|Christine LeBel is an associate with the law firm of Bulkley, Richardson & Gelinas LLP in Springfield and Boston. She practices with the firm's environmental and real estate practice group.
Approximately 50 percent of Massachusetts residences use fuel oil for heating.1 Fortunately, most of these homeowners will never need to contemplate what to do if their insurance company refuses to defend or indemnify them after they have experienced a spill or migration of that oil, either because they will never have such an experience or their insurance company will cover them. For others, however, their insurance company may refuse to pay on the basis of what has been labeled the "owned property" exclusion.2 While that exclusion has a somewhat convoluted history in Massachusetts, examination of the case law, particularly more recent cases, makes clear when the insurance company must respond. This article addresses the current state of the law and what counsel should keep in mind when a homeowner-client seeks advice when an insurance company disclaims responsibility based on the owned property exclusion.
Massachusetts case law reveals the following principles important to the availability of coverage when an "owned property" exclusion is asserted.
Allegations "reasonably susceptible" of coverage. An insurer's duty to defend will arise upon receipt of either a third-party complaint or a governmental notice of responsibility, which contains allegations "reasonably susceptible" of an interpretation that they state a claim covered by the policy.
Actual or threatened migration of contamination. An insurer's duty to indemnify will arise where the evidence establishes that actual migration or a substantial threat of migration exists.
The "owned property" exclusion will never preclude coverage where there has been actual contamination to the property of third parties, even where the efforts to remediate further contamination take place solely on the policyholder's land.
The mere contamination of groundwater under the policyholder's property, where such groundwater is migrating off-property, is enough to establish the requisite "threat."
Work solely on "owned property." Where remediation work is done solely to remediate the owned property itself, there will be no coverage. This rarely will be the case when there is groundwater contamination involved and may not be the case when only soil contamination is involved, if that contamination may lead to groundwater contamination.
Groundwater ownership. The question of who owns the groundwater has not been a dispositive issue on the applicability of the "owned property" exclusion in Massachusetts. Rather, the issue is whether the groundwater has been contaminated and is migrating, or is threatening to migrate, off-property.
Contamination below state Department of Environmental Protection (DEP) thresholds. The issue of whether the contamination at issue exceeds DEP thresholds also has not been dispositive because that fact alone is not a decisive factor in determining whether a threat of off-site migration exists for purposes of insurer liability.
Ambiguity and burden of proof. The insurance carrier has the burden of proving the applicability of the owned property exclusion, which has been found to be ambiguous and, as such, should be construed against the carrier.
Typically, spills of home heating oil occur as the result of pipe leakages or overfills by a homeowner's heating oil provider. Generally, heating oil spills must be reported to the state Department of Environmental Protection,3 which likely then will issue a formal document called a "notice of responsibility" to the homeowners, and possibly to the heating oil provider, outlining the scope of liability and actions necessary for remediation. This author has seen costs for such remediation routinely exceed $100,000. Massachusetts currently has no funding mechanism to address these spills. Hence, homeowners are anxious for their insurance companies to pick up at least part, if not all, of the tab and are in for a rude awakening should their insurer decline to do so on the basis of an exclusion about which most homeowners know nothing. However, the situation is not hopeless, as discussed below.
Massachusetts cases evaluating the "owned property" exclusion analyze the exclusion in two, often overlapping, contexts: duty of an insurance company to (1) defend and (2) indemnify its policyholder. The duty to defend is broader than the duty to indemnify, resulting in the somewhat differing analyses. This article discusses the cases accordingly.
The insurance policy terms governing both an insurer's duty to defend and its duty to indemnify in the context of heating oil spills are: (1) a promise by the insurer to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of … property damage … caused by an occurrence, and … to defend any suit against the insured seeking damages on account of such property damage,"4 and (2) the "owned property" exclusion that "personal liability [coverage] does not apply to property damage to property owned by the insured."5
Many of the substantive words in the foregoing coverage terms are legally charged, in the sense that they have been the subject of much dispute and litigation, such that each could merit its own full-blown article. For the sake of brevity, this article parses the words and phrases pertinent to this discussion in cursory fashion for the reader's reference. The term "damages" has been held to include cleanup costs.6 The term "property damage" has been held to include continued contamination of soil and/or groundwater on a site during the applicable policy periods.7 "Occurrence" is often defined in policies in language such as "an event, or a series of related events resulting from continuous or repeated exposure to the same general conditions, that causes bodily injury or property damage during the policy period." In Massachusetts, the term "occurrence" has been held to include injurious exposure to contaminants during applicable policy periods.8 Finally, governmental notices that have consequences "substantially equivalent to the commencement of a lawsuit," including a DEP notice of responsibility under General Laws chapter 21E, the type of notice a homeowner experiencing an oil spill or oil migration likely would receive, are the functional equivalents of "suits" for purposes of coverage in Massachusetts.9
Duty to defend
In the home heating oil spill or migration context, the duty of an insurance company to defend its policyholder will arise upon receipt of either a third-party complaint or, as more often occurs first, a "notice of responsibility" that contains allegations "reasonably susceptible" of an interpretation that it states a claim covered by the policy terms.10 In the context of contamination, Massachusetts courts have found that an insurer owes its policyholder a duty to defend even in the absence of off-site contamination, as long as the allegations against the policyholder meet the noted "reasonably susceptible" test.11
The "owned property" exclusion in a policy will not bar coverage for the cleanup of contamination on a policyholder's property, or defeat a duty to defend, where there is actual or threatened harm to third parties.12 "If environmental contamination presents a demonstrated danger to the property of another, the owned property exclusion cannot relieve an insurance company of their duty to defend."13 On at least two occasions, insurance companies themselves have agreed. See Allstate Insurance Co. v. Quinn Construction, 713 F.Supp. 35 (D.Mass. 1989), vacated because of settlement, 784 F.Supp. 927 (D.Mass. 1990)14 and Nashua Corp. v. Liberty Mutual Insurance Co., 1997 WL 89163 (1997).
In the case of Marks v. Lumbermans Mutual Casualty Co.,15 the allegations of the complaint underlying the insurance coverage action noted the DEP's concern with oil detected near the property boundary and with off-site migration. The underlying complaint further alleged that actions were taken to contain material on the property to prevent further damage off site and that contamination had spread to groundwater.16 These allegations were enough to require the insurance company to defend.17
In some cases, the parties raise the issue of groundwater ownership as pertinent to whether or note the "owned property" exclusion will apply. An old, but still standing case holds that the property owner residing above the groundwater absolutely owns that groundwater.18 However, later statutory law seems to rest ownership of groundwater in the commonwealth.19 Insurance companies, of course, have latched on to the old case law rule as a reason for the "owned property" exclusion's applicability. Homeowners, contrarily, have latched on to the notion of the commonwealth's (a third party's) ownership to argue that groundwater contamination is harm to a third party that overcomes the exclusion. However, in the environmental context, while it is clear that older case law has ever more limited applicability, it is also clear that the courts desire to steer clear of the groundwater ownership issue and, instead, base their rulings on the "reasonably susceptible" test noted above.
In the Marks case, for instance, the court noted, "[a] reading of [the] Atlas Tack and United Technologies [cases] shows that the longstanding rule in Massachusetts of absolute ownership of groundwater is being closely reexamined in cases pertaining to hazardous contamination."20 The Marks court, therefore, makes its ruling that the complaint alleges damages that plaintiff's insurance policy is reasonably susceptible of covering "irrespective of the determination of the ownership of groundwater."21
In Rubenstein v. Royal Ins. Co. of America,22 in which case there was only a DEP notice of responsibility on record and no complaint had been filed against the policyholder, the allegations of the notice of responsibility regarding leakage into soil of number six fuel oil from an abandoned underground tank, requiring cleanup by the DEP, were enough to state a claim covered by the policy terms, even though the allegations did not identify contamination on property other than that of the property owner:
In soil contamination situations…it is often only the insured's property which is contaminated at the time the cleanup commences. Disposing of hazardous materials is often undertaken at least partially to prevent damage to adjoining property. It would serve "no legitimate purpose to assert that soil and groundwater pollution must be allowed to spread over boundary lines before they can be said to have caused the damage to other people's property which liability insurance is intended to indemnify." Allstate Ins. Co. v. Quinn Constr. Co., 713 F.Supp. 35, 41 (D.Mass. 1989). Discouraging cleanups by the property owner or other responsible parties by precluding [commercial general liability]23 insurance coverage until contamination has migrated or flowed on to someone else's property runs afoul of the general preference within environmental statutes toward preventative action.24
In Preferred Mutual Insurance Co. v. Gordon,25 the insurance company relied on the "owned property" exclusion for its argument that it had no duty to defend, arguing that the policyholder had not established actual damage or the threat of damage to third-party property. The policyholder, in turn, argued that the exclusion did not apply even if the oil release at issue had not yet affected third parties because the contamination had reached groundwater and was moving across the property, which had a 3-foot gradient. The policyholder also argued that contamination of the groundwater was damage to the property of another because statutes included groundwater in the definition of "waters of the commonwealth." Adopting the Rubenstein court's reasoning, the Gordon court held that preferred owed the policyholder a duty to defend because there were allegations of soil contamination on the Gordon's property, "the cleanup of which was 'undertaken at least partially to prevent damage to adjoining property.'"26 The groundwater ownership issue was, as in Marks, disregarded. "The undisputed facts…support a finding that Preferred owes the Gordons a duty to defend because the allegations in the [Notice of Responsibility] are reasonably susceptible of an interpretation that they state a claim under the Policy terms."27 The court found the duty to defend extended to the assessment costs related to a consultant's assessment of the property, the attorneys' fees incurred in defending against the notice of responsibility and the fees and costs incurred in the action to establish preferred's duty to defend. The Gordon court noted that "Rubenstein also suggests that actual third party property damage, or a substantial threat thereof, is an issue to be raised with respect to Preferred's duty to indemnify, a narrower duty than the duty to defend."28 This last point makes clear that an insurance company's obligation to defend arises upon the policyholder's meeting of a relatively low standard: allegations "reasonably susceptible of an interpretation that they state a claim under the Policy terms," as opposed to proof of actual third-party damage or a substantial threat of such damage.
Duty to Indemnify
Regarding the duty to indemnify, as with exclusionary provisions generally, the insurance company bears the burden of the "owned property" exclusion's applicability and, as an exclusion, it will be strictly construed.29 Courts have found the "owned property" exclusion to be ambiguous in the context of contamination cases and, as such, will construe it in favor of the policyholder, given the general rule of insurance contract interpretation that ambiguities are to be resolved in favor of coverage.30 The "objectively reasonable insured" standard applies and coverage will be found where "a reasonable policyholder would expect coverage of some and possibly all of the disputed cleanup costs in the circumstances of [the] case."31
The case law in Massachusetts makes clear that the duty to indemnify will always exist despite the "owned property" exclusion where actual contamination to third-party property is demonstrated.32 The duty to indemnify, however, will not exist where the claim is for damage solely to the policyholder's property.33 It is the insurance company's burden to prove which expenditures relate solely to the policyholder's property.34 While the preeminent Supreme Judicial Court case on the "owned property" exclusion, Hakim v. Mass. Insurer's Insolvency Fund,35 explicitly reserved on the question of whether an owned property exclusion bars coverage if there is a threat of, but not actual, contamination of third-party property, it appears from lower court holdings both before and after Hakim that a duty to indemnify will exist where a significant threat that soil or groundwater contamination will migrate to third-party property can be shown.36
In Wasserman v. Commerce Insurance Co.,37 for instance, the court found a duty to indemnify even though no contamination off property was shown where 300 to 400 gallons of oil had leaked out of the policyholder's fuel tank. Although on-site sampling showed both soil and groundwater contamination (though, notably, less than DEP standards), no contamination was found off property. The consultant on the matter, however, expressed much concern that the contamination was or had migrated off property, given the volume of the spill at issue. The insurance company's investigator concurred, but the insurance company still refused to defend and indemnify (though it eventually, and reluctantly, did defend). The insurance company contended it had no duty to indemnify until an "actual imminent threat of migration and impact on third-party property" was shown and claimed that the evidence (including the fact that the contamination did not exceed DEP standards) did not support such a showing. Holding that "the law supports Commerce's position on this issue [but] [t]he facts do not," the court ruled entirely against the insurer on the issue of indemnity, finding the Hakim and Rubenstein cases particularly instructive in doing so.38 Reading those cases together, the Wasserman court states: "they stand for the proposition that an insurer will be liable not only to defend an insured against an [Notice of Responsibility] but also to indemnify the insured for all cleanup costs, even with an 'owned property' exclusion, so long as there is a significant threat of off-site migration." The more recent case of Preferred Mutual Insurance Co. v. Gordon 39 confirms this proposition.
In Massachusetts, the "owned property" exclusion has limited application in the context of environmental contamination cases. Insurers will have the duty to defend where allegations in a lawsuit or a governmental notice of responsibility against the homeowner are reasonably susceptible of an interpretation that they state a claim under the terms of the insurance policy at issue, such as when actual or threatened harm to a third party is alleged in a complaint or expressed as a concern in an notice of responsibility. An insurer's duty to indemnify a policyholder for remediation costs arises where the policyholder can show a significant threat that soil or groundwater contamination will migrate to third-party property. Where there is such a threat, such as when the contamination has hit groundwater, the contamination will not be deemed to be "solely" on the policyholder's property, such that the "owned property" exclusion will not apply. Hence, a policyholder's counsel facing an "owned property" exclusion argument would do well to thoroughly investigate and document any threat of migration in order to defeat a reticent insurer's coverage disclaimers.40
1. 21E Homeowner Funding Workgroup, Funding the Cleanup of Residential Heating Oil Releases in Massachusetts (December 2001) ("The Massachusetts Oil Heat Council estimates that about half of Massachusetts residences (about 1 million homes) use No. 2 fuel oil for heating.")[back]
2. Other policy exclusions, such as a so-called "absolute pollution exclusion," may apply to exclude coverage in any given situation, but discussion of these exceeds the scope of this article. The discussion here pertains only to the "owned property" exclusion.[back]
3. Heating oil spills of more than 10 gallons must be reported to the DEP within two hours. 310 CMR 40.1600.[back]
4. See, e.g., Trs. of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 847 (1993).[back]
5. See, e.g., Hakim v. Mass. Insurers' Insolvency Fund, 424 Mass. 275, 279 (1997).[back]
6. Hazen Paper Co. v. United States Fidelity and Guaranty Co., 407 Mass. 689, 700 (1990); United Technologies Corp. v. Liberty Mutual Ins. Co., 1994 WL 879545 at *4 (1994).[back]
7. Trustees of Tufts, 415 Mass. at 848; Hazen Paper Co., 407 Mass. at 698.[back]
8. Hakim, 424 Mass. at 282; Preferred Mutual Ins. Co. v. Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38 (Middlesex Superior Court, May 13, 2003).[back]
9. Hazen Paper Co, 407 Mass. at 696-97; Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38.[back]
10. Trustees of Tufts, 415 Mass. at 847; Marks v. Lumbermans Mutual Casualty Co., C.A. No. 94-0917, 1995 WL 502231 at *2 (Aug. 16, 1995); Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38; Wasserman v. Commerce Ins. Co., C.A. No. 010619(B), 2002 Mass. Super. LEXIS 319 at *10, 15 Mass. L. Rep. 170 (Mass.Super.Ct. 2002).[back]
11. Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38.[back]
12. Marks, 1995 WL 502231 at *3, referring to Allstate Ins. Co. v. Quinn Constr., 713 F.Supp. 35 (D.Mass. 1989), vacated because of settlement, 784 F.Supp. 927 (D.Mass. 1990); United Technologies Corp. v. Liberty Mutual Ins. Co., 1994 WL 879545 at *5 (1994); Atlas Tack Corp. v. Commercial Union Ins. Co., C.A. Nos. 91-5666, 91-5667, 91-5669 (Suffolk Superior Court, 1993) (Zobel, J.); Rubenstein v. Royal Ins. Co. of America, 44 Mass.App.Ct. 842, 847-849 (1998); Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38.[back]
13. Marks, 1995 WL 502231 at *3.[back]
14. Note: While vacated by settlement, the Allstate v. Quinn case is repeatedly cited by other Massachusetts cases, even cases decided after the Quinn settlement, as authority on the interpretation of the "owned property" exclusion. See, e.g., Marks, 1995 WL 502231 at *3; Nashua Corp. v. Liberty Mutual Ins. Co., 1997 WL 89163 at *9 (1997); Rubenstein v. Royal Ins. Co. of America, 44 Mass.App.Ct. 842, 848 (1998).[back]
15. Marks, 1995 WL 502231 at *3.[back]
16. Id. at *3, 4. [back]
18. Gamer v. Milton, 346 Mass. 617, 629 (1964).[back]
19. See, e.g., Mass. Gen. Laws ch. 21E, ß2 (defining "waters of the commonwealth" to include groundwater).[back]
20. Marks, 1995 WL 502231 at *3, 4. [back]
21. Id. at 4-5. See also Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38.[back]
22. Rubenstein v. Royal Ins. Co. of America, 44 Mass.App.Ct. 842, 847-849 (1998).[back]
23. Though this case pertained to a commercial general liability (CGL) policy, and not a homeowner policy, the exclusionary language generally differs insubstantially and courts interpreting CGL policies will refer to homeowner's cases in their analyses and vice versa. The applicable analysis is the same. See, e.g., Rubenstein, 44 Mass.App.Ct. at 853-54 (general liability policy), citing to Hakim, 424 Mass. 275, 675 N.E.2d 1161 (1997) (homeowner's policy).[back]
24. Rubenstein, 44 Mass.App.Ct. at 847-48.[back]
25. Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38.[back]
26. Id., citing to Rubenstein.[back]
27. Id. [back]
29. Rubenstein v. Liberty Mut. Ins. Co., Civil Action No. 90-1687-B, 1995 WL 873786 (Suffolk Superior Court, Aug. 23, 1995), Memorandum of Decision and Order for Judgment (Justice Margot Botsford), affirmed except as to attorney's fees, Rubenstein v. Royal Insurance Co. of America, 44 Mass. App.Ct. 842 (1998).[back]
30. Hakim, 424 Mass. at 282. See also Allstate v. Quinn Constr. Co., 713 F.Supp. at 40.[back]
31. Hakim, 424 Mass. at 282. [back]
32. Id.; United Technologies Corp., 1994 WL 87945 at *5; Rubenstein v. Royal Insurance Co. of America, 44 Mass. App.Ct. 842, 854 (1998).[back]
33. Hakim, 424 Mass. at 282; Trustees of Tufts, 415 Mass. at 852; Rubenstein v. Royal Insurance Co. of America, 44 Mass. App.Ct. 842, 853 (1998).[back]
34. Hakim, 424 Mass. at 283, fn. 13.[back]
35. Hakim v. Mass. Insurers' Insolvency Fund, 424 Mass. 275 (1997).[back]
36. Wasserman, 2002 Mass. Super. LEXIS 319 at* 7-8; Atlas Tack Corp. v. Commercial Union Ins. Co., C.A. Nos. 91-566, 91-5667, 91-5609, slip op. at 13-14 (Suffolk Superior Court, Sept. 15 1993), published in Mealey's Lit. Rpt.-Insurance, Vol. 7, Issue 46 at D-1 (10/12/93), affirmed in part, reversed in part on other grounds, Atlas Tack Corp. v. Liberty Mutual Ins. Co., C.A. 97-P-1944, 48 Mass.App.Ct. 378 (Dec. 22, 1999); United Technologies Corp., 1994 WL 87945 at *5; Marks, 1995 WL 502231 at *4; Rubenstein v. Royal Insurance Co. of America, 44 Mass. App.Ct. 842, 848 (1998); Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38. See also Allstate Ins. Co. v. Quinn Constr. Co., 713 F.Supp. at 40.[back]
37. Wasserman, 2002 Mass. Super. LEXIS 319 at* 7-8.[back]
38. Id. at *6-7. [back]
39. Gordon, C.A. No. 02-3147, 2003 Mass.Super. LEXIS 155 at *38.[back]
40. Arguments for relief for homeowner clients soon may be found in the statutory context as well. On March 18, 2004, Massachusetts House Bill No. 1961 favorably emerged from the House Committee on Natural Resources and Agriculture. A new draft, House Bill No. 4583, was referred to the Committee on House Ways and Means on the same date and was pending at the time this article was written. The original bill sought to require the upgrading of oil heating systems and the provision of mandatory homeowner insurance coverage to respond to heating oil spills.[back]