In Consolidated Rail Corporation v. ACE Property & Casualty, Consolidated Rail owned/operated several freight yards and geographical sites from 1976-1999.  During that time, the Environmental Protection Agency conducted studies at several of the Conrail locations.  The EPA found that many of the sites were contaminated with toxins resulting from toxin spills, waste storage, and other harmful practices that occurred before Conrail owned/operated the properties.  Nevertheless, because Conrail owned/operated the properties, it was responsible for the remediation costs and related expenses, for which it paid millions of dollars.  Conrail then sought coverage from its insurers who denied coverage.  The relevant policy language stated:

“TO INDEMNIFY THE INSURED FOR ANY AND ALL SUMS THE INSURED SHALL BECOME LEGALLY LIABLE TO PAY AS DAMAGES, INCLUDING LIABILITY ASSUMED BY THE INSURED UNDER ANY AGREEMENT OR CONTRACT, TO ANY PERSON OR PERSONS AS COMPENSATION FOR:

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(b) DAMAGE TO OR DESTRUCTION OF PROPERTY, INCLUDING LOSS OF USE THEREOF, EXCLUDING INSURED’S OWN PROPERTY BUT INCLUDING PROPERTY OF OTHERS IN INSURED’S CARE, CUSTODY OR CONTROL;

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ARISING OUT OF ANY OCCURRENCE OR OCCURRENCES CAUSED BY OR GROWING OUT OF THE INSURED’S OPERATIONS ANYWHERE IN THE WORLD, AND ALL OPERATIONS INCIDENTAL THERETO.

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Occurrence means an event, or continuous or repeated exposure to conditions which cause injury or damage during the term of the policy.”

Conrail sued and the court interpreted “CAUSED BY OR GROWING OUT OF” to allow Conrail to be reimbursed for environmental contamination only if Conrail caused the damage.  The environmental contamination occurred before Conrail owned/operated the properties, and Conrail did not cause any of the damage.   Consequently, the trial court ruled Conrail was not entitled to coverage under the policies.  The trial court recognized that “The result is somewhat unusual-where Conrail did nothing wrong, it is not covered, but where it is at least partially at fault, it is entirely covered.”  On appeal, the Superior Court upheld the “sound analysis” of the trial court.

This case highlights the importance of careful drafting/reading of insurance policies.  Many individuals may disagree with the Court’s decision from a fairness standpoint, but it is one that the policy language dictated.  Depending on the policy language, being at fault may be a good thing.

Thanks to Malik Pickett for his contribution to this post.