Notice of a Pre-Existing Condition and Late Notice Preclude Coverage Under and Environmental Policy
March, 2009
The Appellate Division, First Department recently ruled that an insured is not entitled to coverage for creditor reimbursement under an environmental damages insurance policy where pollution conditions were known before the inception of the policy and notice to the insurer was late. Wells Fargo Bank N.A. v. Zurich American Insurance Co., N.Y. Sup., App. Div., 1st Dept.; 2009 N.Y. App. Div. LEXIS 1390. Pursuant to the ruling, the Appellate Division upheld the decision by the trial court that Wells Fargo Bank, N.A. ("Wells Fargo") did not meet its burden of establishing coverage in connection with certain properties insured under the policy issued by Lumbermens Mutual Casualty Company ("Lumbermens").
In this action, Wells Fargo made a claim under a claims-based policy intended to secure the value of certain properties that may have been at risk for environmental pollution and which were pledged as collateral for a loan. The policy was issued in 1998 by Kemper Environmental Ltd. ("Kemper") to Convenience Mortgage Corporation, which was the underwriter of a loan to Solomon Partners Inc. and Run In Flood Stores #2 Inc. in the amount of $8.7 million. Lumbermens is the successor to Kemper, both of which were succeeded by Zurich American Insurance Co. The borrowers defaulted in 2002, and environmental site assessments were conducted in connection with the foreclosures of the individual properties. The results of the environmental assessments demonstrated that the properties had been affected by the release of petroleum hydrocarbons into the soil and groundwater from underground storage tanks. The party to whom the loan was assigned immediately notified Kemper. In the event of the borrower's default, the policy covered loss to the collateral value of the properties as a result of an "environmental incident" as defined by the policy.
The Appellate Division held that the trial court correctly construed the terms of the policy in concluding that pollution conditions which were already known before the policy period and remained unchanged during the life of the policy did not constitute an "environmental incident." Id. The Appellate Division also held that Wells Fargo failed to meet its burden of proving the collateral value loss. To satisfy this burden, Wells Fargo needed to establish values for three measures of loss, which it attempted to do through the use of expert testimony. However, the Court struck Wells Fargo's expert testimony as to cleanup costs because the testimony was speculative and could not successfully establish these costs. Id.
The Appellate Division also ruled that the notice given to the insurer lacked any of the particulars which would qualify it as proper notice of an environmental incident claim as required by the policy. Id. Notice was given in October, 2003, yet the record reflects that Wells Fargo had information about six of the sites at issue as early as August, 2002, over one year and two months earlier. Id. The Appellate Division held that the insurer would only be obligated to pay the lesser of the loan balance, the fair market value of the collateral at the time of the loan or the estimated cleanup costs upon receiving proper notice that an environmental incident occurred in addition to a default by the borrower. Id.
Learning Point:
In Wells Fargo, the Court adhered to traditional rules of contract interpretation and enforced the policy language as written, ruling that it cannot ignore clear and unambiguous policy terms and conditions. To do so, would render such terms meaningless.
For more information contact David Group at dgroup@clausen.com.
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