 393, 397 (S.C. 1992). I have found above that there

was a more than reasonable basis - a meritorious basis - for

denying coverage on the two grounds discussed above. This

is sufficient to dismiss the bad faith claim. In addition, I find

that each of the additional grounds asserted for denying or

withholding coverage - which I have not had a need to

resolve - was at least “reasonable” as a matter of law and

also would preclude the bad faith claim.

THEREFORE, for the foregoing reasons, it is

ORDERED that Defendants’ Motion for Summary Judgment

on Helena’s Claim for Reimbursement of Cleanup Expenses,

Defendants’ Motion for Summary Judgment Based on the

Pollution Exclusion in the Insurance Policies and Motion for

Summary Judgment on the Bad Faith and Punitive Damages

Claim are GRANTED, and judgment shall be entered for

Defendants accordingly.

JACKSON V. GREGORY

CIRCUIT COURT JUDGE

Beaufort, South Carolina

This _ day of , 2001

25b

APPENDIX 2

IN THE COURT OF COMMON PLEAS

CASE NO. 90-CP-07-879

STATE OF SOUTH CAROLINA

COUNTY OF BEAUFORT

F.W. SCHEPER, III, Individually and

as a Trustee in Dissolution for Blake and

Johnson Company, BLAKE AND

JOHNSON COMPANY, and ELSIE

WHITE,

Plaintiffs,

V.

UNITED STATES FIDELITY AND

GUARANTY COMPANY,

)

)

)

)

)

)

)

)

)

)

)

Defendant. )

)

ORDER GRANTING

SUMMARY JUDGMENT

This matter comes before the court on Defendant’s

Motion for Summary Judgment. This is an insurance

coverage dispute. The insureds, F. W. Scheper, III and Elsie

White, former officers, directors and employees of the Blake

and Johnson Company, and the Blake and Johnson Company,

a dissolved Connecticut corporation (collectively referred to

as Plaintiffs or Blake and Johnson Company), seek a

26b

|

declaratory judgment that United States Fidelity and Guaranty

Company (USF&G), as insurer, has a duty to defend and

indemnify Plaintiffs under general liability policies for

environmental damage claims made against them by the

United States Environmental Protection Agency (EPA).

Summary Judgment is appropriate where the pleadings,

discovery, and evidence submitted show that there is no

genuine issue as to any material fact and that the moving party

is entitled to judgment as a matter of law. Rule 56,

S.C.R.Civ.P. For the reasons set forth below, I find that

there is no coverage for these claims and order that summary

judgment be granted in favor of the insurer.

This action was commenced on May 14, 1990, by the

filing of the Summons and Complaint. The Complaint alleges

that the Blake and Johnson Company was a Connecticut

corporation which has been dissolved under the laws of

Connecticut and South Carolina; that the company was

engaged in the business of manufacturing and delivering metal

fastening devices in Beaufort County; that USF&G issued

general liability insurance policies to Blake and Johnson

between 1967 and 1977; that while the policies were in effect,

Blake and Johnson released chemical and metal effluents into

the environment; and that on June 1, 1989, Blake and Johnson

was notified by the EPA that it had conducted a removal

action at the site under the authority of Section 104 of the

Comprehensive Environmental Response Compensation and

Liability Act of 1980 (CERCLA), 42 U.S.C. 9604, as

amended by the Superfund Amendments and Reauthorization

Act of 1986 (SARA), P.L. 99—499. The Complaint alleges

that USF&G has a duty to defend the Plaintiff against the

EPA’s claim and a contractual obligation to pay any judgment

that might be rendered in connection with the EPA claim.

The Complaint seeks a declaration by the court fixing the

rights and obligations of the parties.

27b

The underlying facts forming the basis of the EPA

claim against the Plaintiffs are contained in the EPA Record

obtained by Plaintiffs’ counsel through an FOIA Request.

This EPA record was received by this court as evidence in

conjunction with this Motion for Summary Judgment without

objection from either party. The facts are essentially

undisputed. The documents indicate that from 1969 to 1980

Blake and Johnson discharged approximately 33 ,000-75,000

gallons of wastewater containing hazardous material per day

into an unlined lagoon; that EPA began investigating the site

in 1981; and that EPA added the Blake and Johnson site in

Beaufort County to the National Priorities List on September

21, 1984. EPA has conducted studies disclosing the release

and threatened release of Hazardous substance into the

environment, resulting in remedial action consisting mainly of

excavation of contaminated soils and _ sediments;

solidification/stabilization of soils and sediments; backfilling;

return of treated soils and sediments; vegetative cover over

treated material; monitoring and maintenance; and

institutional controls. Following completion of these remedial

procedures, the EPA notified potentially responsible parties,

including the three Plaintiffs in this suit; other, former

officers and directors of Blake and Johnson Company who

now reside out-of-state; and the current occupants of the site,

the Independent Nail Company, of their potential liability for

cleanup costs in excess of 1.6 million dollars plus additional,

undetermined administrative costs, attorney’s fees and

interest.

In its Answer, USF&G set up various defenses,

_ including certain policy defenses. USF&G has denied issuing

the policies, and Plaintiffs themselves have been unable to

produce them. Because the Plaintiffs are entitled to all

favorable inferences at this stage of the proceeding, and

because there is some secondary evidence in the record that

28b

USF&G issued policies to Blake and Johnson during the years

in question, the policies are deemed to have been issued for

purposes of this motion only. It is undisputed that USF&G

issued only standard Comprehensive General Liability

Policies (CGL policies) and Comprehensive Excess Indemnity

Policies (Excess policies) during the years in question.

USF&G has asked the court to grant summary judgment on

the following grounds, among others:

1) That USF&G has neither coverage nor

a duty to defend because the underlying claim

for environmental cleanup costs incurred by

the Environmental Protection Agency does not

constitute covered “damage” under the

policies at issue;

2) that there is neither coverage nor a duty

to defend because the pollution did not occur

within the policy periods; and that there is not

duty to defend because there is no “suit”

which triggers the Defendant’s duty to defend.

MATERIALS REVIEWED

In addition to the EPA record, the court has received

and reviewed the following materials:

1) The pleadings;

2) the written discovery, including

Interrogatories and Answers to Interrogatories,

Requests for Production and Responses to

Requests for Production, and Requests for

Admission and Responses to Requests_ for

Admission;

29b

3) briefs of both parties, including

Defendant’s Memorandum in Support of

Motion for Summary Judgment, Plaintiff's

Memorandum in Opposition to Motion for

Summary Judgment, and Defendant’s Reply

Memorandum;

4) depositions of Donald F. Anderson, F.

W. Scheper, III, John S. Woods and Russell

Lee Beer;

5) standard policy forms for the years in

question, all of which were duly authenticated

by the deposition testimony;

6) correspondence from the EPA to the

Plaintiffs concerning the underlying claim, all

of which w°* duly authenticated by Requests

for Admission;

7) a USF&G Department Circular dated

10-6-70;

8) USF&G Temporary Notice number 70-

9 dated May 26, 1970.

All of this material was submitted to the court for

purposes of this motion without objection by either party. In

addition, the court has reviewed a wealth of case law from

South Carolina and other jurisdictions dealing with the issue

of insurance coverage for pollution under the terms and

conditions of insurance policies such as those involved in the

instant case.

30b

THE INSURANCE POLICIES

The parties have been unable to produce the actual

insurance policies issued by USF&G to the Blake and Johnson

Company for the years in question. Accordingly, the parties

have relied upon standard policy forms issued by USF&G

during the years in question. Three witnesses have knowledge

of the policy forms issued by USF&G. Two of these

witnesses were Plaintiffs’ witnesses: John S. Woods, a retired

insurance agent for Citizens Insurance Company of Beaufort,

and Russell Lee Beer, a former USF&G underwriter who has

been an insurance agent to Citizens Insurance Company of

Beaufort since 1970. Woods and Beer were involved with the

issuance of the policies from USF&G to Blake and Johnson

Company, Woods on the policyholder’s end and Beer on the

carrier’s end. The third witness is Donald F. Anderson, a

claims supervisor for USF&G in its Environmental Claims

Department. Mr. Anderson is familiar with the policy forms

currently possessed by USF&G for the years in question. In

their depositions, these three witnesses have identified the

standard policy forms which would have been issued by

USF&G to Blake and Johnson Company. The testimony

indicates that these policy forms were created by Insurance

Services Organization (ISO), of which USF&G is and was a

member, and that USF&G affixes the company logo to the

basic ISO forms.

Plaintiffs claim that USF&G issued an underlying CGL

policy and an Excess policy to the Blake and Johnson

Company. The Complaint alleges that these policies were

issued between 1967 and 1977. For these years, USF&G

issued CGL policies with edition dates of October 1966 and

January 1973. The relevant language contained in the two

CGL policies is substantially the same. In the coverage Part,

they provide:

31b

The Company will pay on behalf of the Insured

all sums which the Insured shall become

legally obligated to pay as damages because of

to which this insurance applies, caused by an

occurrence, and the Company shall have the right and duty to

defend any suit against the Insured seeking damages on

account of such bodily injury or property damage, even if the

allegations of the suit are groundless, false or fraudulent, and

make such investigation and settlement of any claim or suit as

A. bodily injury or

B. property damage

it deems expedient... .

The standard Excess policies with edition dates of

December 1967 and January 1973 provide, in relevant part:

INSURING AGREEMENTS

3.3

(1)

COVERAGE. The Company will

indemnify the Insured for all sums

which the Insured shall become

obligated to pay as damages and

expenses (all as defined herein and

included within the term “ultimate net

loss”) by reason of liability imposed

upon the Insured by law, or by

contractual liability, because of

personal injury or property damaged

caused by, or

32b

(2) advertising liability arising out

of and occurrence which takes

place anywhere.

The Excess policies do no contain the mandatory “duty to

defend” provision as contained in the CGL policies. The

Excess policies do provide: '

5.3. INSURED’S DUTIES IN THE

EVENT OF OCCURRENCE, CLAIM

OR SUIT. The Insured shall be

responsible for the settlement or

defense of any claim made or suit

brought or proceeding instituted against

the Insured which no underling insurer

is obligated to defend.

5.4 DEFENSE; SETTLEMENT. When in

the judgment of the Company an

occurrence may involve damages in

excess of the applicable underlying

limit, the Company may elect at any

time to participate with the Insured an

with the underlying insurers in the

investigation, settlement and defense of

all claims and suits in connection

therewith. After the exhaustion of any

applicable limit of underlying

insurance, the Company shall have the

option to defend, at its own expense,

any suit seeking to impose liability with

respect to which insurance is afforded

under this policy; and the Company

may make such investigation and

33b

settlement of any claim or suit as it

deems expedient.

I. USF&G HAS NEITHER COVERAGE NOR

A DUTY TO DEFEND BECAUSE

CLEANUP COSTS INCURRED

PURSUANT TO CERCLA DO NOT

CONSTITUTE COVERED “DAMAGES”

UNDER THE POLICIES.

As set forth above, coverage under the USF&G

policies at issue in this action is limited in the Insuring clause

to “all sums which the insured shall become legally obligated

to pay as damages . . . because of . . . property damage

caused by . . . an occurrence .. . .” (Emphasis added).

Likewise, the Excess policies state that “ ‘damages’ means all

sums which the insured . . . becomes legally obligated to pay

as damages . . . because of property damage . . . to which

this policy applies.” (Emphasis added).

The nature of the EPA claim is set forth in two

notification letters sent by the EPA to the potentially

responsible parties and the Close Out Report which is part of

the material received pursuant to Plaintiffs’ FOIA request and

submitted without objection. The Close Out Report describes

the remedial measures undertaken on page 6:

The Operable Unit One Record of Decision

(ROD) was signed on September 28, 1987 and

outlined the following remedy for the soil

contamination at the site:

- Excavation of Contaminated soils and

lagoon sediments.

34b

Solidification/stabilization of excavated

soils and sediments.

Backfilling of excavated lagoon

sediments with a bottom layer of clean

soil to two feet above the high water

table.

Return of treated soils and sediments to

the lagoon at a level of approximately

two feet above the high groundwater

table.

Vegetative cover of top soil and grass

seed over treated material.

Operation and Maintenance (O&M)

activities of groundwater monitoring

and maintenance of the vegetative

cover.

Institutional controls, such as fencing

around the filled lagoon, and methods

to ensure that future land uses are

compatible with the selected remedy.

Construction activities at the size were initiated

on March 28, 1988.

The remediation work was performed by an

EPA ERCS contractor. EPA Region IV

Emergency Response and Control Section

personnel were responsible for design,

oversight and monitoring of the work. Details

35b

of the work are included in the OSC report for

the site.

The Close Out Report further indicates that additional

activities included clearing, sampling, dewatering, and debris

disposal. Earlier activities included sampling and

investigative procedures and the compiling of studies and

reports, as set forth in another portion of the EPA record, the

“First Operable Unit Remedial Investigation Report for

Independent Nail Company Site Beaufort, South Carolina”

dated June 8, 1987. On February 22 and March 1, 1990,

EPA sent a letter to the Plaintiffs describing the activities for

which EPA sought reimbursement:

As a result of the release and threat of release

presented to residents who were living in the

area near the Site, in March, 1988, EPA began

conducting a response which consisted of the

removal and solidification of the hazardous

waste from the lagoon.

This response was undertaken pursuant to the

authority of Section 104 of SERCLA, 42

U.S.C. Section 9601 et seq. The total

response cost incurred to date by EPA in

connection with the Site is approximately

$1,693, 130.87.

Since Blake and Johnson were an

owner/operator of the site during the time

wastes were being placed in the lagoon, EPA

hereby request that Blake and Johnson make

restitution of costs incurred by the agency to

date by payment of $1,693,130.08. EPA is

currently tabulating additional response costs

36b

associated with the Site including, but not

limited to, administrative costs, attorney’s fees

and interest. Therefore, EPA’s total response

costs are likely to increase.

(Emphasis added).

The EPA claim does not include liability under 42

U.S.C. 9607(a)(4)(C) for “damages for injury to, destruction

of, or loss of natural resource . . . .” (Emphasis added).

Rather, the EPA seeks payment of response costs under 42.

U.S.C. 9607(a)(4)(A)(B) incurred to remediate the site. Such

claims seek equitable relief rather than damages. In South

Carolina, response costs are not “damages” as set forth in the

insurance policies at issue. Maryland Casualty Co. v. Armco,

Inc., 822 F.2d. 1348 (4th Cir. 1979), cert. denied, 108 S. Ct.

703 (1988) (Maryland law) involved a suit brought by the

United States against certain waste generators, including

Armco, which alleged that improper maintenance techniques

utilized in storing hazardous wastes resulted in the seepage of

toxic chemicals into the soil and groundwater surrounding the

site and surface flows off the site and onto adjoining property,

thereby endangering persons and property. As in this case,

the claim against Armco was brought pursuant to Section

107(a) of CERCLA seeking reimbursement for ail

investigatory and other response costs and enforcement

activities related to the site and for the costs incurred or to be

incurred in cleaning up the affected area. Applying Maryland

law, the Fourth Circuit held that Armco was not entitled to

coverage because the claim for injunctive and other equitable

relief such as that south by the government under CERCLA

does not constitute a claim for damages” as defined in the

policy’s insuring agreement:

37b

The claim seeking compliance with the

regulatory directive of a federal agency, which

compliance takes the form of obedience to

injunctions and reimbursement of remedial

costs, does not constitute a claim for

“damages” under the insurance policy.

882 F.2d at 1350.

In making it-decision, the Fourth Circuit stressed the

historical distinction recognized by the courts between

“damages” on the one hand and “equitable relief” on the

other. See, e.g., Aetna Casualty and Surety Co. v. Hanna,

224 F.2d at 503; Haines v. St. Paul Fire and Marine Ins. Co.,

428 F. Supp. 435 (D.Md. 1977). In rejecting the

policyholder’s argument that the historical limitations applied

by the courts to the term “damages” should be ignored, the

Armco court observed that:

It is a great step, and a dangerous one, for

courts to begin to construe insurance policies

to encompass costs of compliance with

injunctive and reimbursement relief.

822 F.2d at 1353.

The Fourth Circuit also noted that its construction of

the term “as damages” was consistent with the overall scheme

of coverage set forth in the insuring agreement of the CGL

policy. The insurer did not agree to pay “all sums which the

insured shall become legally obligated to pay,” but rather, “all

sums which the insured shall become legally obligated to pay

as damages”:

38b

ee Deel

If the term “damages” is given . . . broad,

boundless connotations . . . would become

mere surplusage, because any obligations to

pay would be covered. The limitation implied

by employment of the phrase “to pay as

damages” would be obliterated.

882 F.2d at 1352.

Finally, the Armco court observed that insurers have

Insurance policies, probably for reasons of

certainty and economy, traditionally reimburse

only damages arising from actual, tangible

injury. Insurers are very reluctant to cover

what are essentially prophylactic measures,

such as safety precautions, for the obvious

reason that such expenditures are subject to the

discretion of the insured, and are not

connected with any harm to specific third

parties. Insurers require certainty as to the

extent of their liability and this certainty is set

forth in the insurance policy... .

From an insurer’s perspective, investigative

and remedial actions taken by the government

respecting potential environmental hazards

constitutes a prophylactic measure. ... . The

government seeks to prevent or mitigate the

occurrences or reoccurrences of hazardous

contamination. The action is fundamentally

prophylactic, and is not the sort that [insure]

contracted to cover.

39b

sound practical reasons for confining insurance coverage

under liability policies to claims seeking legal “damages” :

822 F.2d at 1353-1354.

The Fourth Circuit reaffirmed its Armco ruling in

Cincinnati Ins. Co. v. Miliken and Co., 857 F.2 579 (4th Cir.

1988). Miliken was a case arising out of the United States

District Court for the District of South Carolina in which the

federal government had brought suit against generators of

hazardous waste for recovery of cleanup costs pursuant to

CERCLA Sections 9604 (a) and (b) and 9607 (a). The

complaint alleged that waste had contaminated the soil and

groundwater of a farm and that toxic compounds had been

detected in neighboring wells. The prayer for relief was

based on 42 U.S.C. Section 9607 (a)(1)-(4)(A) which

empowers the government to sue for “all costs of removal or

remedial action incurred by the Untied States.” The waste

generator was a CGL policyholder whose insuring clause was

similar to that involved in this case. The Fourth Circuit held

that although Armco and another case, Mraz vy. Canadian

Universal Ins. Co., 804 F.2d 1325 (4th Cir. 1986), had been

decided under Maryland law, the result would be the same

under South Carolina law:

The meaning of Cincinnati’s policy must be

determined by application of South Carolina

law. Nevertheless, the district court properly

concluded that its decision should follow the

reasoning of Armco and Mraz. We perceive

no material distinctions between the South

Carolina and Maryland laws in_ the

construction and interpretation of insurance

policies that should cause us to deviate from

Armco and Mraz. Absent ambiguity, in South

Carolina the language of an insurance policy is

given its plain, ordinary, and popular meaning.

(Citations omitted). Similarly, in Maryland

40b

words of an insurance contract are to be given

their customary and normal meaning.

(Citations omitted).

In the insurance context the word “damages”

is not ambiguous. It means legal damages.

(Citations omitted). As a general rule

comprehensive general liability policies do not

extend coverage to claims for equitable relief.

(Citations omitted). We have no doubt that

South Carolina law, in concert with Maryland

and Missouri, would recognize that a general

comprehensive liability policy which obligated

the insurer to pay “all sums which the insured

Shall become legally obligated to pay as

damages” would not cover claims for which

the insured is equitably obligated to pay.

Although an insurance carrier’s duty to defend

is broader than the coverage it affords, for

reasons adequately explained in Armco, 822

F.2d at 1264, Cincinnati was not obligated to

defend the action brought by the Untied States.

857 F.2d at 980-981.

The Armco and Miliken decisions were cited with

approval by the South Carolina Court of Appeals in Braswell

v. Faircloth, 387 S.E.2d 707 (Ct. App. 1989). There is

substantial authority outside of South Carolina supporting the

proposition that “damages” as set forth in the standard CGL

policy do not encompass government ordered cleanup costs as

well. Continental Inc. Co. v. Northeastern Pharmaceutical

and Chemical Co., Inc., 842 F.2d 977 (8th Cir. 1988)

(Missouri); A.J. Johnson and Co. v. Aetna Casualty and

41b

Surety Co., 741 F. Supp. 298 (D.C. Mass. 1990) (Maine

law); Verlan, Ltd. v. John L. Armitage and Co., 695 F.

Supp. 950 (N.D. Ill. 1988) (Illinois); Hayes v. Maryland

Casualty Co., 688 F. Supp. 513 (N.D. Fla. 1988) (Florida

law).

This court is aware of decisions to the contrary. See,

e.g., Spangler Const. v. Indus. Crankshaft, 388 S.E.2d 557

(N.C. 1990). However, in South Carolina, the unambiguous

term “damages” in the USF&G policies does not encompass

coverage for response costs asserted by EPA in its claim

against the Plaintiffs. Therefore, USF&G has no obligation

to defend or indemnify Plaintiffs in connection with the

underlying claims in this case. Accordingly, the first basis of

my decision granting summary judgment is that USF&G has

neither coverage nor a duty to defend because cleanup costs

incurred pursuant to CERCLA do not constitute covered

“damages” under the policies at issue.

Il. THE POLLUTION DID NOT OCCUR

WITH THE POLICY PERIOD.

All of the policies at issue in this case require for

coverage that property damage result during the policy period

from an occurrence. The Coverage Parts for 1966 and 1973

CGL policies are similar:

The Company will pay on behalf of the Insured

all sums which the Insured shall become

legally obligated to pay as damages because of

property damage to which this insurance

applies, caused by an occurrence... .

The 1966 CGL policy contains the following definition of

“occurrence”:

42b

“occurrence” means an accident, including

injurious exposure to conditions, which results,

during the policy period, in bodily injury or

property damage neigher expected nor

intended from the standpoint of the Insured.

(Emphasis added).

The 1973 CGL policy contains the follwing definition of

“property damage”:

“property damage” means:

(1) physical injury to or destruction of

tangible property which occurs during the

policy period, including the loss of use thereof

at any time resulting therefrom.

(Emphasis added).

The 1967 Excess policy contains the following definition of

“occurrence” :

“occurrence” means an accident, including

injurious exposure to conditions, which results,

during the policy period, in personal injury or

property damage neither expected nor intended

from the standpoint of the Insured . .

(Emphasis added).

The 1973 excess policy contains the following definition of

“property damage”:

“Property damage: means:

43b

(1) Physical injury to or destruction of

tangible property which occurs during

the policy period... .

(Emphasis added).

In hazardous waste cases in South Carolina, an

occurrence is judged by which the injuries are first

manifested. In Mraz v. Canadian Universal Ins. Co., 804

F.2d 1325 (4th Cir. 1986), the Fourth Circuit held that, under

Maryland law, in hazardous waste burial cases, “an

occurrence is deemed to take place when the injuries first

manifest themselves.” Mraz at page 1328. The court stated:

The general rule is that the time of the

occurrence of an accident within the meaning

of an indemnity policy is not the time the

wrongful act was committed but the time when

the complaining party was actually damaged .

. .. Often, these cases involve a wrongful act

that produces no harm for a period of time and

then suddenly manifests itself in a burst of

damage... . There are situations, however,

in which the existence or scope of damage

remains concealed or uncertain for a period of

time even though damage is occurring. The

leakage of hazardous wastes as in this case is

a clear example. Determining exactly when

damage begins can be difficult, if not

impossible. In such cases, we believe that the

better rule is that the occurrence is deemed to

take place when the injuries first manifest

themselves... .

804 F.2d at 1328.

44b

Mraz applies in South Carolina pollution cases as well.

Safeco Ins. Co. of America v. Mutual Inc. Co., No. 89-2822

(4th Cir. 1990) (affirming Judge Perry); Cincinnati Milliken

and Co., supra.

Although Plaintiffs argue that contamination was

discovered in 1975, the evidence indicates that the injuries

were not manifested until after the USF&G policies expired

in 1977. F.W. Scheper, III was employed by Blake and

Johnson from 1975-1980 and served on its Board of Directors

from 1976-1980. In his deposition, he testified that the

company was small enough that he would have had knowledge

of any environmental problems at the plant and that he was

unaware of any pollution problems until 1980 when the

company was about to be sold. The first hint of a

contamination problem came in a letter from DHEC dated

April 4, 1980. However, Mr. Scheper produced two letters

from DHEC from June 1980 in which DHEC stated that

groundwater evaluation yielded “favorable results,” showing

no lead in the groundwater and chromium at approximately

the concentration of the drinking water standard with “little

likelihood of finding serious contamination of groundwater”.

Basically, these letters gave Blake and Johnson a clean bill of

health, and, accordingly, Blake and Johnson proceeded to sell

the plant to Independent Nail. Furthermore, Mr. Scheper

testified that Blake and Johnson had no contact with the EPA

whatsoever until the company was dissolved in 1981. The

Close Out Report (p. 3) confirms that EPA did not become

involved at the site until February 26, 1981, at which time a

“Potential Hazardous Waste Site Investigation Report and

Preliminary Assessment Report” was prepared. That is when

the injuries were manifested; that is when there was an

occurrence. Therefore, USF&G is granted summary

judgment on the ground that the pollution did not occur within

the policy period.

45b

Il. THERE [IS NO “SUIT” WHICH

TRIGGERS USF&G’S DUTY TO

DEFEND.

An additional ground for ruling that there is no duty to

defend in this case is the fact that there is not suit to defend.

The Excess policies create no duty to defend on the part of the

insurer; consequently, any duty to defend must arise under the

terms of the CGL policies. As noted above in the discussion

of the insurance policies, the CGL policies require the insurer

to defend any “suit” against the insured. In this case, Mr.

Scheper has testified that no lawsuit has been filed by the

EPA, nor has the EPA issued any administrative orders

directed at the Plaintiffs, and that the extent of the EPA’s

notification is limited to correspondence to the Plaintiffs from

the EPA. This correspondence is neither a suit nor an

administrative order. The letters from EPA to the Plaintiffs |

provide that:

Since Blake and Johnson were an

owner/operator of the site during the time

wastes were being placed in the lagoon, EPA

hereby requests that Blake and Johnson make

restitution . . . . EPA is currently tabulating

additional response costs associated with the

Site including, but not limited to, the

administrative cost, attorney’s fees and

interest. Therefore EPA’s total response cost. - |

Should Blake and Johnson, as the responsible

party want to discuss it s liability with the

EPA, please contact the person named below

in writing not later than fifteen (15) days after

receipt of this letter. Absent such contract, the

Agency will assume that ‘Blake and Johnson

have declined to reimburse the Fund for the

46b

Site expenditures, and may file suit in federal

court to recover its response costs.

(Emphasis added).

The relief requested in Plaintiff’s Complaint includes

a demand for defense of the EPA’s “claim” (Complaint

paragraph 7 and prayer for relief). However, the policy

provides for defense of a “suit,” and there is no “suit” to

defend. It is firmly established under South Carolina law that

general rules of contract construction apply equally to

insurance policies. Gambrell v. Travelers Ins. Cos., 310

S.E.2d 814 (1983); Sloan Construction Co. v. Central Nat’l.

Ins. Co. of Omaha, 236 S.E.2d 818 (1977); Thompson v.

Continental Inc. Cos., 351 S.E.2d 904 (Ct. App. 1986).

Where the policy language in the contract of insurance is plain

and unambiguous, the court must give effect to that language.

Torrington Co. v. Aetna Casualty and Surety Co., 216 S.E.2d

547 (1975). Policy language must be given a plain, ordinary,

and popular meaning. Braswell v. Faircloth, 387 S.E.2d 707

(1989). Policy language should not be tortured in order to

extend or defeat insurance coverage that was never intended

by the parties. Gambrell v. Travelers Ins. Cos., supra. In

South Carolina, there is no duty to defend absent a lawsuit:

Both the obligation to indemnify and the

obligation to defend are inchoate, conditional,

contingent obligations to the insured. Before

they come into play there must be an external

event within the coverage of the policy and the

performance of all conditions percendent by

the insured, including his cooperation. There

brought and no obligation to indemnify until a

judgment against the insured is obtained.

47b

Howard v. Allen, 176 S.E.2d 127, 129 (1970).

(Emphasis added).

Courts from other jurisdictions which have considered

this question have held that claims and demands by

governmental agencies are not “suits” within the meaning of

insurance policies, and therefore do not trigger an insurer’s

duty to defend. Ryan, Klimek, Ryan Partnership v. Royal

Insurance Company, 728 F. Supp. 862 (D.R.I. 1990) (New

York law); Arco v. Traveler Insurance Company, 730 F.

Supp. 59 (W.D. Mich. 1989; Harter Corp. v. Home

Indemnity Co., 713 F. Supp. 213 (W.D. Mich. 1989); Aetna

Casualty and Surety Co. v. Gulf Resources and Chemical

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

The plain language of the policy and decisional

authority of this state and other jurisdictions require that a suit

be filed before an insurer’s duty to defend its insured arises.

Because the demands made by the EPA are not equivalent to

the filing of a suit, USF&G has no contractual duty to defend

the Plaintiffs in this case. Therefore, I grant summary

judgment in favor of USF&G on the duty to defend issue on

the additional ground that USF&G has no duty to defend the

Plaintiffs at this time because there is no contractual duty to

defend at this point without an EPA suit. It is, therefore,

Ordered that summary judgment is granted in favor of

the Defendant, United States Fidelity and Guaranty Company,

on the following grounds: 5

1. USF&G has neither coverage nor a

duty to defend because cleanup costs incurred

pursuant to CERCLS do not constitute covered

“damages” under the policies;

48b

2. USF&G has neither coverage nor a

duty to defend because the pollution did not

occur within the policy period;

3 USF&G has no duty to defend because

there is not “suit” which has been filed which

triggers USF&G’s duty to defend.

AND IT IS SO ORDERED!

THOMAS KEMMERLIN, JR.

SPECIAL CIRCUIT COURT JUDGE

Beaufort, South Carolina

This

day of , 1991.

49b