# Petition for Writ of Certiorari — Universal Underwriters Insurance v. Gerrish Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_0433%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1992 - **Citation:** 504 U.S. 973 ## Text | 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the insurer of constitutional rights where the state has not notified the insurer that approval of the policy form is withdrawn?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? ii 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 iV 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 vi 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 4 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 a granted within twenty days upon request of the Insurer. (c) Any order of the commissioner disapprov- 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 a (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). 10 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 11 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 12 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. DL 13 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 ae 14 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 15 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. e- 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 16 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 a 17 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. © State courts, including Vermont’s, have been less loath to 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). a 18 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. 4 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, ————————— 19 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). 20 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 Se 21 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. 22 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 23 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. 24 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 25 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 — 26 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. ... 27 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. 28 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) ’ | 29 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. 30 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 N 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. ii 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. : me 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 2g 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; or (c) the agent had a power arising from the 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 TT 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. lh 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). ee 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 eT 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 Co [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_0433%3A1. Public record. Not legal advice.