PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
INDUSTRIAL ENTERPRISES,
INCORPORATED, a Maryland
Corporation,
Plaintiff-Appellee,
v.
PENN AMERICA INSURANCE
COMPANY, a Pennsylvania
Corporation,
No. 09-2346
Defendant-Appellant.
COMPLEX INSURANCE CLAIMS
LITIGATION ASSOCIATION,
Amicus Supporting Appellant.
2 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
INDUSTRIAL ENTERPRISES,
INCORPORATED, a Maryland
Corporation,
Plaintiff-Appellant,
v.
PENN AMERICA INSURANCE
COMPANY, a Pennsylvania
Corporation,
No. 09-2397
Defendant-Appellee.
COMPLEX INSURANCE CLAIMS
LITIGATION ASSOCIATION,
Amicus Supporting Appellee.
Appeals from the United States District Court
for the District of Maryland, at Baltimore.
Richard D. Bennett, District Judge.
(1:07-cv-02239-RDB)
Argued: December 7, 2010
Decided: March 18, 2011
Before NIEMEYER, KING, and DUNCAN, Circuit Judges.
Reversed and remanded with instructions by published opin-
ion. Judge Niemeyer wrote the majority opinion, in which
Judge Duncan joined. Judge King wrote a dissenting opinion.
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 3
COUNSEL
ARGUED: Thomas S. Schaufelberger, SAUL EWING, LLP,
Washington, D.C., for Penn America Insurance Company.
John William Schryber, DICKSTEIN SHAPIRO, LLP, Wash-
ington, D.C., for Industrial Enterprises, Incorporated. ON
BRIEF: Paul A. Fitzsimmons, SAUL EWING, LLP, Wash-
ington, D.C., for Penn America Insurance Company. Russell
V. Randle, Kristen M. Jarvis Johnson, PATTON BOGGS
LLP, Washington, D.C., for Industrial Enterprises, Incorpo-
rated. Laura A. Foggan, Gregory J. Langlois, WILEY REIN
LLP, Washington, D.C., for Complex Insurance Claims Liti-
gation Association, Amicus Curiae.
OPINION
NIEMEYER, Circuit Judge:
In this appeal, we decide whether a standard comprehen-
sive general liability insurance policy ("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
Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") for costs to remediate the presence
of hazardous substances on the insured’s land.
On July 9, 1999, the U.S. Environmental Protection
Agency ("EPA") sent Industrial Enterprises, Inc., and other
owners of neighboring properties near the Back River in Bal-
timore County, Maryland, letters expressing the EPA’s intent
to include Industrial Enterprises’ property and neighboring
properties in a Superfund Site designated for cleanup under
CERCLA due to the presence of hazardous substances on the
Site. The EPA also advised Industrial Enterprises and the
other property owners that they might be required to under-
4 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
take or fund investigatory and cleanup actions to protect the
public health, welfare, and the environment.
Industrial Enterprises forwarded the EPA letter to its
insurer, Penn America Insurance Company, requesting that it
provide a defense. When Penn America denied coverage,
Industrial Enterprises commenced this action for a judgment
declaring that Penn America was obligated to pay Industrial
Enterprises the sums that it had incurred and reasonably
would incur as defense costs in response to the demands made
by the EPA. It also demanded reimbursement of defense costs
in an amount not less than $600,000.
On the motions of the parties for summary judgment, the
district court found a "potentiality" of insurance coverage,
requiring Penn America to provide a defense, and accordingly
it awarded Industrial Enterprises $465,774.50 for attorneys
fees incurred, $89,070 in technical consulting fees incurred,
and 6% interest on the sum of those amounts, all reduced by
the $210,000 that Industrial Enterprises received in a settle-
ment with the other property owners. The district court also
denied Industrial Enterprises’ claim for $750,000, which it
paid in reaching a settlement and forming a defense coalition
with the other neighboring property owners.
On appeal, we reverse. Based on the decision of 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 con-
taining hazardous chemicals, we conclude that Industrial
Enterprises’ liability under CERCLA is not liability for "prop-
erty damage," but rather regulatory liability for response
costs. Accordingly, we conclude that Penn America’s CGL
policy does not cover Industrial Enterprises’ regulatory liabil-
ity and, therefore, Penn America has no duty to provide
Industrial Enterprises with a defense.
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 5
I
During the relevant periods, Industrial Enterprises owned
numerous parcels of land located in Baltimore City and Balti-
more County, Maryland, portions of which had been used as
landfills from the 1940s through the 1970s. The landfills were
located in low-lying areas that were previously wetlands, and
Herring Run and Moore’s Run flow through the areas and
feed into the Back River at the land’s eastern boundary.
In January 1999, the EPA issued a proposal to include
Industrial Enterprises’ property, as well as neighboring prop-
erties, in a Superfund Site for cleanup. As part of its process,
the EPA evaluated Industrial Enterprises’ property, as well as
the other properties in the area, and noted that there had been
prior reports of oil pollution at the Site. On July 9, 1999, the
EPA sent Industrial Enterprises and 19 other owners of neigh-
boring properties a letter formally notifying them that they
were potentially liable for environmental damage at the Site
and that there may be "potential response activities at the Site,
which [they] may be asked to perform." The letter stated:
EPA may order PRPs [potentially responsible par-
ties], or any one of them, to perform response
actions deemed necessary by EPA to protect the pub-
lic health, welfare or the environment. Additionally,
PRPs may be liable for all costs incurred by the gov-
ernment in responding to any release or threatened
release at the Site. . . . Such actions and costs may
include, but are not limited to, expenditures for con-
ducting a Remedial Investigation/Feasibility Study
(RI/FS).
Industrial Enterprises forwarded the EPA’s letter to Penn
America, asking Penn America to approve Industrial Enter-
prises’ retention of defense counsel and to reimburse it for the
costs of defense. Penn America, however, denied coverage,
stating:
6 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
The claim presented arises from continual polluting
activities, occurring over a long period of time and
in the course of business operations, which do not
give rise to a potentiality of coverage under the "sud-
den and accidental" language of the pollution exclu-
sion. Further, the claim is excluded under the
"owned property" exclusion.
Negotiating through its own retained counsel, Industrial
Enterprises thereafter entered into a settlement agreement in
2004 with the other potentially responsible parties to form a
"Coalition" to respond to the EPA. Under the Coalition settle-
ment agreement, each member of the Coalition agreed to con-
tribute to a Coalition Fund, and Industrial Enterprises
contributed $750,000. Each member also released every other
member from liability.
Thereafter, in April 2006, the Coalition negotiated with the
EPA and entered into an "Administrative Settlement Agree-
ment and Order of Consent" with the agency. In the Agree-
ment, the Coalition agreed to undertake a "Remedial
Investigation/ Feasibility Study" concerning cleanup of the
Site and to implement the solutions found from the investiga-
tion, so long as the EPA approved the investigation’s conclu-
sions. The Coalition also agreed to fund the investigation.
Industrial Enterprises subsequently commenced this action
to obtain a declaratory judgment that Penn America’s CGL
policy provides coverage for Industrial Enterprises’ response
costs, including its attorneys fees and its $750,000 contribu-
tion to the Coalition Fund.
On Industrial Enterprises’ motion for partial summary
judgment, the district court found that Penn America’s CGL
policy potentially covered Industrial Enterprises’ liability to
the EPA and therefore Penn America had a duty to provide a
defense. Indus. Enters., Inc. v. Penn America Ins. Co., No.
RBD-07-2239, 2008 WL 4120221 (D. Md. Sept. 2, 2008).
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 7
The district court focused only on the pollution exclusion
clause which excluded coverage for losses occasioned by pol-
lution unless the pollution was "sudden and accidental."* It
concluded,
[Industrial Enterprises] has submitted extrinsic evi-
dence that, at least arguably, demonstrates that an oil
spill occurred in or around the five parcels owned by
[Industrial Enterprises] during the relevant policy
period, and that this incident was specifically relied
upon by the EPA in its decision to issue the demand
letter. . . . Based on [this evidence], this Court finds
that [Industrial Enterprises] has established that there
is a potentiality of coverage, even if such potential
is remote.
Id. at *6. Based on its finding of a potentiality of coverage,
the court concluded that Penn America was liable for Indus-
trial Enterprises’ defense costs. Id. at *5-6 (citing Clendenin
Bros. v. U.S. Fire Ins. Co., 889 A.2d 387, 393 (Md. 2006)
(requiring insurance companies to provide a defense if there
is a potentiality that the policy covers the claim)). The district
court denied summary judgment on Industrial Enterprises’
claim for reimbursement of the $750,000 payment it made to
the Coalition Fund, ruling that there were issues of material
fact regarding the purpose of that payment, which had to be
resolved at trial.
*The pollution exclusion in the policy reads:
The insurance does not apply . . . to bodily injury or property
damage arising out of the discharge, dispersal, release or escape
of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liq-
uids or gases, wastes materials or other irritants, contaminants or
pollutants into or upon land, the atmosphere or other water course
or body of water; but this exclusion does not apply if such dis-
charge, dispersal, release or escape is sudden and accidental.
(Emphasis added).
8 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
At a bench trial, the district court held that no portion of the
$750,000 paid to the Coalition Fund was a defense cost
because Industrial Enterprises paid the money to settle poten-
tial liability to the other potentially responsible parties and not
to defend itself against the EPA’s demands.
From the district court’s final judgment, dated June 12,
2009, Penn America filed this appeal, challenging the district
court’s ruling on coverage, and Industrial Enterprises filed a
cross-appeal, challenging the district court’s finding that the
$750,000 payment to the Coalition Fund was not a cost of
defense.
II
In claiming that its CGL policy did not provide indemnity
for costs incurred by Industrial Enterprises in response to
EPA’s regulatory actions under CERCLA, Penn America con-
tends (1) that such costs are not damages because of "property
damage" of a third party, as required for coverage under the
CGL policy, relying on Bausch & Lomb, 625 A.2d 1033-36;
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.
At the outset, we address Industrial Enterprises’ first argu-
ment that Penn America failed to raise the "property damage"
issue before the district court and therefore cannot argue the
issue on appeal or, if it can, that the issue must be reviewed
for plain error.
Industrial Enterprises asserts that in the district court, Penn
America did not present the "property damage" argument
under Bausch & Lomb in its memorandum in response to
Industrial Enterprises’ motion for partial summary judgment
on coverage and that Penn America’s later attempt to file a
surreply memorandum to raise the argument was rejected by
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 9
the district court. Accordingly, Industrial Enterprises contends
that Penn America did not effectively preserve for appeal its
argument that response costs are not property damage. See In
re Wallace & Gale Co., 385 F.3d 820, 835 (4th Cir. 2004)
(observing that "the failure of a party at trial to raise a certain
interpretation of an insurance contract results in a waiver of
that argument on appeal absent exceptional circumstances").
In its initial memorandum in support of its motion for par-
tial summary judgment, Industrial Enterprises itself cited
Bausch & Lomb, but only for the proposition that the EPA’s
July 9, 1999 letter was sufficiently coercive so as to constitute
a third party’s claim. Neither Industrial Enterprises nor Penn
America pointed out that Bausch & Lomb’s holding might
also be dispositive of this case on the issue of whether regula-
tory response costs are property damage. After receiving
Industrial Enterprises’ reply memorandum and after a lapse of
some months, Penn America filed a motion for leave to file
a surreply memorandum in which it proposed to make the
Bausch & Lomb property damage argument explicitly, and it
attached to its motion a memorandum on the issue. Penn
America apparently had to ask for leave to file the additional
memorandum because the time for briefing under the district
court’s schedule had lapsed, even though 12 days remained
before oral argument would take place. The district court
denied the motion for leave to file a surreply memorandum,
not because the memorandum would be late, but because the
court thought that the motion for partial summary judgment
had been "more than adequately briefed at the time."
Nonetheless, at oral argument, Penn America developed its
Bausch & Lomb argument extensively, and its argument fills
some 10 pages of transcript. J.A. 380-390. When the district
court then asked Industrial Enterprises’ counsel, "Is [Penn
America’s counsel] correct that there has to be third-party
property liability for the policy to be triggered," counsel for
Industrial Enterprises objected to the district court’s consider-
ation of the argument, see J.A. 395-97, but counsel also
10 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
argued the merits of the issue, see J.A. 397-402. In its sum-
mary judgment decision, however, the district court did not
address the Bausch & Lomb issue explicitly, focusing instead
on whether the pollution at issue was "sudden and accidental"
and therefore fell within the exception to the pollution exclu-
sion clause.
In view of this record, we conclude that the Bausch &
Lomb property damage issue was not only presented to the
district court in the course of its consideration of Industrial
Enterprises’ motion for partial summary judgment, but it was
also argued by both parties. While the district court did not
specifically address the issue in its ultimate ruling, Penn
America surely preserved the issue for appeal.
III
We now turn to the merits of whether Industrial Enter-
prises’ liability for response costs under CERCLA was cov-
ered by the insurance policy. The CGL policy in this case
contains the standard language of coverage for such policies:
The Company will pay on behalf of the insured all
sums which the insured shall become legally obli-
gated to pay as damages because of . . . property
damage to which this insurance applies.
(Emphasis added). We must therefore decide whether Indus-
trial Enterprises’ CERCLA liability was liability for "damages
because of . . . property damage to which this insurance
applies."
Penn America contends that the liability asserted by the
EPA in its July 9, 1999 demand letter does not assert liability
for damages to property of the federal government, but rather
asserts regulatory liability under CERCLA. It argues, "Al-
though the federal government has constitutionally-derived
power to regulate regarding many surface waters in the
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 11
United States, it does not own them," and it asserts that the
"remediation [demanded in this case] was done pursuant to a
regulatory framework for protecting the environment. . . .
[G]overnmental regulation but not governmental property
ownership was at issue: the United States of America does not
own the waters of the State of Maryland, notwithstanding that
the federal government may exercise regulatory control over
them." Penn America concludes that in these circumstances,
the Bausch & Lomb case, which addressed the same issue in
a similar factual context, requires, as controlling state law, the
conclusion that its CGL policy does not provide coverage for
such regulatory response costs.
In response, Industrial Enterprises seeks to distinguish
Bausch & Lomb because it involved contaminated groundwa-
ter on Bausch & Lomb’s property, whereas in this case, the
EPA was regulating the surface water on Industrial Enter-
prises’ property. It claims that while the State of Maryland
had no property interest in groundwater, the federal govern-
ment does have a property interest in surface water. On that
basis, it argues that the EPA’s demand letter asserted Indus-
trial Enterprises’ liability for property damage to the federal
government’s property interest in the surface water on Indus-
trial Enterprises’ land and therefore that liability was insured
under the CGL policy.
Because our jurisdiction is based on diversity of citizenship
and the jurisdictional amount under 28 U.S.C. § 1332, we
apply Maryland law to resolve this insurance coverage issue.
The seminal Maryland decision in this area is Bausch &
Lomb, 625 A.2d 1021 (Md. 1993). In Bausch & Lomb, the
Maryland Court of Appeals held that a standard CGL policy
did not provide coverage for the cost of meeting the state gov-
ernment’s demand to remove contaminated soil and thus pro-
tect groundwater on the insured’s property because, in making
its demand, the government was acting as a regulator, not as
an injured property owner. The court reasoned that "[a] hall-
mark of the comprehensive general liability policy is that it
12 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
insures against injury done to a third party’s property, in con-
tradistinction to an ‘all-risks’ policy also covering losses sus-
tained by the policy-holder." Id. at 1033 (emphasis added).
Distinguishing a loss sustained by the insured from damage
done to a third party’s property, Bausch & Lomb addressed
whether the "State of Maryland possessed the requisite prop-
erty interest in the groundwater affected by the . . . contamina-
tion to qualify it as a third party whose property was damaged
by the pollutants." Id. Acknowledging that Maryland’s juris-
diction extended to the "waters of the State" which was statu-
torily defined as both surface and underground water, id. at
1034, the Bausch & Lomb court rejected an argument that in
protecting the environment for the public health and welfare,
the State was protecting its proprietary interest in the waters
of the State. It stated, "The term ‘waters of the State’ has no
significance with respect to the proprietary ownership of such
waters." Id. at 1035. It explained:
[T]he legislature has attributed to the State broad
powers in respect to water resources, including
groundwater. Taken collectively, with due regard to
the statutes’ articulation of the State’s interests in
preserving the environment, these legislative pro-
nouncements demonstrate that the State has commit-
ted itself to regulatory oversight of the groundwaters
of Maryland to benefit its citizens.
Id. The court then concluded:
The State’s interest in groundwater rests on its power
to preserve and regulate. That power does not consti-
tute a property interest within the contemplation of
the insurance policy in dispute.
Id. at 1036. Because the State was acting as a regulator, not
a property owner, and the CGL policy insured only against
the insured’s liability for damages to a third party’s property,
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 13
the court concluded that the insurance company had no obli-
gations arising from its CGL policy.
Similarly in this case, the federal government, acting under
the authority of CERCLA, threatened Industrial Enterprises
with liability under CERCLA for the costs of cleaning up haz-
ardous substances on its property. In its July 9, 1999 demand
letter, the EPA advised Industrial Enterprises of its potential
liability under CERCLA to investigate and, if necessary,
remove hazardous substances from its property, citing 42
U.S.C. § 9607(a) (creating a property owner’s strict liability
for the costs of investigation and of removing hazardous sub-
stances from his property). The letter related that the EPA
"ha[d] documented the release or threatened release of haz-
ardous substances, pollutants or contaminants at or from"
Industrial Enterprises’ property, as well as from neighboring
properties, and stated, "to protect the public health, welfare or
the environment," Industrial Enterprises might be required to
perform response action by either remediating the conditions
or paying for the EPA’s remediation. The letter also admon-
ished Industrial Enterprises that it might be required "to pay
for damages for injury to, destruction of, or loss of natural
resources." The EPA’s demand, therefore, while ultimately
aimed at protecting the environment and the public health,
was specifically directed at remediating the presence of haz-
ardous substances on Industrial Enterprises’ land.
As in Bausch & Lomb, the EPA was not attempting to vin-
dicate the government’s rights as a property owner but rather
to fulfill the government’s duty to regulate and remediate haz-
ardous substances on private property. CERCLA authorizes
the EPA to protect the environment, which includes any "sur-
face water, ground water, drinking water supply, land surface
or subsurface strata, or ambient air within the United States."
42 U.S.C. § 9601(8)(B). Accordingly, just as Bausch & Lomb
held that the government’s demand for pollution cleanup was
not liability because of damage to the government’s property,
we hold that the EPA’s demand to Industrial Enterprises did
14 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
not create potential liability for damage to the federal govern-
ment’s property, but rather created regulatory liability for
response costs. See Mraz v. Canadian Universal Ins. Co., 804
F.2d 1325, 1329 (4th Cir. 1986) (holding a government’s law-
suit filed under CERCLA was not an action to collect for
property damage, as the term is used in a CGL policy, but
rather for response costs). Because the EPA was exercising its
jurisdiction over surface waters "within the United States" to
protect "the public health, welfare, and the environment," it
was functioning as regulator, not a property owner, just like
the State of Maryland in Bausch & Lomb. Thus, notwithstand-
ing Industrial Enterprises’ effort to distinguish Bausch &
Lomb, we find it controlling.
The settlement agreement reached by the Coalition of prop-
erty owners and the EPA in this case confirms that the EPA
asserted regulatory liability for the cleanup of hazardous sub-
stances on Industrial Enterprises’ property and not liability for
property damage of a third party. In the "Administrative Set-
tlement Agreement and Order on Consent," the Coalition
members undertook duties related to "five source areas
[within the Site] that were used as landfills from the mid-
1940s through the early 1970s," which the agreement stated
were located "in a low-lying area, originally occupied by wet-
lands that were filled by various means over time." It noted
that the "[p]ast independent land disposal operations were
located at specific source areas at the Site, and involved the
disposal and landfilling of a variety of solid and liquid munic-
ipal solid, industrial and commercial wastes" (emphasis
added), constituting "hazardous substances," as defined by
CERCLA, 42 U.S.C. § 9601(14). The Coalition members
agreed to fund an investigation of the Site for the purpose of
defining a proposal to remedy the conditions there and to
implement the proposal, if approved by the EPA. And the
agreement recognized that cleanup of the Site was "necessary
to protect the public health, welfare or the environment," con-
stituting the "exclusive mechanism" for resolving the disputes
giving rise to the settlement agreement. Thus, the entire
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 15
agreement was framed in terms of remediating hazardous sub-
stances on the property of Industrial Enterprises and neighbor-
ing properties, and nowhere in the agreement do the parties
discuss or address compensation for damages to property of
the United States.
Finally, in addition to noting that we are bound to apply
controlling Maryland law, we find that Bausch & Lomb’s con-
struction of the insuring language in standard CGL policies
makes good sense in the circumstances presented by this case.
While CERCLA itself allows parties to insure against CER-
CLA liability, 42 U.S.C. § 9607(e)(1) ("Nothing in this sub-
section shall bar any agreement to insure, hold harmless, or
indemnify a party to such agreement for any liability under
this section"), there is no evidence to indicate that Penn
America’s CGL policy was intended to protect against that
risk. The standard CGL policy language, which preceded the
enactment of CERCLA in 1980, was formulated to address an
insured’s tort liability for property damage caused to third
parties. The scope of that risk was well understood, and there
is no evidence to indicate that the broad, indeterminate risks
of CERCLA liability somehow became automatically includ-
able in the term "property damage" upon the enactment of
CERCLA, without any change to the policy language. See
Maryland Casualty Co. v. Armco Co., 822 F.2d 1348, 1354
(4th Cir. 1987) ("In the absence of clear contract language . . .
we decline to extend the obligations of insurance carriers
beyond the well-illumined area of tangible injury and into the
murky and boundless realm of injury prevention"). As one
commentator explained:
It long has been recognized that potential liability for
economic loss independent of any liability for per-
sonal injury or property damage is relatively indeter-
minate and therefore difficult to insure. Superfund
liability is a classic case of this form of liability
because the cost of cleaning up a hazardous waste
site may far exceed the value of the property to be
16 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
cleaned up, yet nonetheless be required by the
Superfund regime. In addition, because this regime
now requires cleanup in accordance with extremely
high safety standards, the cost of cleanup may far
exceed the discounted present value of the potential
future bodily injury and property damage that
cleanup prevents.
Kenneth S. Abraham, Environmental Liability and the Limits
of Insurance, 88 Colum. L. Rev. 942, 969 (1988) (footnotes
omitted). Precisely because of the indeterminate nature of
Superfund liability, the term "property damage" in the stan-
dard CGL policy, which referred to risks of tort damage, was
not meant to insure against this form of regulation.
In sum, we hold that Penn America’s standard CGL policy,
which provides indemnity to Industrial Enterprises for sums
that it becomes legally obligated to pay as damages because
of property damage, does not provide indemnity to Industrial
Enterprises for regulatory liability (including remediation
costs) under CERCLA. And because the standard CGL policy
in this case does not provide coverage for CERCLA liability,
Penn America had no duty to provide a defense or to pay the
costs of a defense with respect to such liability.
Because of this holding, we need not reach the other issues
presented in this appeal.
For the reasons given, we reverse and remand with instruc-
tions to enter judgment in favor of Penn America.
REVERSED AND REMANDED WITH INSTRUCTIONS
KING, Circuit Judge, dissenting:
The majority relies on the decision of the Court of Appeals
of Maryland in Bausch & Lomb, Inc. v. Utica Mutual Insur-
ance Co., 625 A.2d 1021 (Md. 1993), to support its conclu-
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 17
sion that environmental contamination for which the
government seeks remediation cannot constitute "property
damage" triggering the duty to defend under a general com-
mercial liability ("GCL") insurance policy issued in Mary-
land. See ante at 4. With all respect for my distinguished
colleagues, Bausch & Lomb does not control the result in this
case, and I therefore dissent.
The issue is not whether contamination of land, surface
water, or groundwater is damage to property (it assuredly is),
but whether the contamination damages a third person’s prop-
erty such that the liability coverage provisions of a GCL pol-
icy are implicated. Bausch & Lomb stands for the proposition
that when the contamination is confined to the insured’s own
property, the remedial directives of state or federal regulators
are not sufficient to confer a coexistent property interest upon
the government such that it may be considered a damaged
third party for the purpose of securing GCL coverage. See 625
A.2d at 1036 ("The State’s interest . . . rests on its power to
preserve and regulate. That power does not constitute a prop-
erty interest within the contemplation of the insurance policy
in dispute.").
In Bausch & Lomb, there was no credible indication that
the pollution contaminating the insured’s soil and groundwa-
ter affected any property other than its own. In one instance,
a solvent contaminant identified as TCE had been released
into a surface stream that crossed onto adjoining property, but
the parties’ experts "agreed that because water tainted by TCE
is rapidly cleansed upon exposure to air, the contamination of
the stream did not pose a significant threat of further pollu-
tion." 625 A.2d at 1025 n.4. The owner of the adjoining parcel
wrote the insured once, threatening to sue for TCE contamina-
tion, but "let the matter drop. Its threat . . . never materialized
into . . . a legitimate claim for damages." Id. at 1036. Had
downstream contamination been confirmed, the insurer
"would have been obliged to pay the costs of any direct
remediation . . . itself." Id.
18 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
Here, by contrast, it is undisputed that the EPA proposed
designating the insured’s property as a Superfund site "be-
cause it contends that contaminants will be washed from the
surface during floods and threaten the Chesapeake Bay." J.A.
243. A number of years before the EPA’s latest involvement,
the property had been the site of a fuel oil release into "a trib-
utary to Back River," and that release eventually "entered the
Waters of the State." J.A. 59; see ante at 5.
Under the GCL Policy, Penn America is bound to provide
coverage for "property damage" inflicted by its insured upon
third parties, in the "sums which the insured shall become
legally obligated to pay." J.A. 209. There is no requirement
of identity, that is, the damaged third party need not initiate
or participate in the process that gives rise to the legal obliga-
tion. Even if such a requirement existed, it is surely satisfied
whenever the government chooses to act on behalf of a third
party as parens patriae, "or as universal trustee for the peo-
ple." Ghingher v. Pearson, 168 A. 105, 119 (Md. 1933).
Because the EPA has imposed a legal obligation in this
case upon Penn America’s insured, Industrial Enterprises, at
least in part to remedy property damage suffered (or threat-
ened to be suffered) by third parties, I am convinced that the
insured has satisfied the minimal threshold showing that its
claim is at least potentially covered by the GCL Policy. See
Clendenin Bros. v. U.S. Fire Ins. Co., 889 A.2d 387, 392-93
(Md. 2006) ("If there is a possibility, even a remote one, that
the plaintiff’s claims could be covered by the policy, there is
a duty to defend." (internal citations omitted)). Bausch &
Lomb, distinguishable on its facts, is simply not to the con-
trary.
The district court never addressed the applicability of
Bausch & Lomb to Penn America’s argument on appeal that
the costs of compliance with the EPA’s mandate were not
expenditures for "property damage." The court had a good
reason for its inaction: the point was nowhere included within
INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE 19
Penn America’s otherwise comprehensive response to the
motion for partial summary judgment and supporting memo-
randum submitted by Industrial Enterprises. Months later,
Penn America appeared to have realized the potential import
of the decision in Bausch & Lomb, as it belatedly sought to
raise the "property damage" issue through a surreply proposed
over objection just eight days prior to the summary judgment
hearing.
Although the court denied the surreply, counsel for Penn
America could not resist arguing Bausch & Lomb at hearing,
see J.A. 380-95, spurring further objection from her colleague
in opposition, see id. at 395-97, 413. The court did not
expressly rule on the objection from the bench, but its prior
disposition of the proposed surreply and the subsequent omis-
sion from its opinion of even the most cursory discussion of
the issue admits of no other conclusion than that the objection
was consciously and deliberately sustained. The district
court’s case management decision is one that we are bound to
respect. See In re Trans World Airlines, Inc., 145 F.3d 124,
132-33 (3d Cir. 1998) (recognizing that lower court’s waiver
ruling reviewed for abuse of discretion). Without evaluating
whether the district court here abused its discretion, the
majority merely asserts that "Penn America surely preserved
the issue for appeal." Ante at 10.
In any event, because I conclude that Bausch & Lomb does
not govern this particular dispute, I would deny both the
appeal and the cross-appeal, affirming the well-crafted rulings
of the district court and adopting the sound reasoning set forth
in the relevant opinions of my good friend Judge Bennett. See
Indus. Enters., Inc. v. Penn Am. Ins. Co., No. 1:07-cv-02239
(D. Md. Sept. 2, 2008) (awarding partial summary judgment
against insurer on duty to defend); Indus. Enters., Inc. v. Penn
Am. Ins. Co., No. 1:07-cv-02239 (D. Md. May 7, 2009)
(denying partial summary judgment request of insurer and
awarding certain defense costs and attorney fees to insured);
Indus. Enters., Inc. v. Penn Am. Ins. Co., No. 1:07-cv-02239
20 INDUSTRIAL ENTERPRISES v. PENN AMERICA INSURANCE
(D. Md. June 12, 2009) (denying, inter alia, $750,000 of
insured’s asserted defense costs); Indus. Enters., Inc. v. Penn
Am. Ins. Co., No. 1:07-cv-02239 (D. Md. Nov. 3, 2009)
(denying, inter alia, motions to alter judgment).