New York Court Holds UST Sublimit Applicable to Underlying Loss

In its recent decision in Two Farms, Inc. v. Greenwich Ins. Co., 2014 U.S. Dist. LEXIS 1629 (S.D.N.Y. Jan. 7, 2014), the United States District Court for the Southern District of New York had occasion to consider the whether the phrase “underground storage tank(s) and associated piping” as used in a pollution liability policy was ambiguous.

Greenwich insured Two Farms under a Pollution and Remediation Legal Liability Policy with limits of liability of $5 million per pollution condition. The policy contained an exclusion applicable to claims “based upon or arising out of the existence of any underground storage tank(s) and associated piping.”  The exclusion, however, had an exception for tanks identified in an “Underground Storage Tank(s) and Associated Piping Schedule, if any.”  The Two Farms policy, in fact, contained such a schedule as an endorsement which identified the underground storage tank (“UST”) and piping at the insured’s facility.  Notably, the policy also contained an endorsement titled “Dedicated UST Sublimit Endorsement,” which set forth a sublimit of liability of $1 million applicable to loss or remediation costs applicable to “all Underground Storage Tanks and Associated Piping scheduled to [the] Policy.”

During the policy period, Greenwich discovered that thousands of gallons of gasoline had been discharged into the soils of its facility.  It was later determined that the source of the leak was a defective “O-Ring,” which is a component of a pump that drew gas from the insured UST.  The gas leaked into a containment sump, but ultimately was discharged directly into the ground.  The remediation costs associated with the leak were alleged to exceed $5 million.  Greenwich paid $1 million toward the loss, asserting that this was the maximum recovery permitted under the policy as a result of the UST sublimit. 

While Two Farms agreed that the phrase “underground storage tanks and associated piping” as used in the exclusion and exception to the exclusion was unambiguous, it contended that the phrase as used in the sublimit endorsement was ambiguous since it could have two meanings.  Specifically, Two Farms argued that

… the term "underground storage tanks and associated piping" can refer either to underground storage tanks and associated piping alone, or to underground storage tanks, associated piping, and other equipment that comprises the UST system. Two Farms therefore argues that the term "underground storage tanks and associated piping" is ambiguous as used in the UST Sublimit, and concludes that this ambiguity must be construed against Greenwich, the insurer.

Two Farms argued that because the sublimit endorsement was ambiguous, the $1 million sublimit set forth therein should not apply to the underlying loss.  Rather, it claimed entitlement to remediation cost coverage up to the policy’s $5 million limit of liability.

While the loss occurred in Maryland, the court applied New York law in light of the policy’s express New York choice of law provision.  The court agreed that under New York law regarding the phrase “arising out of,” the UST exclusion applied to the underlying loss since the discharge of gasoline would not have happened but for the existence of a UST and its associated piping.  As the court explained, “[t]he equipment that caused the Discharge would be entirely unnecessary if Two Farms did not have the underground storage tank and associated piping to which that equipment was attached.”  The court further agreed, however, that because the UST was scheduled in the Underground Storage Tank(s) and Associated Piping Schedule, the exception to the exclusion applied.   In so concluding, the court found no ambiguity in the phrase “underground storage tank and associated piping,” finding the phrase to have a “definite and precise meaning.”  As such, the court rejected Two Farms argument that this phrase could be ambiguous when used in the sublimit endorsement, explaining:

The term "underground storage tanks and associated piping" must be interpreted broadly in order to effectuate the parties' intent that Two Farms receive coverage for losses incurred because of the Discharge; namely, losses that result from defects in the UST system. This interpretation of the term "underground storage tanks and associated piping" is appropriately applied across provisions of the Policy because "a word used by the parties in one sense will be given the same meaning throughout the contract in the absence of countervailing reasons," and no countervailing reasons are apparent in this case.

Notably, the court found no indication that the parties intended the phrase “underground storage tanks and associated piping” to have different meanings in different sections of the policy.  It therefore concluded that Two Farm’s arguments concerning ambiguity unduly strained the policy language beyond its reasonable and ordinary meaning.  While the court found the language plain and unambiguous, it noted in passing that extrinsic evidence, including testimony of the insured’s broker, supported the conclusion that the sublimit was intended to apply to all USTs on the schedule.