Diminution in Value Not Seen as Property Damage

 

In Goodstein v. Continental Cas. Co., 2007 WL 4225803 (9th Cir. 2007), the Court of Appeals held that an insured's claim for the difference between the appraised value of uncontaminated properties and the sale price of the properties in a contaminated state was not recoverable under a commercial general liability policy because the claim did not constitute “property damage” or “damages” that the “insured shall become legally obligated to pay” because of “property damage” under the policy and state law. The case involved the sale of two properties by appellant Goodstein, a receiver appointed by the county court to wind up the dissolved partnerships of the property owners.

 

The owners operated a scrap metal salvage yard for forty-five years at one of the properties, which caused ground pollution; and at another site, the owners recycled scrap metal and electrical equipment for approximately twenty years, which caused hazardous waste byproducts containing high lead concentrations. In 1996 and 1998 Goldstein sold the properties, and although the sales agreements for both properties disclosed that the lands were polluted and required the purchasers to take over the responsibility for any cleanup required by the government, the agreements did not require that the purchasers remediate the property on their own.

 

Appellee Industrial Indemnity Co. issued primary and excess policies to the owners between 1980 and 1986. In September 1990, Goodstein advised Industrial that the Washington State Department of Energy had identified both properties as contaminated, that the owners might make a claim for cleanup and related costs under the policies Industrial issued, and that Goodstein might make a more formal claim for coverage and cleanup costs. However, in an October 1990 letter replying to Industrial's acknowledgment that it had received the September letter, Goodstein indicated they were not making any claims under the policies.

 

Industrial heard no more about the claim and closed its file in December 1992, but eight years later Goodstein wrote Industrial indicating that the properties had been sold and demanded that the insurer pay the difference between the appraised contaminated value of the properties and the value of the sites in an uncontaminated state. Industrial denied coverage and four years later Goodstein filed suit seeking a declaration that Industrial breached its duties to defend and indemnify under the policies.

 

The Ninth Circuit found that Industrial did not have a duty to indemnify Goodstein because, while he likely received a significantly reduced price for the sale of the properties, a Washington court would not find that loss covered under the policy. Goodstein failed to ensure that the polluted properties would be cleaned up promptly as the purchase agreements contained no cleanup condition, thus Goodstein was essentially seeking compensation from Industrial when he had not taken any action to ensure that the harm caused by the owners' polluting activities had been remedied. The court also explained that diminution in value of real property due to pollution did not alone constitute “property damage” under the CGL policy in Washington , where the language of the policy required “physical injury to tangible property.”

Further, diminution in value of real property due to pollution did not fall within the scope of “damages” in the policy, which stated that “insured shall become legally obligated to pay” because of “property damage.” Although such “damages” included response costs incurred by the insured in cooperation with the environmental agency, diminution in property value was not included as a surrogate for response costs which had not been incurred and where neither the insured nor the purchaser had been required to expend any money on remediation.