does the term damages in the comprehensive general

1035

DOES THE TERM "DAMAGES" IN THECOMPREHENSIVE GENERAL LIABILITY

INSURANCE POLICY INCLUDEENVIRONMENTAL CLEANUP

COSTS?

INTRODUCTION

Environmental agencies discover hazardous waste sites inAmerica almost daily.1 Consequently, the legal system has been ex-posed to extensive litigation involving environmental contamination.2

Insurance companies and their insureds are requesting declaratoryjudgments relating to policy coverage of environmental cleanupcosts. 3 Among the most controversial issues is whether the term"damages" in the comprehensive general liability ("CGL") insurancepolicy includes environmental cleanup costs.

In Continental Insurance Cos. v. Northeastern Pharmaceutical &Chemical Co., 4 ("NEPACCO ") the United States Court of Appeals forthe Eighth Circuit predicted that the Missouri Supreme Court wouldtechnically construe the term "damages" within the insurance con-text to exclude cleanup costs. 5 Sitting en banc, the court reversed inpart its prior panel decision which had held that cleanup costs wereincluded within the ordinary meaning of damages. 6

This Note examines the Eighth Circuit's decision in NEPACCOwhich construed "damages" as excluding cleanup costs. 7 This Notethen reviews Missouri's common law rules of insurance policy con-struction and the interpretations of "damages" forwarded by otherjurisdictions.' After reviewing this background, this Note analyzes

1. Crisham & Davis, CGL Coverage for Hazardous Substances Cleanup, FOR THEDEFENSE, Mar. 1988, at 21, 21.

2. Id.3. Id. For a discussion of various insurance coverage issues, see, e.g., Arness &

Eliason, Insurance Coverage for "Property Damages" in Asbestos and Other Toxic TortCases, 72 VA. L. REV. 943 (1986); Crisham & Davis, supra note 1, at 21; Hadzi-Antich,Coverage for Environmental Liabilities Under the Comprehensive General LiabilityInsurance Policy: How to Walk a Bull Through a China Shop, 17 CONN. L. REV. 769(1985); Smith, Environmental Damage Liability Insurance - A Primer, 39 Bus. LAW.333 (1983); Note, The Pollution Exclusion Clause Through the Looking Glass, 74 GEO.L.J. 1237 (1986); T. Price, Issues in Insurance Coverage for Environmental Liabilities(Nov. 17, 1988) (unpublished paper available in Creighton University School of LawLibrary).

4. 842 F.2d 977 (8th Cir. 1988) (en banc), cert. denied, 109 S. Ct. 66 (1988).5. Id. at 985-87.6. Id.7. See infra notes 11-72 and accompanying text.8. See infra notes 73-146 and accompanying text.

CREIGHTON LAW REVIEW

the NEPACCO decision.9 Based on that analysis, this Note concludesthat the restrictive interpretation of "damages" in NEPACCO is in-consistent with Missouri law.10

FACTS AND HOLDING

From April 1970 to January 1972, the Northeastern Pharmaceu-tical & Chemical Co. ("NEPACCO") produced hexachlorophene atits chemical plant in Verona, Missouri." The manufacturing processproduced several toxic by-products, including dioxin.12 Initially,NEPACCO hired a chemical disposal company to dispose of this haz-ardous waste. 13 Subsequently, NEPACCO changed its disposalmethod because of cost considerations. 14

In July 1971, NEPACCO transported approximately eighty-fivedrums, each containing fifty-five gallons of hazardous waste to anearby farm (the "Denney farm" site) and buried the drums in atrench.15 While dumping the deteriorated drums into the trench,many drums cracked open.16 Consequently, a strong odor persistedat the Denney farm for several months.17

Within the following year, NEPACCO contracted with Independ-ent Petrochemical ("IPC") for the disposal of additional hazardouswastes.18 Subsequently, IPC hired Russell Bliss to arrange the dispo-sal of the hazardous waste.19 From 1971 to 1973, Bliss allegedlymixed NEPACCO's hazardous waste with oil to create a dust sup-pressant.20 Bliss allegedly applied the dust suppressant at the Bub-bling Springs Stables in Fenton, Missouri, and on the roads of TimesBeach, Missouri. 21 In 1974, a Mr. Minker purchased contaminated

9. See infra notes 147-219 and accompanying text.10. See infra notes 147-219 and accompanying text.11. United States v. Northeastern Pharmaceutical & Chemical Co., 579 F. Supp.

823, 828 (W.D. Mo. 1984), aff'd in part & rev'd in part, 810 F.2d 726 (8th Cir. 1986),cert. denied, 108 S. Ct. 146 (1987) [hereinafter Northeastern Pharmaceutical].

12. Continental Insurance Cos. v. Northeastern Pharmaceutical & Chemical Co.,842 F.2d 977, 979 (8th Cir. 1988) (en banc) [hereinafter NEPACCO].

13. Northeastern Pharmaceutical, 579 F. Supp. at 829.14. Id.15. Id. at 830.16. NEPACCO, 842 F.2d at 979. Evidence of the deteriorated condition of the con-

tainers was revealed by the testimony of a worker, who told of stepping through thelid of a drum into the hazardous materials. Northeastern Pharmaceutical, 579 F. Supp.at 830.

17. NEPACCO, 842 F.2d at 979.18. Id.19. Id.20. Id.21. Continental Ins. Cos. v. Northeastern Pharmaceutical & Chemical Co., 811

F.2d 1180, 1182 (8th Cir. 1987), aff'd in part & rev'd in part on rehearing, 842 F.2d 977(8th Cir. 1988) (en banc), cert. denied, 109 S. Ct. 66 (1988).

1036 [Vol. 22

1989] DEFINING DAMAGES IN INSURANCE POLICIES

dirt from the Bubbling Springs Stables to improve his property lo-cated in Imperial, Missouri.22 In the same year, NEPACCO liqui-dated its assets, paid its creditors, and distributed the remainingproceeds to its shareholders. 23

In 1980, the Environmental Protection Agency (the "EPA") in-vestigated, secured, and decontaminated the Denney farm site.24 TheEPA subsequently brought suit.25 In United States v. NortheasternPharmaceutical & Chemical Co.26 (the "EPA" lawsuit), the UnitedStates Court of Appeals for the Eighth Circuit held that "NEPACCOhad the capacity to be sued" and that NEPACCO's corporate officerscould be held personally liable.27 The Eighth Circuit ultimately heldthat NEPACCO and two of its corporate officers must pay for thecleanup costs incurred by the federal government.28

Following the EPA lawsuit, several residents of Times Beachand Imperial and the state of Missouri filed related lawsuits.29 InCapstick v. Independent Petrochemical Corp. ,30 the residents ofTimes Beach and Imperial sued NEPACCO, Independent Pe-trochemical Corp., and other defendants.3 1 The residents sought"damages for present and future personal injury and property dam-age allegedly caused by the" improper disposal of NEPACCO's toxicwaste.32 The residents also sought reimbursement of cleanup costs. 3 3

In Missouri v. Independent Petrochemical Corp. ("IPC"),34 the stateof Missouri filed a lawsuit against NEPACCO, Independent Pe-trochemical Corp., and other defendants, seeking recovery of cleanupcosts. 35 The state asserted claims based on the Comprehensive Envi-ronmental Response, Compensation, and Liability Act ("CER-CLA")36 and on the Missouri common law of public nuisance.3 7

During the time the initial contamination occurred, ContinentalInsurance Companies ("Continental") insured NEPACCO underthree standard-form comprehensive general liability ("CGL") insur-

22. NEPACCO, 842 F.2d at 879. The Eighth Circuit referred to this site as "theMinker/Stout/Romaine Creek" site.

23. Northeastern Pharmaceutical, 579 F. Supp. at 827.24. NEPACCO, 842 F.2d at 980.25. Id.26. 810 F.2d 726 (8th Cir. 1986).27. Id. at 749.28. Id. at 749-50.29. NEPACCO, 842 F.2d at 980-81.30. No. 832-00453 (Mo. Cir. Ct. filed Nov. 23, 1983).31. NEPACCO, 842 F.2d at 980.32. Id. at 980.33. Id. at 980-81.34. 610 F. Supp. 4 (E.D. Mo. 1985).35. Id. at 4, 5.36. 42 U.S.C. §§ 9601-75 (1980 & Supp. IV 1986).37. IPC, 610 F. Supp. at 4.

1037

1038 CREIGHTON LAW REVIEW [Vol. 22

ance policies.38 The policies contained similar provisions;39 however,the second and third policies contained a pollution exclusion clause.40

In 1984, Continental initiated this suit seeking a declaration of its lia-bility originating from the EPA and Capstick lawsuits.41 NEPACCOfailed to reply to Continental's complaint; consequently, the state ofMissouri intervened to protect its interests in the IPC lawsuit.42

The United States District Court for the Eastern District of Mis-souri granted Continental's motion for summary judgment on countone and on the state's counterclaim and Continental's motion to dis-miss without prejudice on count two. 43 In count one, Continentalsought a declaration of its obligation "to defend or indemnifyNEPACCO for liability arising out of the EPA" lawsuit.44 In thestate's counterclaim, Missouri alleged that Continental, asNEPACCO's liability insurer, was "obligated to indemnify the statefor the amount of any judgment imposed on NEPACCO in the un-derlying IPC lawsuit. '4 5 The district court reasoned that cleanupcosts are not "property damage" as defined by the CGL policies and

38. Id. at 979. The first policy was effective from Aug. 5, 1970 to Aug. 5, 1971; thesecond policy was effective from Aug. 5, 1971 to Aug. 5, 1972; and the third policy waseffective from Aug. 5, 1972 to Nov. 17, 1972. Id.

39. Id. Under these policies, Continental agreed to:[Play on behalf of the insured all sums which the insured shall become legallyobligated to pay as damages because of ... property damage to which this in-surance applies caused by an occurrence, and [Continental] shall have theright and duty to defend any suit against the insured seeking damages on ac-count of such... property damage.The policies defined "property damage" as:

(1) Physical injury or destruction of tangible property which occurs dur-ing the policy period, including the loss of use thereof at anytime resultingtherefrom,

(2) Loss of use of tangible property which has not been physically injuredor destroyed provided such loss of use is caused by an occurrence during thepolicy period ....The policies further provided that "[t]his insurance applies only to ... property

damage which occurs during the policy period" and defined "occurrence" as "an acci-dent, including continuous or repeated exposure to conditions, injury or property dam-age neither expected nor intended from the standpoint of the insured." Id. at 979-80(emphasis added).

40. Id. at 980. The pollution exclusion clause stated:It is agreed that the insurance does not apply to ... property damage arisingout of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes,acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irri-tants, contaminants or pollutants into or upon land, the atmosphere or anywatercourse or body of water; but this exclusion does not apply if such dis-charge, dispersal, release or escape is sudden or accidental.

Id.41. Id. at 981.42. Id. The other defendants included Milton Turkel, Edwin B. Michaels, and

John W. Lee (NEPACCO's former officers and directors). NEPACCO, 811 F.2d at 1183.43. NEPACCO, 842 F.2d at 981-82.44. Id. at 981.45. Id.


thus are outside of the coverage of the policy. 46 Furthermore, thecourt stated that under Missouri law, an "occurrence" happens whenthe loss is sustained and not when the tortious act is committed. 47

The loss (e.g., the cleanup costs) occurred after the expiration of theCGL policies.48 Thus, the court held that the insurance coverage doesnot extend to cleanup costs incurred after the termination of thepolicies.

49

In count two, Continental sought a declaration of its obligation todefend or indemnify NEPACCO for liability arising out of the Cap-stick lawsuit.5 0 The court granted Continental's motion to dismisswithout prejudice on count two because more information wasneeded to determine when the damages were incurred.51 The stateclaimed that the district court had committed error on all points andappealed to the United States Court of Appeals for the EighthCircuit.

5 2

In a panel decision, the Eighth Circuit affirmed the summaryjudgment granted Continental on the state's counterclaim and thejudgment to dismiss without prejudice on count two. 53 The EighthCircuit, however, reversed the summary judgment granted Continen-tal on count one (Denney farm site).5 4 The court concluded thatcleanup costs were "property damage" under the CGL policy defini-tion.5 5 Furthermore, the court held that the federal and state gov-ernments in addition to the private owners could sustain propertydamage for contaminated land.5 6 Adopting the "exposure" theory,5 7

the court reversed the summary judgment granted Continental oncount one because the contamination occurred during the policy pe-riod.58 The dissent rejected the majority's determination thatcleanup costs were "damages" under the CGL policy definition be-

46. Id.47. Id.48. Id. at 981-82.49. Id.50. Id. at 981.51. Id. at 982.52. Id.53. NEPACCO, 811 F.2d at 1192-93.

54. Id. at 1192.55. Id. at 1189.56. Id. at 1184-87.57. Id. at 1192 n.29 (defining "occurrence" as happening the moment the improper

release is committed).58. Id. at 1191-92. The court affirmed the summary judgment granted Continen-

tal on the state's counterclaim because the contamination addressed by the IPC lawsuitoccurred after the expiration of the insurance policies. Id. at 1192. Furthermore, thecourt affirmed the motion to dismiss without prejudice on count two (the Capsticklawsuit) because of insufficient evidence as to when the polluting activities actually oc-

curred. Id. at 1193.

1039


cause cleanup costs constitute equitable monetary relief.59 The courtgranted both parties' petitions to rehear the issue en banc.60

Sitting en banc, the Eighth Circuit reversed the panel's decisionon count one and granted summary judgment for Continental. 61 Af-ter reviewing the Missouri common law rules of insurance policy con-struction, the court agreed that ambiguous language in the insurancepolicy should be construed against the insurer.6 2 The court also con-ceded that the term "damages" was ambiguous when viewed outsidethe insurance context. 63 However, the court held that the term"damages" in the insurance context is unambiguous and refers onlyto legal damages, not equitable damages. 64 Classifying cleanup costsas equitable damages, the court excluded cleanup costs from themeaning of "damages" under the CGL insurance policy. 65 The courtaffirmed the panel's decision on the state's counterclaim and on thesecond count.

66

Three judges vigorously dissented from the majority opinion.6 7

The dissenting judges agreed that ambiguous language in the insur-ance policy should be construed against the insurer and agrued thatthe majority's concession of the ambiguity of the term "damages"should have been dispositive.68 The dissenting judges also arguedthat the Missouri Supreme Court's decision in Jack L. Baker Cos. v.Pasley Manufacturing & Distributing Co. 69 should control becausethe restoration cost of the Denney "Farm site is less than the valueof the damage to the government's property interest in the environ-mental resources damaged. ' 70 According to the dissent, if any ques-tion existed as to the amounts, the Eighth Circuit should haveremanded to the district court for a determination.7 ' In conclusion,the dissenting judges argued that the term "damages" in the CGL in-surance policy is ambiguous and should be construed against theinsurer.

72

59. Id. at 1193-95. The dissent accepted the determination that cleanup costs were"property damage" under the CGL policy definition. Id. at 1193. However, the dissentargued that use of the term "damages" excludes the insurer's obligation to pay equita-ble damages. Id. at 1194-95.

60. NEPACCO, 842 F.2d at 983.61. Id. at 981, 987 (5-3 decision).62. Id. at 985.63. Id.64. Id.65. Id. at 987.66. Id. at 981-82, 987.67. Id. at 987-90 (Heaney, J., dissenting).68. Id. at 987-88 (Heaney, J., dissenting).69. 413 S.W.2d 268 (Mo. 1967).70. NEPACCO, 842 F.2d at 989 (Heaney, J., dissenting).71. Id.72. Id. at 988-90 (Heaney, J., dissenting).

1040 [Vol. 22


BACKGROUND

The central issue in Continental Insurance Cos. v. NortheasternPharmaceutical & Chemical Co. was the proper meaning of the term"damages" in the CGL insurance policy.73 Webster's Third New In-ternational Dictionary defines "damages" as "the estimated repara-tion in money for detriment or injury sustained: compensation orsatisfaction imposed by law for a wrong or injury caused by a viola-tion of a legal right. '74 This definition fails to distinguish legal dam-ages from equitable compensation. 75 In determining the properconstruction of the term "damages" in the CGL insurance policy, par-ticular attention should be given to the Missouri common law rulesof insurance policy construction,76 to decisions from other jurisdic-tions construing "damages," 77 and to a Missouri case suggesting theproper construction of "damages. 78

THE MISSOURI COMMON LAW RULES OF INSURANCEPOLICY CONSTRUCTION

In construing provisions in the CGL insurance policy, it is help-ful to examine the Missouri rules of construction. In Robin v. BlueCross Hospital Service7 9 the Missouri Supreme Court articulated therules of construction regarding insurance policies.80 In Robin, a for:,mer employee sought to recover the benefits under her former em-ployer's group health plan.8' The court declared that the language ofinsurance policies must "be given its plain meaning. '82 It stated thatthe test for determining ambiguity was whether the language was"reasonably open to different constructions."83 In testing the lan-guage of the policy, the court applied a layperson standard.8 4 Thecourt concluded that if the language was unambiguous, then the pol-icy would be enforced according to such language; however, if thelanguage was ambiguous, then the language would be construed

73. 842 F.2d 977, 983 (8th Cir. 1988) (en banc).74. WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 571 (1971).75. NEPACCO, 842 F.2d at 985.76. See inkfra notes 79-94 and accompanying text.77. See infra notes 95-133 and accompanying text.78. See infra notes 134-46 and accompanying text.79. 637 S.W.2d 695 (Mo. 1982) (en banc).80. Id. at 698.81. Id. at 696-97.82. Id. at 698.83. Id.84. Id. The court stated that "[l]anguage used will be viewed in light of 'the

meaning that would ordinarily be understood by the layman who bought and paid forthe policy.'" Id. (quoting Stafford v. Travelers Ins. Co., 530 S.W.2d 23, 25 (Mo. Ct. App.1975)).

1041


against the insurer.8 5

Two Missouri cases clarified the rules of construction presentedin Robin. First, in Hammontree v. Central Mutual Insurance Co.,86Mary Hammontree, plaintiff, sought recovery under a homeowner'spolicy.8 7 The court explicated the layperson standard.88 Insurancepolicy terms should be construed as "the ordinary insured of averageintelligence and common understanding reasonably would [construe]the words or language under consideration." 89 The court rejected ahigher standard of construction based on the understanding of insur-ance specialists and lawyers.90 Second, in Bellamy v. Pacific MutualLife Insurance Co.,91 the beneficiary sought recovery under a grouplife and accident policy following the insured's death. 92 The courtemphasized the principle that ambiguous provisions should be strictlyconstrued against the insurer.93 The court stated that "an insurancecontract reasonably susceptible of any interpretation favorable to theinsured will be so construed... to avoid a forfeiture. '94

CASE LAW FROM OTHER JURISDICTIONS CONSTRUING DAMAGES

The Term "Damages" Excludes Equitable Relief

In Maryland Casualty Co. v. Armco, Inc.,95 the United StatesCourt of Appeals for the Fourth Circuit faced the issue of whetherequitable claims for reimbursement of environmental cleanup costsare claims for "damages" under the CGL insurance policy.96 InArmco, the insured had allegedly contaminated land in Missouri, andthe federal government brought an action under CERCLA seekinginjunctive and restitutionary relief.97 Subsequently, the insurerbrought a declaratory judgment action in the United States DistrictCourt for the District of Maryland to determine its liability to the in-sured.98 The court held that the insurer had neither a duty to defendnor to indemnify the insured.99

85. Id.86. 385 S.W.2d 661 (Mo. Ct. App. 1965).87. Id. at 662.88. Id. at 666-67.89. Id.90. Id. at 666.91. 651 S.W.2d 490 (Mo. 1983) (en banc).92. Id. at 491.93. Id. at 495-96.94. Id.95. 822 F.2d 1348 (4th Cir. 1987).96. Id. at 1350.97. Id. at 1352.98. Id. at 1350.99. Id.

1042 [Vol. 22


In affirming the district court's decision, the Fourth Circuit rea-soned that insurers employ the language "to pay as damages" to limittheir liability.'0° Even though the standard of construction was areasonably prudent layperson, the court applied a narrow technicalrule of construction to honor the use of such language.10 1 The courtconcluded that "damages" means only payments owed to personshaving legal, but not equitable, claims. 0 2

Having defined "damages," the court distinguished "damages"and "restitution" and formulated a test for determining whether aclaim was legal or equitable. 0 3 The court stated that relief sought isthe determinative factor, not the nature of the underlying action. 0 4

The court based the test on the policy language "to pay as damages"and noted that this language was framed in terms of relief soughtand not in terms of the nature of the proceedings. 0 5

The Armco opinion relied on several pre-CERCLA decisionswhich recognized a distinction between recovery of damages and re-covery of other types of relief. 06 In Aetna Casualty & Surety Co. v.Hanna,10 7 the United States Court of Appeals for the Fifth Circuitheld that the liability insurer had no obligation to defend or indem-nify the insureds for a mandatory injunctive suit.10 8 A storm had de-stroyed the Hannas' retaining wall causing boulders, trash, and otherdebris to wash onto adjoining land.'0 9 Hannas' neighbors brought alawsuit to compel the Hannas to remove the debris, to prevent fur-ther trespass, and to repair and maintain the retaining wall." 0

In reversing the district court's decision, the Fifth Circuit statedthat the term "damages" in a homeowners' policy provides no cover-

100. Id. at 1352.101. Id.102. Id.103. Id. at 1352-54. The court reasoned:

[I]t is not necessarily correct that the measure of relief is unrelated towhether the government sues for reimbursement or for damages. Damages isa form of substitutional redress which seeks to replace the loss in value with asum of money. Restitution, conversely, is designed to reimburse a party forrestoring the status quo. It might very well cost far more to restore a contam-inated marsh than it would to pay damages for its loss.

Id. at 1353.The court further stated that even if the insured's liability was equivalent,

whether the claim was for damages or for restitution, it would not extend the insurer'sliability "beyond the well-illumined area of tangible injury and into the murky andboundless realm of injury prevention." Id. at 1353-54.

104. Id. at 1352.105. Id. at 1352-53.106. Id. at 1352.107. 224 F.2d 499 (5th Cir. 1955).108. Id. at 503.109. Id. at 500.110. Id. at 500-01.

1043


age for suits seeking equitable relief."' The court explained:Clearly, the policy covers only payments to third personswhen those persons have a legal claim for damages againstthe [i]nsured on account of injury to or destruction of prop-erty. The obligation of the insurer to pay is limited to "dam-ages", a word which has an accepted technical meaning inlaw.112

The court concluded that the costs for complying with an injunctionwere not "damages" within the meaning of the insurance policy." 3

Consequently, the insurer had no obligation to defend the insured. n 4

Several jurisdictions have held that claims for equitable relief are not"damages" within the meaning of insurance policies." 5

The Term "Damages" Includes Equitable Relief

By contrast, many jurisdictions have held that the term "dam-ages" includes equitable relief. In United States Aviex Co. v. Travel-ers Insurance Co.," 6 the Michigan Court of Appeals held that"damages" should not be construed narrowly."17 In Aviex, the stateenvironmental agency ordered the insured, United States Aviex Co.,to decontaminate percolating waters underneath the insured's prop-erty."18 The insured brought suit in the Berrien Circuit Court seek-ing a declaration of the insurer's liability for cleanup costs. 1 9 Thecircuit court entered judgment for the insured. 120 In affirming thecircuit court's decision, the Michigan Court of Appeals reasoned that

111. Id. at 503-04.112. Id. at 503.113. Id.114. Id. at 503-04.115. Cincinnati Ins. Co. v. Milliken & Co., 857 F.2d 979, 981 (4th Cir. 1988); Verlan

Ltd. v. John L. Armitage & Co., 695 F. Supp. 950, 954-55 (N.D. Ill. 1988); Travelers Ins.Co. v. Ross Elec., 685 F. Supp. 742, 745 (W.D. Wash. 1988); Haines v. St. Paul Fire &Marine Ins. Co., 428 F. Supp. 435, 441 (D. Md. 1977); Board of County Comm'rs v.Guarantee Ins. Co., 90 F.R.D. 405, 407-08 (D. Colo. 1981); O'Neill Investigation, Inc. v.Illinois Employers Ins., 636 P.2d 1170, 1175 (Alaska 1981); Ladd Constr. Co. v. Insur-ance Co. of North America, 73 Ill. App. 3d 43, -, 391 N.E.2d 568, 572 (1979);Descrochers v. New York Casualty Co., 99 N.H. 129, -, 106 A.2d 196, 197-98 (1954);Seaboard Surety Co. v. Ralph Williams' Northwest Chrysler Plymouth, 81 Wash. 2d740, -, 504 P.2d 1139, 1143 (1973); Judge Will Not Reconsider Coverage Denial Pre-emptory Writ to be Sought, Insured Says, 3 Toxics L. Rep. (BNA) No. 5 at 150 (June29, 1988) (summarizing Transport Indemn. Ins. Co. v. Argonaut Ins. Co., No. 262425(Cal. Super. Ct. June 22, 1988)); Shell, Not Insurers, Liable for $2 Billion for ArsenalCleanup, California Jury Finds, 3 Toxics L. Rep. (BNA) No. 31 at 940 (Jan. 4, 1989)(summarizing Shell Oil Co. v. Accident & Casualty Co., No. 278-953 (Cal. Super. Ct.Dec. 19, 1988)) (returning a general verdict for the insurer).

116. 125 Mich. App. 579, 336 N.W.2d 838 (1983).117. Id. at -, 336 N.W.2d at 843.118. Id. at -, 336 N.W.2d at 840.119. Id.120. Id. at -, 336 N.W.2d at 841.

1044 [Vol. 22


"[i]t is merely fortuitous from the standpoint of either plaintiff or de-fendant that the state has chosen to have plaintiff remedy the con-tamination problem, rather than choosing to incur the costs of clean-up itself and then suing plaintiff to recover those costs.' 121 Thecourt, therefore, required the insurer to defend and indemnify theinsured.

122

In New Castle County v. Hartford Accident & Indemnity Co.,' 2 3

the United States District Court for the District of Delaware rejecteda technical interpretation of "damages" and ruled that the term"damages" should be given an ordinary meaning which makes no dis-tinction between legal and equitable actions.124 In New Castle, thecounty brought a declaratory judgment action against its insurers todetermine the insurers' obligation to defend and to indemnify thecounty.125 Several public and private parties sued the county for al-legedly releasing pollution from its landfills and for the resultingcleanup costs.' 26 The court applied an ordinary meaning standardand concluded that the term "damages" makes no distinction be-tween legal and equitable actions.' 27 The court held that the insur-ance policy covered all of the claims against the county because "the[c]ounty may become 'legally obligated to pay' as a result of injuriessustained by the respective [p]laintiffs or compensation imposed bylaw for a wrong.' 28

In Intel Corp. v. Hart(ford Accident & Indemnity Co., 129 theUnited States District Court for the Northern District of Californiaheld that CERCLA cleanup costs were "damages" under the CGLpolicy. °3 0 The district court reasoned that the term "damages"should be construed "in the light of the reasonable and normal ex-pectations of the parties as to the extent of the coverage" and not in atechnical manner.1 3 The court, therefore, declared that all cleanupcosts under a CERCLA consent decree are "damages" covered by theCGL insurance policy.' 3 2 Many courts have held directly or im-pliedly that environmental cleanup costs constitute "damages" underCGL policies.' 33

121. Id. at -, 336 N.W.2d at 843.122. Id.123. 673 F. Supp. 1359 (D. Del. 1987)..124. Id. at 1365.125. Id. at 1361.126. Id.127. Id. at 1365.128. Id.129. 692 F. Supp. 1171 (N.D. Cal. 1988).130. Id. at 1172, 1189 (applying California law).131. Id. at 1189-90.132. Id. at 1190.133. Port of Portland v. Water Quality Ins. Syndicate, 796 F.2d 1188, 1194 (9th Cir.

1045

1046 CREIGHTON LAW REVIEW [Vol. 22

A MISSOURI CASE SUGGESTING THE PROPER CONSTRUCTION

As well as having various decisions from other jurisdictions, theNEPACCO court also had Missouri caselaw to assist in interpretingthe term "damages." In Jack L. Baker Cos. v. Pasley Manufacturing& Distributing Co., 3 the Missouri Supreme Court stated that ex-penses for restoring real property to its original condition may be re-covered if the restoration costs are less than the diminution invalue. 135 In Baker, the Pasley Manufacturing & Distributing Co.("Pasley") hired the Jack L. Baker Co. ("Baker") to clean a propanetanker.136 The tanker exploded while in Baker's shop causing seri-ous damage to the building and property.137 Baker sued Pasley forthe diminution in value of the property resulting from the explo-sion.138 Baker estimated the diminution in value to be $13,380.139The Circuit Court of Jackson County, Division No. 1, entered a judg-

1986); Commercial Union Ins. Co. v. Taxel, No. 87-336-S, 1 (S.D. Cal. Aug. 18, 1988)(LEXIS, Genfed library, Dist file); American Motorists Ins. Co. v. Levelor Lorentzen,Inc., No. 88-1994, 7 (D.NJ. Oct. 14, 1988) (LEXIS, Genfed library, Dist file); CentennialIns. Co. v. Lumbermens Mut. Casualty Co., 677 F. Supp. 342, 350 (E.D. Pa. 1987); Town-ship of Gloucester v. Maryland Casualty Co., 668 F. Supp. 394, 399-400, (D.N.J. 1987);Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 662 F. Supp. 71, 75 (E.D. Mich. 1987);United States v. Conservation Chem. Co., 653 F. Supp. 152, 194 (W.D. Mo. 1986) (adopt-ing a Special Master's recommendations); Consolidated Rail Corp. v. Certain Under-writers at Lloyds, Civ. A. No. 84-2609, 9 (E.D. Pa. June 5, 1986) (LEXIS, Genfedlibrary, Dist file); Independent Petrochem. Corp. v. Aetna Casualty & Sur. Co., 654 F.Supp. 1334, 1359 (D.D.C. 1986); CPS Chemical Co. v. Continental Ins. Co., 222 N.J.Super. 175, -, 536 A.2d 311, 314 (App. Div. 1988); Broadwell Realty Serv. v. Fidelity &Casualty Co., 218 N.J. Super. 516, -, 528 A.2d 76, 81 (App. Div. 1987); Kutsher's Coun-try Club Corp. v. Lincoln Ins. Co., 119 Misc. 2d 889, -, 465 N.Y.S.2d 136, 140 (Sup. Ct.1983); Cleanup Costs May Be Insured CGL Damages, Court Rules on Summary Judg-ment Motions, 3 Toxics L. Rep. (BNA) No. 32 at 974-75 (Jan. 1, 1989) (summarizingU.S. Fidelity & Guaranty Co. v. Colorado Nat'l Bank, No. 86-Z-1033 (D. Colo. Nov. 4,1988)); Insurers Challenge State Attorney General on Public Policy Stance in AerojetReveiew, 3 Toxics L. Rep. (BNA) No. 22 at 674-75 (Oct. 28, 1988) (discussing Aerojet-General Corp. v. San Mateo Super. Court, No. A042785 (Cal. Ct. App. Oct. 12, 1988));Ruling Tentative in $1 Billion Cleanup Case; Costs May Be Held Covered as CGL Dam-ages, 3 Toxics L. Rep. (BNA) No. [11] at 333-36 (Aug. 10, 1988) (summarizing Shell OilCo. v. Accident & Casualty Co., No. 278-953 (Cal. Super. Ct. July 13, 1988) (tentativeruling)). Cf. City of Thief River Falls v. United Fire & Casualty Co., 336 N.W.2d 274,275 (Minn. 1983) (holding that the term "damages" includes any claim that is arguablywithin the scope of the policy); Doyle v. Allstate Ins. Co., 1 N.Y.2d 439, -, 136 N.E.2d484, 486-87, 154 N.Y.S.2d 10, 13-14 (1956) (construing damages to include equitable re-lief). For a discussion of the proper construction of the term "damages," see Crisham& Davis, CGL Coverage for Hazardous Substances Cleanup, FOR THE DEFENSE, Mar.1988, at 21-31.

134. 413 S.W.2d 268 (Mo. 1967).135. Id. at 273.136. Id. at 270.137. Id.138. Id. at 273.139. Id.


ment for Baker in the amount of $3,000.140 Baker appealed to theMissouri Supreme Court and claimed that the award wasinadequate.

141

Baker claimed that the jury instruction failed to "inform thejury as to what factors should be considered in arriving at its ver-dict.' 142 In Baker, the supreme court stated that the jury was not re-quired to award Baker diminution in value.143 The court noted thatthe jury could have awarded diminution in value if the jury had de-termined that such an amount would have been fair and just compen-sation for Baker's damages.14 4 The court also stated that the jurycould award Baker the cost of restoring real property to its originalcondition if the restoration costs are less than the diminution invalue. 1 4 5 Therefore, the Missouri Supreme Court unanimously af-firmed the circuit court's judgment.146

ANALYSIS

In Continental Insurance Cos. v. Northeastern Pharmaceutical &Chemical Co.,147 the United States Court of Appeals for the EighthCircuit predicted that the Missouri Supreme Court would technicallyconstrue the term "damages" in the CGL insurance policy. 48 TheEighth Circuit held that "damages" has a technical meaning in theinsurance context which excludes cleanup costs. 14 9 The court failedto substantiate its factual premise that the insurance industry inten-tionally uses the term "damages" to preclude coverage for equitableclaims.150 Furthermore, a review of the court's decision indicatesthat the court distorted or ignored Missouri's rules of insurance pol-icy construction. 151 A logical explanation for the court's decision isthat the court feared the enormous economic burden that the insur-ers would bear if CGL policy coverage is found to cover environmen-tal cleanup costs.'5 2 Such a public policy argument, however, isindeterminate.153 Therefore, the court improperly predicted how the

140. Id. at 270.141. Id.142. Id. at 273.143. Id. at 274.144. Id.145. Id. at 273.146. Id. at 274.147. 842 F.2d 977 (8th Cir. 1988) (en banc), cert. denied, 109 S. Ct. 66 (1988).148. Id. at 985-87.149. Id. at 985.150. See infra notes 155-70 and accompanying text.151. See irnfra notes 171-95 and accompanying text.152. See indfra notes 208-19 and accompanying text.153. See infra notes 208-19 and accompanying text.

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Missouri Supreme Court would construe the term "damages." 1M

UNSUBSTANTIATED INSURANCE INDUSTRY CUSTOM

In NEPACCO, the Eighth Circuit held that the term "damages"has a technical meaning in the insurance context which excludes eq-uitable monetary relief. 155 The court relied on this determination ofinsurance industry custom to declare that the term "damages" wasunambiguous. 156 The court held that the insurer had no duty to in-demnify because the Missouri common law rule of insurance policyconstruction requires unambiguous language to be enforced as it iswritten, not strictly construed against the insurer.15 7 Thus, the ma-jority's determination of the insurance industry custom was crucial tothe outcome of the case.

In NEPACCO, the majority failed to substantiate its determina-tion of insurance industry custom in two respects. 158 First, the major-ity relied on Maryland Casualty Co. v. Armco, Inc. 159 to substantiatethe premise that the term "damages" has a technical meaning in theinsurance industry.160 In Armco, the United States Court of Appealsfor the Fourth Circuit applied Maryland law.1 1 Judicial decisions re-garding insurance industry custom and insurance law may be unrelia-ble in other jurisdictions because custom and law vary in differentstates.1

6 2

Second, the NEPACCO majority made its determination of insur-ance industry custom without any expert testimony.16 3 Normally,expert testimony is required to substantiate an alleged insurance cus-tom.1 64 The lack of expert testimony in NEPACCO is evidenced bythe majority's failure to mention any expert testimony; furthermore,the "damages" issue was raised for the first time on appeal, not attrial.165 Incidentally, the Armco decision also lacked expert testi-mony on the "damages" issue.166 Therefore, the NEPACCO majority

154. See infra notes 155-219 and accompanying text.155. NEPACCO, 842 F.2d at 985.156. Id. at 985-87.157. Id.158. See infra notes 159-66 and accompanying text.159. 822 F.2d 1348 (4th Cir. 1987).160. NEPACCO, 842 F.2d at 985-86.161. Armco, 822 F.2d at 1354.162. See Braude & Patin, Comprehensive General Liability Insurance Basic Prin-

ciples and Guidelines, CONSTR. BRIEFINGS, Mar. 1982, at 17.163. NEPACCO, 842 F.d at 985-87.164. C. MCCORMICK, MCCORMICK'S HANDBOOK OF THE LAW OF EVIDENCE § 198, at

583-84 (3d ed. 1984).165. NEPACCO, 842 F.2d at 984-87.166. Armco, 822 F.2d at 1351-54 (failing to mention any expert testimony).

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failed to substantiate its assumption that the term "damages" in theinsurance context has a technical meaning excluding equitable relief.

In Shell Oil Co. v. Accident & Casualty Insurance Co.,167 the Cal-ifornia Superior Court for San Mateo County ruled that the decisionsin NEPACCO and Armco were inapplicable to the Shell Oil case be-cause "those courts did not have the benefit of testimony of policyunderwriters and drafts. 1 68 A commentator suggested that the ShellOil case "demonstrate[s] that policyholders can defeat the applicationof... [the NEPACCO and Armco decisions] to their coverage actionsby . . . [using expert testimony to attack] the factual premise of"those decisions.169 Again, the factual premise of the NEPACCO andArmco decisions was that the term "damages" has a technical mean-ing in the insurance industry excluding equitable relief.170

A DISTORTION OR ABOLITION OF THE LAYPERSON STANDARD

The Missouri common law rules of insurance policy constructionrequire that policy language be given its plain meaning.171 The Robinv. Blue Cross Hospital Service172 test for ambiguity is whether thelanguage is reasonably open to different constructions. 173 The stan-dard for testing language is the meaning that an ordinarylaypurchaser of the policy would understand. 174 If the language isambiguous, then the language should be construed against the in-surer.175 If the language is unambiguous, then the policy should beenforced according to such language.176

The NEPACCO majority determined that the ambiguity of theterm "damages" depends upon the context of its usage. 177 The courtdeclared that outside of the insurance context the term "damages" isambiguous; however, the term "damages" is unambiguous within theinsurance context.1 78 The court used the phrase "in the insurancecontext" to distort or to abolish Missouri's established standard of in-

167. Ruling Tentative in $1 Billion Clean-up Case; Costs May Be Held Covered asCGL Damages, 3 Toxics L. Rep. (BNA) No. [11] at 333 (Aug. 10, 1988) (summarizingShell Oil Co. v. Accident & Casualty Co., No. 278-953 (Cal. Super. Ct. July 13, 1988)(tentative ruling)).

168. Id. at 334.169. T. Price, Issues in Insurance Coverage for Environmental Liabilities 5 (Nov.

17, 1988) (unpublished paper available in Creighton University School of Law Library).170. NEPACCO, 842 F.2d at 985-87; Arnco, 822 F.2d at 1352-54.171. See supra note 82 and accompanying text.172. 637 S.W.2d 695 (Mo. 1982) (en banc).173. See supra note 83 and accompanying text.174. See supra note 84 and accompanying text.175. See supra note 85 and accompanying text.176. See supra note 85 and accompanying text.177. NEPACCO, 842 F.2d at 985.178. Id.

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surance policy construction.179

Average lay policy holders are unaware of the distinction be-tween legal and equitable remedies. °8 0 Furthermore, lay policy hold-ers are unaware of the legal definition of terms like "restitution" orfail to appreciate the consequences of legal classifications. 8 1 Theymost likely interpret the policy language "all sums which the insuredshall become legally obligated to pay as damages" as any compensa-tory obligation imposed upon them. 8 2 The dictionary definition con-firms the lay policy holders' perception of "damages.' 8 3

Remarkably, the NEPACCO majority expressly conceded that the laypolicy holders' perception of "the term 'damages' could reasonably in-clude all monetary claims, whether such claims are described as dam-ages, expenses, costs, or losses.' 8 4 As the three dissenting judgesargued, this concession should have been dispositive.' 8 5

The NEPACCO majority, however, used the phrase "in the insur-

ance context" to completely avoid the application of the lay policyholders' understanding of the term "damages.' 8 6 Instead, the courtconstrued the term "damages" in a highly technical manner. 8 7 Inusing the phrase, the majority appears to have charged lay policyholders with constructive knowledge equivalent to a lawyer or insur-ance specialist. 8 8 Requiring such knowledge distorts the laypersonstandard. 8 9 If the insurer wished to employ a technical meaning tothe term "damages," the insurer should have given notice to the in-

179. Id. at 985-87. See also supra notes 73-94 and accompanying text.180. American Motorists Ins. Co. v. Levelor Lorentzen, Inc., No. 88-1994, 7 (D.N.J.

Oct. 14, 1988) (LEXIS, Genfed library, Dist file).181. Federal Court Finds Cleanup Cost Coverage; Reconsideration Denied, Sanc-

tions Imposed, 3 Toxics L. Rep. (BNA) No. 25 at 770 (Nov. 16, 1988) (summarizingCommercial Union Ins. Co. v. Taxel, No. 87-336-S (S.D. Cal. Oct. 31, 1988).

182. See supra note 39 (quoting language in NEPACCO's standard form CGL pol-icy). The United States District Court for the Eastern District of Michigan stated that"the insurers construe their policies too narrowly: coverage does not hinge on theform of action taken or the nature of relief sought, but on an actual or threatened useof legal process to coerce payment or conduct by a policyholder." Fireman's Fund Ins.Cos. v. Ex-Cell-O Corp., 662 F. Supp. 71, 75 (E.D. Mich. 1987). See also New CastleCounty v. Hartford Accident & Indem. Co., 673 F. Supp. 1359, 1367 (D. Del. 1987). TheUnited States District Court for the District of Delaware stated that "claims for in-junctive relief, statutory response costs, or other required remedial actions enforceablein a legal proceeding come within [the 'damages'] provision." Id.

183. See supra note 74 and accompanying text.184. NEPACCO, 842 F.2d at 985.185. Id. at 988 (Heaney, J., dissenting).186. Id. at 985-87.187. See supra notes 148-49 and accompanying text.188. See NEPACCO, 842 F.2d at 985-86 (acknowledging that the term "damages" is

ambiguous outside of the insurance context and is not defined in CGL policies, but fail-ing to differentiate between levels of understanding of laypersons and specialists).

189. See id.

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sured by using explicit language in the insurance policy. 190 The ma-jority may have disregarded the layperson standard and decidedinstead to use an insurance professional standard.191 It is unclearwhether the NEPACCO majority simply distorted the layperson stan-dard or functionally abolished the standard altogther. It is clear,however, that the NEPACCO majority refused to follow Missouri's es-tablished standard of insurance policy construction. 192

Some commentators suggest that the Armco and NEPACCO deci-sions appear to demonstrate well-reasoned arguments. 193 Assumingthat CERCLA cleanup costs are purely equitable, these argumentsmay be based on sound legal reasoning.194 However, what may be le-gally elementary to a lawyer could be too complex for laypersons tounderstand without adequate explanation or legal training. Under alayperson standard, sound legal reasoning should not be required.195

MISSOURI'S DEFINITION OF "DAMAGES"

In Jack L. Baker Cos. v. Pasley Manufacturing & DistributingCo.,196 the Missouri Supreme Court stated that property damagesmay include restoration cost if that cost is less than the diminution invalue. 9 7 This interpretation does not restrict "damages" to its tech-nical meaning; instead, this interpretation allows both legal and equi-table relief.198 In his dissent, Judge Heaney argued that Bakercontrols because the restoration cost of the Denney "farm site is lessthan the value of the damage to the government's property interestin the environmental resources damaged."' 99 Judge Heaney addedthat if any question existed as to the amounts, the court should haveremanded to the district court for a determination. 20 0 The majorityfailed to discuss the applicability of Baker.201

190. Id. at 988.191. See id.192. Id. at 988 (Heaney, J., dissenting).193. Crisham & Davis, CGL Coverage for Hazardous Substances Cleanup, FOR THE

DEFENSE, Mar. 1988, at 21, 27.194. See supra notes 95-115 and accompanying text.195. See supra notes 180-81 and accompanying text.196. 413 S.W.2d 268 (Mo. 1967).197. See supra notes 134-35 and accompanying text.198. NEPACCO, 842 F.2d at 989 (Heaney, J., dissenting).199. Id.200. Id.201. Id. The NEPACCO majority limited its discussion of Baker to support for its

conclusion that the difference between the liability for damages to natural resourcesand for cleanup costs may influence whether the government brings an action for dam-ages or cleanup costs. See id. at 987.

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THE NEPACCO Majority Refused to Follow the Missouri Test forAmbiguity

The Missouri test for ambiguous language is whether the lan-guage is reasonably open to different interpretations.20 2 In Bellamyv. Pacific Mutual Life Insurance Co, 203 the Missouri Supreme Courtstated that "an insurance contract reasonably susceptible of any in-terpretation favorable to the insured will be so construed in order toavoid a forfeiture. '20 4 The NEPACCO majority conceded that theterm "damages" is reasonably open to different constructions.20 5 TheNEPACCO majority could have utilized the layperson interpretationof "damages" or the Baker interpretation of "damages. '20 6 Eitherone provided a reasonable interpretation favoring the insured to pre-vent forfeiture. The NEPACCO majority refused to follow the Mis-souri rules of insurance policy construction. 20 7

A LOGICAL EXPLANATION FOR THE NEPACCO Majority's Decision

One possible explanation for the majority's decision favoring theinsurer is that the court feared the enormous economic burden thatthe insurers would bear if CERCLA cleanup costs were includedwithin CGL policy coverage.2 08 Such a public policy argument, how-ever, fails to settle the issue.20 9

From the perspective of the insurance industry, environmentalcontamination liability is already straining the industry. 210 If CGLpolicy coverage included CERCLA cleanup costs, the industry wouldsuffer large losses, forcing many insurance companies to liquidate.211

A result for the insurers, however, could have harsh economic reper-cussions on the insureds; moreover, a determination that CGL policycoverage excluded CERCLA cleanup costs would force many in-sureds into bankruptcy. 212 Experts suggest that "[o]nly the largestcorporations or those with the technical skill to perform the clean-upthemselves [would] survive the cost of cleaning up a major hazardouswaste site.

' 2 1 3

The federal government also has a significant interest in the out-

202. See supra note 83 and accompanying text.203. 651 S.W.2d 490 (Mo. 1983) (en banc).204. Id. at 495-96 (emphasis added) (citation omitted).205. NEPACCO, 842 F.2d at 985.206. See supra notes 74, 135 and accompanying text.207. NEPACCO, 842 F.2d at 988 (Heaney, J., dissenting).208. See infra notes 210-11 and accompanying text.209. See ir;fra notes 210-18 and accompanying text.210. Crisham & Davis, supra note 193, at 30.211. Id.212. Id.213. Id.

1052 [Vol. 22


come of this dispute.214 The Environmental Protection Agency's pur-pose of hazardous waste cleanup is served best when its funds aresupplemented with funds from the liable parties' insurers.21 5 With-out insurance coverage, many companies would be unable to contrib-ute to cleanup efforts.2 16

If the NEPACCO majority based its decision on a fear of placingan enormous economic burden on the insurance industry, then'themajority failed to consider the economic burden that it placed on in-sured corporations. 217 Both industries stand to bear a staggering eco-nomic burden.2 18 Thus, such a public policy argument fails to settlethe issue.219

CONCLUSION

The Continental Insurance Cos. v. Northeastern Pharmaceutical& Chemical Co.220 decision was contrary to Missouri's establishedrules of insurance policy construction. The majority opinion dis-tortd or ignored the layperson standard for testing the ambiguity ofpolicy language. Unless the insurer explicitly inserts a technicallegal meaning to a term, the lay policyholder's understanding of thepolicy lanaguage should control. The majority incorrectly predictedthat the Missouri Supreme Court would construe the term "dam-ages" in a legally technical manner. The Missouri Supreme Courtvery likely would have given the term "damages" a nontechnical,layperson meaning. Thus, in Missouri, the term "damages" in theCGL insurance policy should include CERCLA cleanup costs.

Gregory C Scaglione-'90

214. Intel Corp. v. Hartford Accident & Indem. Co., 692 F. Supp. 1171, 1193 (N.D.Cal. 1988).

215. Id. at 1193; Crisham & Davis, supra note 193, at 30-31.216. Crisham & Davis, supra note 193, at 30-31.217. See supra notes 210-16 and accompanying text.218. Crisham & Davis, supra note 193, at 30-31.219. See supra notes 210-18 and accompanying text.220. 842 F.2d 977 (8th Cir. 1988) (en banc).

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does the term damages in the comprehensive general

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