629 A.2d 831

Supreme Court of New Jersey.

MORTON INTERNATIONAL, INC., successor to Morton Thiokol, Inc., now named Thiokol Corporation, Plaintiff-Appellant and Cross-Respondent,

v.

GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, A Pennsylvania Corporation (Successor to the Potomac Insurance Company and the United States Branch of General Accident Fire and Life Assurance Corporation, Ltd.); Affiliated FM Insurance Company, A Rhode Island Corporation; Continental Casualty Company, An Illinois Corporation; First State Insurance Company, A Delaware Corporation, Defendants-Respondents,

and

Liberty Mutual Insurance Company, A Massachusetts Corporation; American Home Assurance Company, A New York Corporation; Insurance Company of North America, A Pennsylvania Corporation; Underwriters at Lloyd’s London, and Certain Subscribing London Market Insurance Companies, Defendants-Respondents and Cross-Appellants,

and

Aetna Casualty & Surety Company, A Connecticut Corporation; American Centennial Insurance Co., A Delaware Corporation; Fireman’s Fund Insurance Company, A California Corporation; Granite State Insurance Company, A New Hampshire Corporation; The Hartford Accident & Indemnity Company, A Connecticut Corporation; Insurance Company of the State of Pennsylvania, A Pennsylvania Corporation; Integrity Insurance Company, A New Jersey Corporation; International Insurance Company, An Illinois Corporation; Lexington Insurance Company, A Delaware Corporation; Mission Insurance Company, A California Corporation; Mission National Insurance Company, A California Corporation; National Union Fire Insurance Company of Pittsburgh, A Pennsylvania Corporation; and Northbrook Insurance Company, An Illinois Corporation, Defendants.

Argued Nov. 30, 1992.Decided July 21, 1993.

Opinion

 

The opinion of the Court was delivered by

STEIN, J.

 

This case concerns insurance coverage for environmental pollution. The events affecting the coverage claims before us span a period of several decades, in the course of which societal indifference concerning **834 environmental-pollution damage has been supplanted by a heightened awareness of the need for environmentally-sound waste-disposal practices and an increasingly aggressive governmental effort to remediate the consequences of past environmental damage. That evolution understandably has influenced the insurance industry’s concern about its exposure for damages *7 caused by environmental pollution, and has resulted in an industry-wide determination to modify the scope of insurance coverage for such damages.

The claims for coverage involve Comprehensive General Liability (CGL) policies covering plaintiff and its predecessors during the period 1961 to 1976, issued by three primary carriers and a large number of excess carriers. Four principal variations of CGL policies are involved, and no dispute exists concerning the language of the critical provisions that affect the question of coverage. Because the policies are essentially standardized, industry-wide forms, our interpretation of their coverage provisions may affect significantly the allocation of damages for environmental pollution of New Jersey property among insurance carriers, industry, and government. The scope of the relief sought by plaintiff requires us to consider not only the kinds of pollution-causing events entitled to coverage under the various policies, but also whether remediation expenses and response costs imposed under the authority of federal and state environmental statutes constitute sums that the insured is legally obligated to pay “as damages” because of property damage covered by the policies. Because the economic consequences are significant, the issues before us already have generated a multiplicity of reported decisions by federal and state courts.

 

I

The procedural history and material facts are set forth in abundant detail in the Appellate Division’s comprehensive and thoughtful opinion. Morton Int’l v. General Accident Ins. Co., 266 N.J.Super. 300, 629 A.2d 895 (1991). A useful perspective concerning that history and those facts is afforded by this Court’s opinion in New Jersey Department of Environmental Protection v. Ventron Corp., 94 N.J. 473, 468 A.2d 150 (1983). Plaintiff, Morton International, Inc. (plaintiff or Morton), is the successor in interest to Ventron Corporation (Ventron), and the claims it now asserts derive from liability imposed on Ventron in that litigation. *8 The Department of Environmental Protection (DEP) had instituted suit against Ventron and other defendants, Velsicol Chemical Corporation (Velsicol), Wood Ridge Chemical Corporation (Wood Ridge), and F.W. Berk and Company (Berk), to compel the defendants to bear the costs involved in remediating pollution of Berry’s Creek, an estuary of the Hackensack River, that had been caused by discharges from a mercury-processing plant operated for over forty years by the various defendants. Justice Pollock’s opinion graphically described the end result of the defendants’ prolonged discharge of mercury and other pollutants:

Beneath its surface, the tract is saturated by an estimated 268 tons of toxic waste, primarily mercury. For a stretch of several thousand feet, the concentration of mercury in Berry’s Creek is the highest found in fresh water sediments in the world. The waters of the creek are contaminated by the compound methyl mercury, which continues to be released as the mercury interacts with other elements. Due to depleted oxygen levels, fish no longer inhabit Berry’s Creek, but are present only when swept in by the tide and, thus, irreversibly toxified.

 

[Id. at 481-82, 468 A.2d 150.]

This Court determined that the discharging of toxic mercury constituted an abnormally-dangerous activity, and imposed strict liability under common-law principles against all the defendants for remediation of the resulting nuisance and property damage. Id. at 493, 468 A.2d 150. We also held that all the defendants were jointly and severally liable under the Spill Compensation and Control Act of 1977 (Spill Act), N.J.S.A. 58:10-23.11 to -23.11z, as **835 amended, L. 1977, c. 346, § 4, and that such liability would apply retroactively to discharges that had occurred prior to the Spill Act’s effective date. N.J.S.A. 58:10-23.11f(b)(3) (as amended, L. 1979, c. 346, § 4; L. 1981, c. 25, § 1). Id. at 496-99, 468 A.2d 150. Finally, we affirmed the judgment entered on the cross-claim asserted by Robert and Rita Wolf, purchasers of the plant property from Ventron, premised on Ventron’s fraudulent nondisclosure that the property had been contaminated by mercury pollution. Id. at 503-04, 468 A.2d 150.

When DEP instituted its action against Ventron, the insurers of the various owners and operators of the mercury-processing plant *9 disclaimed coverage, requiring Ventron to retain counsel to provide a defense. At the conclusion of that litigation Morton, as Ventron’s successor, commenced this declaratory-judgment action, seeking reimbursement for the costs incurred in defending the suit filed by DEP and the cross-claim filed by the Wolfs, as well as indemnity for the cleanup and remediation expenses resulting from the DEP proceeding. Defendants are the primary and excess insurers of Ventron and its predecessors during the period with respect to which Morton seeks reimbursement and indemnity.

Early in the litigation, the trial court granted partial summary judgment in favor of all defendants concerning their obligation to defend and indemnify Ventron with respect to the Wolfs’ cross-claim. The parties filed cross-motions for summary judgment on the remaining issues: defendants asserted that the record presented no material disputed factual issue concerning whether Morton’s predecessors had intended or expected to cause property damage, whereas Morton contended that the Chancery Division was bound by the trial court’s determination in Ventron that no intent “to pollute the waters of the State” had been proved. Those motions resulted in a ruling by the Chancery Division that none of the defendants was obligated to indemnify Morton for the costs of remediation of environmental damage-the amount of which remains undetermined-that were imposed on Ventron in the DEP litigation. Only General Accident Insurance Company of America (General Accident) was held liable for a portion of Ventron’s costs in defending the DEP suit. In a separate trial, Morton was awarded judgment against General Accident for approximately $100,000 for such defense costs, plus attorneys’ fees for prosecuting the claim to recover those costs. On appeal, the Appellate Division affirmed the Chancery Division’s judgment dismissing Morton’s claims for indemnification, and reversed that portion of the judgment awarding damages and counsel fees against General Accident. We granted Morton’s petition for certification and the joint cross-petition for certification of defendants Insurance Company of North America, American Home *10 Assurance Co., Liberty Mutual Insurance Co., Certain Underwriters at Lloyd’s, London, and Certain London Markets Insurance Companies, 127 N.J. 563, 606 A.2d 374 (1992).

 

A. Insurance Coverage

For purposes of the summary-judgment motions, no issue was raised concerning which insurers provided primary and excess coverage during the pertinent periods. Similarly, the relevant provisions of the various policies also appear to be undisputed.

 

Primary Insurance Coverage

1. Defendant General Accident has stipulated that it and its affiliate provided primary general-liability coverage from October 1960 to October 1971. (Although copies of the policies actually issued to Morton’s predecessors were not produced, the record contains sample forms of policies used by General Accident that the parties acknowledged, for purposes of summary judgment, corresponded to the actual policies.) Three different policy forms were in use by General Accident during this period.

(a) From October 1960 to October 10, 1964, General Accident’s policy provided property-damage-liability coverage for “all sums which the Insured shall become legally obligated to pay * * * for damages because **836 of injury to or destruction of property * * * caused by accident.” The term “accident” was undefined. The policy afforded coverage “only to occurrences or accidents which happen during the policy period * * *.”

(b) Effective October 10, 1964, the prior form of policy was amended by deleting the words “caused by accident” and substituting the words “resulting from an occurrence.” The endorsement also added the following definition of occurrence:

The word “occurrence” as used in this endorsement means an unexpected event or happening which results in injury to or destruction of tangible property during the policy period, or a continuous or repeated exposure to conditions which result in injury to or destruction of tangible property during the policy period provided the insured did not intend or anticipate that injury to or destruction of property would result * * *.

*11 c) Effective October 1, 1966, and continuing through October 1971, General Accident’s policy revised the definition of occurrence as follows:

“Occurrence” means an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

2. Although neither the record nor the opinions below indicates the source of Ventron’s CGL coverage from October 10, 1971, to June 1972, primary CGL coverage was provided from June 14, 1972, through January 1, 1975, pursuant to three policies issued by Reserve Insurance Company (Reserve), which had been declared insolvent and liquidated prior to the institution of this litigation. Each of Reserve’s policies provided coverage for “all sums which the Insured shall become legally obligated to pay as damages because of property damage * * * caused by an occurrence,” and their definition of “occurrence” was substantially identical to the definition contained in General Accident’s policies from October 1966 to 1971. Reserve’s policies for the period June 14, 1973, to June 14, 1975, however, contained a so-called “pollution-exclusion clause” that was identical to exclusion “f” of the standard form CGL policy (standard pollution-exclusion clause), see, e.g., Insurance Services Office (“ISO”) form GL 00 02, Ed. 01-73, that had been widely used by insurers from 1973 to 1985. That exclusion stated:

This insurance does not apply * * * (f) to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

3. Liberty Mutual Insurance Company (Liberty Mutual) provided primary CGL coverage to Ventron from January 1, 1975, through January 1, 1977. Its policies afforded coverage for “all sums which the insured shall become legally obligated to pay as damages because of * * * property damage * * * caused by an occurrence.” The policies defined “occurrence” as “an accident, including continuous or repeated exposure to conditions, which *12 results in * * * property damage neither expected nor intended from the standpoint of the insured * * *.” The Liberty Mutual policies also contained the standard pollution-exclusion clause.

 

Excess Insurance Coverage

****

II

Issues of Insurance-Policy Interpretation

The Court is presented with a number of significant insurance-coverage issues. Cross-petitioners argue that we need not determine whether the property damage for which remediation was ordered in the Ventron litigation resulted from an “occurrence,” because in their view environmental-remediation costs imposed at the instance of governmental-enforcement agencies do not constitute “damages” as that term is used in standard CGL policies. They also contend that those policies containing the standard pollution-exclusion clause afford no coverage to Morton and its *22 predecessors because the discharges of pollutants from the mercury-processing plant into Berry’s Creek and the surrounding area were not “sudden and accidental.” Morton argues that the record presents an issue of fact about whether the property damage requiring remediation was “intended or expected from the standpoint of the insured,” asserting that the Chancery Division’s grant of summary judgment on that issue was error. We also address the duty-to-defend questions raised by the Appellate Division’s reversal of the judgment for Morton against General Accident for a portion of Morton’s defense costs and counsel fees.

 

A. “As Damages”

****

B. The Pollution-Exclusion Clause

We next address the arguments against coverage based on the so-called pollution-exclusion clause. Several insurers contend that irrespective of our conclusion about whether the property damage requiring remediation was caused by an “occurrence,” no coverage exists under policies containing the standard pollution-exclusion clause, which, as noted above, supra at 11-12, 629 A.2d at 836 provides:

This insurance does not apply * * * (f) to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

Although the record reveals that some of the excess carriers had issued policies with non-standard pollution-exclusion clauses, we confine our analysis to the standard clause, on which the extensive briefs of the parties and amici have also focused. To facilitate our discussion of the issues, we first summarize our holding with respect to the interpretation that we shall apply to the standard pollution-exclusion clause, and then set forth in detail the factual and legal foundation for our conclusion.

2 We overrule the Appellate Division’s decision in Broadwell, supra, to the extent that it holds that the standard pollution-exclusion clause should be understood merely to impose the same conditions on coverage as are imposed by the definition of “occurrence,” which focuses on whether the ultimate damage was expected or intended from the standpoint of the insured. 218 N.J.Super. 516, 534-36, 528 A.2d 76. As is evident from the text of the standard clause, the phrase “sudden and accidental” does not characterize or relate to the damage caused by pollution but instead narrowly limits the kind of “discharge, dispersal, release or escape” of pollutants for which coverage is provided. Although the word “sudden” is hardly susceptible of precise definition, and *29 is undefined in those CGL policies that include the standard pollution-exclusion clause, we are persuaded that “sudden” possesses a temporal element, generally connoting an event that begins abruptly or without prior notice or warning, but the duration of the event-whether it lasts an instant, a week, or a month-is not necessarily relevant to whether the inception of the event is sudden. The meaning of the term “accidental” being generally understood, we discern that the phrase “sudden and accidental” in the standard pollution-exclusion clause describes only those discharges, dispersals, releases, and escapes of pollutants that occur abruptly or unexpectedly and are unintended. If applied as written, although interpretative questions undoubtedly would require resolution, the clause sharply and dramatically would restrict the coverage that previously had been provided under CGL policies for property damage caused by accidental pollution, which included coverage for continuous or repeated exposure to conditions, provided that the property damage-not the discharge-was “neither expected nor intended from the standpoint of the insured.” We are fully satisfied that if given literal effect, the standard clause’s widespread inclusion in CGL policies would limit coverage for pollution damage to so great an extent that the industry’s representation of the standard clause’s effect, in its presentation to New Jersey and other state insurance regulatory agencies, would have been grossly misleading. Proffered to regulators merely as a clarification of existing coverage “so as to avoid any question of intent,” and as a continuation of coverage **848 for pollution-caused “injuries that result[ ] from an accident,” the industry’s understatement of the clause’s actual effect on coverage for pollution damage is both apparent and unjustifiable. Although the insurers urge that we not consider the regulatory history of the standard clause without a fuller record, we are persuaded that a remand would be redundant, and that this record together with the reported cases that address the regulatory history and the abundant independent commentary on the subject affords an accurate and comprehensive basis for our determination.

*30 3 4 The industry’s presentation and characterization of the standard pollution-exclusion clause to state regulators constituted virtually the only opportunity for arms-length bargaining by interests adverse to the industry, insureds having virtually no choice at all but to purchase the industry-wide standard CGL policy. Accordingly, we deem appropriate construing the pollution-exclusion clause in a manner consistent with the objectively-reasonable expectations of the New Jersey and other state regulatory authorities, because only those regulatory authorities were presented with an opportunity to disapprove the clause. As presented, the regulatory authorities would not readily have understood that the pollution-exclusion clause eliminated all coverage for pollution-related claims except in cases of abrupt and accidental discharges. Rather than “clarify” the scope of coverage, the clause virtually eliminated pollution-caused property-damage coverage, without any suggestion by the industry that the change in coverage was so sweeping or that rates should be reduced. For those reasons, we decline to enforce the standard pollution-exclusion clause as written. To do so would contravene this State’s public policy requiring regulatory approval of standard industry-wide policy forms to assure fairness in rates and in policy content, and would condone the industry’s misrepresentation to regulators in New Jersey and other states concerning the effect of the clause.

To the extent that an interpretation of the pollution-exclusion clause less sweeping than that required by its literal terms was fairly inferable from the industry’s explanatory statements to regulators, we perceive that regulators would reasonably have understood the effect of the clause to have denied coverage for the intentional discharge, dispersal, release, or escape of known pollutants, whether or not the eventual damage was intended or expected from the standpoint of the insured. The industry’s presentation of the clause to regulators described it as a clarification of the “intended and expected” clause of the basic “occurrence” definition “so as to avoid any question of intent,” and could fairly be understood as an attempt to override the issue whether damage was intended by excluding coverage for intentional discharges *31 of known pollutants. Accordingly, we construe and give effect to the standard pollution-exclusion clause only to the extent that it shall preclude coverage for pollution-caused property damage caused by an “occurrence” if the insured intentionally discharged, dispersed, released, or caused the escape of a known pollutant.

 

1. Adoption and Approval of the Standard Pollution-Exclusion Clause.

The background events that led the insurance industry to adopt the standard pollution-exclusion clause are well-documented and relatively uncontroverted. See Nancy Ballard and Peter Manus, Clearing Muddy Waters: Anatomy of the Comprehensive General Liability Pollution Exclusion, 75 Cornell L.Rev. 610, 622-27 (1990); Robert Chesler et al., Patterns of Judicial Interpretation of Insurance Coverage for Hazardous Waste Site Liability, 18 Rutgers L.J. 9, 31-38 (1986); Richard Hunter, The Pollution Exclusion in the Comprehensive General Liability Insurance Policy, 1986 U. of Ill.L.Rev. 897, 903-06; Thomas Reiter et al., The Pollution Exclusion Under Ohio Law: Staying the Course, 59 U.Cin.L.Rev. 1165, 1187-1203 (1991); E. Joshua Rosenkranz, Note, The Pollution Exclusion Through the Looking Glass, 74 Geo.L.J. 1237, 1241-53 (1986). A number of courts have also reviewed the events leading to the adoption of the pollution-exclusion clause. See  **849 New Castle County, supra, 933 F.2d at 1196-98; Broadwell, supra, 218 N.J.Super. at 532-34, 528 A.2d 76; Just v. Land Reclamation Ltd., 155 Wis.2d 737, 456 N.W.2d 570, 573-75 (1990).

As both the cases and commentators acknowledge, CGL policies prior to 1966 afforded liability coverage for bodily injury and property damage “caused by accident,” the term “accident” being undefined in the standard policy. Courts generally construed the term “accident” to encompass ongoing events that inflicted injury over an extended period provided that the injury was unexpected and unintended from the insured’s standpoint. See, e.g., Anchor *32 Casualty Co. v. McCaleb, 178 F.2d 322 (5th Cir.1949) (imposing coverage for damage to adjacent properties from oil flow over two-day period); Employers Ins. Co. v. Rives, 264 Ala. 310, 87 So.2d 653 (1955) (holding property damage from gradual leakage of gasoline into well covered as accident), on remand, 38 Ala.App. 411, 87 So.2d 646, cert. denied, 264 Ala. 696, 87 So.2d 658 (1956); McGroarty v. Great Am. Ins. Co., 36 N.Y.2d 358, 368 N.Y.S.2d 485, 329 N.E.2d 172 (1975) (imposing liability for damage caused by excavation and construction on adjacent property over several months); Ballard & Manus, supra, 75 Cornell L.Rev. at 623-24; Reiter et al., supra, 59 U.Cin.L.Rev. at 1187-88; Rosenkranz, supra, 74 Geo.L.J. at 1241-46.

In 1966 the insurance industry revised its standard-form CGL policy to afford coverage based on an “occurrence,” which the policy defined as “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage that was neither expected nor intended from the standpoint of the insured.” Ballard & Manus, supra, 75 Cornell L.Rev. at 624; Reiter et al., supra, 59 U.Cin.L.Rev. at 1190. (The 1973 version of the standard CGL policy promulgated by the ISO re-defined “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” Robert Tyler, Jr. and Todd Wilcox, Pollution Exclusion Clauses: Problems in Interpretation and Application Under the Comprehensive General Liability Policy, 17 Idaho L.Rev. 497, 499 (1981)). The 1966 revision of the CGL policy was generally understood “to cover pollution liability that arose from gradual losses,” Rosenkranz, supra, 74 Geo.L.J. at 1247, and was acknowledged as having been “intended to broaden coverage * * * by avoiding an implication that there was no coverage for a continuing condition as distinguished from a sudden event.” Robert Keeton, Basic Text on Insurance Law, § 5.4c, at 300 (1971). Those courts that have attempted to trace the events leading to adoption of the pollution-exclusion clause confirm the uniform understanding of the broadened coverage afforded under *33 the 1966 revision of the CGL policy. See, e.g., New Castle County, supra, 933 F.2d at 1197 (“The standard, occurrence-based policy thus covered property damage resulting from gradual pollution. So long as the ultimate loss was neither expected nor intended, courts generally extended coverage to all pollution-related damage, even if it arose from the intentional discharge of pollutants.”); United States Fidelity & Guar. Co. v. Specialty Coatings Co., 180 Ill.App.3d 378, 129 Ill.Dec. 306, 312, 535 N.E.2d 1071, 1077 (Ct.) (“Prior to the insertion of the pollution-exclusion in the 1970s, ‘occurrence-based’ coverage embraced not only the usual accident, but also exposure to conditions which continued for an unmeasured period of time.”), appeal denied, 127 Ill.2d 643, 136 Ill.Dec. 609, 545 N.E.2d 133 (1989); see also Chesler et al., supra, 18 Rutgers L.J. at 31 (“[T]he inclusion of ‘injurious exposure to conditions’ as part of the definition of accident indicated that injury resulting from a continuing process was covered under the policy.”); Reiter et al., supra, 59 U.Cin.L.Rev. at 1191 (“Indeed, gradual pollution was a paradigm example of what was a covered ‘occurrence,’ a feature of the CGL policy that the insurance industry aggressively marketed and routinely emphasized.”).

Foreseeing an impending increase in claims for environmentally-related losses, and cognizant of the broadened coverage **850 for pollution damage provided by the occurrence-based, CGL policy, the insurance industry drafting organizations began in 1970 the process of drafting and securing regulatory approval for the standard pollution-exclusion clause. “The insurer’s primary concern was that the occurrence-based policies, drafted before large scale industrial pollution attracted wide public attention, seemed tailor-made to extend coverage to most pollution situations.” Rosenkranz, supra, 74 Geo.L.J. at 1251. Commentators attribute the insurance industry’s increased concern about pollution claims to environmental catastrophes that occurred during the 1960s. “Pollution claims burst on the insurance scene following the Torrey Canyon disaster and the Santa Barbara off-shore drilling oil spills in 1969.” Hourihan, Insurance Coverage for Environmental Damage Claims, 15 Forum 551, 533 (1980). Other commentators *34 observe that the insurance industry, concerned about public reaction to environmental pollution, desired to clarify and publicize its position that CGL policies did not indemnify knowing polluters. Reiter et al., supra, 59 U.Cin.L.Rev. at 1195-56. Consistent with that objective, the President of INA announced his company’s intention to adopt the pollution-exclusion endorsement with these comments:

INA will continue to cover pollution which results from an accidental discharge of effluents-the sort of thing that can occur when equipment breaks down.

We will no longer insure the company which knowingly dumps its wastes. In our opinion, such repeated actions-especially in violation of specific laws-are not insurable exposures. Moreover, we are inclined to think that any attempt to provide such insurance might well be contrary to public policy. We at INA hope that our anti-pollution exclusion may help encourage many companies to take the first, crucial steps toward improving their manufacturing processes-the steps that will lead eventually to a cleaner, healthier and, we hope, happier life for all.

[Charles K. Cox, Liability Insurance in the Era of the Consumer, Address Before the Annual Conference of the American Society of Insurance Management (Apr. 9, 1970), quoted in Robert S. Soderstrom, The Role of Insurance in Environmental Litigation, 11 Forum 762, 767 (1976).]

Whatever may have been the industry’s motivation, the General Liability Governing Committee of the Insurance Rating Board (IRB) (successor to the National Bureau of Casualty Underwriters) authorized its drafting committee

to consider the question and determine the propriety of an exclusion, having in mind that pollutant-caused injuries were envisioned to some extent in the adoption of the current “occurrence” basis of coverage, and some protection is afforded by way of the definition of this term.

[Reiter et al., 59 U.Cin.L.Rev. at 1197 (footnote omitted).]

The end-product of the IRB’s drafting effort was the standard pollution-exclusion clause, supra at 11, 629 A.2d at 836, which became known as exclusion “f” of the standard form CGL policy. According to one member of the drafting committee, the pollution-exclusion clause allowed the underwriters “to perform their traditional function as insurers of the unexpected event or happening and yet * * * [did] not allow an insured to seek protection from his liability insurers if he knowingly pollute[d].” Francis X. Bruton, Historical Liability and Insurance Aspects of Pollution Claims, Proceedings of Insurance, Negligence and Compensation *35 Law Section, ABA, 1971, at 311, quoted in Soderstrom, supra, 11 Forum at 768. Other commentators have expressed similar conclusions about the central purpose of the pollution-exclusion clause. See, e.g., Soderstrom, supra, 11 Forum at 767 (“By the use of the pollution-exclusion endorsement * * * [c]overage for willful, intentional or expected violations was to be excluded.”); S. Hollis M. Greenlaw, **851 The CGL Policy to the Pollution Exclusion Clause: Using the Drafting History to Raise the Interpretation Out of the Quagmire, 23 Colum.J.L. & Soc.Probs. 233, 246 (1990) (“Yet although the language of the pollution-exclusion clause is ambiguous, intra industry statements made contemporaneously with the drafting of the clause and representations made by the industry to various state insurance commissioners * * * reveal that the industry clearly intended to preclude coverage of the reckless polluter as well as the intentional polluter.”). The New York State legislature apparently shared that view of the pollution-exclusion clause’s purpose, enacting in 1971 a statute requiring policies issued to commercial or industrial enterprises to include the standard form pollution-exclusion clause, N.Y.Ins.Law § 46(13)-(14) (McKinney 1972), and offering this explanation for its adoption:

For example, a polluting corporation might continue to pollute the environment if it could buy protection from potential liability for only the small cost of an annual insurance premium, whereas, it might stop polluting, if it had to risk bearing itself the full penalty for violating the law.

 

[New York Legis.Ann. 353-54 (1971).]

As a New York appellate court explained, “The conclusion thus becomes compelling that the pollution exclusion clause, mandated by statute, was intended to apply only to actual polluters.” Niagara County v. Utica Mut. Ins. Co., 80 A.D.2d 415, 439 N.Y.S.2d 538, 540 (1981).

After industry approval, the IRB and the Mutual Insurance Rating Bureau (MIRB) sought state regulatory approval to add the pollution-exclusion clause as an endorsement to standard CGL policies, apparently submitting to most if not all states in which *36 approval was sought a standard explanatory memorandum that read in part as follows:

Coverage for pollution or contamination is not provided in most cases under present policies because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. The above exclusion clarifies this situation so as to avoid any question of intent. Coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident * * *.

[Reprinted in Ballard and Manus, supra, 75 Cornell L.Rev. at 625-26.]

As the record indicates, the identical explanatory memorandum was filed by the IRB with the New Jersey Department of Insurance in May 1970. The Attorney General’s amicus brief observes that the industry’s submission of the pollution-exclusion clause and its approval by the Department of Insurance were specifically required by New Jersey’s statutory provisions regulating rates for insurance coverage, N.J.S.A. 17:29A-1 to -28, although no rate change was sought with respect to the pollution-exclusion clause. We take note of other provisions of the insurance statutes that require approval of commercial-insurance policy provisions in order to prevent the issuance of policy forms that are inequitable or misleading. See N.J.S.A. 17:29AA-11. We assume that most states had in effect comparable regulatory provisions that mandated the submission of the pollution-exclusion clause for state approval.

In considering the IRB’s explanatory memorandum concerning the effect of the pollution-exclusion clause-which the record suggests was the only explanation offered to New Jersey insurance officials-we accord special significance to the process by which that clause gained approval in New Jersey and other states. Realistically, once the clause gained regulatory approval, it was uniformly adopted as an endorsement to the standard-form CGL policies that were issued to innumerable commercial enterprises and governmental agencies for more than a decade. The abundant case law called to our attention by counsel for all parties may be regarded merely as an illustrative sample of the virtually universal inclusion of the standard clause, or one of its derivatives, in CGL policies issued throughout the United States. Of course, *37 after regulatory approval the specific provisions of the pollution-exclusion clause ordinarily were not negotiable by purchasers of CGL policies. **852 As some commentators observe, the typical commercial insured rarely sees the policy form until after the premium has been paid. Ballard and Manus, supra, 75 Cornell L.Rev. at 621; W. David Slawson, Mass Contracts: Lawful Fraud in California, 48 S.Cal.L.Rev. 1, 12 (1974). Accordingly, to the extent that the pollution-exclusion clause ever was subjected to arms-length evaluation by interests adverse to the insurance industry, that evaluation occurred only when the clause was submitted to and reviewed by state regulatory authorities.

In considering the accuracy of the IRB’s explanatory memorandum, we note that the insurance companies in this litigation, and in general, assert the position that the pollution-exclusion clause precludes coverage for all pollution damage, whether or not intended, unless the discharge of pollutants was “sudden” (meaning abrupt) and “accidental,” or a so-called “boom” event. That being the industry’s understanding of the effect of the pollution-exclusion clause, the first two sentences of the explanatory memorandum to state regulators are, to say the least, paradigms of understatement:

Coverage for pollution or contamination is not provided in most cases under present policies because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. The above exclusion clarifies this situation so as to avoid any question of intent.

The first sentence is simply untrue. As discussed, supra at 32-33, 629 A.2d at 849-850, the 1966 version of the CGL policy covered property damage from gradual pollution and imposed no restriction on the “suddenness” of the pollutant discharge. We repeat the Third Circuit’s observation in New Castle, supra:

The standard, occurrence-based policy thus covered property damage resulting from gradual pollution. So long as the ultimate loss was neither expected nor intended, courts generally extended coverage to all pollution-related damage, even if it arose from the intentional discharge of pollutants.

[933 F.2d at 1197.]

*38 For that matter, the appendix filed by the Attorney General contains the MIRB’s Explanatory Memorandum of Changes submitted to the New Jersey Department of Banking & Insurance in support of the 1966 revision of the CGL policy. That memorandum stated:

Coverage has been broadened to an “occurrence” basis which is defined in the jacket. The definition reinforces the intent that the injury be fortuitous from the insured’s standpoint and by the addition of coverage for “injurious exposure to conditions” eliminates the connotation of suddenness previously intended as respects coverage on an “accident” basis.

 

[Emphasis added.]

In the context of the generally-recognized broad coverage afforded by the pre-existing “occurrence” policies for property damage caused by pollution, the industry’s statement that “such coverage is not provided in most cases under present policies” is not only astonishing but inaccurate and misleading as well. As is widely acknowledged, even by commentators sympathetic to the insurers’ position, the industry’s primary concern in 1970 was that the occurrence-based policies “seemed tailor made to extend coverage to most pollution situations.” Rosenkranz, supra, 74 Geo.L.J. at 1251. See supra at 33-35, 629 A.2d at 849-851.

The second sentence is even more misleading than the first. It states that “[t]he above exclusion clarifies this situation so as to avoid any question of intent,” undoubtedly referring back to the immediately preceding clause that reads “because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence.” Undeniably, the pollution-exclusion clause does “avoid any question of intent” because the clause excludes all coverage for unintentional pollution damage except for that caused by sudden and accidental discharges. But to characterize so **853 monumental a reduction in coverage as one that “clarifies this situation” simply is indefensible. Stated accurately, the pollution-exclusion clause, as construed today by the industry, eliminates all coverage for unintended pollution-caused damage *39 that the occurrence-based policy had provided, except for the unusual “boom-event” type case in which the discharge of the pollutants was both sudden-meaning abrupt-and accidental. To describe a reduction in coverage of that magnitude as a “clarification” not only is misleading, but comes perilously close to deception. Moreover, had the industry acknowledged the true scope of the proposed reduction in coverage, regulators would have been obligated to consider imposing a correlative reduction in rates.

The succeeding sentence of the explanatory memorandum continued to camouflage the literal effect of the pollution-exclusion clause: “Coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident * * *.” In asserting that coverage for pollution-caused injuries is “continued,” the statement does not alert regulators to the critical change effected by the clause: under the occurrence-based policy, coverage was afforded if the property damage was accidental; under the pollution-exclusion clause, even if the property damage is accidental, no coverage is afforded unless the discharge of pollutants is both sudden and accidental. The memorandum utterly obscures that distinction, and the conclusion is virtually inescapable that the memorandum’s lack of clarity was deliberate.

Supplemental explanations submitted by the IRB to state regulatory agencies were similarly lacking in candor. As noted by a Georgia federal court, the IRB informed the Georgia Insurance Department by letter of June 10, 1970, that

“the impact of the [pollution exclusion clause] on the vast majority of risks would be no change. It is rather a situation of clarification * * *. Coverage for expected or intended pollution and contamination is not now present as it is excluded by the definition of occurrence. Coverage for accidental mishaps is continued [except for the risks described in the filing].”

[Claussen v. Aetna Casualty & Sur. Co., 676 F.Supp. 1571, 1573 (S.D.Ga.1987) (quoting letter from R. Stanley Smith, Manager of the Insurance Rating Board, to the Georgia Insurance Department, June 10, 1970), question certified by 865 F.2d 1217 (11th Cir.), certified question answered by 259 Ga. 333, 380 S.E.2d 686, *40 answer to certified question conformed to 888 F.2d 747 (11th Cir.1989), on remand, 754 F.Supp. 1576 (S.D.Ga.1990).]

That letter prompted the Court to observe:

The Court does not wish to condone the conduct of the insurance industry that plaintiff has exposed. The statements made by the Insurance Rating Board to the Georgia Insurance Department, if not fraudulent, certainly were not straightforward. The Rating Board downplayed the substantial effect the pollution exclusion clause would have on existing coverage in an effort to obtain approval for the clause’s insertion into insurance policies.

[Ibid.]

Similarly, in the course of regulatory proceedings before the West Virginia Commissioner of Insurance, the MIRB submitted a supplemental memorandum to explain the purpose of the exclusion: “This endorsement is actually a clarification of the original intent, in that the definition of occurrence excludes damages that can be said to be expected or intended.” George Pendygraft et al., Who Pays for Environmental Damage: Recent Developments in CERCLA Liability and Insurance Coverage Litigation, 21 Ind.L.Rev. 117, 154 (1988). In reliance on the industry’s submissions, the West Virginia Insurance Commissioner approved the pollution-exclusion in a written order that stated in part:

The said companies and rating organizations have represented to the Insurance Commissioner, orally and in writing, that the proposed exclusions * * * are merely clarifications of existing coverage **854 as defined and limited in the definitions of the term “occurrence”, contained in the respective policies to which said exclusions would be attached;

(2) To the extent that said exclusions are mere clarifications of existing coverages, the Insurance Commissioner finds that there is no objection to the approval of such exclusions[.]

[Reprinted in Joy Technologies v. Liberty Mut. Ins. Co., [187 W.Va. 742], 421 S.E.2d 493, 499 (1992).]

Insurance departments in at least two other states expressed concern over the industry’s submission of the pollution-exclusion clause. In June 1970, the Kansas Commissioner of Insurance addressed several questions to the IRB. One question reflected the Commissioner’s assumption that the current definition of occurrence provided coverage for property damage caused by pollution. He wrote: “It appears that the General-Automobile Liability policy now provides coverage for contamination and *41 pollution. Please confirm.” The IRB’s response to the Commissioner’s inquiry was inaccurate and misleading. It tracked the language of the explanatory memorandum submitted to state regulators, and did not attempt to explain or to disclose the full intended impact of the pollution-exclusion clause:

It is our opinion that coverage for pollution or contamination is not provided under the present General-Automobile Liability policy because the damages can be said to be expected or intended, and thus are excluded by the definition of occurrence. It should be noted that the proposed endorsements will definitely clarify the situation.

The Insurance Commissioner of Puerto Rico apparently disapproved the pollution-exclusion clause when it initially was filed, prompting a supplemental letter from the IRB to the Commissioner. The IRB’s letter sheds no light whatsoever on the restriction of coverage that the industry intended to achieve through the pollution-exclusion clause:

We certainly appreciate that where an insured acts in violation of the law, the policy does not provide coverage for the consequences of such acts. The exclusion is not aimed at taking care of such a situation. Rather, it is designed to clarify the policy as respects other situations where questions of intent might arise. Such questions usually arise when, with respect to a particular situation, the policy does not clearly spell out what is and is not covered in terms clearly understood by the insured or his representative. Relying solely upon the policy definition of occurrence which requires that the act causing damage must not be expected nor intended by the insured, might well cause dispute as to whether in fact the act was unexpected or unintended particularly in a fact situation involving a continuous course of action. This kind of situation is often very costly to both insureds and companies since many of them are brought into court to be resolved. All too often, the courts have been deciding such questions in favor of insureds, while strongly criticizing companies for not clearly spelling out intent in the policy. The courts are insisting that policies should clearly set forth intent. When, in the courts opinion, the policy does not, companies usually end up paying out large sums of money for damages resulting from situations wherein no coverage was ever intended and for which no premium was ever charged. Under such circumstances, we strongly believe that it is both necessary and desirable to clarify as many situations as possible so as to avoid any question of intent. This is precisely what our Contamination or Pollution Exclusion is designed to do.

As noted, the response to the Insurance Commissioner of Puerto Rico contains no disclosure about how the specific wording of the pollution-exclusion clause would operate to reduce substantially coverage that previously had been provided for pollution *42 occurring over a sustained period. The conclusion is inescapable that the IRB intentionally avoided any discussion that would illuminate the magnitude of the intended restriction in coverage.

**855 Because of the regulatory history leading to approval by the various state regulatory authorities, a number of State Attorneys General, including the New Jersey Attorney General in the amicus brief filed with this Court, have urged that the pollution-exclusion clause be interpreted in a manner consistent with the industry’s representations to regulatory authorities in 1970. See, e.g., Brief of Amici Curiae State of Delaware and Commonwealth of Pennsylvania, New Castle County, supra, 933 F.2d 1162; Brief of Amicus Curiae Insurance Commissioner of West Virginia, Liberty Mut. Ins. Co. v. Triangle Indus., Inc., 182 W.Va. 580, 390 S.E.2d 562 (1990); Memorandum of Amicus Curiae State of Indiana, in Support of Plaintiff’s Motion for Partial Summary Judgment, Ulrich Chem., Inc. v. American States Ins. Co., 1990 WL 484974 (Ind.Cir.Ct.1990) (No. 73C 01-8901-CP 016). Although the interests of states in insurance-coverage litigation are generally consistent with the interests of insureds, the assertion by several State Attorneys General of estoppel-type arguments, based on a generalized recognition that the industry’s presentation of the pollution-exclusion clause to regulators was misleading, strongly suggests that the issue warrants careful and comprehensive consideration.

Responding to assertions that the IRB’s representations to state regulators concerning the effect of the pollution-exclusion clause were misleading, amicus curiae Aetna Casualty & Surety Co. (Aetna) argues that “regulatory history” should not be confused with “drafting history.” Referring to an affidavit submitted in the New Castle litigation by one of the drafters of the pollution-exclusion clause, Aetna contends that the intent of the drafters of the clause was to restrict pollution coverage to the classical “accident” or “boom” event, and to exclude coverage for gradual pollution. That argument was addressed directly in deposition testimony by Richard E. Stewart, Superintendent of the New *43 York State Department of Insurance from January 1967 to December 1970 and President of the National Association of Insurance Commissioners, 1970-71 (testifying in J.T. Baker, Inc. v. Aetna Casualty & Surety Co., No. CV-4794-SSB (D.N.J.1990)):

“[T]he drafting documents, the internal documents, speak of sudden in its temporal sense, and as accomplishing a serious cutback in coverage. Granted. I am not questioning the accuracy of anything in Mr. Bruton’s affidavit as to what was going on. The filings with the states are completely inconsistent with that. And * * * do not disclose it, do not develop it, and in fact affirmatively maintain that we’re just dealing with a clarification of the occurrence definition.

Now, to me, and I think to other insurance people, what goes in a state filing is of much greater probative power than what is in an internal and unreleased series of memoranda. And since the-the internal communications, the drafting history documents that use temporal were not communicated outside the company bureau world, either to insureds and brokers, but only the filing documents and something like the Aetna bulletins to the field were communicated, but the filing documents are the ones that really matter, and they to me, in terms of what [a] company should be held to, contain the version of this ambiguous term which the industry should be held to. It’s as simple as that, and I think it’s a very straightforward answer * * *.”

[Deposition Testimony of Richard Stewart, quoted in Robert Sayler, The Emperor’s Newest Clothes, Revisionism and Retreat: The Insurer’s Last Word on the Pollution Exclusion, 5 Mealey’s Litig. Reps., Insurance at 27, 46 (1991).]

 

2. Judicial Treatment of the Pollution-Exclusion Clause.

****

Two additional decisions that merit particular attention are Joy Technologies, supra, 421 S.E.2d at 499, and Just, supra, 456 N.W.2d at 573, in which both the Wisconsin and West Virginia Supreme Courts held that the pollution-exclusion clause bars coverage only for pollution-caused property damage that was intended or expected. In reaching that conclusion both courts relied significantly on the regulatory history of the pollution-exclusion clause, Joy Technologies, supra, 421 S.E.2d at 498-99, Just, supra, 456 N.W.2d at 574-75, as did the courts in New Castle, supra, 933 F.2d at 1196-98, Claussen, supra, 380 S.E.2d at 689, Specialty Coatings, supra, 129 Ill.Dec. at 311-13, 535 N.E.2d at 1076-78, *67 Broadwell, supra, 218 N.J.Super. at 533-34, 528 A.2d 76, and Kipin Indus., supra, 535 N.E.2d at 338. Our extensive discussion earlier in this opinion concerning the regulatory history of the pollution-exclusion clause, supra at 31-43, 629 A.2d at 848-855, did not focus on the significant emphasis placed on that history by a number of courts that had found the meaning of the clause to be ambiguous in part because of the manner in which the industry had presented the clause to state regulatory agencies. In Just, supra, property owners adjacent to a landfill sought damages for personal injuries and property damage allegedly caused by the landfill’s improper waste-disposal practices, and joined the landfill’s CGL carrier as a third-party defendant. Relying on the pollution-exclusion clause, the lower courts held that that clause barred coverage for the claims. Reversing, the Wisconsin Supreme Court construed the clause as affording coverage essentially equivalent to that provided under **869 the previously-issued “occurrence”-based policy, basing its holding substantially on the industry’s representations to regulators in seeking approval of the pollution-exclusion clause:

Contemporaneous representations by the insurance industry confirm that the drafting committee, in creating the exclusionary clause, clarified but did not reduce the scope of coverage. This expressed intent was also the interpretation relied upon by insurance regulators in approving the exclusionary clause when it was submitted for approval to various state insurance commissioners by representatives of the insurance industry.

In May 1970, both insurance industry trade associations, (the Mutual Insurance Rating Bureau and the Insurance Rating Board,) submitted the standard pollution exclusion for approval by state regulatory authorities throughout the country.

* * * * * *

Some states questioned whether the purpose of the pollution exclusion was “limiting the coverage and not clarifying it.” The Mutual Insurance Rating Bureau, which assisted in the draft of the exclusion endorsement, in a submission to the West Virginia Commissioner of Insurance, explained that the intent of the clause was to clarify “ ‘that the definition of occurrence excludes damages that can be said to be expected or intended.’ ” [quoting Pendygraft, supra, 21 Ind.L.Rev. at 154].

* * * * * *

Furthermore, documents presented by the Insurance Rating Board to the Georgia Insurance Commissioner when the pollution exclusion clause was first adopted suggest that the clause was intended to exclude only intentional polluters. *68 The Insurance Rating Board represented “ ‘the impact of the [pollution exclusion clause] on the vast majority of risks would be no change. It is rather a situation of clarification * * *. Coverage for expected or intended pollution and contamination is not now present as it is excluded by the definition of occurrence. Coverage for accidental mishaps is continued * * *.’ ” [quoting Claussen, supra, 676 F.Supp. at 1573].

 

[456 N.W.2d at 575.]

In Joy Technologies, supra, 421 S.E.2d 493, the insured had been engaged from 1968 to 1980 in the cleaning and rebuilding of motors used in mining machinery, requiring the regular and continuing disposal of oil contained in the motors. Although the record suggested that the insured’s disposal practices “were commonly accepted in the industry at the time,” id. at 498, Joy Technologies routinely disposed of PCB-contaminated oil in a storm drain and on its property, resulting in contamination of the insured’s site and adjacent property. Joy sought coverage for remediation costs from Liberty Mutual, and the lower court held that the pollution-exclusion clause barred Joy’s claim for indemnification. The West Virginia Supreme Court reversed, relying exclusively on the regulatory proceeding before the West Virginia Insurance Commissioner for its conclusion that the pollution-exclusion clause should be construed in a manner consistent with the industry’s representations to state authorities indicating its intended effect:

Before the exclusion clause could be legally incorporated into the commercial general liability policy in West Virginia, it was necessary that Liberty Mutual obtain the approval of the West Virginia Insurance Commissioner. Before incorporating the exclusion clause, in accordance with West Virginia law, Liberty Mutual submitted the exclusion language to the West Virginia Insurance Commissioner for his approval.

The West Virginia Insurance Commissioner held hearings to consider the proposed exclusionary language. The record shows that, in conjunction with the submissions, the Insurance Rating Board and apparently also the Mutual Insurance Rating Board, acting on behalf of their members and subscribers, including Liberty Mutual, included with their submission **870 of the proposed exclusion language an explanation [of the clause].

* * * * * *

*69 This conclusion is further supported by an affidavit submitted by the former West Virginia Insurance Commissioner, who officially authorized the inclusion of the exclusion in West Virginia policies. That affidavit stated that “in preliminary submissions on the matter, the insurers represented that the proposed forms did not limit and were not intended to limit the coverage.” The Commissioner also said in the affidavit that:

The insurers stated in pre-hearing submissions, at the hearing, and in post-hearing submissions that the proposed endorsement forms did not limit or narrow coverage and were not intended to do so. Based upon those representations, I concluded that the pollution endorsement forms did not narrow or limit coverage and, instead, were mere clarifications of existing coverage as defined and limited by the definition of the term “occurrence.” Accordingly, I approved the endorsement forms IRB 335 and MIRB MB G008 submitted respectively by the Insurance Rating Board and the Mutual Insurance Rating Bureau.

* * * * * *

In this Court’s view, it appears clear from the foregoing discussion that the 1966 commercial general liability insurance policies, as originally issued, covered gradual bodily injury and gradual property damage resulting over a period of time from exposure to the insured’s waste disposal, as was suggested by Mr. Bean in the memorandum issued in conjunction with the drafting of the policies. They, however, as originally issued, excluded damage resulting from expected and intended pollution, as indicated by the Insurance Rating Board and the Mutual Insurance Rating Board in their 1970 filings with the West Virginia State Insurance Commissioner. Further, from the filings it is clear that in seeking approval of the exclusion provision, the insurance companies did not represent that they intended to exclude any risk which was not excluded in the original policies, but that they merely intended to clarify what had been excluded in the original policies. In approving the new policy language, the West Virginia Insurance Commissioner specifically stated that the companies and rating organizations had represented that the proposed exclusions were mere clarifications of existing coverage, and in approving the language the Insurance Commissioner approved it only “to the extent that said exclusions are mere clarifications of existing coverages.”

This Court has recognized that where a definite meaning has been ascribed to language used in an insurance policy, that meaning should be given to the language by the courts. Christopher v. United States Life Insurance Company in City of New York, 145 W.Va. 707, 116 S.E.2d 864 (1960). In view of this, and in view of the fact that in the present case the insurance group representing Liberty Mutual unambiguously and officially represented to the West Virginia Insurance Commission that the exclusion in question did not alter coverage under the policies involved, coverage which included the injuries in the present case, this Court must conclude that the policies issued by Liberty Mutual covered pollution damage, even if it resulted over a period of time and was gradual, so long as it was not expected or intended.

 

*70 [Id. at 498-500 (footnote omitted).]

3. The Pollution-Exclusion Clause Bars Coverage Only for Intentional Discharges, Dispersals, Releases, or Escapes of Known Pollutants.

****.

We are persuaded that construing “sudden” to mean unexpected will not materially expand the coverage afforded by the pollution-exclusion clause to a degree that approaches the breadth of coverage that had been afforded under the “occurrence”-based policy. Moreover, we are of the view that an interpretation of “sudden” that does not acknowledge its temporal quality is unfaithful to its core meaning, although that temporal connotation of “sudden” is not inconsistent with an application to events that begin, but not end, abruptly:

This temporal element of “sudden” is so basic and capable of such broad application that it is often ignored or dismissed as inconsequential by parties and courts interpreting liability policies. Failure to understand this element had led *72 some insureds to argue that the commonly understood meaning of “sudden” has no temporal element. Courts that have not carefully considered the temporal nature of “sudden” have confused it with brevity and have asserted that an event which does not end quickly cannot be sudden. Certainly some “sudden” events do end quickly, due to the physical properties of the activity, such **872 as a “sudden shot.” * * * A sudden emergency is one which arises abruptly and unexpectedly. The duration of the emergency is irrelevant to the concept. A “sudden need” begins abruptly but need not end quickly. Similarly, a “sudden attack,” “sudden fear,” and “sudden resolve” may be of long or short duration. Compare a “sudden recognition” of an old schoolmate that may continue for one’s lifetime with a “sudden explosion” lasting less than a minute, and a “sudden heat wave” which could last one day or several weeks. In common usage, a “sudden” event is one which begins abruptly or without previous notice, irrespective of whether the duration of that event is short or long.

[Ballard & Manus, supra, 75 Cornell L.Rev. at 615-17 (footnotes omitted).]

As noted, “sudden” events may begin abruptly, and continue undetected for a significant period. In addition, gradual deterioration of a pipeline or container is not necessarily inconsistent with a “sudden” discharge of pollutants. See, e.g., Van’s Westlake Union, supra, 664 P.2d at 1266-67. In our view, however, a construction of “sudden” that acknowledges its temporal quality necessarily results in a severe restriction of coverage for pollution-caused property damage under the literal language of the pollution-exclusion clause.

That understanding of the pollution-exclusion clause’s plain meaning reinforces our conclusion that the conflict over whether “sudden” means abrupt or unexpected misses the point, neither interpretation providing coverage for pollution-caused property damage that approaches the coverage afforded under the “occurrence”-based policy. The critical issue is whether the courts of this state should give effect to the literal meaning of an exclusionary clause that materially and dramatically reduces the coverage previously available for property damage caused by pollution, under circumstances in which the approval of the exclusionary clause by state regulatory authorities was induced by the insurance industry’s representation that the clause merely “clarified” the scope of the prior coverage. Our resolution of that issue is heavily influenced by our recognition that this state’s regulatory review of the pollution-exclusion clause was incidental to the *73 authority of the Commissioner of Insurance to determine the reasonableness of rates for insurance coverage. N.J.S.A. 17:29A-1 to -32. Concededly, no rate change was sought or required in connection with the IRB’s submission of the pollution-exclusion clause. But had the IRB asserted then, as the insurers assert in this litigation, that the literal effect of the clause was to limit sharply the coverage for pollution-caused property damage to only those discharges of pollutants that occur abruptly and accidentally, the conclusion is inescapable that a significant rate reduction would have been required. The statute specifying the factors to be considered in determining rates includes “the loss experience of the insurer, past and prospective, including where pertinent, the conflagration and catastrophe hazards, if any * * * [and] all factors reasonably related to the kind of insurance involved * * *.”  N.J.S.A. 17:29A-11. The material and substantial reduction in coverage proposed by the pollution-exclusion clause, if disclosed to regulators in New Jersey and elsewhere, undoubtedly would have affected adversely the industry’s rates for CGL coverage. Instead, because of the industry’s failure, in its presentation to regulators, to acknowledge and emphasize the sharp reduction in coverage, insureds in New Jersey, and perhaps throughout the country, apparently have paid rates for CGL policies incorporating the pollution-exclusion clause comparable to those paid for the prior “occurrence”-based policies that afforded substantially greater coverage. We note that the New Jersey Department of Insurance’s order approving the filing of the pollution-exclusion clause specifically recites that the approval is based on the determination “that the revised insuring forms will produce coverage at rates which are reasonable, adequate and not unfairly discriminatory in accordance with our statutory standards.”

This Court is now asked to construe CGL policies containing the pollution-exclusion **873 clause in a manner consistent with the clause’s literal language, ignoring the industry’s misleading presentation to state regulators over twenty years ago, and overlooking the apparent unfairness that such an interpretation would impose on policyholders who were charged rates that did not reflect the *74 radical diminution in coverage contemplated by the insurance industry. So to construe the pollution-exclusion clause would, in this Court’s view, violate this State’s strong public policy requiring regulation of the insurance business in the public interest, and would reward the industry for its misrepresentation and nondisclosure to state regulatory authorities.

In a non-regulatory context, this Court has long recognized the doctrine that an insurer who misrepresents the coverage of, or the exclusions from, an insurance contract to the insured’s detriment may be estopped from denying coverage on a risk not covered by the policy. In Harr v. Allstate Insurance Co., 54 N.J. 287, 255 A.2d 208 (1969), the insured sought recovery for water damage to business merchandise stored in the basement of his residence. Although neither the homeowner’s policy nor the fire policy issued by Allstate covered the loss, the insured contended that Allstate was estopped from denying coverage under the fire policy because of representations by its agent reasonably relied on by the insured. The record disclosed that before leaving for a trip to Florida the insured had inquired of Allstate’s representative, knowing that his homeowner’s policy did not cover his business equipment, whether he could obtain coverage for such equipment. Allstate’s representative informed Harr that Allstate “can cover you for $7500 and you are fully covered.” Thereafter, Allstate issued Harr a fire insurance policy covering “merchandise in storage” but not affording coverage for damage caused by burst water pipes, a peril covered by Harr’s homeowner’s policy. While Harr was in Florida, a burst water pipe damaged the residence, personal property, and the stored equipment. Allstate’s denial of coverage for the damaged equipment was sustained by the lower courts. Reversing, this Court held that

where an insurer or its agent misrepresents, even though innocently, the coverage of an insurance contract, or the exclusions therefrom, to an insured before or at the inception of the contract, and the insured reasonably relies thereupon to his ultimate detriment, the insurer is estopped to deny coverage after a loss on a risk or from a peril actually not covered by the terms of the policy. The proposition is one of elementary and simple justice. By justifiably relying on the insurer’s superior knowledge, the insured has been prevented from procuring the desired *75 coverage elsewhere. To reject this approach because a new contract is thereby made for the parties would be an unfortunate triumph of form over substance. The fact that the insurer has received no premium for the risk or peril as to which the loss ensued is no obstacle. Any additional premium due can be deducted from the amount of the loss. If the insurer is saddled with coverage it may not have intended or desired, it is of its own making, because of its responsibility for the acts and representations of its employees and agents.

 

[Id. at 306-07, 255 A.2d 208 (citations omitted).]

See also Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388, 400 (1984) (allowing insured to raise issue of estoppel to establish coverage contrary to limitations in standard-form policy when insurer’s agent had represented that coverage was broader than that contained in policy); Griggs v. Bertram, 88 N.J. 347, 363-64, 443 A.2d 163 (1982) (insurer that failed to inform insured of potential disclaimer within reasonable time estopped from denying coverage on subsequent litigation against insured). See generally Robert E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L.Rev. 961, 977-85 (1970) (supporting principle that policyholders can assert doctrine of estoppel to claim coverage contrary to policy provisions based on justifiable and detrimental reliance on insurer’s representations).

**874 Although we have not heretofore applied the estoppel doctrine in a regulatory context, its application to these circumstances is appropriate and compelling. A basic role of the Commissioner of Insurance is “to protect the interests of policy holders” and to assure that “insurance companies provide reasonable, equitable and fair treatment to the insuring public.” See In re N.J.A.C. 11:1-20, 208 N.J.Super. 182, 189, 505 A.2d 177 (App.Div.1986). In misrepresenting the effect of the pollution-exclusion clause to the Department of Insurance, the IRB misled the state’s insurance regulatory authority in its review of the clause, and avoided disapproval of the proposed endorsement as well as a reduction in rates. As a matter of equity and fairness, the insurance industry should be bound by the representations of the IRB, its designated *76 agent, in presenting the pollution-exclusion clause to state regulators.

An insurance doctrine closely related to “estoppel” holds that insurance contracts should be enforced to accord with the objectively-reasonable expectations of the insured even if the contract’s technical provisions would not be found ambiguous by a sophisticated reader. For example, in Gerhardt v. Continental Insurance Co., 48 N.J. 291, 225 A.2d 328 (1966), in determining that although the policy language was unambiguous, it was insufficiently clear to justify depriving the insured of her reasonable expectations of coverage, we observed:

This quoted language was obscure on first reading to both counsel and the Court * * *.

After the purpose of the quoted language is * * * explained it is understandable, but it seems highly unlikely that the ordinary insured would have so understood it on his or her own reading. As far as the plaintiff here was concerned, nowhere was there any straightforward and unconditional statement that the policy was not intended to protect the insured against a workmen’s compensation claim by a residence employee injured at the insured’s home.

 

[Id. at 299, 225 A.2d 328 (citation omitted).]

We explained the basis for the doctrine of “reasonable expectations” in Sparks v. Saint Paul Insurance Co., 100 N.J. 325, 495 A.2d 406 (1985):

The interpretation of insurance contracts to accord with the reasonable expectations of the insured, regardless of the existence of any ambiguity in the policy, constitutes judicial recognition of the unique nature of contracts of insurance. By traditional standards of contract law, the consent of both parties, based on an informed understanding of the terms and conditions of the contract, is rarely present in insurance contracts. W.D. Slawson, “Standard Form Contracts and Democratic Control of Lawmaking Power,” 84 Harv.L.Rev. 529, 539-41 (1971); R. Keeton, Insurance Law 350-52 (1971). Because understanding is lacking, the consent necessary to sustain traditional contracts cannot be presumed to exist in most contracts of insurance. Such consent can be inferred only to the extent that the policy language conforms to public expectations and commercially reasonable standards. See W.D. Slawson, supra, 84 Harv.L.Rev. at 566; R. Keeton, supra, at 350-52. In instances in which the insurance contract is inconsistent with public expectations and commercially accepted standards, judicial regulation of insurance contracts is essential in order to prevent overreaching and injustice.

 

*77 [Id. at 338, 495 A.2d 406.]

The observation that an insurance policy unambiguous to a sophisticated reader may be technically undecipherable to an average insured applies squarely to the standard CGL policy endorsed with the standard pollution-exclusion clause. A decade of litigation has illuminated the literal meaning of the clause and its relation to the definition of “occurrence,” but that clarity of understanding was not prevalent in 1970 when the clause was submitted for regulatory approval. To the contrary, by virtue of the IRB “explanatory” memorandum, the common **875 understanding of regulators undoubtedly was that the clause “clarified” but was consistent with the prior occurrence-based coverage. At most, the IRB’s statement that the exclusion “clarifies this situation so as to avoid any question of intent” could have been understood to characterize the exclusion as denying coverage for the knowing discharge of pollutants, irrespective of whether damage had been expected or intended. As noted earlier, supra at 34-36, 629 A.2d at 850-851, the industry’s public statements contemporaneous with the drafting and submission of the pollution-exclusion clause suggested that its overriding purpose was to deny coverage to intentional polluters. Because the pollution-exclusion clause, after regulatory approval, was added as an endorsement to most standard CGL policies, the typical commercial insured may have had little, if any, awareness that the terms of CGL coverage had been changed, much less any “objectively-reasonable expectation” of the scope of the new coverage, except to the extent of an assumption that unchanged premiums ordinarily would be consistent with a continuing level of coverage. To the extent that in the early 1970s informed “reasonable expectations” of the scope of coverage of the pollution-exclusion clause existed, such expectations were those of state regulators that had reviewed the IRB memorandum and understood that “coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident * * *.” IRB explanatory memorandum, supra at 36, 629 A.2d at 851. We are fully persuaded that the “reasonable expectations” of the New Jersey insurance regulatory authorities *78 should be imputed to those insureds to whom CGL policies with standard pollution-exclusion clauses were issued after the clause had been approved on the basis of the IRB memorandum.

Accordingly, we hold that notwithstanding the literal terms of the standard pollution-exclusion clause, that clause will be construed to provide coverage identical with that provided under the prior occurrence-based policy, except that the clause will be interpreted to preclude coverage in cases in which the insured intentionally discharges a known pollutant, irrespective of whether the resulting property damage was intended or expected. We expressly limit our holding concerning the limited effect of the pollution-exclusion clause to cases in which the insured or an agent specifically authorized to act for the insured intentionally discharges a known pollutant. We disapprove of holdings such as Powers Chemco, Inc. v. Federal Insurance Co., 74 N.Y.2d 910, 549 N.Y.S.2d 650, 548 N.E.2d 1301 (1989), holding that claims for remediation costs against the insured based on property damage caused by intentional discharges of hazardous waste by the insured’s predecessor in title were ineligible for coverage under the pollution-exclusion clause because the former landowner had intentionally discharged pollutants. In our view, so restrictive an application of the pollution-exclusion clause is inconsistent with the IRB’s explanatory memorandum and with the industry’s stated purpose of restricting the availability of pollution-caused damage coverage for those insureds who intentionally pollute the environment.

We add this additional observation. In declining to give effect to the literal provisions of the pollution-exclusion clause, we manifest no hostility to restrictive coverage provisions in standard-form insurance policies. Although intensively regulated, the insurance industry is entitled to reassess periodically the perils it chooses to insure and, subject to regulatory approval, to restrict coverage of risks in a manner consistent with its economic interests. Industry-wide determinations to restrict coverage of risks-particularly *79 those that affect the public interest, such as the risk of damage from environmental pollution-must be fully and unambiguously disclosed to regulators and the public. In the case of the pollution-exclusion clause, the importance of full disclosure in 1970 is illustrated by the events of the ensuing two decades. Under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.A. §§ 9601 to 9675 (CERCLA), and its state counterparts, joint and several **876 liability for cleanup costs may be imposed retroactively and without regard to fault on a broad class of entities involved directly or indirectly in the process of disposal of hazardous substances. Estimated remediation costs range from 150 to 750 billion dollars. Reiter et al., supra, 59 U.Cin.L.Rev. at 1171. Industrial and governmental entities confronted with liability for remediation expenses, often based on hazardous-waste disposal that had occurred ten or twenty years earlier, invariably have turned to their CGL carriers for indemnification, only to be confronted with disclaimers of coverage in reliance on the pollution-exclusion clause.

Had the insurance industry candidly revealed the extent of the contraction in coverage intended by the pollution-exclusion clause, regulatory officials could have made informed judgments concerning the rate and coverage issues implicated by the clause, and both commercial and governmental insureds would have been aware that insurance coverage for environmental pollution would be sharply restricted. Conceivably, commercial and governmental insureds would have taken action, either directly or through intervention by state regulatory authorities, to encourage the industry to provide broader coverage for pollution damage, even at increased rates, perhaps avoiding the litigation explosion that the pollution-exclusion clause has precipitated. Had full disclosure been made, we would not hesitate to enforce the pollution-exclusion clause as written, resolving nuances inherent in the meaning of “sudden” on a case-by-case basis. Not only did the insurance industry fail to disclose the intended effect of this significant exclusionary clause, it knowingly misstated its intended effect in the industry’s submission of the clause to state Departments *80 of Insurance. Having profited from that nondisclosure by maintaining pre-existing rates for substantially-reduced coverage, the industry justly should be required to bear the burden of its omission by providing coverage at a level consistent with its representations to regulatory authorities.

 

C. Environmental Pollution and the Definition of “Occurrence.”

****

IV

The judgment of the Appellate Division is affirmed. No costs.

*96 For affirmance-Chief Justice WILENTZ and Justices HANDLER, POLLOCK and O’HERN-5.

Opposed-None.

Parallel Citations

629 A.2d 831, 62 USLW 2079

 

Footnotes

1

On July 1, 1993, the Florida Supreme Court, in a four-to-three decision, withdrew its prior opinion in this litigation, Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Corp., No. 78293, 1992 WL 212008, at 4-8 (Fla. Sept. 3, 1992), in which the court had construed “sudden and accidental” to mean unexpected and unintended, had determined that the purpose of the pollution-exclusion clause was to bar coverage for knowing polluters, and held that the pollution-exclusion clause did not bar the insured’s claim for coverage. The court’s prior decision also had been rendered by a divided court, four-to-three.