Contaminated Property in New Jersey – New Jersey Environmental Law Blog

Stores5 Under 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 Mitchell know.

Mitchell Kizner is a New Jersey focused attorney in Flaster Greenberg PC’s Litigation and Environmental Law departments. He represents clients in insurance, environmental, construction and other commercial matters as part of his active litigation and commercial law practice. He is also General Counsel to the firm. He can be reached at mitchell.kizner@flastergreenberg.com or 856.382.2247.

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 Mitchell know.

New Jersey Environmental Law Blog

Tag: Contaminated Property in New Jersey

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