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After hearing extensive oral arguments Tuesday, the Pennsylvania Supreme Court will now decide if the Superior Court erred when it overturned a $21 million judgment n.o.v. and set new standards for interpreting the known-loss doctrine. The case — Rohm & Haas Co. v. Continental Casualty Co. — has generated so much interest that a number of organizations filed amicus briefs in the case. Amici included the Insurance Environmental Litigation Association, United Policyholders, Pennsylvania Chemical Industry Council, the Pennsylvania Chamber of Business and Industry, both the Philadelphia and Pittsburgh Chambers of Commerce, the Pennsylvania Trial Lawyers Association, Pennsylvania Environmental Council and a number of businesses, including Bethlehem Steel Corp. and Crown Cork & Seal. Rohm & Haas is asking the high court to affirm Philadelphia Common Pleas Court Judge Paul L. Jaffe’s decision ordering a number of insurers to indemnify the company for costs of cleaning up a Superfund site. A Philadelphia County jury found in favor of the insurance companies, but Jaffe granted Rohm & Haas’ motion for a directed verdict after a non-jury trial as to damages, awarding Rohm & Haas $21 million in damages for past expenses and a share of future cleanup costs. On appeal, the Superior Court reversed Jaffe’s decision and, with a lengthy opinion, reinstated the jury’s verdict. The three-judge panel, consisting of Judges James R. Cavanaugh, Patrick R. Tamilia and John P. Hester, ruled that the j.n.o.v. was wrongly entered “regardless of whether the court’s rationale for the imposition of j.n.o.v. was a matter of law or for gross evidentiary insufficiency.” The appeals panel ruled that the jury was privy to “ample evidence” to show that Rohm & Haas failed to disclose information to its insurers regarding the environmental damage to the property. The court then, ruling on an issue of first impression, adopted a new, broad standard for interpreting the known-loss doctrine. The known-loss doctrine provides that an insured may not obtain insurance for a loss that has either already taken place or is in progress. The Superior Court panel held that the standard for “known loss” should not be the insured’s knowledge of certain liability, but knowledge of the likelihood of exposure to losses that would trigger coverage. John G. Harkins of Harkins Cunningham in Philadelphia argued the case on behalf of Rohm & Haas. Jerome J. Shestack of Wolf Block Schorr & Solis-Cohen, also of Philadelphia, argued on behalf of the insurers. The justices listened intently to both attorneys, interjecting often to ask questions. Both sides focused primarily on the issues of fraud and the known-loss doctrine. Shestack noted early on in his argument that the issue of fraud was a straightforward one that the jury clearly ruled had occurred. The known-loss doctrine, however, was new law that was a bit more difficult. But Harkins said the court was wrong to rule on a fraud and known-loss basis. “Either you have a fraud doctrine or a known-loss doctrine but it makes no sense to have them together,” Harkins said. WHITMOYER SITE In 1964, Rohm & Haas bought Whitmoyer Laboratories Inc., a veterinary feedstock and pharmaceutical company located in Lebanon County, Pa. Soon after buying the property, Rohm & Haas realized that Whitmoyer had been dumping arsenic waste on the land since 1957, which contaminated soil and groundwater in the surrounding area. Rohm & Haas conducted tests on water samples in 1964 and realized that arsenic levels in the wells for several surrounding off-site houses were very high. In January 1965, F.O. Haas, CEO of Rohm & Haas, ordered that the problem be solved and informed the commonwealth of the problem. The company began a cleanup program, supplied bottled water to nearby residences and settled the claims of some people who became sick. According to the Superior Court opinion, in December 1964, Rohm & Haas had that site included under already existing liability policies with its insurers, retroactive from its purchase date. Rohm & Haas informed its primary liability insurer and its insurance broker of the problem with the Whitmoyer site, who were in turn “free to pass that information on to the excess insurers.” The excess insurers claim there was an effort to keep them from learning about the Whitmoyer problem. The “excess” policies in question were comprehensive general liability policies intended to provide additional coverage beyond Rohm & Haas’ primary insurance. The excess insurance policies provide that the companies indemnify Rohm & Haas for “liability to third parties above certain substantial thresholds, ranging from $500,000 to $40 million.” Rohm & Haas began a clean-up of the site in 1965. Throughout the clean-up process, Rohm & Haas continued to buy liability insurance from other insurance companies without voluntarily telling the insurers about the environmental pollution problem on the site. The company did not seek reimbursement for clean-up costs from the insurers. Rohm & Haas sold the site to SmithKline Beecham in 1978. In 1980, Congress enacted the Comprehensive Environmental Response and Liability Act, and in 1986 the EPA informed Rohm & Haas that it would be liable for clean-up costs of the site under the stricter CERCLA standards. In 1988, Rohm & Haas went to its insurers seeking coverage for the additional CERCLA-required clean-up. The insurers denied coverage, and Rohm & Haas sued them for indemnification. After a nine-week trial, the jury decided that the insurers had no duty to indemnify Rohm & Haas because the company did not inform the insurers of the environmental problem on the site. After the trial, Jaffe granted the motion for a j.n.o.v. and began a non-jury trial to determine damages, where he found in favor of Rohm & Haas and granted $21,031,352 in compensation. But on appeal, the Superior Court said Jaffe was wrong to direct the verdict, ruling that there was sufficient evidence for a jury to decide whether Rohm & Haas had a duty to disclose information about the Whitmoyer site to the excess insurers. And the jury said Rohm & Haas did indeed have that duty. KNOWN-LOSS DOCTRINE Under the narrow construction of the known-loss doctrine adopted by the trial court, coverage is precluded only when the insured has certain knowledge of damages and liability. Because no lawsuit for damages had been brought at the time the polices were contracted for, Jaffe concluded Rohm & Haas did not have to inform the insurers of the environmental problems at the Whitmoyer site. But the Superior Court said the known-loss doctrine should be applied broadly. “We think that the appropriate standard for the `known loss’ defense in Pennsylvania should not be knowledge of certainty of damages and liability, but whether the evidence shows that the insured was charged with knowledge which reasonably shows that it was, or should be, aware of a likely exposure to losses which would reach the level of coverage,” Cavanaugh wrote. Under such an interpretation, the known-loss defense was proven at the trial level on the basis of allegations of fraud, the appeals court ruled. ORAL ARGUMENTS Harkins, representing the appellant, of course addressed the court first, touching on both the fraud and known-loss issues. Through their questioning, the justices seemed more focused on the known-loss issue. Justice Ralph J. Cappy presented a hypothetical situation. He set forth the setting of a six-month trial with a potential verdict of $100 million. “Would you consider this trial a known loss?” Cappy asked. Harkins said he would not. “Even under the most extreme definition of known loss, you’re really talking about … a known risk,” Cappy said. Justice Stephen A. Zappala then joined in, “Is it speculative or actual — the loss?” “I don’t believe it’s speculative,” Harkins said. Zappala said it was not actual either. “So you would concede that known loss can’t always mean a known loss?” Cappy asked. “Is there a difference between that kind of scenario [the trial] and the change of a government regulation creating liability on your part?” Harkins said that hindsight is 20/20 and that Rohm & Haas could not have anticipated the enactment of CERCLA. He also said that the company had been voluntarily cleaning up the land under the less-strict Clean Streams Law. Justice Russel Nigro questioned whether it was okay for a company to buy more liability insurance after it knew its land was contaminated, and Justice Sandra Schultz Newman followed a similar line of questioning. “So when you took out this insurance, you knew about this problem?” Newman asked. Harkins said yes, the company was aware of the contamination but not aware of the potential future cleanup costs that would come under CERCLA and that those were the costs being sought. Shestack first addressed the fraud claim and said that the jury had found clear and convincing evidence that Rohm & Haas misled the insurance companies through its silence of the environmental problems. He also noted the three-judge Superior Court panel found sufficient evidence to uphold the fraud claim. Cappy chimed in and asked how the jury could decide that Rohm & Haas had committed fraud if the pre-CERCLA standards at the time were less strict. “If they had complied with the cleanup requirements of the time, how could the jury decide they concealed information?” Cappy asked. “It wasn’t cleaned up,” Shestack said. “Long before CERCLA, they knew [the property] was a nuisance. They knew their liability.” Shestack said Rohm & Haas disclosed the information of contamination to everyone but the insurers, so they did not have the chance to “decide if they wanted to take the risk.” He said the conduct was “out-and-out fraud.” Shestack said Rohm & Haas was aware of the contaminated land and aware of its potential liability. “This was a known loss with certain liability, your honors. They knew it,” Shestack said. Justice Ronald D. Castille later interrupted Shestack. “Here, they cleaned up the site themselves and then new guidelines came along,” Castille said. “It seems to me that those events show the innocence of Rohm & Haas, rather than fraud.” Shestack said it could hardly show innocence. He said they knew about the millions of pounds of sludge on the property. “But they cleaned it up,” Castille said. “Well, they didn’t your honor, or there wouldn’t have been a CERCLA suit,” Shestack responded. Castille noted that Rohm & Haas did not seek any money from the insurance companies for the initial clean-up costs under the Clean Streams Act. Chief Justice John P. Flaherty thanked both attorneys and extended his thanks to the number of lawyers, including amici, involved in the case.

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