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A practical guide to prosecuting pollution claims.

Time and money wasted on litigating pollution claims can be better spent on researching solutions to the problem. Indeed, risk managers confronting these issues for the first time can glean practical lessons from court cases already on the books. Studying these claims and key coverage issues will help them understand insurance liability and may even instill hope that litigation can be more effective, less costly or in some cases completely avoided.

The litigation of environmental cases on a national level gained momentum from the Comprehensive Environmental Response, Compensation and Liability Act of 1980, more commonly known as CERCLA or Superfund. In targeting Superfund sites, the federal government chose what it believed to be the most polluted non-operating sites in the country, which now comprise the National Priorities List. According to the Environmental Protection Agency, only 33 of the 1,189 sites on the list have been completely cleaned up.

The typical pollution claim commences when the EPA requests information about a site under investigation. The agency then notifies the policyholder that it has been designated a potentially responsible party and seeks to impose liability for the investigation and cleanup on all parties deemed responsible. Responsible parties are liable for response costs, which can include removals and remedial actions performed by the parties or EPA-hired contractors.

Pollution claims cases can involve contamination to the insured's own property, air, streams or underground water and neighboring private property. When the damage encompasses only the insured's property, the risk manager's first sign of hope is evidence of property insurance. Specific peril policies usually do not help, but all risk policies with debris-removal clauses should be considered in any pollution situation. However, when public property such as groundwater or adjacent lands are involved, the focus will remain on the standard comprehensive general liability form.

Deciding which policies apply is referred to as the trigger issue. The standard form insures against an occurrence, which is "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." Bodily injury and property damage are defined in terms of injury or damage occurring within the policy period. Therefore, bodily injury or damage to third party property is triggered if it occurred during the policy term.

Insurers have proposed other trigger theories based on, for example, the date on which the waste was disposed or the date the pollution was first discovered. Sometimes risk managers hear different theories from insurers, depending on which period their policy covers. If the risk manager feels compelled to settle based on which theory is more believable, he or she may not be taking advantage of available coverage. The risk manager should ask technical experts when the damage occured and company employees when it was discovered. The relevant CGL policies are those purchased during the time the damage occurred but ending with the policy in effect at the discovery date.

Frequently, undetected pollution occurs gradually over several years, so that more than one policy is triggered and coverage can be stacked, possibly entitling the policyholder to reap coverage from all the triggered policies. This occurred in the 1989 Colorado case Broderick Investment Company v. Hartford Accident & Indemnity Co. Another approach was taken in the 1981 case Keene Corp. v. Insurance Co. of North America which involved asbestos and permitted the policyholder to elect only the most favorable of the triggered policies. A third approach, taken in the 1986 Louisiana case Ducre v. Mine Safety Appliances, allows stacking only if the insured shares a burden that is proportionate to any uninsured years when the damage was occurring. Timely Notice

The standard policy contains two notice conditions: written notice of an occurrence must be given "as soon as practicable," and all claim or suit papers must be forwarded to the insurer immediately. Therefore, as soon as the policyholder learns of an occurrence, regardless of whether a claim has been made, its liability insurers should be notified. The form and wording of the notice is unimportant. If in doubt as to whether a particular policy is applicable, give notice because it can be withdrawn when the facts are better understood.

Unfortunately, risk managers function in the real, imperfect world. It may be years from the date when contamination is discovered until someone asks the risk manager about insurance coverage. It may be well after a third party claim is asserted, at which time the investigation-and even the cleanup, may already be under way.

Is it too late to give notice? Not necessarily. In some states, such as California, late notice only bars a claim if the insurer is prejudiced. It is difficult for the insurer to prove prejudice, since the policyholder often acts promptly to minimize cleanup costs. In other states, such as Colorado, late notice is forgiven if there is a justifiable excuse. Valid reasons for giving late notice include being unable to locate policies, misunderstanding their potential applicability and getting misleading advice from agents or lawyers.

Duty to Defend

Having given notice, what comes next? If there is a third party claim-from the EPA, for example the next step is to find a defense. One common response is that until someone is sued, a claim is premature. The standard policy provides that "the company shall have the right and duty to defend any suit against the insured." However, a suit is not necessarily limited to a court suit. A 104(e) letter requesting information and mandating an investigation, or a letter designating the policyholder as a potentially responsible party, has been recognized as amounting to a suit by many courts.

These rulings make perfect sense. The insurer and insured have a strong economic motive to work together in the early stages to maintain cost control. EPA-arranged investigations and cleanups tend to escalate in price to a greater degree than when private companies are involved. In addition, avoiding litigation can be a major cost saver, one that agencies asserting claims often willingly forego as long as they can obtain adequate administrative response.

Never overlook the possibility that a defense cost settlement can be worked out with the insurer. The duty to defend is separate from, and much broader than, the duty to indemnify. If there are any allegations that might establish a covered claim regarding a potentially-responsible-party letter, administrative order or court complaint, a duty to defend exists.

There are two issues that should be discussed with the insurers: What constitutes defense costs and who pays? Insurers often settle if a compromise approach is taken to these issues. This approach helps both sides; immediate payment of some costs is received, and the insurer avoids troublesome precedent problems. For instance, the policyholder might agree that the costs of investigation studies will not be considered part of the defense. By the same token, consultants:', fees incurred negotiating the most cost-effective remedy, including cleanup, must be recognized as defense costs.

The costs of in-house legal and technical services should be just as recoverable as costs charged by outside professionals, as these procedures are usually less expensive and more effective. Regarding defense costs, it is helpful if the policyholder shares them with the carriers. One way is to allocate defense costs to the risk manager proportionate to uninsured periods or periods where no carrier can be identified.

Finally, if all parties are willing to agree that they reserve their rights against each other regarding the ultimate indemnification issue, including tolling of applicable statutes of limitation, there is a prospect for moving ahead without a lawsuit. Later, depending on the cost of the cleanup, a settlement on indemnification can be negotiated too.

The first issue always raised is whether the claimant seeks damages. Confusion arises when the language of the insurance policy is compared to the language of the laws governing pollution claims, which focus on response costs. However, most recent rulings have held that response costs incurred in cleaning up toxic wastes are damages.

What if no third party claim is asserted? For example, what if a company discovers a pollution problem and voluntarily cleans it up? It is commendable, cost-effective and not as suicidal as it appears under policies that indemnify only against sums the insured becomes legally obligated to pay as damages.

In the 1988 case Compass Insurance Co. v. Cravens, Dargen & Co., which involved an oil spill that ran off onto property adjacent to the insured, the Wyoming Supreme Court held that the insured's property policy covered the damage within its boundaries and its CGL policy covered the rest. A legal obligation to pay damages was found to be inherent in Wyoming statutes requiring that oil spills be cleaned up. This case raises strong public policy considerations. Courts will not rewrite insurance contracts, but if the policy language is not clear, it will be construed to maximize coverage.

Expected or Intended Policies

Some policies insure against occurrences, such as bodily injury or property damage "neither expected nor intended." One interesting legal issue focuses on whether the term "neither expected nor intended" should be applied objectively or subjectively. The objective approach centers on whether a reasonable insured, in similar circumstances, would have expected or intended that bodily injury or property damage would result from an act. The subjective approach looks at whether the insured expected or intended the injury or damage.

The plain language of the policy focuses on the actual, subjective expectations and intentions of the insured, an approach with which numerous courts have agreed. The subjective approach forces the jury to examine the credibility of individuals running the polluting company. Did these individuals expect to cause third party damage or injury? This is a more appropriate question than whether a policyholder should have realized that his or her actions would ultimately cause damage or injury. In other words, the subjective approach puts the jury in the policyholder's position at a time, perhaps decades ago, when there was a lack of awareness about dangers of common industrial procedures.

Finally, the risk manager and his or her corporate officers and attorneys should take a realistic look at the facts. If operations personnel knew of third party contamination before they purchased a policy, a claim should not be filed.

The Pollution Exclusion

Around 1970 the now notorious pollution exclusion, not "sudden and accidental," was tacked on to insurance policies, and after 1973 the standard CGL form included that exclusion within its regular list. By 1984 most carriers began to endorse a so-called "absolute pollution exclusion" to CGL policies. The new occurrence and claims-made forms, implemented in 1986, contain the absolute pollution exclusions. Insureds can buy limited pollution coverage by endorsement only at substantial premiums. In most situations, the absolute pollution exclusion excludes virtually all pollution-related claims.

Therefore, most CGL pollution litigation focuses on bodily injury or property damage in the sudden and accidental years. The wording in this clause has been pivotal in cases litigated in the 1980s and will continue to play an important role in cases litigated in the 1990s. If "sudden" is interpreted to mean instantaneous or temporarily abrupt (beginning and ending quickly), most pollution losses would not be covered. Conversely, if it is taken to mean that expected or intentional pollution damage is not covered, gradual pollution losses may still be covered.

Since the early 1980s, cases have been decided on both sides of the issue. Insurers suggest that the trend favors them. However, many recent cases, to the benefit of the policyholder, have equated sudden with unexpected and accidental with unintended.

A key to understanding the pollution exclusion, and perhaps the whole subject of environmental claims coverage, is to grasp the intentions of the insurance industry when it introduced the exclusion. Memoranda, articles and speeches of industry draftsmen, as well as transcripts of statements to state insurance commissioners and legal briefs, have been amassed to compare what was represented in the mid-1960s and early 1970s to the litigation positions of insurers today.

Practical Suggestions

In addition to keeping track of the larger issues, the risk manager must pay attention to other, more practical matters. What if the insurer asserts that it has no duty to defend unless a lawsuit is filed or that the underlying action is equitable and does not seek damages? These and all other relevant issues should be confronted by a motion at the beginning of the case. Indeed, they are legal issues that, if resolved against the policyholder, end the case.

The risk manager should also know what is needed to plan a limited discovery program. Besides copies of the policies, the policyholder will need information concerning visits by the carrier's representatives to the site that should have allowed them to observe conditions indicating that a pollution problem was developing. The policyholder must also obtain statements by the insurance agent concerning the degree of coverage for pollution claims.

Finally, the policyholder must obtain documents showing the intent of the insurer and when the pollution exclusion and other key terms were first drafted. Judges and magistrates have already handed down many decisions recognizing the relevance of these materials and describing the reasonable boundaries for discovery efforts. Therefore, resources should not be squandered with voluminous interrogatories and requests for documents and depositions.

Insurers may try to wear down the policyholder by exhausting funds with endless discovery requests. However, it is possible to comply with insurers' requests and still cut costs by producing documents and answering interrogatories only once and referring back to the original answers when duplicative sets are served. Duplication can also be curtailed by producing witnesses only once for depositions. Discovery battles may generate more lawyers' fees but add little to the risk manager's case.

Risk managers should also keep in mind that bifurcated, or split, trials are useful despite the fact that insurers like them. In the first trial, which takes place before a judge, policy terms are interpreted and the drafting history is unfolded. At the second trial a jury decides whether the policyholder knew pollution existed when the insurance was purchased.

It makes sense to have the court rule on the interpretation of the policy terms during the first phase. That way, when the more critical jury trial takes place, efforts can concentrate on facts which reveal that the company did not knowingly cause pollution damage when the insurance was purchased. The insurer will try to portray the policyholder as a reckless polluter trying to relinquish responsibility by manipulating the loopholes in the policy. This diversionary tactic will work, unless it is recognized and put to a halt. What must be proven is that the policyholder did not expect or intend to contaminate third party property or cause bodily injury and that it is looking for help from the premiums paid for insurance over the years. Finally, after the policyholder has prevailed, he or she should seek a full award of attorneys' fees.

Is There Hope?

Environmental claims no doubt frighten insurers. Clearly, neither policyholders nor insurers anticipated the enormity and expense of pollution-related claims that have cropped up in the aftermath of CERCLA and other environmental legislation. The enormous costs of defending against these claims and, more significantly, the types of cleanup costs being incurred threaten the profitability and the very existence of carriers that sold these policies as well as the companies that bought them. This known and common thread should be the basis for a partnership forged to solve this spiraling problem.

Insurance industry representatives have stepped forward recently with proposals to allocate the costs of pollution remedies on a non-litigation basis. The Committee on Insurance Coverage Litigation of the American Bar Association Litigation Section has created a bipartisan task force to explore the coverage dispute. A protocol between insurers and policyholders that turns litigation dollars into cleanup dollars would be a great achievement.

It must be understood that there is coverage for third party pollution damage that occurs unbeknownst to the policyholder during the policy term. However, policyholders can make concessions on such subjects as notice, definition of defense costs, stacking, apportionment among multiple carriers and the policyholder itself, alternative dispute resolution and perhaps attorneys' fees to whichever side prevails in arbitrated or litigated disputes. Insurers can make concessions on suit and damages issues as well as the pollution exclusion.

Most risk managers believe that cost-sharing will help them respond to enormously expensive claims. Litigation is available and has been successfully used by policyholders in obtaining defense and indemnity in environmental cases. However, it is not the best answer. If insurance liability claims continue to be settled in court, regardless of who wins, the public and the environment will ultimately be the losers. The next step is for insurers and insureds to devise a cost-sharing response. It is not an easy task, but given the high stakes on both sides, the effort must be made. Brooke Jackson is a partner in the Denver-based law firm Holland & Hart.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Jackson, Brooke
Publication:Risk Management
Date:Aug 1, 1991
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