New Approaches For Obtaining Coverage For Cleanup Of Residential Heating Oil Releases

By Kenneth F. Whittaker, Ph.D., P.E. Esq.

The Massachusetts Oil and Hazardous Material Release Prevention and Response Act, M.G.L. 21E, imposes burdensome requirements for the reporting, investigation and remediation of uncontrolled discharge of oil and hazardous materials in the Commonwealth. The trigger for unleashing these requirements, codified in the Massachusetts Contingency Plan (310 CMR 40.0000 et seq), is the occurrence of a “release” defined as “any spilling, leaking, pumping, pouring, emitting, emptying, discharging injecting” of oil or hazardous material into the environment. Whether caused by a major industrial discharge, a leaking residential oil tank or botched home oil delivery, the regulations apply.

Financial impacts of oil release response on homeowners can be severe. A December 2001 study by The 21E Homeowner Funding Work Group, a committee professionals self-created to address the financial burdens of homeowner oil release response, reported that approximately 350 home heating oil releases are reported annually (approximately 20% of all reported releases). Response costs average between $20,000 and $50,000 per occurrence, have ranged as high as $250,000 and occasionally may result in the complete demolition and rebuilding of the affected home in addition to the cleanup. The Work Group surmised that because of the cost of response pursuant to the MCP, many releases are likely unreported with associated risks to human health and the environment.

The Work Group evaluated a number of options for providing homeowners financial assistance for release response, and has been instrumental in arranging for the introduction of legislation mandating upgrades and inspections of home heating fuel supply lines and insurance coverage for first party (i.e. homeowner-owned) property damage and third party liability claims for liquid fuel release response costs. 1

The proposed mandatory insurance provisions arose from Work Group’s determination that most insurers typically deny claims involving fuel oil releases and, even for potentially covered third party claims such as those involving groundwater, “most[insurers] typically deny such claims entirely until it is shown that groundwater or other impacted properties have been impacted.” Recent judicial decisions have clarified, to the homeowners’ benefit, the scope of third party coverage and an insurer’s duty to defend and indemnify homeowners involved in an MCP-driven oil release cleanup. Thus, the courts may have already accomplished some of the goals of the proposed legislation. Nevertheless, the legislation is still important to establish clear rules for coverage and reduce potential burdens on homeowners in the face of an insurer’s reluctance to pay. For example, the legislation would help to overcome policy modifications by some insurers, taken in response to recent case law favorable to insured parties as discussed herein, to reduce potential liability. These actions, which appear with increasing regularity in newly-issued policies, include limitations (e.g. $5-$10,000) for homeowner oil release claims, establishment of absolute pollution exclusions for third party coverage and specific exclusions against soil and groundwater contamination in first party coverage. The legislation would also provide relief against insurers who routinely deny coverage and force homeowners to incur out-of-pocket response and litigation costs until the insurer is forced to pay.

Conventional Homeowner Policy Terms, Conditions and Exclusions
Standard Homeowners’ Insurance policies provide “first party” coverage for the insured and the covered property, and “third party” coverage for the insured’s liability to others. First party coverage is for loss or damage to real and personal property owned by the insured, and may include coverage for “underground water and surface water.” However, first party coverage often contains a pollution exclusion, for example, provisions which provide that the insurer will “not pay for loss which results from contamination,” and that “coverage does not include costs to …..extract pollutants from land or water” or costs to “remove, restore or replace polluted land or water.” As a result of these exclusions, homeowner insurers frequently deny coverage in the first instance for an oil release on the insured’s own property.

Third party liability coverage offered in standard homeowner insurance policies typically includes provisions to “pay, up to [a limit], all sums for which an insured is liable to pay because of bodily injury or property damage caused by an occurrence to which this coverage applies, “including provisions to “defend a suit seeking damages if the suit resulted from bodily injury or property damage not excluded under [the] coverage.” An essentially universal limitation in third party coverage is the “owned property exclusion” which denies coverage for “damage [including bodily injury or property damage] to property owned by an insured.” Recent decisions by the Massachusetts courts make it clear that coverage is available under the third party coverage provisions, unless specifically excluded by the terms of the policy, for many oil releases to the extent they impact or threaten groundwater or have migrated off the insured’s property.

A Duty To Defend
Long-standing case law in Massachusetts clearly imposes on insurers a duty to defend both broader than, and independent of, any duty to indemnify. See. e.g. Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 855, 847 (1993). A recent case, seeking declaratory judgment of an insurer’s duty with respect to a release of oil from an underground storage tank on a private residence, has substantially strengthened homeowners’ ability to seek third party defense and indemnification costs for such spills irrespective of the owned property exclusion. See Preferred Mutual Insurance Company v. Gordon, Middlesex C.A. No, 02-3147, Memorandum of Decisions and Order, May 6, 2003. Relying on Rubenstein v. Royal Ins. Co. of America, 44 Mass. App. Ct, 842, 847 (1998), aff’d on other grounds, 429 Mass. 355 (1999), the court confirmed that an insurer owes its insured a duty to defend under third party liability coverage “as long as the allegations against the insured are reasonably susceptible of an interpretation that they state a claim covered by the policy.” That is, “a factual dispute as to whether there was actual off-site contamination will not prevent the court from finding the insured owes its insured a duty to defend.” Thus, documentation of off-site contamination migration may not be needed to trigger an insurer’s defense obligations under conventional third party liability coverage if a good faith allegation can be made that off-site migration is likely or may occur.

Of further assistance to homeowners seeking defense-related costs is the court’s reliance on previous holdings in Hazen Paper Co., v. United States Fidelity & Guar. Co., 407, Mass. 689,696 which held that receipt of a Notice of Responsibility (“NOR”) from the Massachusetts Department of Environmental Protection (“MDEP”), in response to a reported release, is “so substantially equivalent to the commencement of a lawsuit that the duty to defend [arises] immediately.” Thus, when the NOR arrives, the insurers cannot deny a homeowners demand for defense costs on the basis that a suit necessitating that defense has not been initiated. 2

If the duty to defend arises when a claim becomes “reasonably susceptible to an interpretation that [it] falls under the policy,” how do homeowners determine when this point has been reached? Do simple spills which contaminate only on-site land fall under the policy, or are they excluded pursuant to the owned property exclusion of third party coverage, and/or specific exclusions of first party coverage including “costs to … extract pollutants from land or water” or to “remove, restore or replace polluted land or water?”

In the Preferred Mutual case the plaintiffs Gordon attempting to overcome the insurer’s denial of coverage, based on the owned property exclusion, by introducing expert testimony that heating oil had migrated into groundwater underlying a third party’s neighboring property. The Gordons also claimed that groundwater, which had clearly been contaminated as a result of an oil release, should be considered third party property for purposes of overcoming the exclusion because it is defined by Section 2 of Chapter 21E as “[w]aters of the commonwealth.”

The court did not reach either of these issues in denying the insurer’s motion for summary judgment. Rather, it relied on Rubenstein to establish the insurer’s duty to defend where soil clean up “was undertaken at least partially to prevent damage to adjoining property.” The court confirmed that actual damage to third party property was not an essential element for finding an insurer’s duty to defend, only that the complaint be reasonably susceptible to that interpretation. To do otherwise, and thereby to require “that soil and groundwater pollution must be allowed to spread over boundary lines before they can be said to have caused damage to the other people’s property which liability insurance is intended to indemnify,” would according to the court serve no legitimate purpose. See Doe v. Liberty Mut. Ins. Co., 423 Mass. 366, 368 (1996). Therefore, under the Preferred Mutual analysis, the mere possibility that home heating oil contamination may extend onto neighboring properties is a sufficient basis to trigger an insurer’s duty to defend under standard third party liability coverage.

Duty To Indemnify
The Preferred Mutual decision also provides substantial leverage to homeowners in overcoming insurers’ denials of third party liability coverage and indemnification on the basis of the owned property exclusion. Although in Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 282 (1997) the court agreed that costs incurred for the sole purpose of remediating an insured’s property would be barred by the owned property exclusion, it noted that the exclusion would not be applicable where there was an immediate threat but no actual contamination of another property. The bar for indemnification coverage was lowered even further in Wasserman where the owned property exclusion was held inapplicable where there was only a significant, as opposed to an immediate, threat of off-site migration. Wasserman v. Commerce Ins. Co., Civil No. 010916B *2-3,7 (Middlesex Super. Ct. July 9, 2002) (Sanders, J.). Thus, where homeowners can point to actual migration or a “substantial threat” of such migration of released oil and its components, the insurers have weak grounds for denial of coverage.

Of even greater potential significance to homeowners was the court’s response to Preferred Mutual’s claim that contamination of groundwater on the Gordon property fell under the owned property exclusion. Dismissing Preferred Mutual’s argument that under Gamer v. Milton 346 Mass. 617,620 (1964). it is “settled in this Commonwealth that a landowner has absolute ownership in the subsurface percolating water in his land,” the court relied on United Techs. Corp. v. Liberty Mut. Ins. Co., to find that Gamer did “not stand for the proposition that a landowner may contaminate or damage the quality of the groundwater, “and that the “owned property exclusion will not bar coverage of cleanup costs undertaken on plaintiff’s property where there is actual or threatened damage to third party property, including groundwater beneath the insured’s property.” Civ. No. 877172 * 12 (Mass. Super. Ct. Aug. 3, 1993) (J. Murphy (emphasis added). In its order the Preferred Mutual court stated its agreement with Wasserman but did not need to rely on it for its summary judgment determination since there were genuine issues of material fact as to whether heating oil had migrated onto a neighboring property.

Summary
Unless excluded or limited through recent modifications to standard homeowner insurance provisions, homeowners in many oil spill cases may be able to obtain coverage for the costs of defense and cleanup of the release. The Massachusetts courts have made clear that homeowner insurers have a broad duty to defend against MDEP enforcement action triggered by an NOR for such releases and have established liberal standards for demonstrating real or potential off-site damage for purposes of overcoming the owned property exclusion under third party coverage. Based on this analysis, a homeowner need only show that oil contamination on their property poses a credible threat to groundwater, whether on or off the property, to obtain coverage under current standard conventional language in such policies. While the current proposed legislation will limit insurers’ ability to adjust these terms and conditions on later policies, homeowners with conventional insurance coverage may be able to take solace in the liberalized standards for recovery that these recent court decisions have provided.

The author wished to thank Christopher Davis, Esq. and Susan Crane Esq. for their assistance in the preparation of this article.

Publications index

[1] The Work Group drafted House Bill 4583 (formerly H. 1961) which has been reviewed by  the Joint Committee on Taxation, favorably reported by the Joint Committee on Natural Resources and Agriculture, and currently pending before the House Committee on Ways and Means.

[2]  Homeowners may still run into trouble recovering attorney’s fees after issuance of the NOR because many insurers will claim that retaining an LSP and providing other engineering/scientific support meets their defense obligations.  Furthermore, the case law has not established that a duty to defend is triggered upon homeowner’s receipt of a third party demand for response costs pursuant to G.L. § 4A. ( “4A” Demand Letter”), and many insurers will deny such claims.  The financial burden on individual homeowners is obvious, and reform is warranted.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute legal advice or other professional advice by McRoberts & Roberts, LLP or its attorneys.