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Developing a strategy for environmental claims.

For many corporations, no other class of liability poses a greater financial exposure than environmental claims. Consequently, risk managers faced with significant exposure for environmental claims against their companies are learning that effective management of these problems requires the development of an overall strategy for pursuing coverage.

Millions of dollars in defense and indemnity payments have been made by insurance companies to insureds for environmental problems. However, some insureds have spent millions trying to obtain coverage, only to come away empty-handed. The difference in results can be explained many ways, but successful efforts to obtain coverage have usually been the culmination of careful preparation, planning and analysis by the insured.

Environmental coverage issues are being decided in the courts on a scale that is almost without precedent. Inconsistent, disparate decisions on key coverage issues involving state contract law continue to be handed down by state and federal courts on a weekly basis. Since in most states there are few, if any, state supreme court decisions that provide definitive guidance on many of the key issues, it is difficult to predict the likelihood of prevailing in a coverage lawsuit in many jurisdictions.

Results in environmental coverage cases are fact-sensitive and subject to dramatic swings in the governing law. The outcome of negotiations, or any suit filed by an insured against its insurers, could easily be affected by cases now pending in which no decision has been rendered. They could also be affected by facts not fully ascertained about matters such as what the insured's officials knew about pollution problems at various sites and when they knew it.

Finally, the potential costs of environmental damages due to property damage and bodily injury are staggering. In some instances, the costs of defending and paying such claims may render healthy companies insolvent. These factors compel the insured to develop an overall strategy for its environmental claims at the earliest possible opportunity.

Before Developing a Strategy

There is no substitute for a thorough factual investigation of the underlying environmental claims and the insured's historical insurance program. The insured that begins its pursuit of insurance recovery without such an investigation is taking a serious risk. Keep in mind, of course, that timely notice is usually required by policy conditions and may sometimes have to be given before a complete investigation can be made.

Before developing a strategy and presenting a claim, all applicable carriers and policies must be identified, and all policies must be analyzed. It is especially important to consider the possibility of coverage under comprehensive general liability policies as well as environmental impairment and property policies. Depending on the particular situation, coverage may even be available under automobile or boiler and machinery policies.

Because many environmental claims involve continuous or repeated exposures to conditions that could have existed for decades before the discovery of actual environmental damage, coverage may be available under old policies that provided occurrence' or 'accident' coverage during those periods. Insureds should try hard to locate these old policies. Prior to the early 1970s, most general liability policies sold in the United States, including policies sold by London market companies and underwriting syndicates, did not include any exclusion for pollution. Its absence removes what may, on occasion, be a significant hurdle to coverage for environmental claims--even if only in the eyes of the insurer.

A small cottage industry of specialists known as insurance archeologists have developed the expertise necessary to assist insureds in locating lost or destroyed policies or evidence of such policies. With remarkable success, these specialists have found billions of dollars in aggregate limits for insureds by searching through the historical records of the insured and third parties. Policies thought to have been lost forever have been found among records maintained by government agencies, insurance brokers and agencies and retired insurance personnel.

The insured must also undertake a diligent factual investigation of environmental claims before a successful strategy can be developed. In some cases, such an investigation may cause an insured to conclude, after analysis of critical legal and factual issues, that coverage is not likely to be available under some or all of its policies. If this discovery is made early enough in the process, the insured can save considerable time and expense.

The insured's investigation will need to focus on how the alleged environmental contamination took place, the extent of contamination, the time period involved, the nature of the contamination, the extent to which and when company officials knew that contamination and resulting property damage or bodily injury might result from specific activities or events, and the extent to which third parties have been injured or are threatened by conditions existing at the insured's facility. The scope of the insured's factual investigation of underlying claims will depend on the issues identified by the risk manager and legal counsel after examining the coverages purchased by the insured.

Strategy Components

Each claim against an insurer, whether environmental, product liability, asbestos or any other major claim, will raise issues of interpretation regarding policy provisions common to the insured's other claims and policies. Development of an overall strategy for dealing with insurers will require an analysis of the facts underlying each claim; the history of the insurers' responses to each claim and the underlying liability; the value of each claim; the policy or policy years involved and the nature and amount of coverage still available; the issues of policy interpretation most likely to arise in pursuing coverage for the claim; the policy interpretation which is likely to produce the most favorable result in that case; the forum in which it will be most desirable to have the legal issues of importance in the policies litigated if negotiations break down; the threat of a declaratory judgment action by the insurers in an unfavorable jurisdiction; and the relationship of the facts and issues in each claim to those in other claims and types of claims.

Deciding how to proceed with a particular environmental claim or any other claim or groups of claims can impact policy interpretation in that case and on other claims under the same policies. In addition, the insured should avoid making irrevocable decisions regarding any claim or groups of claims until the implications of these decisions for other claims can be adequately explored.

The work that should be completed before aggressively pursuing coverage for any claim includes:

* Identifying and analyzing the insured's historical general liability policies and coverages and those of any subsidiaries. If on-site problems are involved, first-party property policies should also be reviewed.

* Reviewing each actual or potential underlying liability which has triggered or is likely to trigger a claim. A thorough factual investigation is essential to determine if any alleged releases or resulting damages could have been intended or expected by the insured.

* Reviewing the history of communications between the policyholder and the insurers regarding each claim to determine how these facts will affect the course of policy interpretation arguments.

* Identifying the insurers, policy years, policy terms, available limits, deductibles and retro-premium provisions that could apply to each individual claim.

* Identifying the coverage interpretations that would be most favorable to the policyholder in asserting coverage for each claim. The number of occurrences, stacking of limits and allocation issues can be just as important as other issues.

* Identifying the most favorable available jurisdiction for resolution of contested issues of policy interpretation and application of policy terms to underlying facts.

* Considering the interrelationships of each major claim or groups of claims with other major claims and groups of claims and deciding whether to compromise certain claims for strategic reasons.

These tasks should begin as soon as claims are presented by private parties or governmental authorities. Highest priority should be given to consideration of environmental claims which pose the greatest exposure to liability.

To maximize the aggregate insurance recovery for environmental and other claims, the insured should consider that filing against insurers could cause those insurers to file a counterclaim. The counterclaim may seek a declaratorv judgment regarding other claims, such as asbestos or product liability claims, which the insured has asserted against the carriers. This response may be a counterclaim in the insured's action, or a declaratory judgment action in another jurisdiction of the insurers' own choosing. The insurers might even decide to sue in each jurisdiction in which the site for an environmental claim is located. Several insurers have done this in response to suits filed against them by Westinghouse and United Technologies Corporation involving a number of environmental claims. Thus, the filing of suit should be based on an analysis of the best forum and legal theories for each case. The decision should also be made based on the best forum and theories for coverage litigation with the insurers on all major outstanding or potential claims under the policies in question. A decision also must be made if other claims should be included along with the environmental claims to prevent the insurers from filing their own declaratory judgment action(s) in a pro-insurer forum. Choice of forum and venue are critical considerations in coverage litigation.

If the insurers should counterclaim in a suit filed by the insured, or file separate declaratory judgment actions regarding the insured's environmental claims, the insurers would probably be obliged to name all other involved primary and excess insurance companies. Indeed, the potential for joint and several liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or Superfund, potentially creates liability which could exceed the limits.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Fields, Richard W.
Publication:Risk Management
Date:Feb 1, 1990
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