PA Manufacturers' Ass'n Ins. Co. v. Johnson Matthey, Inc. and PA DEP ( 2020 )

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Pennsylvania Manufacturers’ :
Association Insurance Company, :
Petitioner :
:
v. : No. 330 M.D. 2015
: Argued: May 12, 2020
Johnson Matthey, Inc. and :
Pennsylvania Department of :
Environmental Protection, :
Respondents :
:
Johnson Matthey, Inc., :
Third-Party Petitioner :
:
v. :
:
Continental Casualty Company, :
American Casualty Company :
of Reading, PA, and :
Federal Insurance Company, :
Third-Party Respondents :
BEFORE: HONORABLE P. KEVIN BROBSON, Judge
HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE J. ANDREW CROMPTON, Judge
OPINION BY JUDGE BROBSON FILED: November 19, 2020
Presently before the Court are cross-applications for partial summary relief in
this insurance coverage dispute between Pennsylvania Manufacturers’ Association
Insurance Company (PMA), as insurer, and Johnson Matthey, Inc.
(Johnson Matthey), as insured.1 PMA seeks a judicial determination that its duty to
defend Johnson Matthey did not arise until May 12, 2010, the date on which the
Pennsylvania Department of Environmental Protection (DEP) filed an amended
complaint in Department of Environmental Protection v. Whittaker Corporation and
Johnson Matthey, Inc., (E.D. Pa., No. 08-cv-06010) (Underlying Action), naming
Johnson Matthey as an additional defendant. PMA also seeks a judicial declaration
that all remedial investigation (RI) and feasibility study (FS) expenses incurred by
Johnson Matthey are indemnity, not defense, costs. In its application, Johnson
Matthey seeks summary relief on its claims2 that PMA has breached its duty to
defend by failing to pay in full Johnson Matthey’s counsel fees from May 31, 2015,
forward. For the reasons that follow, this Court denies the cross-applications for
summary relief.
I. BACKGROUND
The record reveals the following facts. In a May 24, 2006 letter, DEP notified
Johnson Matthey that it had been identified as a potentially responsible person (PRP)
with respect to environmental contamination at a 13.7-acre parcel of land known as
the Bishop Tube Site (Site), located in Chester County, which was owned by
Johnson Matthey’s predecessors. (Johnson Matthey Amended Counterclaims ¶10.)
DEP alleged that from 1951 through April 1, 1969, Johnson Matthey’s predecessors
used hazardous substances to manufacture metal alloy tubes, which substances
1
For purposes of its application only, PMA asks this Court to assume it issued policies to
Johnson Matthey that cover the underlying claims of environmental liability. According to PMA,
however, the existence of coverage remains in dispute. (PMA Application ¶6.)
2
Johnson Matthey moves for summary relief on Count I (Declaratory Judgment) and
Count II (Breach of Contract) of its Counterclaims against PMA.
2
contaminated the Site. Johnson Matthey denied liability and engaged legal counsel
to defend it. On November 7, 2006, Johnson Matthey notified PMA of DEP’s action.
From April 1, 1969, to April 1, 1979, PMA issued a series of commercial
general liability policies to cover the liability of Johnson Matthey’s predecessors for,
inter alia, property damage. The coverage limits of $100,000 under the policies
issued for periods from April 1, 1971, and April 1, 1979, have been exhausted.
Coverage remains available, however, under two policies: the one covering
April 1, 1969, to April 1, 1970, and the one covering April 1, 1970, to April 1, 1971.
PMA did not insure Johnson Matthey or its predecessors after April 1, 1979.
On August 18, 2008, Johnson Matthey entered into a consent order and
agreement with DEP, by which Johnson Matthey agreed to undertake certain actions
at the Site, including preparation of a site investigation report, work plans, and an FS.
The consent order was amended on August 4, 2009. The amended consent order
authorized DEP to terminate the agreement, if not satisfied, and to “take over” the
remediation and recover its costs from Johnson Matthey. (PMA Application for
Partial Summary Relief, Ex. F, Dustin Armstrong Deposition, at 72, 76.)
Johnson Matthey hired Roux Associates, Inc. (Roux) to do the agreed-upon
site studies, and Roux submitted an RI report to DEP in 2010 and in 2015.
(Id. at 127.) DEP provided comments and demanded more investigation.
(Id. at 128-129.) On June 10, 2019, Roux submitted a new RI report, to which DEP
offered more comments. (Id. at 81-82.) Johnson Matthey’s amended counterclaims
aver that Johnson Matthey has sought payment from PMA for invoices totaling
over $2.84 million for work done by Roux. As of the December 17, 2019 deposition
of its corporate counsel, Johnson Matthey posited that the Roux invoices
3
exceed $3 million. (PMA Application for Partial Summary Relief, Ex. G,
Amy Donahue-Babiak Deposition, at 274.)
On May 12, 2010, DEP added Johnson Matthey as a defendant in the
Underlying Action, which DEP had initiated against Whittaker Corporation
(Whittaker) on December 29, 2008, under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (CERCLA)3 and the
Hazardous Sites Cleanup Act (HSCA)4 for the cost of remediating the Site.
The Underlying Action was then assigned to a suspended docket, when
“certain aspects of the technical investigation were performed.” (Johnson Matthey
Amended Counterclaims ¶15.) In June 2017, the Underlying Action returned to the
active docket. (Id.)
On June 2, 2010, PMA agreed to defend Johnson Matthey in the Underlying
Action subject to a reservation of rights, including its right to assert the following
defenses: “lost policies, exhaustion, owned property, voluntary payments and
pre-tender costs, allocation, and other insurance.” (Johnson Matthey Answer to
PMA Motion for Summary Judgment (8/15/2016), John M. Hagan Affidavit, Ex. 3.)
Thereafter, PMA advised that it would abandon the following defenses: “late notice,
failure to cooperate, pollution exclusion (in the 4/1/70 – 4/1/71 policy),
trigger-of-coverage, and the definition of occurrence.” (Id.) PMA defended Johnson
Matthey in the Underlying Action from 2010 until 2015.
On April 23, 2015, PMA notified Johnson Matthey that it would no longer
provide a defense in the Underlying Action and would not pay the invoices of
Johnson Matthey’s legal counsel, Saul Ewing Arnstein & Lehr LLP (Saul Ewing)
3
42 U.S.C. §§ 9601-9675.
4
Act of October 18, 1988, P.L. 756, as amended, 35 P.S. §§ 6020.101-.1305.
4
after May 31, 2015. PMA filed a declaratory judgment action with this Court to
excuse it from Johnson Matthey’s defense, asserting that it did not owe Johnson
Matthey a defense under the two policies.5
PMA moved for summary relief on the duty to defend question.
On April 21, 2017, this Court denied PMA’s motion for summary relief.
We concluded that under its “occurrence policies,” PMA was obligated to provide
Johnson Matthey a defense. In J.H. France Refractories Company v. Allstate
Insurance Company, 626 A.2d 502 (Pa. 1993), our Supreme Court held that
occurrence policies provide protection from the date of the exposure to the date of
first manifestation. Accordingly, multiple policies can be triggered by a single loss.
Relying on J.H. France Refractories, this Court observed that the “multiple trigger
of coverage” is due to “the long latency of the claim for which coverage was sought.”
Pa. Mfrs.’ Ass’n Ins. Co. v. Johnson Matthey, Inc. & Pa. Dep’t of Envtl. Prot.,
160 A.3d 285, 292 (Pa. Cmwlth. 2017). DEP’s amended complaint in the
Underlying Action alleged that contamination at the Site occurred gradually at
indefinite points of time, with the first manifestation of injury in 1980.
This triggered PMA’s 1969-1970 and 1970-1971 policies because “undetected
environmental contamination occurred during the policy period.” Id. at 294. PMA’s
evidence did not rule out contamination during the policy periods, and it did not
show manifestation before the policy periods. Where litigation involves facts
potentially within the scope of the policy’s coverage, the insurance company has a
duty to defend the action until all covered claims are removed from the action.
Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 541 (Pa. 2010).
5
PMA named DEP as a respondent solely because its interests as the plaintiff in the
Underlying Action would be affected by the denial of coverage. See Vale Chem. Co. v. Hartford
Accident & Indem. Co., 516 A.2d 684, 687-88 (Pa. 1986). PMA seeks no relief from DEP.
5
II. PMA’S APPLICATION FOR PARTIAL
SUMMARY RELIEF6
On March 3, 2020, PMA filed an application for partial summary relief,
seeking the following declaratory rulings: (1) that any expenses incurred by Johnson
Matthey related to the Site prior to May 12, 2010, when it was added as defendant
by DEP in the Underlying Action, shall not be deemed defense costs under the
applicable PMA policies; and (2) that all RI and FS expenses incurred by Johnson
Matthey pursuant to the amended consent order dated August 4, 2009, are indemnity,
not defense, costs under the applicable PMA policies.
A. Pre-May 12, 2010 Expenses
1. Summary of Arguments
PMA argues that the costs Johnson Matthey incurred prior to May 12, 2010,
are not reimbursable as defense costs because they predated any “suit.” The policies
at issue provide, inter alia:
The [insurance] company will pay on behalf of the insured all sums
which the insured shall become legally obligated to pay as damages
because of
....
Coverage B. property damage
to which this insurance applies, caused by an occurrence, and the
company shall have the right and duty to defend any suit against the
insured seeking damages on account of such bodily injury or property
6
Summary relief under Pennsylvania Rule of Appellate Procedure 1532(b) is available
where the “party’s right to judgment is clear and no material issues of fact are in dispute.”
Gregory v. Pa. State Police, 185 A.3d 1202, 1205 n.5 (Pa. Cmwlth. 2018). For summary relief
purposes, the record “is the same as a record for purposes of a motion for summary judgment” and
includes pleadings, depositions, answers to interrogatories, admissions, affidavits, and reports
signed by expert witnesses. Summer Sch., Inc. v. Dep’t of Educ., 108 A.3d 192, 195-96
(Pa. Cmwlth. 2015). “When ruling on an application for summary relief, we review the record in
the light most favorable to the nonmoving party, resolving all doubts as to existence of a disputed
material fact against the moving party.” Id. at 196.
6
 damage, even if any of the allegations of the suit are groundless, false
or fraudulent, and may make such investigation and settlement of any
claim or suit as it deems expedient, but the company shall not be
obligated to pay any claim or judgment or to defend any suit after the
applicable limit of the company’s liability has been exhausted by
payment of judgments or settlements.
(PMA Amended Petition for Review ¶16, Ex. C at 2, § I (emphasis added).)
PMA argues that the term “suit” must be understood as a proceeding in a court of
law. It is undisputed that DEP did not name Johnson Matthey as defendant in the
Underlying Action until May 12, 2010. (PMA Brief at 15 (citing Simon Wrecking
Co. v. AIU Ins. Co., 350 F. Supp. 2d 624 (E.D. Pa. 2004)).)
In response, Johnson Matthey urges this Court to follow the majority of
jurisdictions in this country, which have held that PRP letters are the “functional
equivalent of suits” for purposes of triggering the insurance company’s coverage
under a commercial general liability policy. (Johnson Matthey Brief at 6 n.8 (citing,
e.g., Aetna Cas. & Surety Co., Inc. v. Pintlar Corp., 948 F.2d 1507 (9th Cir. 1991);
R.T. Vanderbilt Co., Inc. v. Cont’l Cas. Co., 870 A.2d 1048 (Conn. 2005)).)
Alternatively, Johnson Matthey contends that discovery is needed on PMA’s
“understanding, past and present, regarding the meaning of the word ‘suit’ as used
in its policies.” (Johnson Matthey Brief at 10.)
2. Analysis
Insurance policies are contracts. Jerry’s Sport Ctr., 2 A.3d at 540. The task
of interpreting a contract is generally performed by a court, not a jury. Gene &
Harvey Builders v. Pa. Mfrs.’ Ass’n Ins. Co., 517 A.2d 910, 913 (Pa. 1986).
The interpretation of insurance policies is governed by the mutual intent of the
parties at the time they formed the contract, and such intent will be inferred from the
written provisions of the contract. Jerry’s Sport Ctr., 2 A.3d at 540. Because
“insurance policies are often adhesion contracts prepared by the insurer on its own
7
forms, ambiguities in the policy should be resolved against the insurer and not
against the policy holder.” Treasure Craft Jewelers, Inc. v. Jefferson Ins. Co. of
N.Y., 583 F.2d 650, 652 (3d Cir. 1978); Bishop v. Washington, 480 A.2d 1088, 1094
(Pa. Super. 1984).
Here, the policies obligate PMA to defend where there is a “suit against
[Johnson Matthey] seeking damages on account of such bodily injury or property
damage,” and PMA “may make such investigation and settlement of any claim or
suit as it deems expedient[.]” (PMA Amended Petition for Review ¶16, Ex. C at 2,
§ I (emphasis added).) The policies do not define the term “suit”; as such, any doubt
as to the meaning of the term and any ambiguity should be resolved in Johnson
Matthey’s favor.
While Pennsylvania’s appellate courts have not yet addressed the question of
whether an environmental agency proceeding prior to the filing of a complaint in a
court of law is a “suit” within the meaning of a general liability policy, numerous
other state and federal courts have considered this issue. These decisions arose in
CERCLA proceedings, state proceedings pursuant to statutes modeled after
CERCLA, or both.
In Simon Wrecking Co., the United States District Court for the Eastern
District of Pennsylvania construed “suit” to refer to a proceeding in a court of law.
In that case, the Environmental Protection Agency (EPA) issued a PRP letter for a
contaminated site to the insured in November 1996. In February 1997, the insured
provided notice of potential liability to its insurers. In October 1997, two insurers
responded by denying coverage. In 1999, other PRPs entered into a consent decree
that gave them the right to file suit against the non-settling parties, including the
8
insured. On December 9, 2002, the PRPs to the consent decree filed a complaint
against the insured.
In 2003, the insured brought an action seeking declaratory judgment that the
insurers had a duty under their general liability policies to defend and indemnify it
in connection with the contaminated site. The policies contained coverage language
similar to the policies in the instant case:
The company will pay on behalf of the insured all sums which
the insured shall become legally obligated to pay as damages because
of . . . bodily injury or . . . property damage to which this [insurance]
policy applies, caused by an occurrence, and the company shall have
the right and duty to defend any suit against the insured seeking
damages on account of such bodily injury or property damage, even if
any of the allegations of the suit are groundless, false or fraudulent, and
may make such investigation and settlement of any claim or suit as it
deems expedient.
Simon Wrecking Co., 350 F. Supp. 2d at 636 (emphasis added).
The insurers moved for summary judgment, arguing, inter alia, that the
insured’s action was barred by the four-year statute of limitations. They claimed
that any breach of the duty to defend occurred when they denied coverage in writing
in October 1997. In interpreting the term “suit,” the district court looked to
Black’s Law Dictionary and Webster’s New Collegiate Dictionary for the term’s
“common usage,” which refers to a proceeding in a court of law. Simon Wrecking,
350 F. Supp. 2d at 637. The district court noted that the policies used the term “suit”
and “claim” separately and distinctly: the insurers have the discretion to settle or
investigate any “suit or claim” but only have a duty to defend any “suit.” To give
the distinction between “suit” and “claim” any meaning, the district court opined
that the term “suit” must mean a civil action filed in a court of law, whereas a claim
would be “anything falling short of a suit.” Id.; see also Foster-Gardner, Inc. v.
9
Nat’l Union Fire Ins. Co., 959 P.2d 265 (Cal. 1998) (holding that “suit” refers to
actual court proceedings initiated by filing of complaint).7
The majority of jurisdictions, however, have held that a PRP letter issued by
the EPA or a state environmental agency initiated an administrative “suit” that
triggers an insurer’s duty to defend.8 One such case is McGinnes Industrial
Maintenance Corporation v. Phoenix Insurance Company, 477 S.W.3d 786
(Tex. 2015), where the Texas Supreme Court adopted the majority view in holding
that “suit” includes a CERCLA proceeding conducted by EPA.
In McGinnes, the insured brought an action in the United States District Court
for the Southern District of Texas against its insurers for declaratory judgment that
they owed a duty to defend the CERCLA proceedings arising from mill waste, which
contaminated a nearby river. The district court granted partial summary judgment
in favor of the insurers and certified its order for interlocutory appeal. The United
States Court of Appeals for the Fifth Circuit certified to the Texas Supreme Court
the question of “[w]hether the EPA’s PRP letters and/or unilateral administrative
order, issued pursuant to CERCLA, constitute a ‘suit’ within the meaning of the
7
The United States District Court for the Eastern District of Pennsylvania took the same
position in its unreported decision in Sunoco, Inc. v. Illinois National Insurance Company,
(E.D. Pa., Civ. A. No. 04-4087, Jan. 11, 2007) (Sunoco I).
8
See, e.g., Aetna Cas. & Surety Co., Inc., 948 F.2d 1507; R.T. Vanderbilt Co., Inc.,
870 A.2d 1048; Travelers Indem. Co. v. Summit Corp. of Am., 715 N.E.2d 926
(Ind. Ct. App. 1999); A.Y. McDonald Indus. v. Ins. Co. of N. Am., 475 N.W.2d 607 (Iowa 1991);
Aetna Cas. & Sur. Co. v. Com., 179 S.W.3d 830 (Ky. 2005); Hazen Paper Co. v. U.S.
Fid. & Guar. Co., 555 N.E.2d 576 (Mass. 1990); Michigan Millers. Mut. Ins. Co. v.
Bronson Plating Co., 519 N.W.2d 864 (Mich. 1994); SCSC Corp. v. Allied Mut. Ins.
Co., 536 N.W.2d 305 (Minn. 1995); Dutton-Lainson Co. v. Cont’l Ins. Co., 778 N.W.2d 433
(Neb. 2010); Coakley v. Maine Bonding & Cas. Co., 618 A.2d 777 (N.H. 1992);
Certain Underwriters at Lloyd’s London & Express Ins. Co. v. Mass. Bonding & Ins. Co.,
230 P.3d 103 (Or. Ct. App. 2010).
10
[commercial general liability] policies, triggering the duty to defend.” McGinnes,
477 S.W.3d at 790.
The Texas Supreme Court recognized that “suit” commonly refers to a
proceeding in court. In the context of the general liability policies, however, the
court held that the term must also include CERCLA enforcement proceedings by
the EPA. The court stated cogently the reasons for its holding:
The PRP notice letters serve as pleadings. The EPA obtains
discovery through requests for information, indistinguishable from
interrogatories under the rules of civil procedure. It engages in
mediation through its invitations to settle. A unilateral administrative
order resembles summary judgment. The fines and penalties for willful
non-cooperation in the process are like sanctions in a court proceeding,
only prescribed by statute. And part of the judicial function is ceded to
the EPA by limiting a PRP’s opportunity for review until the end of the
process, and then limiting that review to an abuse of discretion by
the EPA, based on its own record.
[The insured] argues that EPA proceedings are the functional
equivalent of a suit, but in actuality, they are the suit itself, only
conducted outside a courtroom. Had the EPA wanted to force [the
insured] to clean up the [contamination s]ite before 1980, it would have
been required to sue first, and the [comprehensive general liability]
policies would have obligated the [i]nsurers to defend—to challenge
the pleadings, to contest the scope of discovery, to engage in mediation
on a level playing field, to resist judgment, and to settle—all without
fear of being sanctioned at the very end for not having cooperated with
the opponent. CERCLA effectively redefined a “suit” on cleanup
claims to mean proceedings conducted by one of the parties, the EPA,
followed by an enforcement action in court, if necessary.
[The insured’s] rights under its policies should not be emasculated by
the enactment of a statute intended not to affect insurance, but to
streamline the EPA’s ability to clean up pollution.
McGinnes, 477 S.W.3d at 791.
11
Upon review of CERCLA and HSCA, which was modeled after CERCLA,9
we find the reasoning in McGinnes persuasive. CERCLA gives states the right to
recover costs incurred in cleaning up a contamination site from a PRP, and once an
entity is identified as a PRP, it may be compelled to reimburse the government for
past and future response costs. Pa. Dep’t of Envtl. Prot. v. Trainer Custom Chem.,
LLC, 906 F.3d 85, 89-90 (3d Cir. 2018) (citing 42 U.S.C. § 9607). Liabilities that
the insured incurs in response to a PRP letter, if any, are far from voluntary;
indeed, ignoring a PRP letter brings legal consequences. Section 1102(a) of HSCA
authorizes DEP to “issue orders to persons as it deems necessary to aid in the
enforcement of the provisions of this act,” such as “orders requiring response
actions, studies and access.” 35 P.S. § 6020.1102(a). “It shall be the duty of any
person to proceed diligently to comply with an order issued under this section,” or
the person shall be found “guilty of contempt and shall be punished by the court in
an appropriate manner.” 35 P.S. § 6020.1102(c).
Further, DEP possesses adjudicative authority in CERCLA and HSCA
proceedings. A PRP’s response to the PRP letter may become part of the
9
Section 102 of HSCA, 35 P.S. § 6020.102, provides, in relevant part:
The General Assembly finds and declares as follows:
....
(7) [CERCLA] provides numerous opportunities for states to participate in the
cleanup of hazardous sites. It is in the interest of the citizens of this Commonwealth
that the Commonwealth be authorized to participate in such cleanups and related
activities to the fullest extent.
....
(12) The following are the purposes of this act:
(i) Authorize the [DEP] to participate in the investigation, assessment and
cleanup of sites under [CERCLA] to the full extent provided by that act.
12
“administrative record,”10 upon which DEP makes “findings of fact,” determines its
“response,” and files a “statement of decision.” 25 Pa. Code § 3.31. A PRP’s
challenge to DEP’s selection and adequacy of a response action shall be limited to
the administrative record developed under the statute, and DEP’s decision is
overturned by judicial review only when it is found “arbitrary and capricious.”
Section 508(c) of HSCA, 35 P.S. § 6020.508(c).
In sum, a PRP letter issued by DEP, backed by threats of penalties and
sanctions, is more than a simple demand letter threatening a lawsuit or a “claim,” as
distinguished from a “suit” in the insurance policies. Like a civil complaint, the PRP
letter commences a legal process to determine, subject only to review for abuse of
discretion, the appropriate response action that a PRP must perform or fund to abate
the pollution at a site. In other words, DEP, by issuing the PRP letter, initiated an
administrative suit under CERCLA and HSCA against Johnson Matthey.
10
Section 506(a) of HSCA, 35 P.S. § 6020.506, provides that the administrative record
upon which a response action is based shall consist of all of the following:
(1) The notice issued under subsection (b).
(2) Information, including, but not limited to, studies, inspection reports,
sample results and permit files, which is known and reasonably available to [DEP]
and which relates to the release or threatened release and to the selection, design
and adequacy of the response action.
(3) Written comments submitted during the public comment period under
subsection (c).
(4) Transcripts of comments made at the public hearing held under
subsection (d).
(5) [DEP’s] statement of the basis and purpose for its decision, including
findings of fact, an analysis of the alternatives considered and the reasons for
selecting the proposed response action, and its response to significant comments
made during the public comment period.
(6) The docket maintained under subsection (f), listing the contents of the
administrative record.
13
To be sure, neither CERCLA nor HSCA existed when the policies at issue
were issued, and, certainly, we cannot presume that PMA and Johnson Matthey’s
predecessors anticipated the kind of environmental cleanup costs imposed by DEP
that are at issue here. Practices and procedures before administrative tribunals of
this Commonwealth, like those of their federal counterparts, however, had been
established at the time. For instance, the Administrative Agency Law of 194511
provided for procedures for administrative adjudications and judicial review.
While we have no quarrel with PMA’s reasoning that a “suit” must be more than a
“claim,” Simon Wrecking Co., 350 F. Supp. 2d at 637, we cannot agree that an
administrative suit, like the one brought by DEP in the instant case, is merely a
“claim” and, thus, not subject to the defense requirement.
As the Texas Supreme Court pointed out in McGinnes, CERCLA effectively
redefined “suit” on cleanup claims to mean proceedings conducted by the EPA,
followed by an enforcement action in court, if necessary. McGinnes, 477 S.W.3d
at 791. Likewise, our General Assembly enacted HSCA with a similar intent:
(5) Traditional legal remedies have not proved adequate for
preventing the release of hazardous substances into the environment or
for preventing the contamination of water supplies. It is necessary,
therefore . . . to provide new remedies to protect the citizens of this
Commonwealth against the release of hazardous substances . . . .
(6) Traditional methods of administrative and judicial review have
interfered with responses to the release of hazardous substances into
the environment. It is, therefore, necessary to provide a special
procedure which will postpone both administrative and judicial review
until after the completion of the response action.
11
Act of June 4, 1945, P.L. 1388, as amended, formerly 71 P.S. §§ 1710.1-.111.
The Administrative Agency Law of 1945 was repealed by the Act of April 28, 1978, P.L. 202.
This act has been substantially recodified by the Administrative Agency Law, 2 Pa. C.S.
§§ 501-508; 701-704.
14
Section 102(5), (6) of HSCA, 35 P.S. § 6020.102(5), (6) (emphasis added).
PMA’s proposed interpretation of the term “suit,” if adopted, would compel the
insured to ignore the PRP letter and force DEP to initiate a suit in a court of law to
obtain insurance coverage. This could well entail much higher costs and expenses
of defense, as prescribed under HSCA, and frustrate legislative intent.
For these reasons, we conclude that PMA’s duty to defend was triggered on
May 24, 2006, when DEP notified Johnson Matthey that it had been identified as a
PRP with respect to environmental contamination at the Site. We also conclude that
defense costs within commercial general liability policies include any costs incurred
by a party defendant to either avoid or limit liability under CERCLA and HSCA.
This Court thus denies PMA’s summary relief to the extent it seeks a ruling that any
expenses incurred by Johnson Matthey related to the Site prior to May 12, 2010,
should not be deemed defense costs under the applicable PMA policies.
B. RI and FS Costs
1. Summary of Arguments
We now turn to the second declaratory ruling that PMA seeks in its application
for partial summary relief, which is that the RI and FS costs incurred by Johnson
Matthey for the Site must be characterized as indemnity costs, not defense costs.
PMA contends that under the amended consent order, DEP can take over the
remediation and recover its costs against Johnson Matthey as “damages,” which
would be payable as indemnity costs under applicable insurance policies.
(PMA Brief at 16.) For this reason, PMA argues that Roux’s invoices incurred as a
result of performing RI and FS on behalf of Johnson Matthey should be allocated as
indemnity payments.
15
PMA urges this Court to adopt the view of the United States District Court for
the Eastern District of Washington in Travelers Indemnity Company v. City of
Richland, (E.D. Wash., No. 4:17-cv-5200, May 30, 2018) (unreported). In that case,
the City of Richland (Richland) operated a municipal landfill that allegedly had
released hazardous substances. The state notified Richland that it was liable under
the state’s toxics control statute for remedial action costs and for all damages
resulting from these releases. Richland entered into an “agreed order” with the state
and agreed to undertake RI and FS for the landfill.
The insurer paid for Richland’s defense costs incurred for the period between
the state’s preliminary determination notification and the execution of the agreed
order. A dispute arose, however, with respect to the insurer’s continued duty to
defend after the agreed order, which prompted the insurer to commence the
declaratory judgment action in federal court. In a partial summary judgment motion,
the insurer asserted that its duty to defend ceased when Richland entered into the
agreed order and that any costs of performing the RI and FS under the agreed order
were “damages” and payable as indemnity, not defense costs.
The district court agreed with the insurer and granted its motion. The district
court noted that the state’s toxics control statute required that a “potential liable
person” as found by the state environmental agency comply with the agreed order,
which may be used to require or approve cleanup or other remedial actions.
Although it was not filed with the court, the agreed order settled Richland’s
obligation to do the RI and FS for the landfill. The district court held that the RI and
FS costs Richland incurred constituted “damages,” because they were paid as a result
of a liability imposed by law.
16
Johnson Matthey counters that it has served discovery requests on PMA that
relate to this claim and must be permitted to proceed because of the “fact-intensive
nature of PMA’s claim.” (Johnson Matthey Brief at 15.) Johnson Matthey contends
that, in any event, “courts throughout the country” characterize RI and FS costs as
defense costs because they are necessary, unavoidable expenses that would reduce
the insured’s ultimate liability. (Johnson Matthey Brief at 7 n.8 (citing, e.g.,
Aerojet-Gen. Corp. v. Transp. Indem. Co., 948 P.2d 909 (Cal. 1997), Am. Bumper
& Mfg. Co. v. Hartford Fire Ins. Co., 550 N.W.2d 475 (Mich. 1996)).)
2. Competing Views
Pennsylvania has not yet addressed the question of whether RI and FS costs
incurred during a government-mandated cleanup process should, for insurance
purposes, be regarded as defense costs or indemnity costs. Under CERCLA and its
accompanying regulations, RI and FS costs are generally incurred to “assess site
conditions and evaluate alternatives to the extent necessary to select a remedy.”
40 C.F.R. § 300.430. Simply put, RI and FS costs do not include the actual
remediation of the contamination. Policyholders often take the position that RI and
FS costs should be characterized as defense costs, while primary insurers argue that
such costs are indemnity costs so as to exhaust their contracts’ limits of liability.
Seaman & Schulze, ALLOCATION OF LOSSES IN COMPLEX INSURANCE COVERAGE
CLAIMS, §10:5 (updated December 2019), at 2.
The district court’s unreported decision in Travelers, on which PMA relies,
represents the view taken by several state and federal jurisdictions that to the extent
that costs were imposed upon insureds pursuant to CERCLA or similar state statutes
in satisfaction of their claimed liability, they should be covered, if at all, as indemnity
costs. These jurisdictions interpret the term “damages” in the environmental setting
17
broadly to bring all RI and FS costs within policy coverage. However, insureds
generally expect that the insurer will investigate the potential liability of an insured
under the insurer’s duty to defend under the insurance contract, and, likewise, most
insurers expect that they will incur these expenses. That the government orders the
insured to perform an investigation does not change the character of the work or the
initial expectation of the parties.
It is for that reason several other jurisdictions, attempting to discern how to
characterize RI and FS costs, have focused not on the timing of costs or agreements
with regulators, but on the nature or purpose of the work performed.
In Aerojet-General Corporation, an insured instituted a declaratory judgment action
against its insurer for coverage for losses resulting from groundwater contamination
under the insured’s industrial facility. At issue was whether site investigation
expenses, including those incurred for determining the existence, nature, extent, and
effect of the discharge of hazardous substances, constituted defense costs that the
insurer must incur in fulfilling its contractual duty to defend. The California
Supreme Court set forth a three-part analysis to address whether the insured’s site
investigation expenses constituted defense costs: (1) the site investigation must be
conducted within the temporal limits of the insurer’s duty to defend (i.e., between
tender of defense and conclusion of the action); (2) the site investigation must
amount to a reasonable and necessary effort to avoid or at least minimize liability;
and (3) the site investigation expenses must be reasonable and necessary for that
purpose. Id. at 922. The court ultimately affirmed the lower court to the extent it
held that site investigation expenses might constitute defense costs.12 Id. at 933.
12
In Aerojet-General Corporation, the site investigation expenses were incurred after the
insured had been sued in the court for environmental contamination. Aerojet-General Corporation
(Footnote continued on next page…)
18
Likewise, in American Bumper, an insured sued its liability insurers seeking
to recover costs incurred in responding to governmental demands to investigate its
seepage lagoon for possible violation of CERCLA. The Michigan Supreme Court
held that the insurers had a duty to defend during the investigation process to
determine whether the site was in fact contaminated and that the site investigation
costs incurred after and in response to the PRP letter issued by the EPA were
recoverable defense costs if they were expended to “defeat or limit the scope of
liability and were not ordinary costs of doing business.” Id. at 477. On the other
hand, costs expended during the investigation process that “go toward remediation,
or making a potentially injured party whole, are indemnification.” Id. at 485. In
sum, Aerojet-General Corporation and American Bumper distinguish between
defense and indemnity costs in the context of CERCLA by defining defense costs as
costs incurred to defeat or limit the scope of liability and indemnity costs as those
incurred to compensate for damages.
A growing number of jurisdictions have taken a “middle-ground” approach in
characterizing the RI and FS costs. In the seminal case General Accident Insurance
Company of America v. State, Department of Environmental Protection
(N.B. Fairclough & Son, Inc.), 672 A.2d 1154 (N.J. 1996) (Fairclough), the insurer
brought a declaratory judgment action concerning coverage under a general liability
policy for groundwater cleanup claims against the insured. The insurer asserted that
it owed no further duty to defend or indemnify the insured due to exhaustion of
policy limits. The New Jersey Supreme Court remanded the matter to the trial court
with instructions to fairly allocate the RI and FS costs between the defense and
thus did not involve the issue of an insurer’s duty to defend its insured prior to a complaint being
filed.
19
indemnity provisions of the insurance contract.13 The court held that there is a
presumption that the government-mandated RI and FS costs are indemnity costs;
however, that presumption may be overcome by the insured, who bears the burden
of demonstrating that the insurance company would derive an unjust benefit from
such an allocation to the extent it would relieve the insurance company of an expense
that otherwise would have been incurred under its obligation to defend. Id. at 1162.
In so holding, the court reviewed the Michigan (American Bumper) approach
and observed that it is difficult to “draw[] the line between studies that will help to
‘mitigate or reduce liability’ and those that are done to ‘correct the problem.’”
Id. at 1160 (citing Fireman’s Fund Ins. Co. v. Ex-Cell-O Corp., 790 F. Supp. 1318
(E.D. Mich. 1992)). The court opined that conservation of resources should be a
goal of the decision-making, as “[courts] do not want to encourage needless
litigation” and “must avoid, at all costs, another war of experts to determine how
much of the costs should be allocated to defense and how much to indemnity.”
Fairclough, 672 A.2d at 1162.
The United States Court of Appeals for the Third Circuit, in a case governed
by New Jersey substantive law, followed the approach in Fairclough. See Chem.
Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 177 F.3d 210 (3d Cir. 1999)
(holding excess insurer may rebut presumption that RI and FS costs are indemnity
costs because classification of costs as defense costs would relieve it of
13
The New Jersey Supreme Court further listed several factors for the trial court to
consider, on remand, in making the allocation. These factors include: (1) the relative risk that the
PRP bore if it did not conduct the RI and FS; (2) the extent to which the details of the RI and FS
may have been mandated by the environmental agency; (3) the extent to which the RI and FS
provided a means by which the insurance company or the policyholder would be relieved of, or be
able to mitigate, potential claims for damages; and (4) the cost of preparing the RI and FS in
relation to the policy limits provided. Fairclough, 672 A.2d at 1162.
20
responsibility for such costs). In Sunoco, Inc. v. Illinois National Insurance
Company, 503 F. Supp. 2d 743 (E.D. Pa. 2007) (Sunoco II), the United States
District Court for the Eastern District of Pennsylvania, in a case governed by
Pennsylvania substantive law, chose to apply the New Jersey presumption as well.
It did so relying in part on its earlier decision in Sunoco I that a PRP letter does not
even trigger an insurer’s duty to defend under Pennsylvania law because it is not a
“suit,” as the district court defined that term:
We find that the New Jersey presumption—that mandated
clean-up costs are indemnity costs to be allocated to indemnity
provisions of the policy, but allowing a policyholder to rebut that
presumption by showing that the insurance company would derive an
unjust benefit from such an allocation if it would relieve the insurance
company of an expense that it would otherwise have incurred under its
obligation to defend—should apply and that Sunoco has not
demonstrated its entitlement to summary judgment on this record.
Sunoco, as the moving party, presents no factual basis that would rebut
the presumption that the expenses associated with [the consultant’s]
work to remediate the site and mitigate liability were indemnity
expenses. We find no basis for determining that [the insurance
company] derived an unjust benefit from this allocation, given our
determination that expenses incurred pursuant to the . . . PRP letter and
Consent Order cannot qualify as defense costs.
Sunoco II, 503 F. Supp. 2d at 754. As noted above, however, we disagree with the
district court’s narrow construction of the term “suit” in the policies as applying only
to actions initiated in courts of law. Instead, applying our assessment of
Pennsylvania law, we construe the undefined term “suit” as encompassing both
actions initiated in a court of law to address environmental property damage and
statutorily authorized alternative formal actions initiated by administrative agencies
to address the same.
The United States District Court for the Northern District of New York
developed yet another approach—equitable allocation. In Endicott Johnson
21
Corporation v. Liberty Mutual Insurance Company, 928 F. Supp. 176 (N.D.
N.Y. 1996), the insured sought a declaration of coverage for claims based on
insured’s dumping of hazardous substances at two waste disposal sites. The insured
moved for a declaratory ruling that all RI and FS costs it incurred were defense costs.
The district court denied the motion and ruled that to the extent that an expense is
primarily attributable to RI—which addresses the sources and extent of the
contamination, whether environmental damage can be mitigated by controlling the
sources, or whether additional action is necessary because of migration of
contaminants from the site—the expense will be treated as a defense cost. To the
extent that an expense is primarily attributable to FS—which comprises plans for
selecting and implementing the remediation alternative for the site—the expense will
be treated as damages to be indemnified. Indeterminate expenses will be allocated
in an equitable manner. Id. at 184.
3. Analysis
After carefully considering the competing views outlined above, we conclude
that a hybrid of the approaches taken in Fairclough and Endicott Johnson
Corporation is most consistent with Pennsylvania law, in view of the policy
language at issue and Johnson Matthey’s obligations in the amended consent order.
An insurer’s duty to defend is broader than its duty to indemnify.
Jerry’s Sport Ctr., 2 A.3d at 541. The duty to defend is a distinct obligation
“separate and apart from the insurer’s duty to provide coverage” and arises when a
claim may potentially come within the coverage of an insurance policy.
Id.; Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1368 (Pa. 1987)
(describing duty to defend as arising “whenever the complaint filed by the injured
party may potentially come within the coverage of the policy”). While the insurer’s
22
indemnity payments are subject to policy limits in commercial general liability
insurance policies, defense payments may not be capped. As such, in most general
liability policies, including the one at issue in the instant case, the duty to defend is
also a “right . . . to defend any suit against the insured seeking damages on account
of such bodily injury or property damage.” (PMA Amended Petition for Review
¶16, Ex. C at 2, § I (emphasis added).) By undertaking the right to defend the
insured, the insurer is benefited by “preserving its right to control the defense and to
take actions to mitigate any future indemnification responsibilities.” Am. & Foreign
Ins. Co. v. Jerry’s Sport Ctr., Inc., 948 A.2d 834, 848 (Pa. Super. 2008),
aff’d, 2 A.3d 526 (Pa. 2010). Where a claim has the potential to trigger a policy’s
duty to indemnify the insurer (i.e., pay damages), the insurer’s refusal to defend at
the outset of the controversy is a decision it makes at its own peril. Jerry’s Sport
Ctr., 2 A.3d at 542. The insurer’s duty to defend “exists until the claim is confined
to a recovery that the policy does not cover.” Id.
The insurance policy at issue provides that PMA “will pay on behalf of the
insured all sums which the insured shall become legally obligated to pay as
damages” and will “have the right and duty to defend any suit against the insured
seeking damages on account of such bodily injury or property damage.”
(PMA Amended Petition for Review ¶16, Ex. C at 2, § I (emphasis added).)
We reject PMA’s assertion that all costs incurred by Johnson Matthey through Roux
under DEP’s amended consent order must be characterized as indemnity under the
insurance policy. Instead, the costs must be allocated between defense and
indemnity, or damages.
It is well established in Pennsylvania that the cost of restoring land to its
original condition is recoverable in damages. In Kirkbride v. Lisbon Contractors,
23
Inc., 560 A.2d 809 (Pa. Super. 1989), the Pennsylvania Superior Court stated the
rule as follows:
The measure of damages for injury to property is the cost of repairs
where that injury is reparable unless such cost is equal to or exceeds the
value of the injured property. Where the cost of repair does exceed the
value of said property, the cost of damages becomes the value of the
property. Where, however, the injury is deemed to be permanent, the
measure of damages becomes the decrease in the fair market value of
the property.
Kirkbride, 560 A.2d at 812 (citations omitted). In Kirkbride, the Superior Court
affirmed a damage award in the form of restoration costs despite the defendant’s
contention that such costs were improper because they significantly exceeded the
diminution in the value of the land. Because the injury was reparable, plaintiffs
“were entitled to receive the costs of restoring their land back to its original
condition.” Id. at 813. The Superior Court held so by relying on the Supreme
Court’s decision in Lobozzo v. Adam Eidemiller, Inc., 263 A.2d 432 (Pa. 1970),
which “specifically noted that, with regard to remedial damage to realty, a plaintiff
may recover only the cost of repair or restoration without regard to the diminution
in value of the property.” Kirkbride, 560 A.2d at 813. Consistently, we hold that
under Pennsylvania law costs incurred in CERCLA and HSCA proceedings for
purposes of repairing or restoring the land to its original condition are recoverable
as “damages” and, therefore, are covered as indemnity costs under general liability
insurance policies at issue in this matter. The damages recoverable, however, cannot
exceed the value of the property. Id. at 812.
Turning to the actions Johnson Matthey was required to take at the Site, the
amended consent order provides, in pertinent part:
After full and complete negotiation of all matters set forth in this
AMENDED CONSENT ORDER AND AGREEMENT (Amended
Agreement) and upon mutual exchange of the covenants contained
24
herein, the parties intending to be legally bound, it is hereby
ORDERED by [DEP] and AGREED to by Johnson Matthey and
Whittaker as follows:
1. Authority. This Amended Agreement is an Order of the [DEP]
authorized and issued pursuant to Sections 505(c) and 1102 of
HSCA, 35 P.S. §[§] 6020.505(c) and 6020.1102. The failure of
Johnson Matthey and/or Whittaker to comply with the terms and
conditions of this Amended Agreement shall subject Johnson
Matthey and/or Whittaker to any and all remedies available to the
[DEP] for the violation of an Order.
....
3. Environmental Investigations. Environmental Investigations are
defined as all of Johnson Matthey’s and Whittaker’s obligations as
identified in Paragraph 5 of this Amended Agreement.
....
5. Johnson Matthey’s and Whittaker’s Obligations. Johnson
Matthey and Whittaker shall:
....
b. Prepare a Work Plans(s) for the completion of a Site
Investigation that will characterize the following media and
pathways at the Site: 1) Groundwater contamination contained
within the bedrock originating from the [Site]; 2) Contaminated
groundwater contained within the overburden (i.e. above the
bedrock zone) originating from the [Site], and occurring on
properties down-gradient from the [Site]; 3) The vapor
intrusion pathway resulting from migration of contaminants
from the [Site]; 4) The groundwater to surface water pathway,
to determine whether, and if so where, contaminated
groundwater resulting from the [Site] may be entering Little
Valley Creek or other surface water features; 5) Performance
of a Risk Assessment; and 6) a Feasibility Study (if necessary).
....
f. The final Site Investigation Report shall conform to the
requirements of Chapter 250.408 of the Land Recycling
Program Regulations pertaining to Remedial Investigations
conducted under the [DEP’s] Land Recycling Program
25
(Act 2).[14] The Feasibility Study Report (if necessary) shall be
in accordance with “Guidance for Conducting Remedial
Investigations and Feasibility Studies under CERCLA, Interim
Final” (October 1988) and shall include at least two remedial
alternatives capable of meeting an Act 2 Standard or
combination of Act 2 Standards. Within 30 days of submitting
any Final Feasibility Study Report, the parties shall advise the
[DEP] in writing which, if any, contaminated media present at
the Site require remediation to meet one or more standards
established under Act 2.
....
h. Upon approval or modification of the Work Plan(s) and subject
to Paragraph 13 (Force Majeure), Johnson Matthey and
Whittaker shall implement the Site investigation in accordance
with the Work Plan(s) and schedule contained therein as
approved or modified by the [DEP].
(PMA Application for Partial Summary Relief, Ex. E, at 6-7.) In sum, the amended
consent order requires Johnson Matthey to perform a site investigation, subject to
the approval of DEP, to characterize the scope and extent of the groundwater
contamination originating from the Site and occurring on “properties down-gradient
from the [Site]” and nearby surface waters. (Id.) The amended consent order further
requires Johnson Matthey to submit an FS report, “if necessary,” and select at least
two remedial alternatives in compliance with CERCLA and Act 2 standards. (Id.)
The site investigation must conform to the RI requirements in Section 250.408
of DEP’s regulations, which “shall sufficiently define the rate of movement and the
present and future extent and fate of contaminants, to ensure continued attainment
of the remediation standard.” 25 Pa. Code § 250.408. Further, under
Section 250.408(b):
14
Land Recycling and Environmental Remediation Standards Act, Act of May 19, 1995,
P.L. 4, No. 2, 35 P.S. §§ 6026.101-.908.
26
[A]n appropriate number of sample locations should be investigated
from the identified media of concern to characterize the nature and
composition of the contaminants including:
(1) Source characterization or development of a conceptual site
model.
(2) The vertical and horizontal extent of contamination above the
selected standard within each medium of concern.
(3) The direction and rate of contaminant movement within each
medium of concern.
(4) Identification of the appropriate remedial technology options for
each medium of concern.
25 Pa. Code § 250.408(b). CERCLA and its accompanying regulations provide,
likewise, that the purpose of an RI is to “collect data necessary to adequately
characterize the site for the purpose of developing and evaluating effective remedial
alternatives,” and the “primary objective” of an FS is to “ensure that appropriate
remedial alternatives are developed and evaluated such that relevant information
concerning the remedial action options can be presented to a decision-maker and an
appropriate remedy selected.” 40 C.F.R. § 300.430(d)(1), (e)(1).
In view of the policy language, the amended consent order, and the EPA and
DEP regulations, an RI is primarily an information gathering process to determine
the scope and extent of contamination. This is the type of investigation an insurer
would be expected to engage in under its duty to defend for purposes of determining
the risk of loss and “mitigat[ing] future indemnification responsibilities.”
Jerry’s Sport Ctr., 948 A.2d at 848. On the other hand, the purpose of an FS is to
develop and evaluate remedial actions for purposes of repairing or restoring the land
to its original condition, the implementation of which will carry a cost recoverable
under Pennsylvania law as an item of “damages.” Kirkbride, 560 A.2d at 812.
Accordingly, we presume that to the extent an expense is primarily
attributable to an RI, which addresses the sources, scope, and extent of the
27
contamination, it is a defense cost. The burden should be on the insurer, or any party
disadvantaged by the presumption, to show that the insured has derived an unjust
benefit from such an allocation to the extent that the insurer has incurred an expense
that would have been covered as damages for indemnification and subject to policy
limit under the insurance policy. Likewise, we presume that to the extent that an
expense is primarily attributable to an FS, which comprises plans for selecting and
implementing the remediation alternatives for the site, it is an indemnity cost.
The burden should be on the insured, or any party disadvantaged by the presumption,
to show that the insurer has derived an unjust benefit from such an allocation to the
extent that it has relieved the insurer of an expense that it would otherwise have
incurred under its obligation to defend.
This approach points us toward our goal of fulfilling the fair expectations of
the parties to the insurance contract. While insureds and insurers generally expect
that a careful investigation of the insured’s potential liability will be provided by the
insurer pursuant to its duty to defend, it is unlikely that the insured could fairly
expect that the insurer would bear limitless liability to perform RI and FS associated
with government-mandated environmental cleanups. As the New Jersey Supreme
Court pointed out in Fairclough, the issue of characterizing RI and FS costs incurred
in the context of CERCLA is “legally and scientifically complex,” and courts must
attempt to provide a cost-efficient method of resolving disputes that are not plainly
controlled by policy language. Fairclough, 672 A.2d at 1163. We believe that under
Pennsylvania law, a balanced solution that allocates the costs between defense and
indemnity, rebuttable by the party disadvantaged by the presumption, is appropriate.
For all of these reasons, we deny PMA’s application for summary relief to the
extent it seeks a ruling that the RI and FS costs incurred by Johnson Matthey for the
28
Site under DEP’s August 4, 2009 amended consent order must be characterized as
indemnity costs.
III. JOHNSON MATTHEY’S APPLICATION
FOR PARTIAL SUMMARY RELIEF
A. Summary of Arguments
Johnson Matthey seeks summary relief on its claims that PMA has breached
its duty to defend by failing to pay in full Johnson Matthey’s counsel fees from
May 31, 2015 forward. Specifically, Johnson Matthey’s application for partial
summary relief demands that PMA (1) reimburse Johnson Matthey for all of the
legal fees it paid to Saul Ewing with respect to the “Bishop Tube Claim” during the
June 2015 to December 2018 period; (2) pay Saul Ewing’s bills for its work from
January 2019 forward, in full and without deductions; and (3) pay Johnson
Matthey’s defense costs going forward at the rates billed by Saul Ewing and without
reductions. (Johnson Matthey Application for Partial Summary Relief ¶¶14, 15.)
The “Bishop Tube Claim,” Johnson Matthey avers, is its “alleged liability for
environmental property damage relating to” the Site, which includes, “without
limitation,” the Underlying Action. (Id. ¶1.) Johnson Matthey argues that under
Gedeon v. State Farm Mutual Automobile Insurance Company, 188 A.2d 320, 322
(Pa. 1963), “recovery for breach of the covenant to defend will ordinarily be the cost
of hiring substitute counsel and other costs of the defense.”
Johnson Matthey’s application includes affidavits and correspondence
between PMA and Johnson Matthey, which show, inter alia, that PMA agreed to
retain Saul Ewing to defend Johnson Matthey in the Underlying Action on
February 7, 2011, and Saul Ewing agreed to comply with PMA’s liability litigation
management guidelines for defense counsel (Litigation Guidelines). (Johnson
Matthey Application, John M. Hagan Affidavit, Ex. 1.) PMA had paid Saul Ewing
29
at the negotiated, reduced, hourly rates until May 31, 2015, when PMA withdrew
from the defense of the Underlying Action, and PMA owes Johnson Matthey
$570,715.79 for legal work that Saul Ewing did from June 2015 through
December 2018.15 (Johnson Matthey Application, Amy Donohue-Babiak
Affidavit ¶5.) The Underlying Action was placed on a suspended docket in
March 2009, while “certain aspects of the remedial investigation” at the Site were
performed. (Johnson Matthey Application, Cathleen M. Devlin Affidavit ¶4.)
The Underlying Action was returned to the active docket in June 2017, and
discovery in the Underlying Action closed on December 31, 2018. (Id. ¶¶4-5.)
Saul Ewing offered a 10% discount on its standard hourly rates and is owed
$90,083.40 for work performed with respect to the Underlying Action from
January 1, 2019, through August 31, 2019. (Id. ¶¶7-8.) Johnson Matthey
acknowledged that PMA has paid “certain Saul Ewing invoices,” i.e., for work done
between January and April of 2019. (Johnson Matthey Application ¶10.) In its brief,
Johnson Matthey denies that either it or Saul Ewing agreed to the Litigation
Guidelines or even received them. (Johnson Matthey Brief at 10.) It argues that
PMA has applied the Guidelines “retroactively and unilaterally” in order to obtain
“further reductions of Saul Ewing’s invoices.” (Id.)
In response, PMA contends that Saul Ewing was retained to defend the
Underlying Action, not the “Bishop Tube Claim” as broadly defined by Johnson
Matthey. PMA asserts that it is not required to pay “any and all invoices and
submittals made by defense counsel”; rather, it has in the past and will in the future
15
Johnson Matthey avers that it paid Saul Ewing a total of $1,089,570.56 for work
performed from June 2015 through December 2018, for which PMA has only reimbursed
$518,854.77.
30
pay for all “reasonable defense costs and fees incurred by Saul Ewing.” (PMA Brief
at 1, 10.)
PMA avers that on September 25, 2018, it advised Johnson Matthey that it
would pay all reasonable defense costs and fees incurred by the latter in the defense
of the Underlying Action for the period of May 31, 2015, through June 30, 2018,
and that PMA would continue to defend Johnson Matthey in the Underlying Action.
(PMA Answer in Opposition to Johnson Matthey’s Application for Partial Summary
Relief, Ex. B, Sallyanne Donovan Affidavit ¶11.) All payments would be made
“subject to Saul Ewing’s then[-]standard attorney billing rates and [Litigation]
Guidelines.” (Id.)
PMA maintains that it is not responsible for the following fees and costs
submitted by Johnson Matthey for the period of May 31, 2015, through
June 30, 2019:
• Fees and costs incurred prior to June 2017, when the Underlying
[Action] was in “civil suspense” and therefore inactive.
• Fees billed by Saul Ewing for work related to insurance coverage
issue and not the Underlying [Action].
• Fees and costs for non-professional services and other
un-reimbursable charges as set forth in the [Litigation] Guidelines.
(PMA Answer, Ex. B, Sallyanne Donovan Affidavit ¶12.) PMA identifies the
following fees and costs included in Saul Ewing’s invoices as for “non-professional
services” or “un-reimbursable charges”:
• Work entries that are block billed with no separate outlined billing
times for each task performed;
• Costs for which no receipts have been submitted;
• Duplicative attendance at depositions;
• Interoffice conferences between Saul Ewing lawyers and/or staff;
31
• Vague time entries that list a task but do not identify whatsoever the
purpose of the task/work.
(PMA Answer, Ex. B, Sallyanne Donovan Affidavit ¶18.) PMA further avers that
Johnson Matthey has not submitted, and PMA has not reviewed, Saul Ewing’s
invoices for the period of July 1, 2018, to December 31, 2018. (PMA Answer, Ex. B,
Sallyanne Donovan Affidavit ¶20.)
B. Analysis
PMA agreed to defend “any suit against [Johnson Matthey] seeking
damages on account of . . . bodily injury or property damage.” (PMA Amended
Petition for Review ¶16, Ex. C at 2, § I.) A refusal to defend constitutes a breach of
contract, and damages for the breach are based upon “the usual contract rule.”
Gedeon, 188 A.2d at 322. This rule allows an award of damages “which will
place the injured party in the position which he would have been in had the
obligation in question been performed.” Id. at n.5 (citing Restatement (First) of
Contracts § 329(a) (Am. Law Inst. 1932)). As such, “the recovery for breach of the
covenant to defend will ordinarily be the cost of hiring substitute counsel and other
costs of the defense.” Id. at 322.
While it is true that damages are owed to the insured in the amount that returns
the parties to the position they would have been in but for the breach, the insured is
not expected or required to hire substitute counsel under the same terms as the
insurer would have but for the breach. We, thus, reject PMA’s assertion that Johnson
Matthey and Saul Ewing were bound by the Litigation Guidelines after
May 31, 2015, when PMA breached its contractual obligation to defend.
Conversely, if PMA resumed its duty to defend, as it alleges, on September 25, 2018,
PMA is not prohibited from negotiating a substitute fee arrangement with
32
Saul Ewing or even obtaining substitute counsel, so long as Johnson Matthey is not
prejudiced.
We also reject Johnson Matthey’s argument that PMA is required to pay all
Saul Ewing invoices from May 31, 2015, through the present. To hold otherwise
would deviate from the well-established contract rule that a party that suffers
damages as a result of breach of contract is bound to use ordinary care and diligence
to lessen damages as far as is practicable. Henry Shenk Co. v. Erie Cty., 178 A. 662,
666 (Pa. 1935) (observing “a party cannot recover damages from a defaulting
defendant which could have been avoided by the exercise of reasonable care and
effort,” and this rule is applicable to “all types of contracts”). While the recovery
for breach of the duty to defend will “ordinarily be the cost of hiring substitute
counsel and other costs of the defense,” Gedeon, 188 A.2d at 322, our Supreme
Court has also illustrated:
Damages for which compensation may be justly claimed and allowed
are such only as naturally and ordinarily flow from the breach of
contract complained of. They should be such as may fairly be supposed
to have entered into the contemplation of the parties when they made
the contract, or such as might according to the ordinary course of things
be expected to follow its violation.
Macchia v. Megow, 50 A.2d 314 (Pa. 1947); see also Birth Ctr. v. St. Paul Cos., Inc.,
787 A.2d 376, 390 (Pa. 2001) (holding that where insurer’s refusal to settle claim
constituted breach of its contractual duty to act in good faith and its fiduciary duty
to its insured, insurer is liable for “known and/or foreseeable compensatory damages
of its insured that reasonably flow from the insurer’s bad faith conduct” (emphasis
added)).
After viewing the record in the light most favorable to PMA, the nonmoving
party, we conclude that there are disputed material issues of fact that relate to
33
Johnson Matthey’s counterclaims. Summer Sch., Inc., 108 A.3d at 196. While we
agree that PMA breached its duty to defend by withdrawing from the defense of the
Underlying Action on May 31, 2015, the record is unclear whether Johnson
Matthey’s claimed damages, namely, $570,715.79 for Saul Ewing’s work performed
from June 2015 through December 2018, and $90,083.40 from January 2019 through
August 2019, were all caused by PMA’s breach on May 31, 2015. The Underlying
Action was placed on a suspended docket in March 2009 and was not returned to the
active docket until June 2017, and certain invoices submitted by Saul Ewing,
according to PMA, were unrelated to the Underlying Action. (PMA Answer, Ex. B,
Sallyanne Donovan Affidavit ¶12.) Stated otherwise, the record is unclear whether
all of Saul Ewing’s invoices were “costs of the defense” incurred to either avoid or
limit liability under CERCLA and HSCA. Gedeon, 188 A.2d at 322. Further, it may
be that PMA has resumed its duty to defend since September 25, 2018, and, if so, it
should be allowed to attempt to renegotiate the fee arrangement with Saul Ewing or
even obtain substitute counsel, so long as no prejudice falls on Johnson Matthey.
For all these reasons, we deny Johnson Matthey’s application for partial
summary relief that demands PMA pay in full Johnson Matthey’s counsel fees from
May 31, 2015, forward.
IV. CONCLUSION
For the reasons set forth above, we deny PMA’s application for partial
summary relief. In doing so, we hold that PMA’s duty to defend was triggered on
May 24, 2006, when DEP notified Johnson Matthey that it had been identified as a
PRP with respect to environmental contamination at the Site. We also hold that the
costs incurred by Johnson Matthey through Roux under DEP’s amended consent
order must be allocated between defense costs and indemnity costs (damages).
34
Expenses primarily attributable to RI are presumed to be defense costs. The insurer
or any party disadvantaged by the presumption carries the burden to show that the
insured has derived an unjust benefit from such an allocation. Expenses primarily
attributable to an FS are presumed to be indemnity costs. The burden is on the
insured, or any party disadvantaged by the presumption, to show that the insurer has
derived an unjust benefit from the allocation. Finally, we deny Johnson Matthey’s
application for partial summary relief because issues of material fact remain in
dispute.
P. KEVIN BROBSON, Judge
President Judge Leavitt and Judge Fizzano Cannon did not participate in the decision
of this case.
35
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Pennsylvania Manufacturers’ :
Association Insurance Company, :
Petitioner :
:
v. : No. 330 M.D. 2015
:
Johnson Matthey, Inc. and :
Pennsylvania Department of :
Environmental Protection, :
Respondents :
:
Johnson Matthey, Inc., :
Third-Party Petitioner :
:
v. :
:
Continental Casualty Company, :
American Casualty Company :
of Reading, PA, and :
Federal Insurance Company, :
Third-Party Respondents :
ORDER
AND NOW, this 19th day of November, 2020, Pennsylvania Manufacturers’
Association Insurance Company’s (PMA) and Johnson Matthey, Inc.’s
cross-applications for partial summary relief are DENIED.
Pursuant to 42 Pa. C.S. § 702(b), it is the Court’s opinion that the portion of
this Order denying PMA’s cross-application for partial summary relief, relating to
the appropriate characterization and allocation of remedial investigation and
feasibility study expenses as between defense costs and indemnity (damages) costs
under a commercial insurance policy, involves a controlling question of law as to
which there is substantial ground for difference of opinion and that an immediate
appeal from the order may materially advance the ultimate termination of the matter.
P. KEVIN BROBSON, Judge