Contamination From A Neighboring property: What Is An Innocent New Jersey Owner To Do?

Stores5Under a new ruling by the New Jersey Supreme Court, an owner whose property becomes contaminated as a result of the migration of hazardous substances from a neighboring property will need to pursue uncharted theories of recovery if he or she seeks compensation for the economic loss caused by that migration. (Ross v. Lowitz, decided on August 6, 2015). In Ross, two spouses claimed that the use, enjoyment and value of their home had been diminished by a heating oil discharge that flowed from their neighbor’s underground storage tank onto their property. Although the migration was detected in 2006, the insurance companies providing liability coverage to the neighbor for the discharge did not begin the cleanup until 2010.  Shortly after learning of the contamination on their property, these apparently innocent owners lost a sale of their home and said that they were unable to sell it for years while the contamination remained. When the remediation finally commenced, large volumes of soil were excavated and removed from their property over a period of months.

Mr. and Mrs. Ross sued the owners of the property where the tank had been located under common law theories of nuisance and trespass, and also sued their neighbor’s insurance companies on the theory that they, the Ross’s, were third party beneficiaries of the coverage provided under those policies. They claimed that as a result of the delay in the cleanup, the insurance companies had breached their obligation of good faith and fair dealing, thereby allowing them to recover damages from the carriers.  Despite the apparently sympathetic nature of the plaintiff’s complaints, the Supreme Court rejected both of those arguments.

With respect to common law theories, a bare four member majority of the Court ruled that in the absence of any evidence of negligence or other wrongdoing by the owner of the property with the leaking heating oil tank, trespass and nuisance were unavailable to help the Plaintiff’s cause.  This was significant because under New Jersey’s main environmental statute, the Spill Compensation and Control Act, a plaintiff can force a cleanup, but cannot recover economic damages such as loss of use, enjoyment, or diminution of value.  Three of the seven justices joined in an opinion stating that they would expand the common law to give greater rights to owners to obtain recovery for economic loss in this situation.  What was not mentioned in either opinion was that there are ways to prod administrative agencies to require more prompt action to remediate and there are provisions of law and regulations setting deadlines for the commencement and completion of a remediation.

Concerning the claim by the adjacent owner against their neighbor’s insurance companies, the Court was,surprisingly, unanimous, in holding that in the absence of a policy assignment by the insured to a third party or an agreement by the insurance company to recognize a third party as having rights under the policy, the adjacent owner had no recourse under the  neighbor’s policies. This was unfortunate because the carriers largely controlled when and how to accomplish the remediation and took four years to begin the work. The concept of giving injured victims third party beneficiary status in the liability policy of another is not an unheard of concept, and in other limited circumstances, the Court and the Legislature have given injured parties direct rights in a wrongdoer’s liability policy.  For example, under a still valid New Jersey statute enacted early in the 20th century, an injured party can proceed directly against the liability insurance policy of another in instances where the insured is either defunct or insolvent. The circumstances present here may well similarly justify legislative intervention to expand the rights of injured victims to obtain payment from the insurance company of another.

Questions? Let me know. 

NJ Appellate Court Approves Insurance Policy Assignments to Fund Pollution Claims

Many owners and operators of contaminated sites may be surprised to learn that there can be insurance coverage available to cover their environmental liabilities even though they were never insureds under the policies in question.  In a determination that will more readily allow current owners and operators of contaminated properties to utilize liability policies issued to prior owners and operators of the site, a New Jersey appellate court has issued a decision that confirms there can be an assignment of the proceeds of these policies by the original insured even though the policies have “no assignment” clauses.  Givaudan Fragrances v. Aetna Casualty and Surety Company (A-2270-12T4, August 12, 2015).

This ruling makes it critical for any party purchasing commercial property from a party who owned the property prior to 1986, when the “absolute pollution exclusion” generally went into effect and ended most pollution coverage in standard commercial liability policies, to make efforts to obtain an assignment of policies owned by the seller as part of the purchase.  Likewise, the purchaser should also seek to include in the agreement of sale a provision obligating the former owner to cooperate in any effort to access the coverage as  carriers may still resist or contest any such assignment, or the applicability of the coverage to the environmental discharge that must be remediated.  Moreover, in situations where a sale has already occurred without a policy assignment having been obtained, efforts should be considered by the current owner to obtain an assignment after the fact, although that may require providing additional contractual consideration to the seller.  Obtaining such coverage can protect a buyer and provide protection for discharges of contaminants that occurred during or prior to the term of the policies.

Under both state and federal statutes, purchasers of property containing contaminants that were discharged or released on the site before the present owner acquired the property are usually held strictly liable for cleaning up those contaminants, even if the purchasers did not cause the contamination.  Even where documentation exists to show that a previously contaminated property has already been cleaned up, a purchaser can still find itself in a position of having to further address that contamination.  One reason for this is that remediation standards change over time and if the change makes the standard more restrictive by an order of magnitude or more, additional cleanup of previously remediated property may still be required.  Another reason is that areas of concern may not have been investigated, or even identified, during a previous assessment, and having now been tested, could show exceedances from current standards.  As a result, owners who had no role in causing the contamination may find themselves called upon to pay large sums merely because they currently own the site.

The court in the Givaudan case commented upon the specificity required for policy assignments and determined that the assignment involved, which was prepared after a claim had been asserted, passed muster.  In many instances, evidence of coverage issued before 1986 can be found, but the policies are unlikely to be used so many years later without an assignment.  It is, therefore, recommended that owners of sites where hazardous substances have been utilized act promptly to try to obtain assignments and agreements to cooperate from former owners so that they can benefit from the existing coverage, and that new buyers try to make sure that such assignments and cooperation agreements are contained in the contract for purchase.

Refusing To Put The Cart Before The Horse: Pursuing Insurer Bad Faith In New Jersey Must Await Resolution Of Coverage Issue

A recent case illustrates that proving insurer bad faith in New Jersey will take a back seat to the resolution of the coverage issue.  By way of background, a cause of action for bad faith in first party coverage actions was first recognized in New Jersey in 1993. See Pickett v Lloyd, 131 N.J. 457 (1993) At that time, the New Jersey Supreme Court held that bad faith would be found where the basis for the insurer’s denial was determined by a court to be not even “fairly debatable.”  

If bad faith is established, an insured can recover consequential damages from an insurance company that extend beyond what the policy may provide, and can also recover punitive damages.  These consequential damages can include interest payments on loans taken by insureds to pay bills that should have been paid by the insurance company with the policy proceeds and even damages caused by the insured’s inability to operate its business because timely payment of benefits under the policy had not been made.

The resolution of the bad faith issue will not occur quickly, however.  Indeed, significant activity may need to occur in the litigation before the bad faith issues will even be addressed. For example, the New Jersey Supreme Court clarified this year that an insured must prevail on the substantive claim for coverage as a matter of law before being able to establish bad faith under the “fairly debatable” standard.  Badiali v. New Jersey Manufacturers Insurance Group, 220 N.J. 544 (2015).   

In another case just decided by an appellate court in New Jersey, Alden Leeds, Inc v. QBE Specialty Insurance Company, et al (A-2034-14T1), the court applied Pickett and Badiali to hold that pretrial discovery on the issue of bad faith should await the determination of whether the insured is entitled to prevail on the substantive claim for coverage.  In doing so, it vacated a trial court ruling requiring the carrier to provide documents to the insured which the insurance company contended were privileged.  

While pursuing a bad faith claim is often warranted and can be of enormous benefit to an insured, there are significant hurdles and costs. Understanding those hurdles and costs can best lead to the successful pursuit of a bad faith claim.

Questions? Let me know. 

NJDEP Won’t Save Buyers

Scales of JusticeIn a case recently decided by the New Jersey Superior Court, Appellate Division, the Court rejected the assertion of a buyer of real property that the NJDEP should be ordered to require the seller of contaminated property to complete the cleanup on a more expedited basis.  See CD&L Realty v. State of New Jersey, Department of Environmental Protection,  Docket No. A-4066-13T3, decided July 30, 2015.

The contract between the buyer and seller had required the seller to continue to remediate the property after the sale but expressly stated that, as between the buyer and seller, the seller would retain all decision making as to the remediation and would be the sole party to negotiate with the NJDEP.  Prior to the transaction, the seller had entered into an Administrative Consent Order (ACO) with the NJDEP agreeing to complete the cleanup, but the buyer was not a party to that ACO and, thus, had no direct means to seek its enforcement.  More than 13 years after the buyer acquired title to the property, the remediation was still ongoing.  Growing tired of the delays and alleging other problems with the manner in which the seller was performing the remediation, the buyer sued the NJDEP to compel the agency to require the seller to expedite the cleanup and  correct other perceived problems.

The trial court granted the NJDEP’s motion to dismiss.  Among other rulings, it held that in this case the NJDEP’s authority was discretionary and not ministerial, thereby precluding the relief sought by the plaintiff.  On appeal, the Appellate Division held that the trial court had been correct that the NJDEP’s authority was discretionary, thereby precluding issuance of a writ of mandamus.   However, the appellate court also ruled that, given the ongoing cleanup, the dismissal should be without prejudice rather than with prejudice.

The decision is a reminder that the courts and administrative authorities will not save a party to real estate transaction from a contract that does not protect its interests.  Sellers of contaminated property typically want wide rein in deciding how to do a cleanup and the time frames in which to accomplish it.  They will resist contractual language that requires specific deadlines to be met or that even provides that the cleanup must be performed expeditiously.  During the course of time, the seller may go out of business, the buyer may want to sell the property, and other events may occur.  These issues may not be apparent at the time of purchase, but delay does not work in favor of the buyer.

The decision to buy a contaminated property  is one that involves the balancing of  competing factors, including the price and other savings to the buyer in purchasing a contaminated property instead of a clean site, the utility of the property for the buyer’s needs, and the ability and willingness of the seller to satisfy its obligations.  Buyers should think carefully about whether they want to leave important decisions concerning the property in the hands of the former owner, especially when the process of remediation may span decades.  Contractual language can be employed which obligates  the seller to carry out the cleanup, but gives enhanced decision making to buyers and imposes tighter deadlines for the completion of the remediation.

Questions? Let me know. 

New Supreme Court Decision on Regulation of Power Plants: Dispute May be Less Than Meets the Eye

In Michigan v. Environmental Protection Agency, the United States Supreme Court ruled in a 5-4 decision that the EPA violated the law by not considering cost when it decided to regulate certain power plant emissions.  Under the Clean Air Act Amendments of 1990, the EPA was empowered to regulate air pollutants from stationary sources if it determined that regulation was “appropriate and necessary” after studying hazards to human health caused by these emissions of mercury and other pollutants. The EPA determined that regulation was appropriate and necessary, but in doing so did not consider financial cost as part of its initial decision, reserving that inquiry to later stages where emission standards were set.  A comparison of the majority and dissenting opinions reveals that the dispute between the justices was relatively narrow.

The majority opinion, written by Justice Scalia, declared that the EPA must consider cost, including the cost of compliance, before deciding whether regulation is necessary and appropriate and that it could not leave that inquiry until later stages of the regulatory process.  It did not require EPA to conduct a formal cost benefit analysis, but stated that the agency must make a preliminary estimate before it decided whether to regulate.  That estimate could take into account factors that the EPA reasonably deemed relevant.

The dissent, written by Justice Kagan for the four dissenters, agreed that “cost is almost always a relevant – and usually, a highly important – factor in regulation.”  Justice Kagan continued that unless Congress provides otherwise, an agency acts unreasonably in setting standards pursuant to  a process that ignores economic considerations.  She noted that had the regulatory process ended after the initial decision to regulate the power plant emissions was made, she would agree that cost had not been adequately taken into account.  However, Justice Kagan then described in detail the various later steps taken by EPA to consider economic factors when setting the emission standards.  She stated that as long as the overall regulatory process adequately took cost into account, it did not matter that the first step of the process did not, especially since it was not possible to carefully quantify cost factors at that early stage of the process.

In retrospect, the EPA, which has had a reasonably good track record before the Supreme Court in the past 10 years, could have avoided this outcome by simply making a reasonable showing that it had considered costs on at least a preliminary basis before deciding to regulate power plant emissions. The challenge to its rule making and the fact that a majority of a conservative Supreme Court might not be receptive to its position that cost should not at all be a consideration in its initial decision to regulate was to have been expected.  The agency will now have to return to the beginning of the process and undertake such a cost analysis.  Unfortunately, as the regulatory process again slowly unfolds, the public will remain exposed to the documented and apparently undisputed, harmful effects of these emissions.

Questions? Let me know. 

Insurance Policies Issued to Predecessor Can Be Used to Pay for a Purchaser’s Environmental Liabilities

Many owners of contaminated properties cannot use their own liability insurance policies to cover remediation obligations because those policies were issued in or after 1985 or 1986 when the “absolute” pollution exclusion came into effect. That exclusion generally bars coverage for environmental cleanup obligations, and it has been held enforceable by the courts. However, although not frequently pursued, often these owners can utilize the policies issued to their predecessors to pay for these expenses. If those policies were issued before 1985 or 1986, the chances are that they contained a narrower pollution exclusion that courts in New Jersey and elsewhere have held to allow coverage.

The majority view holds that a party who has acquired a substantial portion of the assets of a business through an asset purchase may, by operation of law, utilize the liability insurance policies of the seller to address environmental liabilities that were present prior to the sale. Case law in New Jersey is in line with this view. Since the assignee assumes no greater rights in the policy than the original insured, and the only risks covered are those that the insurer would have been liable for if the claim had been made by the original insured anyway, courts have determined that there is no unfair prejudice inflicted on the insurance carrier by allowing such an assignment.

In determining whether a current owner can make a claim for coverage under its seller’s liability policies, the asset purchase agreement should be reviewed as a first step to determine if there was, in fact, an express assignment or other transfer of the right to recover under those policies to the buyer.  The existence of such language will strengthen the arguments in favor of coverage and may also mean that the policies were either physically presented to the buyer, or that the name of the carrier, policy year and policy number were listed on a schedule of assets included in the sale documents.  However, even if there is no express assignment or other transfer of the policies, there is case law holding that an assignment of the predecessor’s policies can occur by operation of law.  By purchasing a substantial portion of the assets of the seller and bearing liability for environmental discharges which occurred prior to the buyer’s ownership, the buyer may still be afforded the benefits of the seller’s liability insurance coverage.

Of course, in the case of a stock sale or merger instead of an asset purchase transaction, there may be no need to have the purchase agreement recite an assignment of the seller’s policies because the purchaser steps in the shoes of the seller and, thus, automatically becomes the insured under the seller’s existing insurance policies.

No matter what kind of transaction results in a transfer of cleanup liability from a seller to a buyer, it is important that buyer’s counsel in negotiating such a transaction make sure that all insurance policies intended to be transferred from the seller to the buyer be properly identified and scheduled in the governing contract, and that complete copies of all liability policies be provided by the seller to the buyer.  A complete policy is generally wanted because the “declarations” page, standing alone, would not contain the actual policy language proving entitlement to coverage and also because carriers will often deny coverage, at least initially, without being presented with the full policy.

In sum, in assessing the various options for funding a cleanup, the insurance of the predecessor owner of the property should not be forgotten, and may provide a basis for the payment of remediation costs

Questions? Let me know. 

Can Contaminated Property in New Jersey be Bought and Sold?

Clients often ask me if contaminated properties can be bought and sold in New Jersey before they are cleaned up. Not only is the answer a resounding yes, but such purchases can often result in substantial financial benefit to a buyer willing to evaluate carefully the risks inherent in these types of purchases and fund all or part of the remaining cost of the cleanup. Contaminated sites are often available for deep discounts, and a smart buyer can later reap large rewards if the combined cost of the purchase and cleanup borne by the buyer winds up being less than the market value of the property in a clean condition.

Needless to say, a prospective buyer of contaminated property needs to approach such a purchase with care since a failure to evaluate the risks and benefits properly can lead to disappointing results. A team consisting of an environmental attorney and consultant must be assembled to evaluate the pros and cons of proceeding.

The environmental consultant must review the environmental history of the site and surrounding area, including all prior testing of the property. Often, additional testing for purposes of assessing the factors bearing on the range of likely remediation costs will be required as well. All of this information must be shared with the client and legal counsel so that it can be taken into account when decisions are made.

It is important for the attorney to discuss applicable state and federal laws and regulations, as well as any agreements (such as “Bona Fide Prospective Purchaser Agreements), with governmental regulators, which can serve to limit liability of a buyer who has no prior connection with the contamination. The attorney will, of course, also be responsible for negotiating the environmental provisions of the contract of sale, as well as any agreements with regulators. The attorney should also investigate whether insurance is available to help fund the cleanup, or otherwise provide protection, and whether claims can be made against third parties responsible for the discharge. Purchasers of contaminated sites must also take into account continued obligations after the completion of the cleanup, such as maintenance of caps and other engineering controls.

The risks and benefits of such a purchase can never be computed with exact certainty since unexpected developments can occur, but the prospect of a financially rewarding outcome will be increased if a skillful review of the legal and technical issues bearing upon the purchase is performed prior to moving forward.

Questions? Let me know.

 

 

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