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Insurance coverage for environmental claims.

During the past ten years, most property managers or owners have been faced with environmental conditions that translate into cleanup costs and even lawsuits. Meeting these financial obligations and dealing with legal disputes can be devastating.

Until recently, few policyholders have looked to their insurance carriers for defense of such claims or indemnification for monetary damages incurred in connection with them. Lately, however, many property managers and owners have sought and won indemnification from their insurance carriers for a variety of environmental claims.

Policies covering environmental claims

Three basic types of insurance provide coverage for environmental claims: comprehensive general liability insurance, also known as commercial general liability (or CGL); first-party property; and environmental impairment liability (or ELL). Excess liability policies also may provide coverage beyond the limits of these primary insurance policies. The scope of environmental claims coverage afforded by each type of insurance varies significantly.

CGL policies. A CGL policy traditionally provides coverage for:

* damages caused to a third party's property;

* bodily injury to a third party arising from the use or condition of the policy-holder's property; or

* injury that results from the operation of the policyholder's business.

A typical CGL policy will have an "owned property" exclusion that may preclude the policyholder from obtaining indemnification for damages to his or her own property. For example, if hazardous waste generated and stored by Company A on its property migrates to neighboring land owned by Company B and Company B in turn seeks compensation from Company A for the damages caused, Company A may seek indemnification under its CGL policy for Company B's damages. To date, courts have disagreed as to whether Company A may recover costs to remediate damages suffered on its own property.

Property policies. A first-party property policy provides coverage for damages incurred as a result of a direct physical loss sustained by the policyholder's own property, but, unlike a CGL policy, does not provide coverage for damages caused to a third party's property.

The scope of coverage provided by the first-party property policies varies; some provide coverage for "all risks" (except those specifically excluded), while others cover only "named perils."

Accordingly, managers should review and, if necessary, negotiate language on a new policy to ensure that the policy:

* accurately reflects the identity and status of the property it is intended to insure (i.e., the correct address, the number of buildings or equipment covered); and

* provides coverage for appropriate risks and perils (fire, water, earthquake, tank defects or ruptures, etc.).

Although most CGL and first-party property policies do not explicitly identify coverage for environmental claims, the broad language they use has been interpreted to provide policyholders with environmental claims coverage. For example, many policies written before 1980 contain broad definitions of the kinds of "incidents" causing "damages" for which a policyholder may seek indemnification. Courts traditionally have interpreted this language as providing environmental coverage to the policyholder.

First-party property policies and CGL policies may be combined to guarantee coverage for the majority of losses incurred on both the policyholders' property and any third-party property.

If the presence of environmental hazards in a building adversely impacts another's property or health, building owners have recovered the costs of compensating the affected third party under their CGL policies. A number of courts have held that the bodily injury provisions of certain CGL policies provide coverage to property owners for injuries allegedly sustained by individuals as a result of exposure to asbestos.

Under common-law nuisance and trespass theories, property owners also have pursued third parties--such as architects, asbestos installation contractors, or production companies--to recoup the cost of managing asbestos on their property.

Environmental impairment liability policies. Because of the number of claims made against these policies in the 1960s and '70s, insurance companies sought to revise and narrow the CGL language to exclude coverage for environmental claims. Insurers began offering a new product, the "environmental impairment liability" policy, that was designed to provide coverage for specific environmental risks.

Unlike the standardized language found in CGL policies, the language of an ElL policy varies. It may or may not cover on- or off-site pollution and may cover claims for property damage but not for bodily injury or economic loss.

In addition, most ElL policies are "claims made" rather than "occurrence" policies. Therefore, an ElL policyholder may be indemnified only for those claims that arose during the policy period and for which a claim was made during the same period. In contrast, "occurrence" policies allow an insured to file a claim after the expiration of the policy if the loss occurred during the coverage period.

Exclusionary policy provisions

Beginning in 1966, the insurance industry began revising the broad language found in CGL and first-party property policies to decrease the likelihood that such policies would be interpreted to provide coverage for environmental claims. The standardized CGL form was modified to define a covered "accident" as an event that was "neither expected or intended" by the insured.

While this definition narrowed pre1966 policy language, it still allowed policyholders to obtain indemnification for claims arising from repeated and ongoing environmental conditions as well as sudden accidents.

Consequently, the standard CGL policy was revised again in 1973 to include a "pollution exclusion" clause that provided coverage only for claims arising from "occurrences" which were "sudden and accidental."

Whether and to what extent the 1966 and 1973 revisions actually limit coverage for environmental claims is still hotly disputed. Indeed, courts in several states have offered mixed interpretations of the original and revised language, which have allowed some policyholders to recover costs on various environmental claims.

Because of these disputes, policyholders should not rely solely on the information provided by an insurer to determine if a claim is valid. Instead, they should either familiarize themselves with the current status of how the courts have interpreted their policies or consult with an experienced attorney who can provide them with an objective analysis of trends in policy interpretation.

To further avoid environmental claims, CGL policies issued after 1986 contain an "absolute pollution exclusion;' which almost always excludes coverage for environmental claims. However, many environmental claims at issue today are the result of incidents that took place before 1986. Thus, property managers should evaluate all current and expired policies when considering an environmental claim.

Keeping records

Because of this added emphasis on past policies, managers should maintain accurate, comprehensive records: never destroy a policy.

When purchasing a property, the buyer should require the seller to provide a schedule of policies, with copies of each and a record of claims already made against the policies. The purchase agreement also should require the seller to cooperate with the buyer in filing and pursuing claims against a seller's policies, should a loss relating to those policies be discovered.

Maintaining an accessible file of policies and related documentation will eliminate the confusion of trying to piece together policies from secondary sources in the event of a loss. Managers should keep policies in a safe or other protected area, with duplicate copies kept on file by risk management personnel and an insurance broker.

If policies have been misplaced or destroyed, policyholders can sometimes obtain copies of the originals and related documentation (like riders, correspondence, and claims reports) from insurance brokers and, on occasion, the issuing insurance agent.

However, if the actual policies cannot be obtained, policyholders can reconstruct essential policy provisions by consulting secondary sources, including file memoranda, correspondence, canceled checks, binders, and certificates. Such documentatlon can be combined with the standard form policy, which was approved and issued by insurers during the applicable time period, as obtained from the insurance carriers or state insurance authorities.


Because court interpretations of insurance policies have varied considerably in recent years, property managers and owners may be able to recoup damages related to environmental conditions of their properties by making claims against several different types of property insurance, including both current and expired policies.

To ensure that policies are interpreted correctly, property managers facing an environmental loss should obtain skilled, independent advice about the type and scope of coverage that applies to their properties. Thus armed, they must investigate whether filing and pursuing a claim against a policy is justified and cost effective. Ultimately, insurance coverage may make the difference between a devastating financial loss and the ability to continue business with little adverse impact.

Janine M. Landow-Esser is partner and cochair of the environmental department of Holleb & Coff, a Chicago law firm. Before joining the firm, she spent seven years at the U.S. Department of Energy, Washington, D.C. She also is a member of the environmental law committee of the Chicago Bar Association.

Kathleen C. Spears also is an attorney with Ho leb & Coff and is a member of its environmental committee. She focuses her law practice on general commercial environmental litigation and environmental regulation, representing policyholders in environmental insurance claims.
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Title Annotation:Insurance Insights
Author:Landow-Esser, Janine M.; Spears, Kathleen C.
Publication:Journal of Property Management
Date:May 1, 1992
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