Petition for Writ of Certiorari — Universal Underwriters Insurance v. Gerrish Corp.

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| errice OF THE CLERK

In The

Supreme Court of the United States

October Term, 1991

UNIVERSAL UNDERWRITERS INSURANCE COMPANY,

Petitioner,

Vs.

GERRISH CORPORATION, doing business as

Gerrish Motors, doing business

as Scrub-a-Dub,

Respondent.

Petition For Writ Of Certiorari To The

United States Court Of Appeals

For The Second Circuit

PETITION FOR WRIT OF CERTIORARI

AND APPENDIX, VOLUME I,

PAGES 1-109

Davip J. SPIELMAN KAREN McANbDREW

Dins—E, EROMANN & CLapp Dinse, ERDMANN & CLAPP

Burlington, Vermont 209 Battery Street

Of Counsel Burlington, VT 05402-0988

(802) 864 5751

Counsel of Record for

Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

I. Can a federal court disregard the notice and

hearing provisions of a state insurance regulatory statute,

where the statute would be constitutionally infirm with-

out those provisions?

II. Where a state’s insurance regulatory statutes

require the state to give an insurer notice and an oppor-

tunity for hearing if the state intends to withdraw

approval of a previously approved policy form, does a

federal court order requiring an insurer to amend an

insurance contract written on an approved form deprive

the insurer of constitutional rights where the state has not

notified the insurer that approval of the policy form is

withdrawn?

III. Where a federal court finds that an insurance

contract unambiguously excludes pollution coverage, can

the court nevertheless constitutionally compel the insurer

to provide pollution coverage, in the absence of a statute,

rule or regulation requiring such coverage?

IV. Can a federal court constitutionally compel an

insurer to provide insurance coverage where the state

with administrative jurisdiction in the matter would be

estopped to require such coverage?

V. Are government mandated environmental

response costs “damages” for which coverage is provided

under standard general liability insurance policy lan-

guage?

PARTIES TO THE PROCEEDING

UNIVERSAL UNDERWRITERS INSURANCE

COMPANY!

Petitioner,

VS.

GERRISH CORPORATION, doing business as

Gerrish Motors, doing business as Scrub-a-Dub

Respondent.

1 Universal Underwriters is a wholly-owned subsidiary of

Maryland Casualty Company, which is a wholly-owned sub-

sidiary of Zurich Insurance Company - U.S. Branch, which in

turn is owned by Zurich Insurance Company, Zurich, Switzer-

land. In addition to several wholly-owned subsidiaries, Uni-

versal Underwriters owns a controlling interest in Zurich

American Life Insurance Company.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .............-2200000000-

PARTIES TO THE PROCEEDING ............------ i

TABLE OF CONTENTS................00.00000008: iii

TABLE OF AUTHORITIES...............220000002- iv

OPINIONS BELOW..............ccc0ceeeeeeeeeeees 1

ee 2

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED.............000.200005 2

STATEMENT OF THE CASE.................00005- 3

REASONS FOR GRANTING CERTIORARI ......... 15

ccc uns cesccnscssssesccccees 18

The notice and hearing provisions of Vermont's

insurance regulatory statutes are constitutionally

| TS Te Tree eee eee Ta eR In eho a 18

It is undisputed that VDBI neither adopted a rule

on pollution exclusions nor gave notice of its intent

to withdraw prior approval of the Unicover III

policy containing pollution exclusions. VDBI

would, under the circumstances, be estopped to

claim that coverage existed. ...................5. 20

Vermont’s Supreme Court has consistently held

that where statutory notice of intent to withdraw

approval of a license or permit is mandated, gener-

alized rulemaking or a change in agency position is

not sufficient to amend the license. Vermont law

also holds that an administrative agency cannot

exceed its delegated authority...................- 24

TABLE OF CONTENTS - Continued

Page

In an unwarranted intrusion upon Vermont juris-

prudence, the federal courts in this case have, by

judicial construction, deprived a party of basic due

“sdaincnsasssth iesininan:sneinene. CCE CEE TET ee 26

The “as damages” issue warrants this Court’s

TABLE OF AUTHORITIES

Page

Cases

A. Johnson & Co., Inc. v. Aetna Casualty and Surety

Ce, 353 Fae OS (lat Cit: TGR). oi wc ces cecccciseses 28

Aetna Casualty and Surety Co. v. Hanna, 224 F.2d

Tae Cree Ri Wee si os-cnweeshniciecusrie tree 28

Aetna Casualty and Surety Co., Inc. v. Pintlar Corp.,

Oe a a | eee 28

Avondale Industries, Inc. v. Travelers Indemnity Co.,

887 F.2d 1200 (2d Cir. 1989), cert. denied, __ US.

ii A De ER CEE sek eS a hae 28

Blumenthal v. Brainerd, 38 Vt. 402 (1866)............. 14

Boute v. Columbia, 378 U.S. 347 (1964)............ 15, 26

Carpenter v. Home Telephone Co., 122 Vt. 50, 163

i Pe eer er TT rere rere 25

Claussen v. Aetna Casualty & Surety Co., 888 F.2d

FOr CERU Maes Ss es os oo oe nl eae ees oe ee ees 29

Continental Insurance Cos. v. Northeastern Phar-

maceutical & Chemical Co., Inc., 842 F.2d 977 (8th

Cir. 1988), cert. denied, 488 U.S. 821 (1988) ........ 28

Corniel-Rodriguez v. I.N.S., 532 F.2d 301 (2d Cir.

EWOMIK A 453 4kn cag csaven se cee eee ears 23

Dale v. Haeberlin, 878 F.2d 930 (6th Cir. 1989)........ 27

Detroit Edison Co. v. NLRB, 440 U.S. 301 (1979)...... 26

Goldberg v. Kelly, 397 U.S. 254 (1970)................ 18

Grisham v. Commercial Union Insurance Co., 951

Fae Ore Gee A peek ca nka sks ceive ees 29

Hannah v. Larche, 363 U.S. 420 (1960)................ 18

TABLE OF AUTHORITIES - Continued

Page

Heckler v. Community Health Services, 467 U.S. 51

CHOON dnc ssi cka a bewnekebuseee wep eheroenene tenes 17, 24

In re Agency of Administration, 141 Vt. 68, 444 A.2d

8 Re eee errr Ty reer Tere Te Tere eee 17, 2

In re Petition of Vermont Welfare Rights Organiza-

tion, 132 Vt. 622, 326 A.2d 828 (1974).......... 16, 25

In re Vermont Gas Systems, Inc., 150 Vt. 34, 549

PBR GF CIOUED oi x 6 seein sande eeek sauce eennee ees 25

independent Petrochemical Corp. v. Aetna Casualty

and Surety Co., 944 F.2d 940 (D.C. Cir. 1991) ...... 28

McKart v. United States, 395 U.S. 185 (1969) ......... 26

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

Ce Bee eee ee er re 28

Morton v. Ruiz, 415 U.S. 199 (1974). .............068: a3

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

ERED SOs CR. Ti id ei ai ok eee eee eres 28

My Sister's Place v. City of Burlington, 139 Vt. 602,

SBS Fil Bre ERM aa hee ss weeks es anees nes pees 17

New Castle County v. Hartford Accident and Indem-

nity Co, 933 F.2d 1162 Ged Cit. 1991)... .25..5.5: 28

New Hampshire-Vermont Physician Service v. Com-

missioner, 132 Vt. 592, 326 A.2d 163 (1974)........ 25

Parker Solvents Co. v. Royal Insurance Cos., 950 F.2d

eR Se .. ) Pepmrrceepenr rr Tare yee 29, 30

Pension Benefit Guaranty Corp. v. R. A. Gray & Co.,

a6? US. 717 GOB. eee 18

St. Regis Paper Co. v. United States, 368 U.S. 208

(T9GTD cis casudcsoetsynndupeuean verses sae ee 24

Vil

TABLE OF AUTHORITIES — Continued

Page

Schweiker v. Hansen, 450 U.S. 785 (1981)............. 24

Texaco, Inc. v. Short, 454 U.S. 516 (1982)............. 18

United States v. Goodheim, 651 F.2d 1294 (9th Cir.

| AOR A ail Ong arg kta ria er A NOE nee! 26

Vermont Real Estate Commission v. Martin, 132 Vt.

ee ee Fue Pe Ci oo os eee ke cae vow an 20

Village of Morrisville Water & Light Dept. v. Town of

Hyde Park, 129 Vt. 1, 270 A.2d 584 (1970)...... 23, 24

Wong Yang Sung v. McGrath, 339 U.S. 33 (1950)...... 18

CONSTITUTION

United ‘States Constitution, Article I, Section 10...... 2

United States Constitution, Amendment V............ 2

United States Constitution, Amendment XIV ......... 2

STATUTES

Vermont Statutes Annotated, Title 3

I oe ee ee we wk & oak 2; 13,19, 21

Tt cee hic eeu ae ees ee uw een 2, 15, 19

I 0 eer eae Taig Cat taed 15, 19

I se a ee ee 2.49

SI a ee eg oe 2, 15, 19

Vili

TABLE OF AUTHORITIES - Continued

Page

Vermont Statutes Annotated, Title 8

scaperssin Kcaiand TE TE EET TOOT Te TT PS passim

re 4, ae

NN ice ay oso can ceeusnackuces siecle 2,3

a ee ne en eS 3

i a ere 3

I re cee eae eee ee 3

Vermont Department of Banking and Insurance

IE HGR os cs suk ecdeuevencueresiscesl » Pe

In The

Supreme Court of the United States

October Term, 1991

UNIVERSAL UNDERWRITERS

INSURANCE COMPANY,

Petitioner,

VS.

GERRISH CORPORATION, doing business as

Gerrish Motors, doing business as Scrub-a-Dub,

Respondent.

Petition For Writ Of Certiorari To The

United States Court Of Appeals

For The Second Circuit

PETITION FOR WRIT OF CERTIORARI

Universal Underwriters Insurance Company, respect-

fully petitions for a writ of certiorari to review the judg-

ment of the United States Court of Appeals for the

Second Circuit in this case.

OPINIONS BELOW

The opinion of the Court of Appeals (App. 1) is

reported at 947 F.2d 1023. The opinion of the United

States District Court for the District of Vermont (App. 20)

is reported at 754 F.Supp. 358. The order of the Court of

Appeais (App. 57) denying petitioner’s motion for rear-

gument is not reported.

JURISDICTION

The opinion of the United States Court of Appeals

was entered on October 30, 1991. A timely motion for

reargument was denied cn November 29, 1991 (App. 57).

On February 20, 1992, this Court granted an extension of

time within which to file a petition for writ of certiorari

until March 29, 1992 (App. 59). Jurisdiction of this Court

is invoked under 28 U.S.C. §1254(1).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The following constitutional provisions and statutes

are set out verbatim in the Appendix:

United States Constitution,

Article I, Sectian 10;

Amendment V;

Amendment XIV

Vermont Statutes Annotated, Title 3

Sections 801, 814, 831, 832, 835-848

Vermont Statutes Annotated, Title 8

Sections 3541, 3542, 4201-4210

STATEMENT OF THE CASE

Universal Underwriters Insurance Company (“Uni-

versal”) is a stock insurance company with its principal

place of business in Kansas City, Kansas. Universal,

which specializes in insuring automobile, truck and

motorcycle dealers, does business in nearly every state. It

staffs a Governmental Affairs Department, which is

responsible for compliance with all of the nuances of the

insurance regulatory requirements in the many states in

which it does business. In Vermont, as elsewhere, Univer-

sal files with the Department of Banking and Insurance

(“VDBI”) forms of insurance policies and manuals of the

rules and rates it intends to apply to those policy forms

when writing coverage in Vermont. By statute, a liability

insurance policy form cannot be used in Vermont unless

the carrier has received prior approval of that form from

VDBI, 8 V.S.A. §3541. (App. 87). Title 8 V.S.A. §§4201-4204

(App. 90) contains similar provisions specifically applica-

ble to liability insurance policies.

In May, 1980, Universal submitted to VDBI for

approval, its “Unicover III” insurance policy form. Uni-

cover III, like Unicover II which preceded it, is a policy

form especially designed for use in inguring automobile

dealer risks. The Unicover III policy form, which speci-

fically excludes coverage for claims based upon contam-

ination of a watercourse by a petroleum substance was

approved by VDBI for Universal’s use in Vermont on May

19, 1980. (App. 110). A Vermont endorsement (the “Ver-

mont State Amendatory Part”) which references the pol-

lution exclusions contained in the policy was filed with

and approved as mandatory for use with the Unicover III

policy. (App. 122-26). Universal subsequently filed a

number of amendments to its Unicover III policy form;

none of the amendments approved for Universal’s use

prior to May 6, 1985 changed the Unicover III exclusion

concerning petroleum pollution of a watercourse. An

amended Universal Vermont endorsement referencing the

Unicover III pollution exclusions (which remained

unchanged by the amendment) was again approved by

VDBI on October 26, 1983. (App. 231).

Universal’s Governmental Affairs Department care-

fully monitored filings made in Vermont and elsewhere

by the Insurance Services Office (“ISO”), an insurance

rating and services organization representing a large

number of carriers nationwide. Universal frequently

informed VDBI, in the cover letter accompanying its fil-

ings and amendments thereto, how its filing differed

from or was similar to “common insurance language,” or

a form ISO had on file. (See, e.g., App. 115). When Uni-

versal filed the first edition of its Unicover III policy form

in May, 1980, it pointed out to VDBI that the Unicover

exclusion pertaining to the “discharge or escape of petro-

leum into a body of water” differed from “standard lan-

guage.” (App. 121).

By statute, 8 V.S.A. §3541(b), (c) (App. 87), VDBI

would be required to give Universal notice and an oppor-

tunity for hearing if it intended to withdraw the approval

it previously gave to the Unicover III policy form. The

statute pertaining to filing and approval of liability insur-

ance policy forms provides, in pertinent part:

(b) ... The commissioner may at any time,

after notice and for cause shown, withdraw any

such approval. In any notice of disapproval, or

withdrawal of a previously approved form, the

commissioner shall state that a hearing will be

granted within twenty days upon request of the

Insurer.

ing any such form or withdrawing a previous

approval shall state the grounds therefor and

the particulars thereof in such detail as reason-

ably to inform the insurer thereof. . . .

8 V.S.A. §3541(b), (c) (emphasis added) (App.

87).

VDBI has never given Universal notice that it intends to

withdraw approval of the Unicover III policy form.

Prior to and during the period of time when Univer-

sal had on file with VDBI its approved Unicover III policy

form for automobile dealer risks, Universal, like many

other carriers, maintained membership in ISO and had on

file with VDBI a form authorizing ISO to file insurance

policy rates and forms on its behalf. (The last ISO Autho-

rization Form which Universal filed was dated October 1,

1982. (App. 266).)

The Vermont statute on filing and approval of policy

forms provides that forms for use in casualty insurance

may be filed by rating organizations on behalf of their

members or subscribers, “but this provision shall not be

deemed to prohibit any such member or subscriber from

filing any such forms on its own behalf.” 8 V.S.A. §3541(a)

(App. 87). The ISO Authorization Form itself makes no

suggestion that an insurer who signs it is thereafter pre-

cluded from filing separate, independent forms on its

own behalf. Universai’s Unicover III policy form con-

tained a comprehensive general liability segment; some

of the forms which ISO had on file with VDBI also con-

tained general liability provisions. Universal filed its ISO

Authorization Form with VDBI and the regulatory agen-

cies of other states so that Universal could, if it chose,

write coverage on ISO forms in situations where its own

specialized forms were not appropriate for the risk to be

underwritten. In the overwhelming majority of cases Uni-

versal wrote coverage on its own forms and not on ISO’s.

Testimony from VDBI employees established that they

could recognize the Unicover III policy on sight as being

different from an ISO form, and that VDBI treated the

Unicover III form as a filing separate from forms filed by

ISO. (App. 366). VDBI consistently communicated

directly with Universal, and not through ISO, about the

Unicover III form in its files. Amendments and endorse-

ments to the Unicover III policy were approved or disap-

proved on their own merit and not on the basis of

whether ISO had approval for similar language. (See, e.g.,

App. 389-92; 403-04). In particular, a revised version of

Universal’s Vermont State Amendatory Part referencing

the relevant poliution exclusions in the Unicover III pol-

icy was approved by VDBI on October 26, 1983, two

weeks after VDBI informed ISO that ISO’s general lia-

bility policy form could not contain pollution exclusions

and one year after the last ISO Authorization Form was

filed by Universal. (App. 231).

ISO’s comprehensive general liability policy utilizes a

different structure and different language from the Uni-

cover III policy form. The ISO form also differed from

Universal’s in that, from some time prior to May, 1980

until January, 1983, the ISO comprehensive general lia-

bility form approved for use by ISO members in Vermont

had a specific Vermont endorsement which deleted the

pollution exclusion contained in the ISO policy.? Until

2 ISO, like Universal, files policy forms nationwide. Both

ISO and Universal will submit a standard policy form to each

(Continued on following page)

January 1983, then, the approved ISO general liability

form, unlike the Unicover III policy form, provided pollu-

tion coverage. In January, 1983, after ISO had assured

VDBI that pollution coverage would be made available

on a separate policy form, VDBI approved an amended

ISO general liability policy form which excluded cover-

age for environmental pollution. In early October, 1983,

however, VDBI informed ISO that if pollution coverage

was not restored to ISO’s general liability policy form,

VDBI would withdraw its approval of that policy form.

After some months of drafting and discussion with VDBI,

ISO filed a Vermont endorsement which once again pro-

vided pollution coverage (by deleting the pollution exclu-

sions contained in ISO’s generic general liability policy

form). ISO’s Vermont endorsement was approved by

VDBI effective July 1, 1984. Like Universal’s Vermont

State Amendatory Part, ISO’s Vermont endorsement was

approved as “mandatory” for use with ISO’s comprehen-

sive general liability policy form in Vermont.3 Mandatory,

in this context, is something of a term of art, and means

that the endorsement must be used each time coverage is

(Continued from previous page)

State in which they are filing, but add to that form endorse-

ments or amendments designed to accommodate the pecu-

liarities of each state’s laws and regulations. Universal’s

Unicover II! policy, for example, had a Vermont State Amenda-

tory Part which was used with a Unicover Ill policy each time

Universal wrote coverage in Vermont. ISO had its own Ver-

mont endorsements.

° ISO did not delete the pollution exclusions from some of

its other forms, including its Business Owners’ Liability form,

until approximately one year later.

written on the policy form to which it belongs. The word

“mandatory” is used to make a distinction between endorse-

ments which form an integral part of an approved policy

form and endorsements which are optional — i.e., approved

for a carrier’s use when requested by and appropriate to a

given risk. Universal, like other ISO members, received

notice from ISO that ISO’s Vermont endorsement was man-

datory — in other words, that a carrier writing coverage on

ISO’s policy form in Vermont should in every instance attach

ISO’s Vermont endorsement.

At no time between May, 1980 when the Unicover III

policy was first approved and May 6, 1985, the date

plaintiff first received notice from the State of Vermont

concerning its potential responsibility for an environmen-

tal clean-up, did the Unicover III policy form provide

pollution coverage. Moreover, VDBI did not at any time

advise Universal that its policy had to contain pollution

coverage, or give Universal notice, pursuant to 8 V.S.A.

§3541(b) and (c), that VDBI’s approval of the Unicover III

policy was going to be withdrawn. Nor did VDBI advise

Universal that signing an ISO Authorization Form would

preclude Universal from filing other different forms on its

own behalf.4

4 The ISO Authorization Form (App. 266) states on its face

that ISO’s agency is “deemed amended” to the extent that

Universal makes any VDBI filing on its own behalf which is

inconsistent with the ISO filing on file. Universal’s Unicover III

insurance program, first approved by VDBI on May 19, 1980,

was inconsistent with ISO’s general liability policy if for no

other reason than the pollution exclusions contained in Univer-

sal’s policy. VDBI regulations provide that:

(Continued on following page)

Employees of VDBI testified at trial that a depart-

mental policy in effect from the mid-1970’s to January 1,

1983, and again after October 11, 1983, required carriers

writing insurance in Vermont to provide pollution cover-

age. No formal rule or regulation requiring pollution

coverage was adopted, however, and the Unicover III

policy containing pollution exclusions was nevertheless

approved while such a departmental policy was sup-

posedly in place. VDBI employees also testified that their

informal policy requiring pollution coverage (which they

simply agreed to among themselves) (App. 361-63) was

never applicable to insurance contracts written for

insureds at high risk of pollution claims, such as busi-

nesses like Gerrish’s which had underground storage

tanks on their premises. (App. 392-93). VDBI employees

later adopted, again informally, a procedure whereby

insurers could exclude pollution coverage in high risk

cases with the express consent of VDBI and acknowledge-

ment of the insured. Universal eventually obtained

(Continued from previous page)

An insurer who has authorized a rating organization

to submit . . . policy and/or form filings on its behalf

may submit exceptions to that filing authoriza-

tion. . . . The insurer may not use the insurance

. . . policy or form which was filed by the rating

organization in its behaif, on and after the effective

date of its exception filing. Consequently, all subse-

quent revisions to the excepted rule, rate(s), etc.,

which are submitted by the rating organization, will

not apply on behalf of such an insurer.

Such an exception filing applies indefinitely . . . or

until it is replaced or withdrawn.

Reg. 81-3, Sec. VIII (emphasis added) (App. 313-14).

blanket advance consent of VDBI (so long as each indi-

vidual insured acknowledged the pollution exclusions in

writing), because virtually all of Universal’s automobile

dealer insureds, including Gerrish, fall in the high pollu-

tion risk category. (App. 367; 392-93).

Universal issued a renewal insurance policy for Ger-

rish, effective September 1, 1984 through September 1,

1985, on its Unicover III policy form, as that form had

been approved, word-for-word, by VDBI. The renewal

policy thus took effect two months after the effective date

that pollution coverage was reincorporated into ISO’s

generic general liability policy form.

On May 6, 1985, Gerrish received notice from the

Vermont Agency of Environmental Conservation that a

petroleum product migrating from Gerrish’s property

was polluting the Ottauquechee River, a Vermont water-

course. Gerrish’s attorneys sought coverage from Univer-

sal under the comprehensive general liability provisions

of Gerrish’s Unicover III policy. Universal referred Ger-

rish to the pollution exclusions in the policy, and under-

took to monitor and manage environmental damage to

the site only under a reservation of rights agreement.

Gerrish then filed the instant declaratory judgment action

in the United States District Court for the District of

Vermont.

Gerrish’s complaint sought a declaration that Univer-

sal was obligated to defend and indemnify Gerrish

against costs it might incur in responding to the State’s

May 2, 1985 letter. Gerrish’s complaint sought to avoid

the effect of the pollution exclusions in his insurance

policy on the grounds that VDBI did not permit pollution

exclusions in general liability insurance policies written

in Vermont and, therefore, the policy issued to Gerrish

had to be amended to conform to departmental policy.

Complaint, {30 (App. 106).

Universal defended on the grounds that the insur-

ance policy issued to Gerrish constituted a contract, the

form of which was specifically approved for Universal’s

use in Vermont; that VDBI had not given Universal

notice, as required by 8 V.S.A. §3541(b) and (c) and the

Due Process Clause of the United States Constitution,

that its prior approval of the Unicover III policy form was

going to be withdrawn; and, that, in any event, VDBI had

no authority under its enabling legislation, specifically 8

V.S.A. §3542, to require that liability insurance policies

contain particular substantive provisions, such as pollu-

tion coverage. Universal also argued that environmental

response costs mandated by the State’s letter did not

constitute “damages” under the insuring agreements of

the policy, and that the “owned property exclusion” in

the Unicover III policy defeated coverage.

After hearing, the district court held, in an opinion

by the Hon. Fred I. Parker dated December 5, 1990, that:

(1) Universal had notice of VDBI’s departmental policy

prohibiting pollution exclusions through receipt in July,

1984, of an ISO bulletin stating that the pollution exclu-

sions contained in ISO’s general liability policy form had

to be deleted, and (2) that VDBI, therefore, was not

required to give Universal notice of and an opportunity

for a hearing on withdrawal of its prior approval of

Universal’s Unicover III policy form, as required by 8

V.S.A. §3541(b) and (c) (App. 87). The district court also

held that: (1) VDBI, by virtue of its general authority to

approve and disapprove policy forms, could “decide[ ] as

a matter of policy that it will not approve certain [sub-

Sstantive] types of coverage, or exclusions” (App. 52);5 (2)

that VDBI was not obligated to follow the rulemaking

procedures of Vermont’s Administrative Procedures Act,

3 V.S.A. §§801-849, in adopting a rule or regulation on

pollution coverage because VDBI “let it be known [to

ISO] what it intended to do with regard to filings pertain-

ing to pollution coverage” (App. 52); (3) that Universal

had waived the question of VDBI’s jurisdiction to adopt a

substantive rule on pollution coverage by not raising the

issue in October, 1983, when VDBI told ISO it intended to

withdraw approval of ISO’s general liability policy form

(App. 52); and (4) that Universal’s Unicover III policy

was, therefore, deemed amended by the provisions of

ISO’s endorsement deleting the pollution exclusion in

ISO’s general liability policy form. The district court con-

cluded by holding that environmental response costs con-

stitute damages under the insuring provisions of the

policy (App. 53), and that the owned property exclusion

contained in the policy did not defeat coverage. (App.

39). The court ordered Universal to afford Gerrish cover-

age for environmental clean-up costs in accordance with

the provisions of the July 1, 1984 ISO policy endorsement.

On appeal, the Second Circuit affirmed the decision

of the trial court, but on somewhat different grounds. The

° The district court either overlooked or ignored 8 V.S.A.

§3542, which provides that the Commissioner of VDBI can

disapprove a liability insurance policy form only on one or

more of four stated grounds, none of which includes any

reference to substantive policy provisions of any kind, let alone

to pollution coverage.

Second Circuit did not address the notice and oppor-

tunity for hearing provisions of the Vermont statute or

consider Universal’s argument that those provisions in

the statute were constitutionally required. Nor did the

circuit court consider either VDBI’s jurisdiction to reject

liability insurance policies on substantive grounds or the

validity of VDBI’s informal “no pollution exclusions”

departmental policy. Indeed, the Second Circuit did not

even cite Vermont’s insurance regulatory statutes, but

purported to base its decision on “general rules of con-

tract and insurance law.” (App. 13). After citing the

“basic tenet of insurance law that once an insurance

contract is accepted by both parties, the parties are bound

by it” (App. 12), and finding that the “Universal Unicover

III policy in the form in which it was issued to Gerrish

did not cover [the state’s pollution] claim” (App. 10)

(emphasis added), the circuit court’s opinion goes on to

hold that Universal, by signing an ISO Authorization

Form in 1982, “implicitly empowered ISO to alter the

Unicover policy” (App. 11), and that the ISO endorse-

ment approved in July, 1984 for use with ISO’s generic

general liability policy, therefore, serves to amend Uni-

versal’s Unicover III policy.

The Second Circuit’s opinion in this regard curiously

does not explain why an insurance contract accepted by

both parties should be “deemed” amended by an

endorsement which the insured never saw and the

insurer had no intention of including in the contract. At

the district court level it had been assumed, as claimed in

the complaint, that Vermont's insurance statutes and reg-

ulations could have the effect of amending a contract not

in conformance therewith — and the district court had

found that VDBI required pollution coverage. The Second

Circuit’s opinion, however, which does not refer to Ver-

mont’s insurance statutes or regulations, does not rely on

“conformance to law” principles to imply a contract

amendment. The Second Circuit purports to rely instead

on Vermont agency law, but takes a quantum leap beyond

the holdings of the Vermont automobile collision cases

which it cites. Vermont case law, like that of most states,

holds that an agent may bind his principal in a transac-

tion with a third party, where the third party relies upon

the authority of the agent — real or apparent - in the

transaction in question. See, e.g., Blumenthal v. Brainerd, 38

Vt. 402, 409 (1866). The Second Circuit's Opinion in this

case, however, binds the principal (Universal) by actions

of an agent (ISO) in an unrelated transaction of which the

third party (Gerrish) had no knowledge, and on which

the third party, therefore, did not rely. The only possible

rationale for such an extension of traditional contract and

agency principles would be the operation of Vermont’s

regulatory statutes, but the Circuit’s opinion omits any

reference to those statutes. Because it did not cite the

relevant insurance regulatory statutes, the Second Circuit

did not address (a) Universal's argument that notice from

VDBI of its intent to withdraw (or modify) Universal’s

previously approved Unicover III policy form was

required both by the Vermont statute and by the Due

Process Clause of the Federal Constitution or (b) Univer-

sal’s claim that VDBI had no authority to prohibit pollu-

tion exclusions.

The Second Circuit’s opinion also affirmed the dis-

trict court’s holding that environmental response costs

constitute damages under the insuring provisions of the

policy, and that the owned-property exclusion does not

defeat coverage even where the required environmental

response would entail cleaning up the insured’s own

property.

REASONS FOR GRANTING CERTIORARI

Certiorari should be granted because the judicial

decisions in this case did what neither the legislature nor

the executive department of Vermont government could

constitutionally have done, namely read the notice and

opportunity for hearing provisions right out of the Ver-

mont insurance regulatory statutes.

When the State of Vermont determined to subject

contracts of insurance to state regulation, it built into its

statutes the procedural protections which the Due Pro-

cess Clause requires. Vermont statutes contain both an

Administrative Procedures Act (“APA”), 3 V.S.A.

§§801-849, which incorporates notice and comment provi-

sions appropriate for generalized rulemaking, and speci-

fic insurance form filing procedures, 8 V.S.A. §3541,

which contain notice and hearing provisions appropriate

to individualized adjudicatory determinations. No Ver-

mont proceeding, legislative or adjudicatory, has found

those constitutionally mandated protections inapplicable

to Universal’s use of its pre-approved insurance policy

form. Federal judicial construction, however, simply air-

brushed the constitutional protections out of Vermont's

regulatory scheme, thereby implicating both Universal’s

due process rights and serious issues of federalism. In

Boute v. Columbia, 378 U.S. 347 (1964), this Court found

that a due process violation was created by judicial con-

struction of a criminal statute. This case presents an anal-

ogous situation in the civil context; that is, Universal's

statutorily protected due process property rights have

been infringed by judicial decision.

Insurance companies nationwide file policy forms,

rates and schedules for approval by state regulatory

agencies, some independently and some through reliance

upon filings by ISO. As this case illustrates, carriers writ-

ing insurance policies need to know, not in a general way,

but down to the letter, the comma, and the last conjunc-

tion, what form has been approved for their use. The

chaos which would be occasioned if state administrative

agencies were to adopt the haphazard and casual regard

for notice and hearing procedures which the lower courts

adopted here would be staggering. The Vermont Supreme

Court has not countenanced such careless attention to the

notice and hearing protections of its state’s statutes. See,

e.g., In re Petition of Vermont Welfare Rights Organization,

132 Vt. 622, 326 A.2d 828 (1974). The Second Circuit's

opinion, however, which “deems” an insurance contract

amended in the admitted absence of administrative regu-

larity, leaves both insured and insurer in the dark with

respect to the terms of the contract between them. In the

instant case it was the insured who benefited by expan-

sion of the contracted coverage, but nothing in the Sec-

ond Circuit’s opinion distinguishes the case from one in

which an undisclosed amendment of a policy would

inure to the benefit of the carrier.

Universal wrote insurance coverage for Gerrish on a

form of policy which had received the affirmative prior

approval of VDBI for Universal’s use in Vermont. The

policy as written excluded coverage for pollution dam-

age. VDBI never advised Universal that approval of its

policy form was withdrawn or changed. VDBI would

have been estopped, both by virtue of the affirmative

approvals it gave to Universal’s pollution exclusions and

by its continued course of dealings with Universal to

compel Universal to afford Gerrish coverage for this

claim.®

The Vermont Supreme Court has been particularly

vigilant that the administrative agencies of the state act

only within their delegated powers, i.e., those set forth in

their enabling legislation. See, e.g., In re Agency of Admin-

istration, 141 Vt. 68, 75, 444 A.2d 1349, 1352 (1982). The

refusal of both the district court and the Second Circuit to

hear Universal on the issue of VDBI’s authority to pro-

hibit pollution exclusions is an unseemly breach of the

principles of federalism which should instruct a federal

court’s interpretation of state administrative and regula-

tory schemes.

The decisions of the district court and the Second

Circuit are not just wrong and contrary to the jurispru-

dence of the State of Vermont, which, after all, has the

primary interest in the matter at hand; the decisions

impose by judicial fiat a deprivation of constitutionally

guaranteed property rights.

find their governments estopped than have been federal

courts. Compare, e.g., My Sister’s Place v. City of Burlington, 139

Vt. 602, 433 A.2d 275 (1981) with Heckler v. Community Health

Services, 467 U.S. 51 (1984).

The holding of the Second Circuit that environmental

response costs constitute damages under the liability

insurance policy also adds fuel to the conflict among the

Circuits over the so-called “as damages” issue.

ARGUMENT

The notice and hearing provisions of Vermont's insur-

ance regulatory statutes are constitutionally required.

It is by this late date settled law that an administrative

agency charged with the regulation of what would otherwise

be private conduct must afford the regulated who appear

before it at least minimal due process protections of notice

and the opportunity to be heard. Hannah v. Larche, 363 U.S.

420 (1960); Wong Yang Sung v. McGrath, 339 US. 33 (1950).

(Due process requirements are, of course, made applicable to

the states by the operation of the 14th Amendment.) Notice

may be contained in the announcement of generalized

rulemaking which, through prospective application, may

affect property rights, Pension Benefit Guaranty Corp. v. R. A.

Gray & Co., 467 U.S. 717 (1984), Texaco, Inc. v. Short, 454 U.S.

516 (1982), or through individualized notice of adjudicatory

proceedings where general rules are applied to specific cases.

See, e.g., Goldberg v. Kelley, 397 U.S. 254 (1970). The nature of

the right which is in danger of infringement, of course,

determines the extent of the process which is due. Id. at 263.

Vermont’s APA and its insurance regulatory statutes

provide for the exercise, by VDBI, of both legislative and

adjudicatory functions. Vermont’s APA states that:

where due process or a statute directs or permits

an agency to adopt rules, regulations or both,

—————————

unless that statute expressly provides to the

contrary, it shall be construed as requiring or

permitting the agency to adopt rules in the man-

ner provided in this chapter.

3 V.S.A. §831(a) (App. 67).

The statute then goes on to set forth conventional notice

and comment provisions for administrative rulemaking, 3

V.S.A. §835-48 (App. 69-85). The Vermont APA also states

that:

no revocation, suspension, annulment, or with-

drawal of any license’ is lawful unless, prior to

the institution of agency proceedings, the

agency gave notice by mail to the licensee of

facts or conduct which warrant the intended

action, and the licensee was given an oppor-

tunity to show compliance with all lawful

requirements for the retention of the license. . . .

3 V.S.A. §814(c) (App. 66).

The insurance regulatory statutes reiterate these

notice and hearing requirements by providing that VDBI

may withdraw prior approval of a policy form only after

giving the insurer notice of the proposed withdrawal and

an opportunity for hearing thereon. 8 V.S.A. §3541(b)

(App. 87). The provision for notice is form-specific; that

is, the commissioner must direct his disapproval or with-

drawal of prior approval to a particular form. 8 V.S.A.

§3541(b) and (c) (App. 87).

7 A “licensee” is defined in the prefatory section of the

Vermont APA to include “the whole or part of any agency

permit, certificate, approval, registration, charter or similar

form of permission required by law.” 3 V.S.A. §801(b)(3) (App.

64).

While the statutes could arguably have been con-

structed differently, there is no doubt that the Vermont

Legislature intended the provisions to comport with the

mandates of due process. Vermont Real Estate Commission

v. Martin, 132 Vt. 309, 311, 318 A.2d 670, 672 (1974) (“An

administrative agency hearing on a license suspension is

subject to the essentials of due process. . . . The essentials

of due process are notice and the opportunity to be

heard,” (citations omitted)).

It is undisputed that VDBI neither adopted a rule on

pollution exclusions nor gave notice of its intent to

withdraw prior approval of the Unicover III policy con-

taining pollution exclusions. VDBI would, under the

circumstances, be estopped to claim that coverage exis-

ted.

In the complaint and at trial, Gerrish contended that

a VDBI departmental policy prohibiting pollution exclu-

sions rendered invalid those portions of the Unicover III

policy which contain the relevant pollution exclusions.

The district court relied upon the existence of a depart-

mental policy, albeit an informal one, to “deem” Univer-

sal’s policy amended to conform to VDBI’s requirements,

which stemmed from negotiations with [SO and resulted

in ISO’s “Vermont Pollution Endorsement.” In the face of

Universal’s argument on appeal that no validly enacted

VDBI policy compelled inclusion of pollution coverage in

the Unicover III policy, Gerrish abandoned reliance on its

claim grounded in VDBI agency policy, and the Second

Circuit made no finding that such a policy existed. With

the concessions, then, that rulemaking procedures had

not been followed and no regularly adopted departmen-

tal policy existed, support for judicial revision of previ-

ously approved contractual terms would seem to demand

proof of compliance with statutory notice and hearing

requirements for withdrawal of (or amendment to) a pre-

viously approved “license,” as the Vermont APA, 3 V.S.A.

§801(b)(3) (App. 64), refers to agency approval. Neither

the court of appeals nor the district court found, however,

that procedures for withdrawal of prior approval had

been instituted. Both courts effectively held, instead, that

the statutorily required form-specific notice could be dis-

pensed with in the case of the Unicover III policy, since

Universal (the proprietor of the Unicover III form)

received from ISO notice that VDBI intended to withdraw

approval of an ISO policy form unless it were amended to

include pollution coverage.®

8 In this regard, Gerrish made much of several internal

Universal office memoranda, which demonstrated that Univer-

sal had notice of VDBI action with respect to the ISO general

liability policy form. The memoranda referred to are repro-

duced at App. 273-74. There is no doubt, as the memoranda

demonstrate, that Universal was on notice that ISO’s general

liability policy form was amended in July, 1984, to include

pollution coverage, and that the amendment was, in VDBI

parlance, “mandatory.” The memoranda also demonstrate that

Universal took the notice from ISO about changes in the ISO

policy to mean that Universal would eventually have to amend

its own policy, either because of pressure from VDBI or

because of the need to compete with the sale of ISO policies in

the marketplace. At the same time, however, the memoranda

suggest that it never occurred to Universal that the ISO

endorsement could simply be tacked onto the Unicover Ill

policy form, without its submission to and approval by VDBI

for use with the Unicover III policy form. Universal’s response

to the ISO notice was not to start printing the ISO language for

use with Universal policies, but was instead to begin to draft

language for a new Universal endorsement, which would track

the language of the Unicover III policy, while at the same time

discussing other alternatives to providing pollution coverage.

Constitutionally required notice from an administra-

tive agency can be waived in certain circumstances where

it is apparent that the regulated entity is advised of

expected agency action. In the case at hand, plaintiff was

able to prove that Universal had notice of expected

agency action toward another player, ISO, but offered

nothing to suggest that Universal was apprised that VDBI

action affected the previous stamp of approval issued to

the Unicover III policy. Learning that one’s neighbor will

have to alter plans submitted in support of a building

permit application, for example, is hardly adequate to

advise the holder of a previously approved permit that

his permit is now deemed amended.

The practice of VDBI, for all the years Universal dealt

with them, had been to communicate directly with Uni-

versal about changes, amendments, or additional filings

in connection with the Unicover III program. VDBI

employees discussed Universal’s filings with Universal

employees over the telephone and in writing. The trial

exhibits contained many items of correspondence

between VDBI and Universal’s Governmental Affairs

Department. Not one of the more than 400 pages filed in

connection with the Unicover III program between 1980

and 1985 was filed by ISO, and not one of VDBI’s

responses to those filings was directed to ISO. VDBI

employees testitied that they knew on sight that the

Unicover III policy “was obviously not an ISO form being

used” (App. 364), that they treated it as a separate and

distinct filing (App. 407), and that they did not consult

the ISO Filing Authorization Forms on file to determine

whether a filing was independent of ISO (App. 364). In at

least two instances, when universal sought VDBI

approval to use policy language which had been

approved for ISO’s use, approval was denied. VDBI’s

practice in this regard was consistent both with its own

rules on independent filings, which make the updating

and amendment of independent, i.e., non-ISO forms, the

responsibility of the filing carrier, VDBI Reg. 81-3, Sec.

VIII (App. 313-14), and with 8 V.S.A. §3541 (App. 87),

which contemplates form-specific approval or disap-

proval of filed forms.?

An administrative agency which adopts regulations

and practices for conducting its business must act in a

manner consistent therewith. Morton v. Ruiz, 415 U.S. 199,

232 (1974). A governmental agency’s failure to follow its

own procedures, even where not mandated by statute,

may preclude that agency from taking action which

affects the rights of an individual dealing with the

agency. See, e.g., Corniel-Rodriguez v. I.N.S., 532 F.2d 301,

306-07 (2d Cir. 1976). In Vermont, at least, a governmental

agency which has lulled another into inaction by its

assurance that individual notice will be provided is

estopped to benefit from the other’s inaction. Village of

® Given the attention to detail that must attend the draft-

ing, filing and administrative approval of insurance policy

forms, a filing system not directed to specific forms would be

unthinkably chaotic. Vermont statutes are very clear that VDBI

“shall disapprove” a form of liability policy if it contains

clauses that are “inconsistent, ambiguous or misleading.” 8

V.S.A. §3542(2) (App. 89). If forms were approved by reference

to similar filings by other insurers, or to vague departmental

positions on issues of social worth, such as the allocation of the

costs for environmental clean-up, rather than by reference to

the specific language of the particular form being examined

there would inevitably be inconsistencies and ambiguities.

Moreover, neither insurer nor insured could comfortably

assume that the policy he held in his hand was the contract

which governed his relationship with the other.

Morrisville Water & Light Dept. v. Town of Hyde Park, 129 Vt. 1,

3, 270 A.2d 584, 586 (1970), cited with approval in My Sister's

Place v. City of Burlington, 139 Vt. 602, 609, 433 A.2d 275, 279

(1981). While this Court has been reluctant to find the federal

government estopped by the conduct of its employees when

the public treasury will be charged, Schweiker v. Hansen, 450

U.S. 785 (1981), this case does not involve depletion of public

funds. Moreover, even while announcing a general distaste

for estoppel by government, this Court has quoted Justice

Black’s observation that:

It is no less good morals and good law that the

Government should turn square corners in dealing

with the people than that the people should turn

Square corners in dealing with their government.

St. Regis Paper Co. v. United States, 368 U.S. 208, 229 (1961)

(Black, J., dissenting), quoted in Heckler v. Community Health

Services, 467 U.S. at 61, fn. 13. If VDBI itself had sought to

compel Universal to provide coverage in accordance with the

terms of ISO’s Vermont endorsement, VDBI would have

been estopped, under Vermont law, by its own failure to give

Universal statutory notice, coupled with its prior conduct in

treating the filings as independent of ISO, from asserting that

Universal could not write coverage on the approved Uni-

cover III form. Village of Morrisville v. Town of Hyde Park,

supra.

Vermont's Supreme Court has consistently held that where

statutory notice of intent to withdraw approval of a license

or permit is mandated, generalized rulemaking or a change

in agency position is not sufficient to amend the license.

Vermont law also holds that an administrative agency can-

not exceed its delegated authority.

The Vermont Supreme Court has on several occasions

considered the effect on existing licenses or permits of

changes in the granting agency’s rules or policies of

general application. In both In re Petition of Vermont Wel-

fare Rights Organization, 132 Vt. 622, 326 A.2d 828 (1974),

and Carpenter v. Home Telephone Co., 122 Vt. 50, 163 A.2d

838 (1960), for example, the Vermont Supreme Court held

that the Public Service Board could not, even through

valid APA rulemaking with appropriate notice and com-

ment procedures, affect a utility’s individually filed rate

schedule previously approved by the Board, where the

statute specified procedures for withdrawal of an

approved rate schedule: “rate schedules on file with the

Public Service Commission become lawful rates which

remain in force until changed in the manner prescribed

by statute.” Carpenter v. Home Telephone Co., 122 Vt. at 53,

163 A.2d at 841 (citations omitted).

In the instant case, the district court and the Second

Circuit dispensed with the requirement for either

rulemaking or individualized notice, and found a negoti-

ated agreement with ISO sufficient to amend Universal's

approved license.

The Vermont reports are also replete with cases

where the Vermont Supreme Court has admonished

administrative agencies to “operate for the purposes and

within the bounds authorized by [their] enabling legisla-

tion.” In re Agency of Administration, 141 Vt. 68, 75, 444

A.2d 1349, 1352 (1982). See also, e.g., In re Vermont Gas

Systems, Inc., 150 Vt. 34, 549 A.2d 627 (1988); New Hamp-

shire-Vermont Physician Service v. Commissioner, 132 Vt.

592, 596, 326 A.2d 163, 166 (1974) (Commissioner of Bank-

ing and Insurance not authorized to “control aspects of

contract coverage”). Universal endeavored from the out-

set of this litigation to raise the issue of VDBI’s authority

—

to prescribe the substantive provisions of a liability insur-

ance policy. The district court found that Universal had

waived the issue of authority (App. 52) despite this

Court’s decisions in Detroit Edison Co. v. NLRB, 440 U.S.

301, 311, n. 10 (1979) and McKart v. United States, 395 U.S.

185, 197 (1960) that an agency’s authority to act is a

question of subject matter jurisdiction which is not

waived by failure to raise it before the agency. The Sec-

ond Circuit simply ignored the issue. The lower courts

themselves thereby prescribed the substantive provisions

of the liability insurance policy Universal issued to Ger-

rish.

In an unwarranted intrusion upon Vermont jurispru-

dence, the federal courts in this case have, by judicial

construction, deprived a party of basic due process pro-

tections.

In Bouie v. Columbia, 378 U.S. 347 (1964), this Court

held that due process protections preclude a federal court

from applying an expanded definition of criminality to

conduct which occurred prior to adoption of the new

standard. Interpreting Bouie, the Ninth Circuit Court of

Appeals has noted that “[iJt is whether an act of judicial

enlargement has occurred .. . that is determinative of the

due process question.” United States v. Goodheim, 651 F.2d

1294, 1298 (9th Cir. 1981). The Sixth Circuit Court of

Appeals has noted that:

The federal courts of appeals have universally

suggested that the right to due process prevents

judicially wrought retroactive increases in levels

of punishment [in the criminal context] in pre-

cisely the same way that the ex post facto clause

does when the changes are produced by legisla-

tiem. ...

Circuit courts have typically echoed language in

Bouie suggesting that ‘a state Supreme Court is

barred by the due process clause from achieving

by judicial construction a result which a state

legislature could not obtain by statute.’

Dale v. Haeberlin, 878 F.2d 930, 934 (6th Cir., 1989). In this

case, the federal courts have, by judicial construction,

required Universal to pay hundreds of thousands of dol-

lars of environmental response costs under the terms of

an insurance policy it never wrote, for which it never

charged a premium, and with respect to which it never

had opportunity to inquire about the extent of the risk

underwritten!° — a deprivation of basic due process notice

and hearing requirements which could not have been

accomplished by statute, and which would not have been

countenanced by the Vermont Supreme Court.

The “as damages” issue warrants this Court's review.

Finally, the holding of the Second Circuit that Univer-

sal must bear the financial burden of any environmental

response costs that Gerrish may be ordered to pay fuels

the fire of controversy that rages among the circuit courts

over the so-called “as damages” issue. Presently, four

circuits have interpreted the standard insurance policy

language, which appears in Gerrish’s Unicover III policy,

that obligates the insurer to pay all sums which the

insured legally must pay “as damages” to encompass

1 Gerrish knew that approximately 5,000 gallons of gas-

oline had escaped from an underground storage tank on his

property well before the policy at issue was written. Universal

did not inquire about such risks because the policy it wrote

excluded pollution coverage.

environmental response or clean-up costs! and four cir-

cuits have held that the term “damages,” as used in the

insurance policies at issue, does not encompass such

equitable or restitutionary relief.12 Curiously, in

'! Avondale Industries, Inc. v. Travelers Indemnity Co., 887

F.2d 1200 (2d Cir. 1989), cert. denied, _ US. —__, 110 S.Ct. 2588

(1990) (under New York law, clean-up costs come within com-

prehensive generai liability coverage “as damages”); New Cas-

tle County v. Hartford Accident and Indemnity Co., 933 F.2d 1162

(3rd Cir. 1961) (under Delaware law, the term “damages” as

used in insured’s general liability policy encompasses response

costs and other equitable relief the insured was required to

pay); Aetna Casualty and Surety Co., Inc. v. Pintlar Corp., 948

F.2d 1507 (9th Cir. 1991) (holding that, under Idaho law,

CERCLA response costs constitute “damages” as that term is

used in insured’s general liability policy); Independent

Petrochemical Corp. v. Aetna Casualty and Surety Co., 944 F.2d 940

(D.C. Cir. 1991) (under Missouri law, “damages” included costs

the insured was legally obligated to pay the United States and

State as reimbursement for activities in remedying environ-

mental harm).

12 A. Johnson & Co., Inc. v. Aetna Casualty and S:irety Co.,

933 F.2d 66 (1st Cir. 1991) (under Maine law, administrative

and clean-up costs were held equitable in nature and, there-

fore, not “damages” under insured’s policy); Mraz v. Canadian

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

response costs are economic loss and not equated with “injury

to or destruction of tangible property,” the policy at issue’s

definition of property damage); Maryland Casualty Co. v. Armco,

Inc., 822 F.2d 1348 (4th Cir. 1987) (CERCLA claim made against

insured for injunctive and restitutionary relief not a claim for

“damages” under insured’s general liability insurance policy);

Aetna Casualty and Surety Co. v. Hanna, 224 F.2d 499 (Sth Cir.

1955) (“damages,” as distinguished from injunctive or restitu-

tionary relief, includes only payments to third persons with a

legal claim for damages); Continental Insurance Cos. v.

(Continued on following page)

’ |

apparently only one case involving a dispute over a pol-

lution exclusion in an insured’s general liability policy

has a circuit court certified the issue to the relevant state

court.!% This fact is of particular relevance where, in the

instant case, there is nothing in Vermont law which com-

pelled the district and circuit courts to hold as they did

on this issue.

The present controversy concerning the “as dam-

ages” issue was recently forthrightly addressed by the

Eighth Circuit:

[S]tandard form CGL insurance policies use vir-

tually the same language around the country,

and general principles of insurance law do not

vary greatly from state to state. The real issue, of

(Continued from previous page)

Northeastern Pharmaceutical & Chemical Co., Inc., 842 F.2d 977

(8th Cir. 1988), cert. denied, 488 U.S. 821 (1988) (under Missouri

law, “damages” in the standard comprehensive general lia-

bility insurance policy does not include clean-up costs); Parker

Solvents Co. v. Royal Insurance Cos., 950 F.2d 571 (8th Cir. 1991)

(hereinafter Parker Solvents) (under Arkansas law, clean-up

costs not encompassed within meaning of the word “damages”

in standard form comprehensive general liability insurance

policy); Grisham v. Commercial Union Insurance Co., 951 F.2d 872

(8th Cir. 1991) (echoing holding of Parker Solvents).

13 In Claussen v. Aetna Casualty & Surety Co., 888 F.2d 747

(11th Cir. 1989) where there was a dispute between the insured

and the insurer over the meaning of the word “sudden,” the

Eleventh Circuit, recognizing that the issue involved inter-

pretation under Georgia law of the pertinent pollution exclu-

sion and policy language and that similar provisions and

language have received conflicting interpretations in other

jurisdictions, certified the question of liability to the Supreme

Court of Georgia.

course, is whether the insurance industry

should be compelled to help finance an

immense environmental clean-up obligation that

was not anticipated, by insureds or insurers, at

the time these policies were written. On this

difficult issue, which transcends state bound-

aries and has important public policy implica-

tions, it is not surprising that judges disagree.

Parker Solvents, 950 F.2d at 572. Accordingly, because of

the decisive split among the circuit courts, the federalism

and due process issues involved, and the far reaching and

potentially crippling public policy concerns unleased, the

“as damages” issue cries out for the wisdom of this Court

and the exercise of this Court’s supervisory powers.

CONCLUSION

The district court and the Second Circuit, in their

eagerness to find available insurance coverage for envi-

ronmental response costs, have stripped the Vermont

statutes of the due process protections provided by the

Vermont Legislature. The judicial decisions of the lower

courts so far depart from the accepted and usual course

of judicial proceedings in this regard that a grant of

certiorari is appropriate.

Respectfully submitted,

KAREN McANbDREW*

Davip J. SPIELMAN

Dinse, ERDMANN & CLAPP

209 Battery Street

Burlington, Vermont 05402-0988

*Counsel of Record

March, 1991

TABLE OF CONTENTS

Page

VOLUME |

1. Opinion and Order of Second Circuit Court of

Appeals, October 30, 1991.................. App. 1

Opinion and Order of United States District

Court for the District of Vermont, December 5,

PE Aa ie eect wok cae Ce ae eee eee App. 20

3. Judgment of United States District Court for the

District of Vermont, December 6, 1990..... App. 55

4. Order of Second Circuit Court of Appeals,

November 29, 1991 denying Motion for

reer Teer ree Tee eer eee eee App. 57

5. United States Supreme Court Order, February

20, 1992, granting extension of time to file Peti-

tion for a Writ of Certiorari............... App. 59

6. United States Constitution, Article I,

ON Waa 3 ko ke oc cw adcesy euesen counnens App. 60

7. United States Constitution, Amendment V... App. 61

8. United States Constitution,

I eee ok check bea ESA App. 62

9. Vermont Statutes Annotated, Title 3 Sections

801, 814, 831, 832, 835-848. ............005:. App. 64

10. Vermont Statutes Annotated, Title 8 Sections

ae OU eS, ee ee App. 87

Ri. Pebaiili’s Comment. . ow. cca ccc taweee eas App. 97

12.

13.

14.

15.

16.

Ef.

18.

19.

TABLE OF CONTENTS - Continued

Page

VOLUME II

Letter and attachments, May 2, 1980,

Universal Underwriters Insurance Company to

Vermont Department of Banking and

i PERRET REET ete App.

Letter and attachments, October 10, 1983

Universal Underwriters Insurance Company to

Vermont Department of Banking and

RIN 5.5. tah caKew ne dedueewan eee Canines App.

Letter and attachments, April 1, 1985,

Universal Underwriters Insurance Company to

Vermont Department of Banking and

cas oe at eae hee eek scuie App.

ISO Authorization Form.................. App

a a SS ced, on cuues a hee aia App

Vermont Department of Banking & Insurance

Administrative Rule 81-3................. App.

ISO Standard Commercial General Liability

CUNO SUM s oc cacu una ndadeeweemen App. ;

Transcript Excerpts

ys Re Serre rere rT App. ;

Bp ee | ee ererer rer App. :

App. 1

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 1480 August Term, 1990

(Argued May 22, 1991 Decided October 30, 1991)

Docket No. 91-7008

GERRISH CORPORATION, doing business as

Gerrish Motors, doing business as Scrub-a-

Dub,

Plaintiff-Appellee,

Vv.

UNIVERSAL UNDERWRITERS INSURANCE

COMPANY,

Defendant-Appellant

Before: VAN GRAAFEILAND, MESKILL and

McLAUGHLIN, Circuit Judges.

Appeal from a judgment entered in the United States

District Court for the District of Vermont, Parker, /., Ger-

rish Corp. v. Universal Underwriters Ins. Co., 754 F.Supp

358 (D. Vt. 1990), declaring that appellant Universal

Underwriters’ policy as amended by Insurance Services

Organization required Universal Underwriters to defend

appellee Gerrish Corp. and that Universal Underwriters

could be liable for cleanup costs as well as other dam-

ages.

The judgment of the district court is affirmed.

KAREN McANDREW, Burlington, V1

(Dinse, Erdmann & Clapp,

Burlington, VT, of counsel),

for Appellant.

App. 2

ROBERT E. MANCHESTER,

Burlington, VT

(Patricia S. Orr, Manchester Law

Offices, Burlington, VT, Leo A.

Bisson, Jr., Richard N. Bland,

Downs, Rachlin & Martin,

Burlington, VT, Gerald R.

Tarrant, Montpelier, VT,

of counsel),

for Appellee.

George A. Holoch, Jr., Miller,

Cleary & Faignant, Rutland, VT,

Thomas W. Brunner, Marilyn E.

Kerst, Frederick S. Ansell, John

W. Scott, Wiley, Rein & Fielding,

Washington, D.C., on the brief,

for Amicus Curiae Insurance

Environmental Litigation

Association.

William H. Allen, Saul B.

Goodman, William F. Greaney,

Stanlake J.T.M. Samkange,

Covington & Burling, Washington,

D.C., on the brief,

for Amici Curiae The American

Petroleum Institute, The American

Fiber Manufacturers Association,

International Business Machines

Corporation, and Olin Corporation.

MESKILL, Circuit Judge:

In this diversity action we must determine whether

an insurance organization authorized to act on behalf of

member insurance companies can substantively alter a

policy of insurance that was traditionally amended only

by the insurance company and whether environmental

App. 3

response costs fail within the meaning of “damages”

under a general liability policy.

This is an appeal from a judgment of the United

States District Court for the District of Vermont, Parker,

]., entered on December 5, 1990. See Gerrish Corp. v. Uni-

versal Underwriters Ins. Co., 754 F.Supp. 358 (D. Vt. 1990).

The judgment declared that appellant Universal Under-

writers Insurance Company (Universal) was required to

defend appellee Gerrish Corporation (Gerrish) in an envi-

ronmental action threatened by the State of Vermont. The

judgment also proclaimed that Universal could be

responsible for the payment of cleanup costs as well as

for other damages. Universal appeals claiming that the

liability policy issued to Gerrish excluded coverage for

Vermont’s pollution claim, that Insurance Services Orga-

nization (ISO) did not amend the Gerrish policy, that

environmental response costs are not recoverable as dam-

ages under the Gerrish policy, and that Gerrish cannot

succeed in this action because of the “owned property”

exclusion in the policy.

We agree with the district court that the policy issued

by Universal to Gerrish was amended by ISO, that the

policy covers Vermont’s pollution claim, that environ-

mental response costs are damages as that term is used in

exclusion does

””

the policy and that the “owned property

not bar Gerrish’s claim. We therefore affirm the judgment

of the district court.

BACKGROUND

The background of this litigation, filed under the

Federal Declaratory Judgments Act, 28 U.S.C.A. § 2201, is

App. 4

set forth in the opinion of Judge Parker. 754 F.Supp. 358.

The facts relevant to this appeal are summarized below.

Gerrish, a Vermont Corporation with its Principal

place of business in Woodstock, Vermont, is the owner of

Woodstock East, a small shopping center in Woodstock,

Vermont. Two of the businesses on the property are Ger-

rish Motors, an automotive dealership, and Scrub-a-Dub,

a car wash and gas station, both of which are subdivi-

sions of Gerrish.

Defendant, Universal is a stock insurance company

with its principal place of business in Kansas City, Mis-

souri. Universal is licensed to engage in the business of

selling insurance in the State of Vermont. On September

I, 1984 Universal issued a general liability policy, here-

inafter the Unicover III policy, covering the Gerrish prop-

erty. The events that led to the instant controversy are

Outlined below.

In November 1973 Scrub-a-Dub realized that approx-

imately 4,785 gallons of gasoline had been lost from its

underground fuel storage tanks. The tanks were tested,

excavated, and a tank thought to be leaking was replaced.

Gerrish made no attempt to clean up the subsurface

spilled gasoline. Gerrish subsequently leased the Wood-

stock East property and shopping center to Woodstock

Associates but, through various lease and leaseback

arrangements, Gerrish retained Ownership, possession

and control of the Scrub-a-Dub facilities.

On May 2, 1985 Gerrish was notified by Vermont's

Agency of Environmental Conservation that petroleum

pollution emanating from Woodstock East was migrating

into neighboring property and into a natural drainage

es rlrlr—<(j.Ce

App. 5

stream that emptied directly into the Ottauquechee River,

creating a hazard to the public and the environment.

Vermont advised that Gerrish could on its own take cor-

rective measures under Agency supervision to alleviate

the harm. Alternatively, if Gerrish failed to take action,

the Agency of Environmental Conservation would

arrange for the cleanup and would seek reimbursement

from Gerrish. Vermont informed Gerrish that a State-

managed cleanup is typically more expensive than a pri-

vately undertaken environmental response. Prior to its

discussions with Vermont, Gerrish was unaware of the

existence of any underground contamination on the

Woodstock East property.

On June 11, 1985 Gerrish contacted Universal, its

insurer, and demanded that Universal be responsible for

all costs involved in monitoring and cleaning up the

source of the pollution under the policy issued by Uni-

versal to Gerrish for the September 1, 1984 to September

1, 1985 period.

The Universal Unicover III Policy

The original policy issued to Gerrish by Universal

was the Unicover III Motor Vehicle Dealers Policy

approved by the Vermont Department of Banking and

Insurance (VDBI) in 1980. The policy obliged Universal to

“pay all sums which the INSURED legally must pay as

damages . . . because of INJURY” to which the policy

applies. The policy defined “INJURY” as “bodily injury,

sickness, disease, or disability . .. or damage to or loss of

use of tangible property.” The policy contained certain

App. 6

exclusionary language in Part 500 Garage Coverage,

including the following:

Exclusions ~ This insurance does not apply to:

(m) INJURY caused by the dumping, dis-

charge, or escape of irritants, pollutants or con-

taminants. This exclusion does not apply if the

discharge is sudden and accidental;

(n) INJURY caused by the discharge, release,

Or escape of any petroleum substance into or

upon any body of water or water course, regard-

less of the nature of the discharge, release, or

escape (whether accidental or not).

The same language was included in Part 950 General

Liability Coverage in sections labelled (e) and (f).

Two other pertinent exclusions were included in the

general liability portion of the Unicover II] policy. They

State:

Exclusions — This insurance does not apply to:

(k) INJURY to property owned by, rented or

leased to, used by, or in the care, custody or

control of the INSURED... .

(1) INJURY to premises after YOU transfer

ownership or possession to another, if INJURY

is caused prior to the transfer.

Although Universal revised the Unicover III policy sev-

eral times between 1980 and 1985, none of those alter-

ations affected any of the exclusions quoted above.

App. 7

Universal is a member of ISO, an insurance rating

organization comprised of insurance companies. ISO pro-

vides various services for its members, including the

drafting and filing of insurance forms with various state

insurance departments. In 1982 Universal signed a broad

authorization (Authorization), empowering ISO to act on

its behalf before the VDBI and filed it with Vermont's

Commissioner of Insurance. The document authorized

ISO to file “rates, rules, [and] forms” with respect to

general liability insurance, as well as several other insur-

ance areas. Universal did not limit ISO’s authority with

respect to general liability insurance policies or pollution

exclusions. The Authorization contained a provision that

stated: “This Filing Authorization shall be deemed

amended to the extent that any filing is made in your

office directly by the undersigned company and is incon-

sistent with the filing of said Insurance Services Office.”

In a circular dated June 4, 1984 ISO notified all its

members that a new pollution endorsement had been

developed, filed with the VDBI and approved for use.

The new pollution provision provided insurance cover-

age for all pollution incidents, whether sudden or not, on

a claims-made basis, subject to an aggregate limit, and

was to be included in all ISO members’ policies issued

after July 1, 1984. The ISO circular informed members

that they were automatically deemed to accept the

endorsement; they had to contact the VDBI prior to July

1, 1984 if they did not want to be bound by the terms of

the ISO endorsement. Universal did not contact the VDBI

with respect to the endorsement. Furthermore, Universal

had no relevant contact with the VDBI after receiving the

ISO circular and before issuing the Gerrish insurance

App. 8

policy. A Universal interoffice memorandum made it

clear that Universal was aware of the endorsement.

On September 1, 1984, while ISO’s pollution endorse-

ment was still in effect, Universal issued a general lia-

bility and automotive dealer insurance policy, the

Unicover III policy, to Gerrish.

In April and May of 1985 Universal submitted to the

VDBI multiple endorsements affecting pollution coverage

under the Unicover III policy. After several exchanges

between Universal and VDBI and subsequent to Ver-

mont’s claim against Gerrish, the endorsements were

approved with the proviso that whenever Universal! spec-

ifically excluded pollution coverage under an insurance

policy an Individual Risk filing had to be made with the

VDBI.

Procedural Background

Based on the original Unicover III policy issued to

Gerrish and the endorsements and amendments filed by

Universal, Universal claimed that it would not cover the

costs of cleaning up the Woodstock East fuel spill. Uni-

versal claimed that it never amended the Unicover !II

pollution exclusions, that the Gerrish fuel spill was defi-

nitely excluded under the policy as originally written

and, therefore, Gerrish was not covered.

Gerrish commenced this action in the United States

District Court for the District of Vermont seeking a

declaratory judgment that the Unicover III policy issued

by Universal provided coverage for the gasoline cleanup

claim asserted by Vermont.

\ ie

App. 9?

Universal responded that the Unicover policy, which

Universal claimed was unaffected by either Universal or

ISO filings, excluded coverage of Gerrish’s claim. Univer-

sal claimed that the VDBI had never withdrawn approval

of the Unicover III policy as approved in 1980 and there-

fore continued use of that policy was appropriate. If the

VDBI had established a practice of requiring pollution

coverage in all insurance policies, urged Universal, not

only was Universal unaware of the practice, but mainte-

nance of such a practice was beyond the power of the

VDBI. Universal also contended that the cleanup or

“response” costs for the gasoline contamination were not

tantamount to damages under the policy because they

were equitable in nature, not legal under Vermont law.

Finally, Universal contended that the “owned property”

provision of Exclusion (k) found in the general liability

part of the policy excluded coverage of the claim. Univer-

sal, therefore, maintained that it was not responsible for

providing coverage for the gasoline cleanup.

The district court found that the Universal Unicover

Ill policy as originally issued excluded Gerrish’s claim.

While the court concluded that VDBI had authority to

establish practices with respect to insurance exclusions,

the court did not base its decision on this holding. The

court went on to rule that the Unicover III pollution

exclusions were negated by the 1984 ISO pollution

endorsement. Thus, the district court concluded that

under Vermont law, which we must apply, Erie v.

Tompkins, 304 U.S. 64 (1938), Gerrish was covered by the

Unicover III policy as amended by the ISO, inciuding

pollution cleanup costs. Furthermore, the court found

that the “owned property” exclusion did not bar the

App. 10

claim. In sum, the district court granted Gerrish the

declaratory judgment.

Universal appeals and reasserts on appeal the argu-

ments raised below.

DISCUSSION

First we must determine whether the policy provided

coverage to Gerrish for injury resulting from gasoline-

related pollution.

Universal contends that Gerrish is not covered for

this gasoline leak because as the district court held, the

Unicover III policy as originally issued to Gerrish did not

cover Vermont’s claim, the VDBI never withdrew

approval of the Unicover III policy and Universal never

amended the pollution exclusions prior to Vermont’s

claim against Gerrish. Universal also raises an argument

with respect to the practice of the VDBI in approving

policies and requiring certain types of coverage. Univer-

sal claims that the VDBI lacks authority to withhold

approval of policies until a specific type of coverage is

provided. Universal urges that it was just such a practice

of the VDBI that prompted ISO to file the pollution

endorsement. What motivated the filing of the endorse-

ment is irrelevant however. It is the effect of that endorse-

ment that controls the outcome in this case.

We agree with the district court that the Universal

Unicover III policy in the form in which it was issued to

Gerrish did not cover Vermont's claim. The original pol-

icy language explicitly excludes from coverage the type

of claim raised here. We conclude, however, that the

App. 11

policy was amended by Universal’s agent, ISO, to pro-

vide coverage for this claim. The basis for this conclusion

is rooted in the law of agency.

Under general agency principles the following holds

true:

§ 140. Liability Based upon Agency Principles

The liability of the principal to a third person

upon a transaction conducted by an agent-

. may be based upon the fact that:

(a) the agent was authorized;

(b) the agent was apparently authorized;

agency relation and not dependent upon author-

ity or apparent authority.

Restatement (Second) of Agency § 140, at 349 (1958).

Universal signed an authorization in 1982 permitting

ISO to file, on Universal’s behalf, amendments to its

general liability policies. Universal did not limit that

Authorization with respect to these policies or to the

Unicover III policy specifically, nor did Universal ever

withdraw the Authorization prior to Vermont’s claim

against Gerrish. Although Universal typically amended

the Unicover III policy independently, it did not reserve

the exclusive right to alter the Unicover III policy. When

Universal filed the Authorization in 1982, it implicitly

empowered ISO to alter the Unicover policy.

The existence of an agency relationship may be

shown in many ways. In an agency relationship, the

App. 12

agent has the power “to subject his principal to liability

for an act done in furtherance of the agency.” Young v.

Lamson, 121 Vt. 474, 476, 160 A.2d 873, 875 (1960) (citing

Ploof v. Putnam, 83 Vt. 252, 255, 75 A. 277, 277 (1910)).

“(T]he real test, as to third persons, is whether the act,

however trivial, is done by one for another, with the

knowledge of the person sought to be charged as master,

with his assent, expressed or implied, even though there

was no specific request on his part to do the act in

question.” Young, 121 Vt. at 477, 160 A.2d at 875 (inter-

preting law of agency with respect to operation of motor

vehicles) (citing Brown v,. Gallipeau, 116 Vt. 290, 293, 75

A.2d 694, 696 (1950)). In the instant case ISO clearly acted

on behalf of Universal with Universal’s knowledge and

with the authority conferred by Universal. In sum, ISO

was Universal’s agent and was empowered to bind Uni-

versal.

Universal claims that even in an express agency con-

text, absent reliance by a third party to the detriment of

that third party, there can be no liability on the principal.

In so arguing, Universal attempts to circumvent basic

Principles of contract and insurance law. The ISO

endorsement was, in effect, part of the insurance contract

between Universal and Gerrish. The ISO endorsement

affected all policies issued after July 1, 1984. The Gerrish

policy was issued on September 5, 1984, while the ISO

endorsement was in efiect. The ISO endorsement, there-

fore, affected the Gerrish policy and negated the original

pollution exclusions therein set forth.

It .s a basic tenet of insurance law that once an

insurance contract is accepted by both parties, the parties

are bound by it. See 1 Couch Cyclopedia of Insurance Law

App. 13

§ 12:16, at 807 (Rev. 2d ed. 1984). An insured, absent

fraud or misrepresentation, is bound by the terms of the

policy and “cannot thereafter complain that he did not

read or know its terms.” Id. Likewise, the insurer is

bound by those same terms, regardless of whether the

insured is aware of them. The parties are bound to the

terms of the policy on the formation of a contract of

insurance. A contract is formed when the insured accepts

a policy and pays the premium and the insurer accepts

the premium. By accepting the policy and paying the

premiums the insured agrees to the terms of the insur-

ance contract. By the same token, when the insurer issues

a policy and accepts payment for insurance coverage

under that policy, the insurer agrees to assume the risks

enunciated in the policy. See 6 Couch Cyclopedia of Insur-

ance Law § 31:10, at 19-20 (Rev. 2d ed. 1985).

Applying these general rules of contract and insur-

ance law to the instant case, we see that Gerrish was

entitled to coverage for the State’s pollution claim regard-

less of any lack of awareness on its part of the specific

terms of the contract. The pollution endorsement filed by

ISO affected all policies issued after July 1, 1984, includ-

ing the Gerrish policy. Despite Gerrish’s lack of aware-

ness of its inclusion, the pollution endorsement was part

of the Unicover III policy, approved by the VDBI, for

which Gerrish contracted and on which Gerrish paid

premiums. Universal failed to opt out of the endorsement

prior to issuing the policy to Gerrish. It accepted the

premiums tendered by Gerrish for the amended Unicover

III policy. As already stated, Universal was undeniably

aware of the endorsement. The contract of insurance

App. 14

formed between Gerrish and Universal, therefore,

included the ISO pollution endorsement.

Universal contends that because the ISO endorse-

ment was inconsistent with the original policy and prior

Universal amendments to it the Authorization did not

apply to the endorsement. This argument is based on the

inclusion in the Authorization which states:

This Filing Authorization shall be deemed

amended to the extent that any filing is made

directly by [Universal] and is inconsistent with

the filing of said Insurance Services Office.

Under Universal’s interpretation, any ISO filing

inconsistent with anything previous!y filed by Universal

would be deemed amended by the relevant Universal

filing. This explanation, however, is inconsistent with the

ISO Authorization itself. ISO was empowered to make

filings and to file amendments and endorsements on

behalf of its members, including Universal. An “amend-

ment” to a policy is, by definition, “a change for the

better; improvement” or “a correction of errors, faults,

etc.” Webster's New World Dictionary 43 (2d College ed.

1970). A “change” or “correction” is necessarily different

from or perhaps inconsistent with that which is being

changed or corrected. Furthermore, the ability to amend

implies the existence of some pre-existing filing to be

amended. Thus, there had to be a policy in existence,

whether filed by Universal or ISO, in order for ISO to

amend a policy. The Authorization permitting ISO to file

amendments would be eviscerated if we accepted Univer-

sal’s interpretation and concluded that ISO was not per-

mitted to amend the existing policies. We reject such an

interpretation.

App. 15

Universal's position also fails to recognize the time

sequence implicit in the ISO Authorization. The Authori-

zation is “deemed amended” when Universal makes a

filing inconsistent with a filing by ISO. A Universal filing

cannot be inconsistent with an ISO filing unless there is a

pre-existing ISO filing at the time the Universal filing is

made. In the instant case, Universal made no relevant

filings between the date the ISO amendment was submit-

ted to the VDBI for approval and the date of issuance of

Gerrish’s policy. Universal, therefore, made no filings

inconsistent with ISO filings such that the Authorization

should be deemed amended prior to the issuance of the

policy to Gerrish.

We conclude that the district court correctly held that

the ISO pollution endorsement applied to the Gerrish

policy and afforded Gerrish coverage against the State’s

claims.

Universal next contends that the district court erred

in concluding that the environmental response costs

involved in the State’s claim are “damages” as the term is

used in the Unicover III policy and that the “owned

property exclusion” in the policy was inapplicable. Uni-

versal bases its claim on the language of the policy.

Coverage Part 950 —- General Liability states, under the

heading “Insuring Agreement,” that Universal “will pay

all sums which the INSURED legally must pay as dam-

ages ... because of INJURY to which this Coverage Part

applies.” Exclusion (k), the “owned property” exclusion

also contained in Coverage Part 950, states: “This insur-

ance does not apply to: INJURY to property owned by,

rented, or leased to, used by, or in the care, custody or

control of the INSURED.” Injury is defined in the policy

App. 16

as “damage to . . . tangible property.” Universal’s inter-

pretation of these portions of the policy and its technical

reading of the terms result in its conclusion ihat environ-

mental response costs are not sums that Gerrish must

legally pay as damages because of injury, and that costs

to clean up Gerrish’s land are excluded under the Policy.

Universal’s arguments are unpersuasive.

The term “damages” is not defined in the Unicover

III policy issued to Gerrish. Vermont law provides some

guidance on this issue however. Vermont law is clear that

policies are to be interpreted in favor of complete cover-

age. See City of Burlington v. Glens Falls Ins. Co., 133 Vt.

423, 424, 340 A.2d 89, 90 (1975). Limitations and exclu-

sions in policies are to be strictly and narrowly construed.

Id. We find no cases interpreting Vermont law, however,

that determine whether environmental response costs or

cleanup costs constitute damages. Other courts are split

on this issue. Compare, e.g., Avondale Indus. v. Travelers

Indem. Co., 887 F.2d 1200, 1207 (2d Cir. 1989) (under New

York law damages include cleanup costs), and Ray Indus.

v. Liberty Mut. Ins. Co., 728 F.Supp. 1310, 1314-15 (E.D.

Mich. 1989) (under Michigan law “suit” includes environ-

mental cleanup action and insurer must defend), with

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

1352-54 (4th Cir. 1987) (cleanup costs not damages under

Maryland law), cert. denied, 484 U.S. 1008 (1988). The

question is further clouded by the fact that the damages

must be “for injury,” and “injury” is defined in the policy

as “damage” to property.

In an earlier case we were required to construe under

New York law the term “damages” in an insurance policy

containing pollution exclusions similar to those in the

’

App. 17

instant case. See Avondale, 887 F.2d 1200. In Avondale we

concluded that the term “damages,” when given its natu-

ral meaning, could include cleanup costs, particularly

because an ordinary businessman reading the policy

would believe that “damages” included such costs.

Vermont, like New York, requires that the language

in an insurance policy be giver: its plain and ordinary

meaning. Kusserow v. Blue Cross-Blue Shield Plan of N.H.-

Vt., 140 Vt. 328, 333, 437 A.2d 1114, 1117 (1981). The

Unicover III policy states that Universal “will pay all

sums which the INSURED legally must pay as dam-

ages .. . because of INJURY to which this Coverage Part

applies.” We conclude that the plain and ordinary mean-

ing of this clause is that Universal agreed to pay all sums

Gerrish was ordered by a court to pay, regardless of the

technical, legal characterization of the particular judg-

ment. Even if we conclude that the term “damages” is

ambiguous, however, the result is the same because

under Vermont law all ambiguities in an insurance con-

tract must be construed in favor of the insured. Sanders v.

St. Paul Mercury Ins. Co., 148 Vt. 496, 500, 536 A.2d 914,

916 (1987). In this instance, construing the term “dam-

ages” in favor of Gerrish results in coverage under the

policy. Thus, if Gerrish is ordered by a court to pay the

environmental response costs associated with the gas-

oline leak, Universal must bear the financial burden. We

believe that the Vermont courts would reach the same

conclusion. Cf. Bean v. Sears, Roebuck & Co., 129 Vt. 278,

282, 276 A.2d 613, 616 (1971) (repair and restoration costs

may be a proper measure of damages under Vermont

law).

App. 18

The district court also correctly concluded that

because property beyond that owned, used, or controlled

by Gerrish was damaged, Exclusion (k) of Part 950 of the

Unicover III policy did not apply. Universal disputes this,

claiming that Gerrish failed to provide evidence that any

other landowner suffered a loss of use of his property or

diminution in property value as a result of the gasoline

leakage. We find Universal’s argument unpersuasive.

The pollution at issue in the instant case was, at the

time of the district court decision, “a plume of petroleum

product (dissolved hydrocarbons in groundwater) which

is located in the subsurface strata of the Woodstock East

property. It has migrated to an adjacent property of the

Marble Bank as well as into the right of way for a public

highway (Route 4).” It was also found that the pollution

is entering a “natural drainage stream” flowing into the

Ottauquechee River. Universal admits that the petroleum

seepage may demonstrate “an imminent and substantial

threat to the environment.” The presence of the pollution

in the drainage stream and Ottauquechee River and

groundwater clearly represent actual damage to the sur-

face and groundwater and deterioration of the ground-

water quality both on and off of the Gerrish property.

While the specific effects of this pollution migration have

not been provided, such effects are not required in this

declaratory judgment action. It is only proof of damage to

Property not owned, controlled or possessed by Gerrish

that must be proffered. Gerrish has met this burden. Its

claim is not barred by Exclusion (k). Universal, therefore,

is responsible for the cleanup costs of the property dam-

aged by the plume. This may require Universal to bear

the cost to clean up the leakage on Gerrish’s property for

App. 19

the purpose of abating seepage to neighboring property.

The cost of repairing Gerrish’s property is inextricably

linked to Vermont’s claims. We agree with the district

court that the cost of “on premises remedial work, as well

as any off premises remediation, is not excluded by the

language of exclusion (k).” 754 F.Supp. at 366.

CONCLUSION

We conclude that the ISO endorsement applied to the

Gerrish policy. The endorsernent negated Universal’s pol-

lution exclusions and required that Universal provide

coverage to Gerrish for the State of Vermont's pollution

claim. We further conclude that the environmental

response costs fall within the definition of damages as

that term is used in the insurance policy issued by Uni-

versal to Gerrish. In so holding, we do not pass upon the

merits of Vermont’s claims against Gerrish.

For the foregoing reasons, the judgment of the dis-

trict court is affirmed.

App. 20

UNITED STATES DISTRICT COURT

FOR THE

DISTRICT OF VERMONT

GERRISH CORPORATION, et. al, :

Woodstock East :

Woodstock, Vermont

Plaintiff Civil Action

V. File No. 89-19

Universal Underwriters

Insurance Company

: (Filed Dec. 5, 1990)

Kansas City, Missouri a

Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, OPIN-

ION AND ORDER

I. INTRODUCTION

In this Declaratory Judgment action, plaintiff, Gerrish

Corporation (hereinafter “Gerrish or plaintiff”) seeks a

declaratory judgment, declaring that a liability insurance

policy (“the policy”) issued by Universal Underwriters

Insurance Company (hereinafter “Universal, or defen-

dant”) to Gerrish, provides coverage for a petroleum

pollution clean-up claim, asserted against Gerrish by the

State of Vermont on May 2, 1985. Universal opposes

plaintiff’s petition and requests that the Court issue a

declaratory judgment that the Policy does not provide

coverage for plaintiff’s claim. The case was tried to Court

commencing Octeber 24, 1990.

App. 21

I]. FINDINGS OF FACT

Jurisdiction and Venue

1. This action is filed under the Federal Declaratory

Judgment Act, 28 U.S.C.A. § 2201 (West Supp. 1990).

2. Plaintiff, Gerrish d/b/a/ Woodstock East, d/b/a

Gerrish Motors and d/b/a/ Scrub-A-Dub is a Vermont

Corporation with a principal place of business in Wood-

stock, Vermont.

3. Defendant, Universal is a stock insurance com-

pany with its principal place of business in Kansas City,

Missouri. Universal is licensed to engage in the business

of selling insurance in the State of Vermont and has, for at

least twenty years, submitted its insurance forms and

rates for approval to the Vermont Department of Banking

and Insurance and sold policies in Vermont.

Backgrou nd

4. Plaintiff is the owner of a shopping center in

Woodstock, Vermont, known as “Woodstock East”. Kurt

Gerrish (a shareholder of Gerrish) has owned a portion of

the realty on which Woodstock East sits, since 1963 and

obtained the rest of the property in fee simple on May 29,

1967. Mr. Gerrish conveyed all the property he owned,

consisting of 7 acres, to Gerrish on May 29, 1968. The

portion known as Woodstock East is approximately 4.8

acres.

5. Plaintiff has developed the Woodstock East prop-

erty since 1968 and the property now includes approx-

imately 15 retail stores and 8 apartments. Plaintiff also

operates two other businesses on the property, one of

App. 22

which is Gerrish Motors, an automotive dealership, and

Scrub-A-Dub, a car wash and retail petroleum sales facil-

ity. Scrub-A-Dub and Gerrish Motors are corporate divi-

sions of Gerrish. Scrub-A-Dub sold petroleum products at

retail to customers of Gerrish Motors and others.

6. During 1972, Woodstock Structures, Inc. installed

oil storage tanks at Woodstock East as a part of Scrub-

A-Dub’s retail sales business. Retail sales began during

November 1972 and over the next year in excess of 75,000

gallons of petroleum were sold.

7. During November, 1973, Scrub-A-Dub discovered

that approximately 4,785 gallons of gasoline had been lost

due to either a gasoline spill or theft.

8. The tanks were air pressure tested to determine

whether the tank system might be faulty. The tanks were

thereafter excavated and a tank thought to be leaking was

replaced. At that time, it was determined that the leak

was actually caused by a cracked Pipe fitting, which was

also replaced. (Plaintiff’s Exhibit 13 — an invoice for the

fitting repair.) The tanks themselves had no evident leaks.

9. On September 8, 1975 Gerrish settled a claim

against Woodstock Structures, Inc., the contractor for the

gas island for Scrub-A-Dub, and Wyman, Inc., a sub-

contractor, for the then known damage resulting from the

gas leak. Gerrish received $2,085.96 for the value of the

lost gasoline product and released Woodstock Structures

and Wyman from damages it sustained. (Plaintiff’s

Exhibit 65.)

10. The settlement did not include any payment for

pollution clean-up. Between the date of settlement and

App. 23

May 6, 1985, when Gerrish received the State’s Pollution

Claim, Gerrish had no knowledge that pollution contam-

ination had resulted from the gasoline spill.

11. From the time of the gas spill in 1972-73 until

this claim arose, there have been no material changes to

the subsurface structure of the Woodstock East property

except for the installation of a “French drain” in 1981 or

1982. The “French drain” is an underground drainage line

which drains the property, in part, into a tributary of the

Ottauquechee River.

12. On May 31, 1984, Gerrish leased its Woodstock

East premises to Woodstock East Associates (a Vt. limited

partnership) for a term of five years with an option to

purchase. The option to purchase has not been exercised.

Gerrish continues to hold title in fee simple to the leased

property. (Plaintiff’s Exhibit 69.)

13. On May 31, 1984, Gerrish also entered into other

leases with Woodstock East Associates, leasing back a

portion of the premises. Gerrish thereby retained owner-

ship, possession and control of the Scrub-a-Dub facilities,

including the gasoline islands, tanks, piping and underly-

ing land. (Plaintiff’s Exhibit 68.)

Pollution Claim by Agency

14. On May 2, 1985, the State of Vermont through

the Agency of Environmental Conservation, (“Agency”)

notified plaintiff that Woodstock East was the source of

petroleum pollution which was entering a “natural drain-

age stream” which “empties directly” into the Ottau

quechee River. The migration of the material was

App. 24

considered hazardous. Pursuant to Vermont Statute, the

Agency gave notice that the State would investigate to

determine the magnitude and extent of the petroleum

pollution and take appropriate steps to minimize the

harm to the public and the environment. Prior to the

expenditure of State funds, the State notified plaintiff as a

potentially responsible party that it could voluntarily

take corrective measures under Agency direction to alle-

viate the pollution hazard. (Plaintiff’s Exhibit 2.)

15. The State in its notice Says that Marvin Wolf

owns the property on which both businesses (Gerrish

Motors and Scrub-A-Dub) are located. This statement is

simply erroneous.

16. Although there have been other minor petro-

leum spills on the Property over the years, the pollution

Siving rise to this claim is in all likelihood a result of the

1972-73 spill and the Court so finds.

17. Prior to the receipt of the State’s Pollution

Claim, Gerrish had no knowledge of any subsurface pol-

lution contamination of the Woodstock East property

resulting from the 1972-73 spill, and no one had asserted

any claim for clean up or damages against Gerrish due to

pollution contamination. Gerrish had no intention to

clean up any subsurface pollution before the Agency’s

Pollution Claim arose.

18. On June 11, 1985, Gerrish demanded that Uni-

versal be responsible for all costs involved in Monitoring

and cleaning up the source of the pollution under the

terms of a Universal insurance policy, No. 428584D,

which had been issued to Gerrish with a policy period of

September 1, 1984 to September 1, 1985. (Plaintiff’s

App. 25

Exhibit 2A, copy of the letter from Philip Johnson to

Universal.) (Plaintiff’s Exhibit 1, the Policy.)

19. Universal agreed to investigate the State’s Pollu-

tion Claim under a reservation of Rights/non-waiver

agreement dated June 18, 1985. (Plaintiff’s Exhibit 4.)

20. Thereafter, Ground Water Technology, Inc. (GTI)

was hired jointly by Aetna Insurance Co. (which pro-

vided coverage to a lessee of part of the premises) and

Universal to investigate the pollution contamination.

21. Universal now maintains that it is not respons-

ible to Gerrish under the policy for any damages for

environmental clean-up incurred as a consequence of the

State’s Pollution Claim, and refuses to reimburse Gerrish

for its expenses. (Plaintiff's Exhibits 17, 18, 19 and 20.)

(See defendant’s answer in this case.)

22. Pollution presently exists as a plume of petro-

leum product (dissolved hydrocarbons in groundwater)

which is located in the subsurface strata of the Woodstock

East property. It has migrated to an adjacent property of

the Marble Bank as well as into the right of way for a

public highway (Route 4). GTI Dec. 1988 Rprt. (Plaintiff's

Exhibits 14, 14(k), 14(1) and charts.)

23. In addition to the pollution plume in the subsur-

face of the property, there are two areas of seepage of

petroleum product into a tributary stream of the Ottau-

quechee River. One is near the opening of the “French

Drain”, which is on the north-westerly corner of the

Woodstock East property. The other point of seepage is

on the west side of Route 4, on property not owned by

Gerrish. (Plaintiff's Exhibit 66.) At these seepage areas

App. 26

GTI has installed “collection boxes” in which both dis-

solved and free-phase hydrocarbons have been collected.

The Insurance Policy

24. The prototype of what Universal calls its Uni-

cover III insurance policy, which is at issue here, was first

approved by the Vermont Department of Banking and

Insurance (VDBI) on May 19, 1980. Attached to the policy

that was then approved was a Vermont State Amendatory

Part (Edition 4-80). (Defendant’s Exhibit A, pp. 289-291.)

25. Gerrish’s Universal Unicover III Motor Vehicle

Dealers policy was issued with the Vermont State Amen-

datory Part attached. (Edition 9-83.) (Plaintiff’s Exhibit 1,

p. 5.)

26. The pertinent coverages in the instant case are

Part 500 Garage-Liability; Part 950 General Liability and

Part 980 Umbrella coverage.

27. INJURY under all these Parts includes: “bodily

injury, sickness, disease, or disability . . . or damage to or

loss of use of tangible property.”

28. The Gerrish 1984-85 Unicover III policy, (like the

1980 prototype), Part 500 Garage Coverage contained the

following exclusionary language:

Exclusions — This insurance does not apply to:

(m) INJURY caused by the dumping, dis-

charge, or escape of irritants, pollutants or con-

taminants. This exclusion does not apply if the

discharge is sudden and accidental;

App. 27

(n) INJURY caused by the discharge, release,

or escape of any petroleum substance into or

upon any body of water or waiter course, regard-

less of the nature of the discharge, release, or

escape (whether accidental or not)

29. Part 950 General Liability Coverage contained

the same exclusionary language, labelled (e) and (f) in

that Part. The Umbrella Part 980 also included the same

provisions, labelled (g) and (h).

30. The Vermont State Amendatory Part of the pol-

icy, as issued, deleted exciusions pertaining to pollution

and contamination for any “AUTO insured by this policy

and licensed or principally garaged in, or used for

GARAGE OPERATIONS in Vermont:

Coverage Part 500-GARAGE INSURANCE: (m)

and (n)

Coverage Part 900-BASIC AUTO INSURANCE:

(8)

Coverage Part 980-UMBRELLA: (g) and (h).”

31. The Vermont State Amendatory Part made no

deletion with respect to pollution from any source other

than an insured automobile, and no deletion of any kind

was made of the pollution exclusionary language con-

tained in the generai liability coverage part.

32. As defendant points out, the original Unicover

III specimen policy was revised numerous times by fil-

ings with the VDBI between the first filing in May, 1980

and the effective date of the Gerrish policy in September,

1984. (Defendant’s Exhibits C-Q.)

App. 28

None of those revisions pertained to the pollution exclu-

sions or the Vermont State Amendatory Part.

33. In addition to the previously referenced pollu-

tion exclusions, the Gerrish policy has two exclusions in

the General Liability Part 950 that are pertinent to the

issue of coverage in this case:

Exclusions — This insurance does not apply to:

(k) INJURY to property owned by, rented or

leased to, used by, or in the care, custody or

control of the INSURED... .

(1) INJURY to premises after YOU transfer

ownership or possession to another, if INJURY

is Caused prior to the transfer.

(Plaintiff’s Exhibit 1.)

34. The Gerrish Universal policy as issued to the

insured was in its pertinent parts, an “Occurrences” pol-

icy, providing coverage only for losses arising from inju-

ries occurring during the policy period. (Plaintiff’s Exhibit

1.)

35. Between its May 2, 1980 initial filing of its Uni-

cover III policy and an April 1, 1985 filing which con-

tained a certain pollution endorsement, (No 322),

Universal itself did not make any filing with the Depart-

ment which altered, amended or deleted the above-refer-

enced exclusionary language.

App. 29

Insurance Services Organization

36. Universal is a member of the Insurance Services

Organization (“ISO”). ISO is an umbrella rating organiza-

tion, which is owned by a number of insurance com-

panies. ISO provides various services to its members and

subscribers including drafting and filing of insurance

forms with state insurance departments, which it can do

on behalf of its member companies if given authority by

the members to do so.

37. Universal has filed ISO Filing Authorization

forms with the VDBI. The latest authorization bears the

effective date of October 1, 1982 and remained effective at

all times pertinent to this litigation. (Plaintiff’s Exhibit 6.)

38. The ISO authorization form gives ISO express

authority to act on Universal’s behalf before the Depart-

ment of Banking and Insurance. The authorization indi

cates that ISO has the authority to file “rates, rules, [and]

forms” in several areas of insurance, including “general

liability” insurance, with the VDBI on behalf of Univer

sal, a “MEMBER or SUBSCRIBER of the INSURANCI

SERVICES OFFICE.”

39. The only exception to this authority, rese:ved by

Universal is in the area of “personal auto” insurance

There is no exception in the ISO Authorization form filed

by Universal pertaining to General liability or pollution

exclusions for any states or Vermont specifically. (Plain

tiff’s Exhibit 6.) (Defendant’s Exhibit DD.)

40. Universal’s ISO Filing Authorization Form

states that “[t]his Filing Authorization shall be deemed

amended to the extent that any filing is made in your

App. 30

office directly by the undersigned company and is incon-

sistent with the filing of said Insurance Services Office.”

The History of the Pollution Exclusion

41. The Vermont Department of Banking and Insur-

ance has changed its position at various times, as to

whether insurance companies may exclude pollution cov-

erage from their general liability policies.

42. From the mid 1970’s through the end of 1982,

the VDBI did not approve policies containing a pollution

exclusion. This was merely Departmental policy; no regu-

lation addressed this issue. Nevertheless, the Department

did not “knowingly approve any form that contained any

pollution exclusion unless a companion mandatory

endorsement deleted that exclusion.” (Feb. 8, 1990 letter

of Paul Candage, Senior Insurance Analyst, VDBI, to

Robert Manchester, Plaintiff’s Exhibit 22.) During that

time, form GL 01 11 (Edition 01-73) was the contamina-

tion or pollution exception endorsement used in Vermont.

43. Late in 1982, ISO filed a pollution liability policy

for use by its members and subscribers, but did so on the

VDBI’s agreement to withdraw form GL 01 11. VDBI

accepted a withdrawal of GL 01 11 as of January 1, 1983.

Hence, the VDBI once again allowed pollution exclusions

because it believed that separate pollution policies were

available in Vermont.

44. Later in 1983, however, VDBI learned that the

pollution liability policy was not widely available and

therefore told ISO that VDBI intended to withdraw

ied

App. 31

approval of the pollution liability policy and to effec-

tively reinstate form GL 01 11 pursuant to Vt. Stat. Ann.

tit. 8, § 3541(c) (1984).

ISO 1984 Filing

45. Negotiations over the pollution coverage issue

between ISO and the VDBI resulted in ISO’s April 30,

1984 filing. This filing provided for a Vermont Pollution

Liability exception Endorsement GL 01 54. (Plaintiff's

Exhibit 9.) The Endorsement deleted the pollution exclu-

sion and provided coverage for sudden and non-sudden

pollution incidents on a modified claims-made basis sub-

ject to an aggregate limit.

46. Under Endorsement GL 01 54, “a claim... shall

be deemed to have been made when written notice of

such claim is received by the insured or by the company,

whichever comes first.”

47. The definition of “property damage” under the

GL 01 54 Endorsement (includes, in part) “physical injury

to or destruction of tangible property .... “

48. In addition to Endorsement GL 01 54, the April

30, 1984 ISO filing provided for two Pollution Exclusion

Endorsements, GL 21 31 and GL 21 32, for cases where

there was a “recognized hazard.” For insureds’ with rec-

ognized pollution hazards, the exclusions would totally

negate pollution coverage ona “risk by risk” basis, if the

insured either purchased a separate pollution liability

policy or the insurer filed an Individual Risk Filing with

VDBI. (Plaintiff's Exhibit 9.)

VEL een

App. 32

49. The April 30, 1984 filing stated that “these

changes are applicable to all policies written on or after

July 1, 1984.” (Emphasis added.) (Plaintiff’s Exhibit 9.)

50. After July 1, 1984, the VDBI allowed the equiva-

lent of GL 01 54 (the ISO form) to be attached to policies

issued in Vermont as long as the pollution exclusions

were deleted. (Paul Candage letter to Robert Manchester,

February 8, 1990, Plaintiff’s Exhibit 22.)

51. At the time ISO made its April 30, 1984 filing,

ISO was authorized to act as Universal's agent by virtue

of the October 1, 1982 filing with VDBI.

52. The VDBI approved ISO’s April 30, 1984 filing

on May 2, 1984.

53. Ina June 4, 1984 Circular, ISO notified all of its

members that the Vermont Contamination and Pollution

Endorsement GL 01 11, which previously deleted the

pollution exclusion in the General Liability Policy, was

withdrawn. Members were informed that a new Vermont

contamination or Pollution Exception Endorsement (GL

01 54) had been developed which provided coverage for

sudden and non-sudden pollution incidents on a claims-

made basis subject to an aggregate limit.

54. The Circular stated that these changes were

applicable to all policies written on or after July 1, 1984

and that GL 01 54 “must be attached to all policies provid-

ing general liability coverage in Vermont unless the cov-

erage is specifically excluded.” (ISO June 4, 1984 Circular,

p. 2, Plaintiff’s Exhibit 7.)

55. Universal received a copy of the ISO Circular on

July 9, 1984. (Plaintiff’s Exhibit 11.)

App. 33

56. On an interoffice memorandum dated August 9,

1984, in reaction to the June 4, 1984 ISO Circular, Bob

Oakes, a Universal Vice President, wrote, “we have no

choice — these endorsements are MANDATORY. Also, we

can’t delete them or charge for the coverage without the

Insured’s permission .... How do you propose we get

around this?” (Written notes between Al Birch and Bob

Oakes on Plaintiff’s Exhibit 11, p.7.)

57. The ISO Circular notified its members that Uni-

versal had to contact the Department before July 1, 1984 if

Universal wanted to either have a different effective date

or decided not to use the ISO endorsement form. Mem-

bers of ISO were not required to file anything with the

VDBI to use the new forms and effective date. Universal

did not notify VDBI regarding a different effective date or

any desire not to use the iSO form.

598. Universal made no contact or filing with VDBI

between the time of its receipt of the ISO Circular and the

time of plaintiff’s receipt of the State’s Pollution Claim on

May 6, 1985, pertaining to pollution coverage, except for

an April 1, 1985 filing.

Universal’s 1985 Filing

59. On April 1, 1985, Universal submitted to the

VDBI a proposed form of endorsement for its two Uni-

cover III policies (Motor Vehicle Dealers and Automotive

Parts Dealers). This filing is the first filing by Universal

itself pertaining to pollution exclusions since the original

filing of the prototype Unicover policy in May, 1980. The

endorsements, Nos. 322 (Auto, Truck and Motorcycle

App. 34

Dealers) and 322P (Parts Dealers) would provide cover-

age for “sudden and non-sudden pollution incidents on a

claims-made basis.”

60. The claims-made provision of Endorsement 322

would change the policy from an occurrence type policy

to a claims-made policy. In other words, the “occurrence”

provisions of the policy covered incidents occurring dur-

ing the policy period regardless of when the claim was

made. Under the new endorsement, “[a]ny claim shall be

deemed to have been made when written notice of such

claim is received by the INSURED or US, whichever

comes first.”

61. On May 12, 1986, Universal filed Endorsement

No. 400 Pollution Exclusion with VDBI. This endorsement

excluded pollution coverage entirely under any Universal

policy to which it was attached:

This policy shall not apply to any INJURY aris-

ing out of the actual, alleged, or threatened dis-

charge, dispersal, release, or escape of

pollutants; or to any loss costs or expense aris-

ing out of any governmental direction or request

to monitor, clean up, remove, contain, treat,

detoxify, or neutralize pollutants.

(Plaintiff’s Exhibit 5, p. 756.) The VDBI initially disap-

proved Endorsement 400 on June 27, 1986, stating that

VDBI “did not allow the Pollution Hazard to be routinely

excluded. Pollution coverage must be provided unless

excluded by means of an Individual Risk filing submitted

to this Department each time it is attached to a policy.”

(Defendant’s Exhibit S, p. 740.)

App. 35

62. In response to the Department’s disapproval,

Universal drafted Endorsement 402, which was the same

as Endorsement 400 except for the addition of a place for

the insured’s acknowledgement. Universal assumed that

if the insured signed and Universal filed the endorsement

with VDBI, such an Endorsement would meet the

requirements of an Individual Risk filing. (Defendant's

Exhibit S, p. 739.)

63. On September 23, 1986, the VDBI disapproved

Endorsement 402 even with the space for the insured

acknowledgement. The VDBI explained that it needed

Universal’s agreement that the endorsement would “not

be attached to every policy, even with the insured’s signa-

ture. It may be used only when there is a recognized

exposure which must be described to this Department.”

(Defendant’s Exhibit S, p. 738.)

64. On October 13, 1986, Universal explained to the

VDBI that virtually all of their accounts had some “recog-

nized pollution exposure” as most had underground fuel

tanks and therefore, Universal was in a position of having

to exclude coverage. (Defendant’s Exhibit S, p. 742.)

65. On November 5, 1986, the VDBI approved

Endorsement 402 provided that whenever the pollution

hazard is excluded, an Individual Risk filing must be

made with the Department. Underneath the form, Ed

Mason (a Vice President of Universal) made a notation on

November 13, 1986, that says “[t]his means we send a

copy of the 402 signed by the Insured to the Vt. Insurance

Dept.” (Defendant’s Exhibit S, p. 734.)

App. 36

CONCLUSIONS OF LAW, OPINION AND ORDER

This is a declaratory judgment action in which plain-

tiff, Gerrish Corporation, seeks a declaration that a lia-

bility insurance policy issued by defendant, Universal

Underwriters Insurance Company, provides coverage for

a petroleum pollution clean-up claim asserted against

plaintiff by the State of Vermont on May 2, 1985. Defen-

dant opposes plaintiff’s petition and requests a declara-

tion that the policy does not Provide coverage for

plaintiff’s claims.

The underlying facts are that plaintiff owned prop-

erty in Woodstock, Vermont, which contained gasoline

Storage tanks used in connection with a retail gasoline

sales operation. Certain plumbing associated with those

tanks leaked petroleum products in 1972, or 1973, which

petroleum has migrated since that time off plaintiff's

Property to at least one adjacent property. Petroleum

contamination is also bleeding into a stream, which is a

tributary of the Ottauquechee River.

In May of 1985, the State of Vermont through its

Agency of Environmental Conservation, notified plaintiff

that the Agency had determined that a petroleum product

emanating from plaintiff’s proper.y is entering a natural

drainage stream, which empties into the Ottauquechee

River. The State also expressed its intention to investigate

and mitigate the situation and seek to recover the costs

from responsible parties. At the same time, the State

offered plaintiff the opportunity as a potentially respons-

ible party to take its own steps toward investigation and

mitigation.

App. 37

Plaintiff received the notification on May 6, 1985 and

on June 11, 1985 transmitted its demand to defendant that

it should take responsibility for all costs of monitoring

and cleaning up the contamination under the terms of the

insurance policy at issue in this case, which policy was in

effect at the time the claim was made.

Defendant originally investigated the claim under a

reservation of rights and eventually denied coverage alto-

gether, claiming that the policy provided no coverage for

this type of contamination because of the application of

various exclusions in the policy.

Plaintiff acknowledges that the policy as issued con-

tained certain exclusionary language, but contends that:

(a) the exclusions do not apply to the injury which

occurred in this case, or (b) that the exclusions have been

deleted by an amendment to the policy, which was effec-

tive July 1 of 1984, or (c) that an amendment to the policy

occurred in May of 1985, which provides coverage for

plaintiff’s claim.

This Court rejects plaintiff’s contention (a) and holds

that the language of the policy as issued excluded cover-

age. There is no need to reach plaintiff’s contention (c) in

view of the Court’s holding with regard to contention (b),

which is, that an amendment to the policy did occur on

July Ist of 1984, which amendment applies to the policy

which issued in September, 1984, and which provides

coverage for the precise claim made by plaintiff in this

Case.

This Court has diversity jurisdiction over this declar

atory judgment action Pursuant to 28 U.S.C.A.

§ 1332(a)(1) (West Supp. 1990).

een ennai,

App. 38

We will first discuss defendant’s view that there are

general exclusions in the policy which defeat coverage

regardless of the existence or non-existence of specific

pollution exclusions.

Universai contends, in part, that coverage under the

policy is excluded by exclusions (1) and (k) in the general

liability coverage part.

Exclusion (l) provides that there is no coverage for:

“INJURY to premises after YOU transfer ownership or

possession to another, if INJURY is caused prior to the

transfer.” In fact, although Gerrish leased to another

entity at one point, it immediately leased back and has

maintained ownership, possession and control of the

property from which the pollution emanates throughout

the time when the pollution occurred and through the

time when the claim arose during the policy period.

Accordingly, exclusion (l) under the General Liability

Coverage Part 950 is inapplicable.

Exclusion (k) negates coverage for “INJURY to prop-

erty owned by, rented or leased to, used by, or in the care,

custody or control of the INSURED ....” Defendant

urges that this exclusion applies because the contamina-

tion in this case originates on plaintiff’s property and

constitutes damage to that property.

Vermont law provides that policy terms in an insur-

ance contract should be interpreted consistent with the

purpose of providing coverage, therefore, limitations and

exclusions should be strictly construed. City of Burlington

v. Glens Falls Ins. Co., 133 Vt. 423, 424, 340 A.2d 89, 90

(1975).

App. 39

In this case, the “Injury” (damage to property) from

pollution includes not only damage to the Gerrish prop-

erty, but also includes potential damage to adjacent land-

owners including the Marble Bank and present damage to

a stream, which runs to the Ottauquechee. We hold that

the claim giving rise to this case encompasses injury to

property not owned by the plaintiff. Exclusion (k)

excludes injury to property owned by the insured. It

might be necessary to do remedial work on the insured’s

property in order to stop injury to the property of others.

The cost of such on premises remedial work, as well as

any off premises remediation, is not excluded by the

language of exclusion (k).

puag

The State of Vermont has the authority to regulate

pollution contamination of groundwater and the water-

ways and can recover clean-up costs. Vt. Stat. Ann. tit. 10,

§§ 1283, 1390-1410 (Supp. 1990).

Defendant contends that clean-up costs or “response

costs” in response to State Agency action under Title 10,

Section 1283 of the Vermont Statutes are not “damages”

under the policy. In the beginning of the General Liability

Coverage Part, the policy states that the Insurer “will pay

all sums the INSURED legally must pay as dam-

ages .. . because of INJURY.” The policy also provides

that Universal has a “duty to defend any suit asking for

these damages.” The question is whether clean-up costs

constitute legal damages or are remedial and restorative

and therefore only equitable in nature. This Court finds

that clean-up costs constitute damages within the mean-

ing of the policy. Legal authority on this issue is split and

5 & I

App. 40

there are no Vermont cases on the issue. However, par-

ticularly in light of Avondale Indus. Inc. v. Travelers Indem.

Co., 887 F.2d 1200 (2d Cir. 1989), cert. denied, 110 S. Ct.

2588 (1990) (New York law), this Court believes that the

Vermont Supreme Court would find that pollution clean-

up costs are damages under the policy in this case, and

we so hold.

In Avondale, Avondale Industries was sued by neigh-

boring property owners for personal injury and property

damage caused by pollutants (petroleum products and

chemical compounds), emanating from a dump site in

Louisiana. Avondale’s insurance policy had similar pollu-

tion exclusions to plaintiff’s policy. Avondale was sued

' Cases holding that environmental clean-up costs or

response costs are covered under a general liability policy

include: Ray Indus. Inc. v. Liberty Mut. Ins. Co., 728 F. Supp.

1310, 1314 (E.D. Mich. 1989); Federal Ins. Co. v. Susquehanna

Broadcasting Co., 727 F. Supp. 169, 174 (M.D. Pa. 1989), order

amended by, 738 F. Supp. 896 (M.D. Pa. 1990); National Indem.

Co. v. United States Pollution Control Inc., 717 F. Supp. 765,

766-67 (W.D.Okla. 1989); Intel Corp. v. Hartford Accident and

Indem. Co., 692 F. Supp. 1171, 1186-93 (N.D. Cal. 1988); New

Castle County v. Hartford Accident and Indem. Co., 673 F. Supp.

1359, 1365-66 (D. Del. 1987); Township of Gloucester v. Maryland

Casaulty [sic] Co., 668 F. Supp. 394, 398-400 (D.N.J. 1987). Cases

finding clean-up or response costs are not covered damages

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

1352-54 (4th Cir. 1987), cert. denied, 484 U.S. 1008 (1988) (Mary-

land law); Cincinnati Ins. Co. v. Milliken and Co., 857 F.2d 979,

980-81 (4th Cir. 1988) (South Carolina law); Mraz v. Canadian

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

are not property damages under CERCLA); United States Fidel-

ity & Guar. Co. v. Morrison Grain Co., 734 F. Supp. 437, 449-50)

(D. Kan. 1990); Verlan, Ltd. v. John L. Armitage & Co., 695 F.

Supp. 950, 954-55 (N.D. III. 1988).

App. 41

by private individuals near the dump site and received a

“demand” letter from the Louisiana State Department of

Environmental Quality demanding that Avondale submit

a plan for remedial action at the site and informing

Avondale that it was a potentially responsible party.

The Second Circuit found that the insurer was

obliged to defend Avondale in private litigation and in

the public administrative proceeding. The Court also held

that “damages” included “remedial costs that may be

imposed on Avondale by the State of Louisiana.” 887 F.2d

at 1207. The Court expressed concern with public interest

and the prompt cleanup of the hazardous waste and

mentioned a report that found that private remedial

effort was quicker and less expensive than a government