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SOMERSET, N.J.-A New Jersey court decision awarding punitive damages to a policyholder for insurers' bad faith in handling environmental claims could set a precedent for similar cases in the state.
"The ruling relates to claims-handling procedures that date back a number of years, and if the insurance carriers were employing the same procedures in other claims, the bad faith could already be established" by the New Jersey Superior Court ruling, said Michael J. Geiger, an attorney at Hannoch Weisman in Roseland, N.J., who represented Princeton Gamma-Tech Inc. in the case.
The primary insurers include ITT Hartford Group Inc. of Hartford, Conn.; North River Insurance Co., a Morristown, N.J.-unit of Crum & Forster Insurance Cos.; and Federal Insurance Co., a unit of Chubb Corp. in Warren, N.J.
The insurers failed to investigate the claim properly before they denied coverage and should cover the claims and pay punitive damages to Princeton Gamma-Tech, Superior Court Judge Robert E. Guterl ruled last month.
Hearings are scheduled for later this year so the judge can decide on the amount of compensatory and punitive damages and how to allocate them among the insurers.
The insurers' "bad faith was deliberate, malicious and egregious, and compensatory and punitive damages are therefore warranted," according to the ruling.
An award for a bad faith finding in environmental claims handling is rare, said Laura Foggan, a partner at Wiley, Rein & Fielding in Washington, who represents insurers in environmental coverage disputes.
"Bad faith is routinely alleged, but it is not common for a bad faith award to be made," she said.
Judges are reluctant to make bad-faith awards for the handling of what are usually complex claims, Ms. Foggan noted.
The case centered on pollution at several sites in New Jersey that began in the 1960s and continued for several years.
Princeton Gamma-Tech manufactures measuring and monitoring instruments, including nuclear radiation detection equipment. In its operations, it used trichloroethylene as a degreasing agent. The company disposed of TCE by pouring it onto the open ground at the manufacturing site and in later years at waste disposal sites.
By 1980, TCE had been found in the water at properties near the Princeton Gamma-Tech site. In 1988, the Environmental Protection Agency told Princeton Gamma-Tech that it had been designated a potentially responsible party for environment contamination at sites surrounding its manufacturing unit. In 1989 the EPA also said the company was a PRP at the waste disposal sites.
The estimated cleanup costs for all of the polluted sites is several million dollars.
Princeton Gamma-Tech informed its insurers of the claim. All the insurers denied coverage and refused to defend Princeton Gamma-Tech.
Neither Princeton Gamma-Tech nor Hartford had copies of the company's comprehensive general liability policies, so Hartford said there was no evidence of coverage, court papers say.
However, the judge accepted secondary evidence of coverage, including condensed records of insurance coverage, certificates of insurance and coverage binders.
Hartford then accepted the secondary evidence but said there was no proof of the extent of the coverage, court papers say.
The judge ruled that Hartford typically used Insurance Services Offices Inc. forms and the ISO forms would include coverage for the Princeton Gamma-Tech claims.
Hartford's denial of coverage and its handling of the claim illustrated "Hartford's arrogant disregard of its fiduciary obligations to an insured," court papers say.
The designated claims handler was inexperienced in environmental claims and was overburdened with claims, as he had to process 1,000 to 1,200 environmental claims from 1985 to 1992, court papers say.
He "accomplished this achievement by avoiding personal attention to the individual facts of a claim and by simply generating standard form letters which demanded information from the insured, declined coverage and asserted pro forma reservations of rights that often did not even relate to the facts of the claim," according to court papers.
Hartford also made little effort to locate the missing policies or verify the coverage, the court found.
"Instead, it conducted a superficial search which confirmed that the actual policy had been destroyed, ignored ample secondary evidence of coverage and refused to evaluate the merit of PGT's claim," court papers say.
Much of the evidence in the case centered on Hartford's claims handling, but the judge said North River and Federal also failed to adequately investigate the claim, court papers say.
North River did not comply with the claims handling procedures set out in its environmental claims processing manual, court papers say.
"In stark contrast to its own procedure manual, North River undertook no investigation of its own and did not even respond to PGT's notices of claim until it was reminded of that failure by PGT's counsel in June of 1990," court papers say.
Federal conducted no meaningful review of the claims and applied its standard "philosophy" for environmental claims, court papers say.
"According to that 'philosophy,' remediation costs did not constitute property damages, the owned-property exclusion extended to the property of others if it was used by the insured and only abrupt discharges were covered," court papers say.
As a result of the failure to investigate the claim and other inadequate claims-handling procedures, the insurers acted in bad faith, court papers say.
Hartford plans to file a motion for the judge to reconsider the ruling. Lawyers representing North River, and a spokeswoman for Chubb would not comment on the case.
Princeton Gamma-Tech Inc. vs. Hartford Insurance Group et al., Superior Court of New Jersey Somerset County-Law Division; Civil Action, No. SOM-L-1289-91, June 5, 1997.