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POTOMAC ELEC. POWER CO. v. CALIFORNIA UNION INS. C

October 2, 1991

THE POTOMAC ELECTRIC POWER COMPANY, Plaintiff,
v.
CALIFORNIA UNION INSURANCE CO., et al., Defendants


John H. Pratt, United States District Judge.


The opinion of the court was delivered by: PRATT

In our previous memorandum opinion of September 30, 1991, (Pepco I), we considered and acted upon five dispositive motions. The underlying facts which led to this litigation have been previously set forth and will not be repeated. Still pending are five additional dispositive motions, all of which were filed by one or more of defendants. We address them in turn.

 1. Defendants' Joint Motion for Partial Summary Judgment Regarding Costs Incurred in Connection with Criminal and Certain Other Proceedings

 In this motion, eight of defendant insureds *fn1" seek a ruling that many of the legal fees and other expenses incurred by Pepco as a result of the United Rigging (hereinafter "U.R.") incident are not covered under the insurance policies at issue. *fn2"

 The numerous legal proceedings began in the spring of 1985 when the environmental authorities of Maryland commenced an investigation of PCB contamination at the U.R. site in Beltsville. This inquiry led to Pepco and U.R. becoming the targets of two grand jury investigations, one conducted by the State of Maryland, and the other by the United States. In response to the state grand jury investigation, Pepco initiated a declaratory judgment action entitled Potomac Electric Power Co. v. Stephen H. Sachs, Civ. No. B86-220, ("Pepco v. Sachs"), in the District of Maryland. In this case Pepco sought a ruling that Maryland's environmental regulations were preempted by federal regulations. This case was lost in the district court and in the Fourth Circuit. While a petition for certiorari was pending before the Supreme Court, the state grand jury investigation ended without Pepco or any of its employees being indicted. As a result, the Supreme Court granted the petition for certiorari and remanded the case to the Circuit Court to dismiss on the ground of mootness.

 The federal grand jury investigation ended in late 1988. Again, neither Pepco nor any of its employees were indicted.

 In addition, the damage to the Beltsville site caused a flurry of lawsuits between U.R. and Pepco. U.R. first sued Pepco in the District Court for the District of Columbia. This suit was initially filed in October 1985, and shortly thereafter was dismissed for a year to allow settlement negotiations to proceed.

 In July 1986, U.R. brought another lawsuit against Pepco in the District of Maryland. In this suit U.R. alleged Pepco had breached the contract which governed the sale of the transformers. *fn3"

 A third suit was filed by U.R. against Pepco in the District of Maryland in November 1986. In this suit, U.R. again sought damages for the PCB damage at Beltsville. Pepco counterclaimed for the $ 3.25 million it had spent to clean up the U.R. site. This second PCB case and the contract action were consolidated by the Maryland district court in April 1987. On August 17, 1987 Pepco and U.R. settled the consolidated Maryland suit. As part of the settlement agreement, Pepco paid U.R. $ 850,000, and agreed to assume liability for the $ 3.25 million Pepco spent to clean up the Beltsville site. Plaintiff alleges that the total legal fees resulting from the Beltsville incident were in excess of $ 2.6 million. *fn4"

 (a) Relevant Policy Provisions

 The relevant liability clauses of the policies issued by defendants to Pepco read as follows:

 the policy is to indemnify the insured . . . for any and all sums which the insured shall become legally liable to pay, and shall pay . . . as damages for personal injury or by reason of damage to or destruction of property.

 Additionally, the policies contain an exclusion clause covering any pollution-related fines. *fn5"

 (b) Discussion

 Defendants in their motion make various arguments as to why portions of the total sum are, as a matter of law, excluded from coverage. They seek the following specific rulings: first, that $ 1,014,729.98 of these fees is not covered under the applicable policies because this is the sum Pepco expended to defend the company and its employees during the grand jury proceedings; second, that the legal fees Pepco incurred while the U.R. PCB action was stayed from October 1985 to November 1986 (which total $ 723,178.49) can not be recovered since there was no defense of the civil suits going on during this time; third, that the amount billed for services rendered after the PCB action was settled in August 1987 ($ 55,553.42) be excluded from coverage; and, lastly, that $ 908,604.50 paid to the law firm of Hogan and Hartson can not be recovered under the liability policies because Pepco has failed to disclose during discovery which of the relevant legal proceedings these fees were expended towards.

 Plaintiff admits some of the legal fees which arose out of the Beltsville incident are not recoverable under the policies. As previously stated, plaintiff does not dispute that the fees it incurred in defending U.R.'s suit alleging breach of contract in the sale of transformers are not covered by the policies. Further, it admits any expenses incurred in evaluating Pepco's potential liability for federal and state civil penalties are not covered. *fn6"

 The dispute over the remaining categories of legal fees can not be resolved by summary judgment. This is because there are genuine issues of material facts which prevent the resolution of this issue prior to trial. For those fees, which remain in dispute, we express the following thoughts for the guidance of the parties.

 Any fees incurred solely for the purpose of representing the company and/or its employees before state and federal grand juries are not reimbursable under the policy. This is because fees expended in defending against possible criminal charges are not recoverable under a liability policy. There are two reasons for this. First, criminal punishments -- fines and incarceration - are not "damages" caused to the property of another. Jaffe v. Cranford Ins. Co., 168 Cal. App. 3d 930, 214 Cal. Rptr. 567, 570 (Cal. App. 1985) ("'damages' describes a payment made to compensate a party for injuries suffered"; criminal actions do not seek damages); Stein v. International Ins. Co., 217 Cal. App. 3d 609, 266 Cal. Rptr. 72, 75 (Cal. App.), mod., reh'g denied, 217 Cal. App. 3d 1439, 266 Cal. Rptr. 601 (1990) ("it is well established that an insurer is not required to provide a criminal defense to an insured under a liability policy obligating the insurer to pay 'damages'"). Further, it has been suggested that allowing fees spent on a criminal defense to be recovered under a liability policy would violate public policy. E.g., 1 G. Couch, Cyclopedia of Insurance Law 114-15 (2d ed. 1984); 6C J. Appleman, Insurance Law and Practice 404 (1979); Shew v. Southern Fire & Casualty Co., 307 N.C. 438, 298 S.E.2d 380, 384 (N.C. 1983); cf. Curry v. Giant Food Co., 522 A.2d 1283, 1290 (D.C. 1987) (other jurisdictions have held it would defeat public policy to allow an insurer to indemnify punitive damages). *fn7"

 Most importantly, Pepco has raised a genuine issue that at least some of the expenses it had previously allocated to the defense of the grand jury proceedings would have accumulated even if there had been no grand jury proceedings. Pepco claims that the expenses for these criminal proceedings would have arisen even if there had been only civil proceedings resulting from the Beltsville incident. To determine how to allocate these expenses between the covered (civil suits) and uncovered (criminal proceedings) claims, we will follow the reasoning of a Maryland Court of Appeals case, Continental Casualty Co. v. Board of Education, 302 Md. 516, 489 A.2d 536 (Md. 1985) *fn8" which held that if fees and expenses were incurred in connection with a covered claim, but were also involved in an uncovered claim, then if the fees and expenses of the uncovered claim "are reasonably related to the defense of a covered claim [they] may ordinarily be allocated wholly to [the] covered claim." Id. at 538 (emphasis added). The Maryland Court of Appeals also set forth the relevant standard a finder of fact must use to determine whether expenses incurred with respect to uncovered claims can be apportioned to covered claims; namely:

 Legal services and expenses are reasonably related to a covered count if they would have been rendered and incurred by reasonably competent counsel ...


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