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Old liability policies unearth underground tank coverage.

Steven W. Weston, J.D., is a partner and Clifton J. McFarland, J.D., is an associate with McClintock, Weston, Benshoof, Rochefort, Rubalcava & MacCuish in Los Angeles.

During the 1980s federal, state and local governments adopted underground storage tank laws that held their owners and users strictly liable for the cleanup of any contamination resulting from leaks. Yet many businesses faced with catastrophic underground tank cleanup costs fail to pursue viable insurance claims because they do not understand the terms of standard insurance policies. The fact is, however, liability policies can provide funds for cleanup.

After an underground tank is installed, it generally remains intact for a long time. But at some point, due to corrosion or for another unexpected reason, a leak occurs. Yet the leak may go undiscovered for months or even years, avoiding detection until it creates a problem elsewhere such as fouling a water well or turning up in a sewer line. The cleanup costs from a leaking tank can add thousands of dollars to the costs of a routine tank or piping replacement. If leaking substances contaminate groundwater, the resulting costs can mean financial ruin for many businesses.

Liability insurance carried by most businesses covers almost all underground tank leaks, provided it was accidental and began before 1986. Not surprisingly, given the amount of money at stake, most insurers have resisted coverage claims for cleanup liability. As a result, many cleanup coverage disputes have resulted in litigation. All in all, however, insurers have not fared well legally.

Insurers generally deny cleanup claims costs caused by leaking underground tanks based on the pollution exclusion clause contained in policy forms from the insurance Services Office. This provision, which became standard in liability policies in 1973, excludes coverage for damages "arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental."

Insurers have sought to limit the sudden and accidental exemption by maintaining that sudden means happening quickly. They argue that damages caused by long-term leaks are not sudden and are therefore excluded from coverage; this reasoning would exclude coverage for almost every underground tank leak. Insurers have argued successfully in some pollution cases that sudden means instantaneously or beginning and ending quickly. Most courts, however, have rejected this interpretation, noting that the primary definition of sudden is unexpected and that if the damages were unexpected, coverage should be provided.

Contract Interpretation Rules

While one can argue that the term sudden can mean unexpected or happening quickly, standard contract interpretation rules require ambiguous terms to be construed against the person or entity that drafted the contract. Because the insurer always drafts form language, the courts have found coverage where damages resulting from pollution were unexpected by the insured.

Contract interpretation rules also require that the policy provide coverage for matters that an ordinary business person would expect to be covered. It is important to note that liability policies are meant to provide the broadest protection that a business could obtain. Obviously, the average business operating underground storage tanks, be it a car wash or service station, would therefore expect losses to be covered from an accidental tank leak. Several courts have used this analysis to bolster their conclusion that liability policies cover underground tank leaks.

Finally, evidence suggests that when the insurance industry adopted the pollution exclusion clause for use in liability policies, it intended sudden and accidental to mean unexpected and unintended. Various insurance executives stated this at the time the pollution exclusion was approved in 1973. In addition, insurers represented in filings and hearings conducted by state insurance commissions in the 1970s stated that the term sudden and accidental merely clarified language in the standard liability policy's definition of an occurrence as an event causing damage unexpected or unintended from the insured's standpoint.

The Courts' Reaction

While there are many arguments concerning how to interpret the pollution exclusion clause, their common theme is that they all point to coverage for damages caused by a leak from an underground tank. Thus, it is not surprising that courts have concluded that the pollution exclusion does not exclude claims for underground tank leaks. In fact, in the last several years a dozen courts nationwide have considered the issue of whether the pollution exclusion excludes coverage for long-term underground tank leaks. With the exception of one, all have found that the exclusion does not apply to long-term underground tank leaks and that coverage is provided.

The courts have been persuaded by the argument that leaks from above-ground tanks would be covered because they are easily and quickly discoverable. They have chosen not to penalize owners and users of underground tanks because their leaks are inherently difficult to detect. As a New York appellate court noted: "The fact that the discharge was not readily discoverable and, thus, continued for a period of time, through no fault of the insured, should not move an otherwise covered occurrence within ... the exclusion." Or, as a New Jersey court noted, insurance policies should not be construed to require "prescience or clairvoyance" from the insured.

Insurers' Reaction

The insurance industry has responded by toughening the language of the pollution exclusion clause in new policies. Beginning in 1986, the so-called absolute pollution exclusion clause eliminated the sudden and accidental language and excluded coverage for virtually any pollution damage, including leaking underground storage tanks. However, regardless of recent policy changes, policies written before 1986 still provide valuable coverage if it can be shown that the leak began during those policy periods.

Indeed, old liability policies can aid underground storage tank owners or operators facing cleanup obligations imposed by governmental agencies. To protect the assets represented by these policies, it is critical that insureds not discard their old liability policies when a new one is received. In fact, all policies should be kept in a safe place, and if insurance files are incomplete, an effort should be made to locate missing policies. Old policies may be obtained by contacting the original broker and insurer that issued the policy or the state insurance commissioner's office.

The pollution exclusion clause is not the only coverage barrier created by the insurance industry to hinder underground tank claims. The owned property exclusion denies coverage for damage caused to property owned, leased or operated by the insured. However, many courts have concluded that costs of cleaning up an insured's land is not excluded from coverage by the owned property exclusion for two reasons. First, environmental damage to the insured's property is, essentially, damage to the environment at large. Second, cleanup of the insured's property prevents groundwater contamination, and groundwater is considered to be property of the state and not of the insured.

If a leaking tank is discovered, it is important to immediately notify any insurer that may have insured the property. This will eliminate or reduce the likelihood of timeliness objections that insurers often raise. Conversely, it is seldom too late to notify an insurer of damage from a leaking tank. Courts require insurers to show how they were materially prejudiced by a delay in notice, and that is often difficult to accomplish.

Finally, an attorney experienced in pollution coverage should be consulted when a leaking tank is discovered. As mentioned earlier, insurers routinely try to deny claims for damages caused by leaking underground tanks. This is the case even though insureds have generally prevailed in cases concerning insurance disputes resulting from leaking underground storage tanks.
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:Weston, Steven W.; McFarland, Clifton J.
Publication:Risk Management
Date:Apr 1, 1991
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