Carrier not responsible for covering clean-up costs at a CERCLA site under Maryland law. Those costs were incurred to satisfy a regulatory requirement.

Background: On July 9, 1999, the U.S. Environmental Protection Agency ("EPA") expressed its intent to include Industrial Enterprises’ property and other neighboring properties near the Back River in Baltimore County, Maryland, in a Superfund Site designated for cleanup under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). The EPA cited the presence of hazardous substances on the Site. At the time of the EPA letter, Industrial Enterprises held a comprehensive general liability insurance policy (“CGL policy”) with Penn America Insurance Company. Industrial Enterprises forwarded the EPA letter to Penn America and requested that it provide a defense.

The insurer denied coverage. Penn America countered that its CGL policy did not provide indemnity for costs incurred by Industrial Enterprises because: 1) such costs are not damages because of "property damage" of a third party, as required for coverage under the CGL policy, and (2) that the pollution exclusion applied because facts to support the exception to the exclusion – that any "release or escape" of the hazardous substances on Industrial Enterprises’ property be "sudden and accidental” – were not demonstrated.

Industrial Enterprises commenced this action for a judgment declaring that Penn America was obligated to pay Industrial Enterprises the amount that it had incurred and reasonably would incur as defense costs in response to the demands made by the EPA.

Issue: 1) Whether a standard CGL policy, which indemnifies the insured for "all sums which the insured shall become legally obligated to pay as damages because of ... property damage," covers the insured’s liability under the CERCLA for costs to remediate the presence of hazardous substances on the insured’s land.

Holding: On appeal, the Court of Appeals reversed the judgment of the lower court, concluding that a standard CGL policy does not cover the insured’s liability under the CERCLA. The Court based its decision on Bausch & Lomb, Inc. v. Utica Mutual Insurance Co., 625 A.2d 1021 (Md. 1993), where the Maryland Court of Appeals held that a similar CGL policy did not cover expenses incurred in response to the State’s regulatory order to remove soil containing hazardous chemicals. Therefore, the Court concluded that Industrial Enterprises’ liability under CERCLA was not liability for "property damage," but rather regulatory liability for response costs. Accordingly, the Court concluded that Penn America’s CGL policy did not cover Industrial Enterprises’ regulatory liability and, therefore, Penn America had no duty to provide Industrial Enterprises with a defense.

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