State v. Universal Underwriters Ins. Co., No. 539-9-98 Wncv (Teachout, J., Aug. 20, 2003)

[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the
original. The accuracy of the text and the accompanying data included in the Vermont trial court
opinion database is not guaranteed.]


                                 STATE OF VERMONT
                               WASHINGTON COUNTY, SS.



STATE OF VERMONT                                    )
                                                    )      Washington Superior Court
              v.                                    )      Docket No. 539-9-98 Wncv
                                                    )
UNIVERSAL UNDERWRITERS INS. CO.                     )



                            FINDINGS AND CONCLUSIONS
               Part One (Liability) of Bifurcated Final Hearing on the Merits


        This matter came before the court on May 15 and 16, 2003 for a final evidentiary hearing
on the merits on Defendant’s liability to provide insurance coverage. Pursuant to Order of
March 24, 2003, the damages portion of the final hearing is postponed and will be consolidated
with the damages portion (if any) of State v. Peerless, Docket No. 681-12-01 Wncv. Plaintiff is
represented by William E. Griffin, Esq. and Mark J. DiStefano, Esq. Defendant is represented
by James H. Kallianis, Jr., Esq. and Antonin I..Z. Robbason, Esq. Following the hearing, the
parties filed proposed findings of fact and several memoranda of law.

        In this and the related State v. Peerless case, the State seeks reimbursement for funds
spent by the State from the Petroleum Cleanup Fund to clean up petroleum contamination in East
Clarendon, Vermont. The State alleges that the petroleum at a single site came from facilities on
two neighboring properties, one an auto dealership operated by C.H. Jorgensen, A Corporation,
and the other a general store. In this case, the State seeks reimbursement in relation to the
Jorgensen property, and in State v. Peerless, the State seeks reimbursement in relation to the
general store property. In this case, the State has sued the insurer directly, and claims that
insurance policies issued in relation to the Jorgensen property provide coverage, whereas the
insurer, Universal Underwriters Insurance Company (Universal), claims that no coverage is
available for a variety of reasons discussed below.




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                                         Findings of Fact
         The factual history concerning discovery of contamination at the site and remediation
efforts is set forth below. The issues between the parties involve the specific provisions of
insurance policies and their application to the facts.

        In June of 1990, the State Agency of Natural Resources received a report of contaminated
wells in East Clarendon. Its Department of Environmental Conservation (DEC) undertook an
inspection and confirmed contamination by petroleum of drinking water wells in the area. DEC
personnel suspected that the petroleum releases were coming from one or both of two adjoining
properties, one owned by Clarence and Marilyn Jorgensen on which a Honda dealership was
operated, and the other owned by Judith Webster on which the East Clarendon General Store was
operated. It determined that there was one underground storage tank on the Jorgensen property
and two on the Webster property. On July 9, 1990, it sent to C. H. Jorgensen, Jr. and Judith
Webster letters identifying them as potentially responsible parties, and asking them to investigate
and respond. DEC informed them that if they did not comply, it would perform the work and
seek reimbursement from them. On July 19, 1990, a letter was sent by Clarence Jorgensen on
behalf of C.H. Jorgensen, A Corporation, stating that the corporation declined to voluntarily
perform the mitigation and site assessment efforts that DEC had identified.

        Beginning in the fall of 1990, DEC undertook the investigation and cleanup, and
employed contractors for much of the work. On May 1, 1991, Robert Haslam, who was the DEC
project manager, conducted an inspection at the Jorgensen property. With the help of contract
workers, he removed the asphalt and soil over the 1000 gallon underground storage tank,
exposing the upper 6" of the tank. He did not find a leak. He examined the space between the
double walls of the underground storage tank, and found no petroleum, which indicated that
there was no leak between the inner and outer walls of the tank. There was no leak in the
underground piping that was exposed by the excavation. Another test conducted through the fill
port revealed that the tank itself was sound.

        He then investigated the dispenser, which was located above ground at one end of the
tank, and partially off to the side of it. The dispenser sat on top of a 4" thick concrete pad which
was resting on the ground. A pipe ran from the top of the underground tank straight up to a
union with another pipe (still underground) that ran horizontally to a point below the dispenser,
where it connected (still underground) to another pipe that ran vertically straight up through a
hole in the concrete pad to the dispenser above. Mr. Haslam first removed the soil to a point as
close as possible to the concrete pad, exposing the vertical pipe leading out of the tank and a
portion of the horizontal pipe, and found no leak. He did not remove the soil under the concrete
pad, and therefore did not expose a portion of the horizontal pipe or the vertical pipe that
emerged from the ground through the concrete pad into the above ground dispenser.

        Mr. Haslam then went to the top of the dispenser itself, which was above ground, sitting
on the concrete pad, and opened the cover plate. When he looked down into the dispenser, he
saw gas leaking at a union of pipes located approximately 8-10" above the top of the concrete
pad. The vertical pipe coming from below ground and through the concrete pad was joined to


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another pipe at this location, approximately 12" or more above the ground. Gas was dripping off
the pipe union and running down through the hole in the concrete pad into the ground. The drip
was immediately observable and steady. He then collected a sample from the nearest
monitoring well in the area with a bailer, and discovered a 26" thickness of pure gasoline.

        Charles Schwer was the Chief of the Sites Section of DEC, and was the person who
authorized expenditures from the Petroleum Cleanup Fund (PCF). The PCF was established by
statute for the purpose of providing funds for the cleanup of releases from underground storage
tanks and compensating third parties for damages from releases. At the time pertinent to this
case, the PCF could only be used in relation to releases from underground storage tanks. (In
1998, eligibility was expanded to include above ground storage tanks.) Mr. Schwer was not
clear whether the pipe union where the leak was discovered should be treated as part of an
underground storage tank or not, since it was located above ground in a dispenser attached to an
underground storage tank. There is a definition of underground storage tank in the PCF
“Procedures” guidelines, but it did not help him determine eligibility for use of PCF funds. He
authorized the expenditures from the PCF nonetheless, in order to avoid delay in dealing with a
serious level of contamination at the site.

         10 V.S.A. Chapter 59 is entitled “Underground Liquid Storage Tanks.” It includes two
statutory sections pertinent to this case, each located in a different Subchapter. 10 V.S.A. §1921
et seq. authorizes standards and criteria for regulating underground storage tanks for the purpose
of preventing ground and surface water contamination. 10 V.S.A. §1941 establishes the PCF for
the purpose of cleaning up and restoring soils contaminated by releases from underground
storage tanks. ANR has issued regulations pertinent to its preventative regulatory function with
respect to underground storage tanks. These regulations are administered by a different
department in the agency than the Sites Section, which is the one that is responsible for cleanup
of sites using PCF funds. With respect to the regulation of underground storage tanks, both the
statute and the regulations define “underground storage tank” as follows:

       any one or combination of tanks, including underground pipes connected to it or
       them, which is or has been used to contain an accumulation of regulated
       substances, and the volume of which, including the volume of the underground
       pipes connected to it or them, is 10 percent or more beneath the surface of the
       ground.

10 V.S.A. §1922(10); Underground Liquid Storage Tank Regulations 8-201(31). The
regulations define “facility” or “storage facility” as “one or more underground storage tanks,
including any associated pipelines, fixtures, or other equipment.” UST Regs. 8-201(11).

       Between October 15, 1990 and May 21, 2002, ANR paid for investigation and cleanup
expenses at the Jorgensen site from the PCF. The statute authorizes PCF expenditures for
remediation expenses as well as for property damage to third parties, and both types of
expenditures were made. For remediation, $900,000-1,000,000 was spent, and approximately
$260,000 was spent for damage to third parties, primarily related to private water supplies. The


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cleanup continued, and in May of 1997, the cleanup had progressed sufficiently that the remedial
system was decommissioned. The equivalent of more than 1000 gallons of petroleum product
was recovered from the site. Ongoing monitoring will continue for approximately 10 more
years.

        The Jorgensen property is owned by Clarence and Marilyn Jorgensen. A corporation
entitled C. H. Jorgensen, A Corporation, was the entity that operated an auto dealership on the
property. The corporation had purchased general commercial general liability policies from
Universal every year since 1982, and Mr. and Mrs. Jorgensen, as well as the corporation, were
named insureds. Prior to 1984, the State Department of Banking and Insurance (DBI) did not
permit insurers to issue liability policies that excluded pollution coverage. Although Universal’s
standard form policy contained such an exclusion, in Vermont that exclusion was required by
DBI to be deleted in order to implement compliance with the requirement that pollution coverage
be included. It was provided on an “occurrence” basis.

         In 1984, the insurance industry approached DBI with new proposals, and after
negotiations, changes were allowed. From then on, insurers were permitted to issue standard
form policies that excluded pollution coverage, but with a State Amendatory Part required in
Vermont that built pollution coverage back into the policy on a “claims made,” rather than an
“occurrence,” basis. In addition, DBI allowed insurers to negotiate with commercial insureds to
exclude pollution coverage from their commercial coverage, as long as “individual risk filing”
procedures were followed, which required documents clarifying the exclusion, signed by the
business owner, to be filed and approved. DBI required insurers to offer these business clients
the option of purchasing separate policies for pollution coverage. An individual risk filing was
not needed to exclude pollution coverage from a commercial umbrella policy if a pollution
liability policy on the excluded risk was purchased by the insured. The Department did not,
however, permit individual risk filings or exclusion of pollution coverage with respect to
personal lines of insurance.

        For the policy year beginning February 1, 1990, which is the year pertinent to this case,
Universal issued two separate policies in relation to the Jorgensen property, providing for
different kinds of coverage as follows:

               Unicover policy: This was a multiple coverage insurance policy. It covered C.H.
Jorgensen, A Corporation, with garage and operations coverage in the amount of $300,000. It
also covered the corporation with commercial umbrella coverage in the amount of $3,000,000.
With respect to the commercial umbrella coverage, an individual rate filing to exclude pollution
coverage was signed on February 1, 1990, on behalf of C.H. Jorgensen, A Corporation, by its
President, C.H. Jorgensen. The corporation purchased a separate Pollution Liability policy (see
below). An individual risk filing was not actually required, since a concurrent pollution liability
policy was purchased on the same risk. In any event, pollution coverage was excluded from the
commercial umbrella coverage. This Unicover policy also covered Mr. and Mrs. Jorgensen as
named insureds with personal umbrella coverage in the amount of $1,000,000. Although
exclusion (h) in the policy states that pollution coverage is excluded, the Vermont Amendatory


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Part amends the personal umbrella coverage to remove exclusion (h): “PERSONAL
UMBRELLA Coverage Part 970 is amended to remove EXCLUSION (h).” (Plaintiff’s A, page
50.)

               Pollution Liability policy: This was a separate policy that provided $1,000,000 of
coverage to the corporation and to Clarence H. and Marilyn Jorgensen for cleanup costs because
of environmental damages caused by a pollution incident. Under exclusion (j) of this policy,
coverage was excluded for “INJURY or ENVIRONMENTAL DAMAGE eminating (sic) from
any underground storage facility.” The policy does not include a definition of this term.

        C.H. Jorgensen, A Corporation, made a claim against Universal with respect to the
release of petroleum on the property. On September 30, 1992, Universal wrote to the
corporation that there was no coverage because of the absolute pollution exclusion under the
Unicover policy, and lack of coverage in the Pollution Liability policy “for this type of loss
which deals with Underground Storage Tanks.” The State filed this suit on September 30, 1998.
The State claims coverage under the Pollution Liability policy through the corporation and Mr.
and Mrs. Jorgensen, and under the personal umbrella portion of the Unicover policy through Mr.
and Mrs. Jorgensen. Universal claims that with respect to the Pollution Liability policy, the
exclusion for underground storage facilities bars coverage. It further claims that there is no
coverage under the Unicover policy because of the pollution exclusion, and that to the extent
coverage is claimed through Mr. and Mrs. Jorgensen on the personal umbrella coverage, the
“business pursuits” exclusion bars coverage.


                                      Conclusions of Law

       1. Responsible parties.

        Clarence and Marilyn Jorgensen, as owners, and C.H. Jorgensen, A Corporation, as
operator, are all parties responsible for abating release of petroleum on the Jorgensen property,
and for costs of investigation, removal and remedial actions incurred by the state which are
necessary to protect the public health and the environment. 10 V.S.A. §6615(a).


       2. Basis for liability.

        The State is authorized by statute to seek reimbursement of PCF cleanup expenditures
when there is insurance coverage. 10 V.S.A. §1941(f). ANR v. U.S. Fire Ins. Co., 173 Vt. 302
(2001).


       3. Pollution Liability policy.
       Under the Pollution Liability policy, there is coverage for the damages and pollution
cleanup expenditures incurred by the State unless the exclusion for underground storage facilities


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applies. Once a plaintiff has shown eligibility for insurance coverage, the defendant has the
burden to prove that an exclusion applies. Id.; see City of Burlington v. Assoc. Elec. & Gas Ins.
Servs., 170 Vt. 358, 364 (2000). Therefore, it is Universal’s burden to show that the exclusion
bars coverage.

        Under exclusion (j) of the policy:

                        This insurance does not apply to INJURY or
                ENVIRONMENTAL DAMAGE eminating from any underground
                storage facility owned by, rented, leased or in the care, custody or
                control of any INSURED.

        There is no definition of “underground storage facility” in the policy itself, so ordinary
contract principles applicable to the construction of insurance policies are the frame of reference
for applying this provision to the facts of the case. The purpose of the policy was to provide
protection against the risk of pollution injury or damage, except for that “eminating (sic) from
any underground storage facility,” and the terms must therefore be interpreted in light of that
purpose, “with limitations and exclusions strictly construed.” City of Burlington v. Glens Falls
Insurance Company, 133 Vt. 423 at 424 (1975). The effect of the exclusion should be
interpreted “in accord with the reasonable expectations” of the insured. Cooperative Fire
Insurance Association of Vermont v. White Caps, Inc., 166 Vt. 355, 360 (1997).

         The fundamental distinction between an underground storage facility and an above
ground storage facility is whether or not it is buried in the ground. An underground storage
facility is not capable of being monitored and maintained to the same extent as a comparable
above ground facility. It makes sense that leaks from tanks buried beneath ground level
represent a higher risk for insurers than those that can be more easily inspected and maintained,
and that this difference reasonably justifies excluding them from a policy with a rate structure
designed for above ground facilities. The fact that the policy uses the phrase “underground
storage facilities” is consistent with the use of this distinction, since it is not only the tank itself,
but also associated buried piping that is incapable of being seen and thereby represents
undetectable risk. Hence, the exclusion applies not only to the tank itself, but to its related
appurtenances that are also underground. The word “facility” accomplishes this purpose, as it
makes clear that the exclusion is not limited to the tank, but anything related to it that is also
buried.

        The exclusion would therefore bar coverage for a release emanating from any of the pipes
leading from the tank to the dispenser on the Jorgensen property, to the extent that they were in
the ground. This would include the first vertical pipe leading out of the tank, the horizontal pipe
still underground, and that portion of the next vertical pipe located below the concrete pad. It
does not make sense to apply the exclusion to a leak in a dispenser that is located 12" above
ground at a place where it is capable of being maintained and monitored. The leak occurred at a
location clearly above ground, three pipe unions away from the tank. The risk associated with
this location is no different than the risk from a leak at a comparable place in an above ground


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storage facility. In applying the exclusion in accordance with the “reasonable expectations” of
the insured, id., an insured would reasonably expect that environmental damage and injury
emanating from a location below ground would be excluded from coverage, whereas
environmental damage and injury emanating from a location above ground would not be
excluded.

         Universal asks the court to use the definition in the underground storage tank regulatory
statute and related regulations in interpreting the meaning of the term “underground storage
facilities” in the policy exclusion. Neither exclusion (j) nor any other term of the policy includes
any reference to state statutes or regulations. Therefore, there is no indication that it was the
intent of either party to incorporate such definitions into the policy to set standards for purposes
of interpreting exclusion (j).

       Even if these definitions are used, however, they do not help Universal meet its burden of
proof. The definition of “underground storage tank” is as follows:

                       . . .any one or combination of tanks, including underground
               pipes connected to it or them, which is or has been used to contain
               an accumulation of regulated substances, and the volume of which,
               including the volume of the underground pipes connected to it or
               them, is 10 percent or more beneath the surface of the ground.

10 V.S.A. §1922(10); UST Regulations §8-201(31). “Facility” or “storage facility” is defined by
regulation as “one or more underground storage tanks, including any associated pipelines,
fixtures, or other equipment.” UST Regs. 8-201(11). Therefore, to the extent pipes related to an
underground storage tank are included, they are described under the statutory definition as
“underground.” It is arguable that the word “underground” in the definition of “facility” in
Regulation 8-201(11) modifies all nouns in the remainder of the sentence and not just “tanks,”
and that the meaning of the exclusion is therefore ambiguous. The most reasonable
interpretation of the provision is that it applies to tanks, pipes, and equipment to the extent they
are underground. That is the reason that these items are subject to regulation. The characteristic
that distinguishes underground devices that contain regulated substances from above ground
devices for the same purpose is that they are located beneath the ground, and are therefore
unavailable for monitoring. Regulated substances can leak out of them and go directly into the
ground without detection. They thereby represent a heightened hazard to public health and the
environment, as they have the potential to cause a much greater degree of damage before the
problem is discovered than do comparable devices above ground.

        Universal argues that Mr. Schwer’s authorization of payments from the PCF to remediate
the Jorgensen release site necessarily mandates applying exclusion (j) to bar coverage, since
DEC itself treated the release as coming from an underground source. Mr. Schwer, a DEC site
supervisor and not an expert in interpreting insurance policy terms, made a practical decision in
1990 concerning PCF eligibility when he could find no clear guidance and was faced with a
seriously contaminated site. This decision cannot be the basis for a legal decision construing a


                                                 7
private insurance agreement between Universal and its insured, a contract to which the State was
never a party. It is the court’s responsibility to construe the exclusion using principles of
insurance policy interpretation developed in the law. Mr. Schwer’s decision on PCF eligibility
has very little value for that purpose, and is certainly not binding as to its effect in determining
insurance coverage.

        To the extent there is ambiguity in exclusion (j) at least as it relates to the facts of this
case, the court resolves that ambiguity by interpreting the exclusion as inapplicable where the
leak was in piping in the dispenser apparatus, above ground, three pipe unions away from the
tank. This interpretation uses the clear distinction of above ground/below ground, or
buried/unburied, as the standard for deciding whether piping related to an underground storage
tank is excluded from a policy that is designed to exclude from coverage devices in which
regulated substances are stored beneath the ground. It incorporates a principle that is sound as to
risk allocation, since it is based on the essential characteristic of underground tanks: that releases
can occur without detection due to the practical inability to monitor the facility for integrity,
resulting in a greater degree of contamination than is likely to result from above ground tanks.

        In sum, the court concludes that Universal has not sustained its burden to show that
exclusion (j) bars coverage for the injury and damage resulting from the release from the pipe
joint located 12" above ground within the dispenser. Therefore, there is insurance coverage
under the Pollution Liability policy in the amount of $1,000,000 less retention.


       4. Unicover policy.

       The State’s expenditures fall within coverage under the policy terms, unless a pollution
exclusion applies. It is Universal’s burden to show that the exclusion bars coverage. See City of
Burlington v. Assoc. Elec. & Gas Ins. Servs., 170 Vt. 358, 364 (2000).

       The policy is actually a collection of three policies (garage and operations; commercial
umbrella, and personal umbrella) under the terms of the policy language:

                      [E]ach Coverage Part is made up of its provisions, plus
               those of the State Amendatory Part (if any), the General
               Conditions, and that portion of the declarations referring to the
               coverage Part, including all endorsements made applicable to that
               Coverage Part. Each Coverage Part so constituted becomes a
               separate contract of insurance.

Plaintiff’s Exhibit A (Unicover policy) at 13.
        Universal has met its burden to show that pollution coverage was excluded from the
policy as to the corporation, as there was both a separate pollution policy and an individual risk
filing excluding coverage. The State does not dispute this conclusion.



                                                  8
        As to the personal umbrella coverage for the insureds Mr. and Mrs. Jorgensen, however,
neither of the individuals signed a consent to rate application. Universal’s argument that Mr.
Jorgensen’s signature alone, given on behalf of the corporation, was sufficient to make the
individual risk filing effective as to all insureds ignores the fundamental distinction between a
signature given on behalf of a corporation and one given as an individual. Mr. Jorgensen simply
did not sign in his individual capacity, and no one signed for Mrs. Jorgensen. More significantly,
the individual risk filing was not authorized on personal lines of insurance, and therefore could
not lawfully be effective. 8 V.S.A. §3541(a). Consequently, the State Amendatory Part that
removed exclusion (h) from personal umbrella coverage applied to eliminate the pollution
exclusion as to Mr. and Mrs. Jorgensen.

       Universal argues that the State’s original claim in this case did not specify that it was
seeking coverage through Mr. and Mrs. Jorgensen on the personal umbrella coverage. It is clear
from Judge Cheever’s decision on the cross motions for summary judgment, entered July 24,
2002, that the State was making such a claim at that time. Discovery continued after that date,
and Universal never objected to the State making such a claim in the case. Universal cannot
show prejudice. This theory of the claim will be treated as if part of the original pleadings.
V.R.C.P. 15(b).

        Universal argues that an exclusion for “business pursuits,” exclusion (i), bars coverage as
to the individuals Mr. and Mrs. Jorgensen. This argument was raised for the first time in post-
hearing argument. There is insufficient evidence in the record to support this defense. While
facts are referred to in Universal’s memo argument on this issue, those facts were not admitted
into evidence, and the court is not in a position to make findings of fact on the predicate facts
that would support this defense. In addition, Universal waived this defense by not raising it
either at the time of declining coverage, or in its answer to the complaint in this action.
Middlebrook v. Banker’s Life and Casualty Co., 126 Vt. 432 (1967); Armstrong v. Hanover Ins.
Co., 130 Vt. 182 (1972).

        Universal has not met its burden to show that the pollution exclusion applies under the
personal umbrella policy covering Mr. and Mrs. Jorgensen. Therefore, the court concludes that
there is insurance coverage through the insureds Mr. and Mrs. Jorgensen under the Personal
Umbrella portion of the Unicover policy in the amount of $1,000,000 less retention.




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                                              Order


        For the foregoing reasons, Plaintiff has established liability as set forth above. The case
will be scheduled for a hearing on damages which will be consolidated with the damages portion,
if any, of State v. Peerless, Docket No. 681-12-01 Wncv.


       Dated at Montpelier, Vermont this ____ day of August, 2003.


                                                 ________________________________
                                                 Mary Miles Teachout
                                                 Superior Judge




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