Because of the increasing frequency of significant, often multimillion-dollar, environmental claims against businesses and individuals under environmental statutes such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), it is important for any potentially responsible party ("PRP") to fully explore how the costs may be shifted in whole or in part to others.
One potential source of money that policyholders should not overlook is their insurance. The availability of insurance to pay for environmental clean-up liability is a critical issue not only for individual and corporate PRPs but for the general public as well. There is no longer any question that unless coverage exists, the enormous costs of responding to many serious environmental problems may well fall on the taxpayers.
Policyholders typically face considerable difficulty in convincing insurers to defend against and indemnify them for environmental liabilities. The existence of coverage usually turns on the interpretation of key policy provisions and exclusions in the standard form comprehensive general liability ("CGL") policies written by insurance industry organizations and issued by insurance companies to large and small companies throughout this region beginning in the 1930s.
As a general rule, the law interpreting coverage under CGL policies has developed favorably to policyholders in Washington and, more recently, in Oregon. Nonetheless insurers continue to vigorously resist policyholders’ requests for coverage under the property damage section of CGL polices. In response, policyholders have begun to seek coverage under their first-party casualty policies or the "personal injury" coverage of their CGL policies (which, as discussed below, is not equivalent to coverage for bodily injury). Additionally, it is now possible to purchase coverage for environmental claims. Policyholders continue to face the problem that even if coverage might exist, some insurers have become insolvent.
II. COVERAGE UNDER A COMPREHENSIVE GENERAL LIABILITY POLICY
III. POLLUTION EXCLUSIONS
Businesses faced with potential environmental liabilities usually look first to their CGL policies for clean-up cost funding. The basic terms of the standard form CGL policy began to take form in the 1930s. The original language was written by two insurance industry organizations: the Mutual Insurance Rating Board and the National Bureau of Casualty Underwriters (later known as the Insurance Rating Bureau). In 1971, these groups merged to form the Insurance Services Office. See Carl A. Salisbury, "Pollution Liability Insurance Coverage, the Standard-Form Pollution Exclusion, and the Insurance Industry: A Case Study in Collective Amnesia," 21 Environmental Law 361 n8 (1991). These groups drafted and revised the standard form CGL policy over the years, with the most significant changes in 1966, 1973 and 1985. Id. at 363-69.
The standard CGL policy imposes two primary obligations on the insurance company: a duty to defend and a duty to indemnify. The duties to defend and indemnify are found in the CGL policy’s insuring agreement, which typically provides that
"[the insurer] will pay on behalf of the policyholder all sums, *** which the policyholder shall become legally obligated to pay as damages because of *** property damage, to which this insurance applies, caused by an occurrence and the company shall have the right and duty to defend any suit against the insured seeking damages on account of *** bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent." An "occurrence" is usually defined as
"[a]n accident occurring within the policy period, including continuous or repeated exposure to conditions which result in personal injury or property damage neither expected nor intended from the standpoint of the insured."
The insurer must defend the insured in the event of a suit for damages due to property damages or bodily injury to a third party. The duty to defend is broader than the duty to indemnify and arises if any claim brought against the insured could conceivably be a covered claim.
While courts in the Pacific Northwest have construed the duty to defend definitively and broadly, a number of major coverage issues remain as to the duty to indemnify. Unlike much of the law creating and defining environmental liability, these insurance coverage issues are governed by state, not federal, law. Because the laws of the states vary greatly on insurance coverage issues, a crucial threshold question is which state’s law applies.
- Choice of Law.
In Oregon, it is not completely clear which state's law will be applied in a multistate insurance dispute. Although a government interest analysis generally applies in the context of a contract dispute, Lilienthal v. Kaufman, 239 Or 1, 395 P2d 543 (1964), the Oregon Court of Appeals has held that the "most significant relationship" test of the Restatement (Second) of Conflicts of Laws § 188 (1971) applies to the interpretation of an insurance contract. Citizens First Bank v. Intercontinental Express, 77 Or App 655, 713 P2d 1097 (1986); Manz v. Continental American Life Ins. Co., 117 Or App 78, 843 P2d 480 (1992). A federal court has, however, applied the governmental interest analysis rule to hold Oregon law applies where an insured bought policies through Oregon agents, the insured had its principal place of business in Oregon and one of the named insureds was an Oregon corporation. Safeco Ins. Co. v. Great American Ins. Co., No. 87-664-JU (D Or Jan. 16, 1990). In the environmental insurance context, the Oregon Court of Appeals has held that based on public policy grounds and Oregon's "important, fundamental interest" in environmental insurance transactions, Oregon law applied to a cleanup of a California site where the insured was an Oregon corporation with its primary place of business in Oregon and most or all of the insurance policies were issued in Oregon by an Oregon broker. St. Paul Fire v. McCormick & Baxter Creosoting, 126 Or App 689, 870 P2d 260 (1994), rev'd in part on other grounds 324 Or 184 (1996).
Washington applies the Restatement approach to choice-of-law issues in insurance cases. This approach focuses on which state has the most significant relationship to the parties, the dispute, the insurance contract and the risk. Washington also considers the public policies of the involved states. Dairyland Ins. v. State Farm, 41 Wash App 26, 701 P2d 806 (1985). In the context of an environmental insurance dispute, Washington has a "paramount interest" in ensuring that a contaminated site within the state is remediated, including a significant interest in whether insurance proceeds are available for clean-up costs. Canron v. Federal Ins. Co., 82 Wash App 480, 918 P2d 937 (1996) (Washington law applied where Canadian insured entered insurance agreement in Quebec). But see Aluminum Co. of America v. Admiral Ins. Co., No. 92-2-28065-5, Order on Choice of Law (Wash Super Ct, King Cty, June 10, 1994) (where environmental insurance dispute involved multiple sites in many jurisdictions worldwide, and other states had greater interest than Washington in cleanup of sites within their borders, Pennsylvania law applied because Pennsylvania had more contacts with insurance contract formation than any other state). Absent a compelling argument that another state has the most significant relationship to a cleanup, a Washington court will likely apply Washington law to an environmental insurance dispute concerning a Washington site.
Idaho has the same rule as Washington and (possibly) Oregon: The law of the state with the most significant relationship to the transaction will be applied. The location of the insured risk is a very important factor in this equation. Draper v. Draper, 115 Idaho 973, 772 P2d 180 (Idaho 1989). A choice-of-law provision in the insurance contract will not be enforced if there is a strong Idaho public policy to the contrary. Industrial Indem. Ins. Co. v. United States, 757 F2d 982 (9th Cir 1985) (Idaho statute of limitations).
- Notice to Insurer.
The standard form CGL policy typically requires the policyholder to give the insurance company notice of any claim or potential claim. It is important for an insured to provide timely notice or else the insurer will argue that coverage is barred because the insured has breached the notice requirements of the policy.
The general rule and the rule in Washington is that an insurer is not relieved of its duties under the policy unless it can prove that it suffered actual prejudice from the late notice. Felice v. St. Paul Fire & Marine Ins., 42 Wash App 352, 711 P2d 1066 (1985).
In Oregon, even if the insurer suffers prejudice, the insurer will still not be relieved of its contractual duties if it was reasonable for the insured not to give notice at an earlier date. Halsey v. Fireman's Fund Ins. Co., 68 Or App 349, 681 P2d 168 (1984). The Oregon Court of Appeals held in North Pacific Ins. Co. v. United Chrome Products, 122 Or App 77, 857 P2d 158 (1993), that insurers have the burden of proving that notice many years after discovery and cleanup of hazardous substances was prejudicial. The court refused to bar coverage on notice grounds as a matter of law in the absence of clear evidence that the insurer could not have conducted a reasonable investigation at the time notice was given. On the other hand, in Carl v. Oregon Automobile Ins. Co., 141 Or App 515, 918 P2d 861 (1996), the Oregon Court of Appeals denied a coverage claim for environmental clean-up costs resulting from a leaking underground storage tank because notice was given a year after the soil and tank were discovered, removed and disposed of off-site. See also Port Services Co. v. General Insurance Co., Case No. 91-464-JU (D Or Oct. 6, 1992) (magistrate's findings and recommendations: insurer prejudiced by several-month delay in receiving notice, during which contaminated soil and underground tanks and pipes were excavated and removed). The Carl and Port Services cases stand for the proposition that where it is impossible to tell the source and timing of contamination, and therefore precludes a determination of which if any carrier is liable and how to allocate any liability which exists, late notice may as a matter of law bar coverage.
Under Idaho law, an insurance company may have a valid defense to coverage if the policyholder fails to give timely notice and is unable to show that the failure was excusable. State of Idaho v. Bunker Hill Co., 647 F Supp 1064, 1075 (D Idaho 1986); Kootenai County v. Western Cas. & Sur., 113 Idaho 908, 750 P2d 87 (Idaho 1988). In sharp contrast to the general rule, an insurance company may not even be required in Idaho to prove actual prejudice from the late notice. Bunker Hill, 647 F Supp at 1075.
- Duty to Defend.
The duty to defend in a CGL policy is triggered by a "suit" against the insured. A heavily litigated issue has been whether a regulatory agency demand in the form of a PRP letter is a "suit" or "claim" that triggers the duty to defend. While there is a split of authority nationwide, this question has been decided favorably to policyholders in the Pacific Northwest. In this region, the courts have generally held that, because of the coercive nature of the PRP designation, the letter triggers the insurer's duty to defend. St. Paul Fire, 126 Or App 689; City of Corvallis v. Hartford Acc. & Indemn. Co., No. 89-294-JU (D Or Feb. 26, 1993); Queen City Farms, Inc. v. Aetna Cas. & Sur. Co., No. 86-2-06236-0 (Wash Super Ct, King Cty, Jan. 15, 1988); Cascade Pole Co. v. Reliance Ins. Co., No. 88-2-2316-13 (Wash Super Ct, Thurston Cty, March 20, 1992); Boeing Co. v. Aetna Cas. and Sur. Co., Inc., No. C86-352WD (WD Wash Apr. 16, 1990) (oral decision); Time Oil Co. v. CIGNA Property & Cas. Ins. Co., 743 F Supp 1400, 1420 (WD Wash 1990); Aetna Cas. and Sur. Co., Inc. v. Pintlar Corp., 948 F2d 1507 (9th Cir 1991) (applying Idaho law).
This approach has steadily gained the acceptance of many courts throughout the country. See Michigan Millers Mutual Ins. Co. v. Bronson Plating Co., No. 95639 (Mich July 12, 1994) (holding that Environmental Protection Agency ("EPA") PRP letter is equivalent to lawsuit triggering duty to defend); Anderson Dev. Co. v. Travelers Indemnity Co., Nos. 93-2140, 93-2166 (6th Cir Mar. 20, 1995) (holding insurance company must indemnify/defend insured because EPA letter notifying insured it was PRP constituted initiation of suit). However, in a surprising development, the California Supreme Court recently held that a potentially responsible party letter does not constitute a "suit" that an insurer must defend. Foster-Gardner Inc. v. National Union Fire Ins. Co., 18 Cal 4th 857, 959 P2d 265 (1998).
The law in this area has continued generally to develop favorably to policyholders. Notably the Oregon Court of Appeals held in North Pacific Ins. Co. v. Wilson's Distributing, 138 Or App 166, 908 P2d 827 (1995), that an insurer may not avoid its duty to defend by filing a declaratory judgment action against its policyholder, before the underlying case is decided, to develop evidence to show that the policy does not cover the claim being asserted in the underlying environmental cleanup cost recovery case. Most recently, the Oregon Court of Appeals held that where an insurer wrongfully refuses to defend against a claim that could have been covered and the policyholder, acting on its own, settles reasonably, the insurer is liable for defense costs. Northwest Pump v. American States Ins. Co., 144 Or App 222, 925 P2d 1241 (1996). As for the insurer's liability for the settlement amount, the Northwest Pump case held that an insurer is entitled to assert the applicability of the pollution exclusion provision, but will be liable for reasonable settlement costs for damages outside the exclusion.
A noteworthy change in Oregon law was the enactment of the Oregon Environmental Cleanup Assistance Act, ORS 465.200-.510. The statutory amendment expressly recognized that the duty to defend arises where a cleanup is performed under an Order or other voluntary agreement with the Oregon Department of Environmental Quality.
The insurer's obligation to defend arises whenever the complaint contains some allegations that are within the policy coverage, even if other allegations are clearly excluded from policy coverage. Timberline Equip. Co. v. St. Paul Fire and Marine Ins. Co., 281 Or 639, 645, 576 P2d 1244 (Or 1978) (if complaint contains at least some allegations within policy coverage, "the insurer is liable for the total defense costs"); Kirk v. Mt. Airy Ins. Co., 134 Wash 2d 558, 951 P2d 1124 (Wash 1998) (duty of defense arises whenever lawsuit filed against insured alleges facts and circumstances arguably covered by insurance policy).
Because an insurer's duty to defend is broader than its obligation to indemnify, a policyholder will prefer to classify site investigation or consultant expenses as "defense" costs whenever possible. Northwest courts have not yet definitively decided this issue. The reported case law to date suggests that Oregon and Washington courts are more likely than not to categorize expenses such as site investigation costs, consulting fees, expert fees, and associated expenses as defense costs in the environmental insurance context. The court in Aetna Cas. and Sur., 948 F2d 1507 at 1517, holding that under Idaho law a PRP notice is effectively a "suit" triggering a duty to defend, noted that the PRP letter in that case forced the policyholder to hire "technical experts" to protect its interests. This statement indicates that consultant fees would probably be considered defense costs in Idaho.
No Oregon case addresses this precise issue, although Oregon law recognizes the general principle that the defense of a claim includes the proper investigation and negotiation of the claim. See Maine Bonding v. Centennial Ins. Co., 298 Or 514, 693 P2d 1296 (1985).
Recent cases from other jurisdictions emphasize that, at least in some circumstances, investigation, consultant, expert, and regulatory agency oversight costs will qualify as defense expenses. See Fireman's Fund Ins. Companies v. Ex-Cell-O Corp., 790 F Supp 1318 (ED Mich 1992) (environmental consultant's hydrogeological defense costs are defense costs if "necessary and proper" in preparing defense to defeat or limit liability or limit scope and costs of remediation); General Acc. Ins. Co. v. State Dept. of Environ., 143 NJ 462, 672 A2d 1154 (1996) (court should make "fair allocation" of costs between defense and indemnity); Endicott Johnson Corp. v. Liberty Mut. Ins. Co., 928 F Supp 176 (NDNY 1996), appeal dismissed 116 F3d 53 (2d Cir 1997) (remedial investigations to determine source and extent of contamination to be treated as defense costs); Domtar, Inc. v. Niagara Fire Ins. Co., 563 NW2d 724 (Minn 1997) (investigative and oversight costs are defense costs if reasonably necessary to defeat or minimize scope of liability).
In the most recent and most voluminous case discussing this issue, Aerojet-General Corp. v. Transport Indem., 17 Cal 4th 38, 948 P2d 909, 70 Cal Rptr 2d 118 (1997), the California Supreme Court held that site investigation expenses constitute defense costs if three requirements were met: the investigation must be conducted between tender of the defense and conclusion of the action, the investigation must be a reasonable and necessary effort to avoid or minimize liability, and the investigation expenses must be reasonable and necessary for that purpose.
- "Damages" Because of "Property Damage."
Except when coverage for personal injury applies (see below) or when a plaintiff has suffered bodily injury (for example, in a toxic tort suit), a policyholder must generally face allegations that it is legally obligated to pay "damages" because of "property damage" suffered by a third party in order to obtain a defense and indemnity from its liability insurer. Insurers have argued that clean-up costs sought in a cost-recovery action are essentially a form of restitution and costs of complying with agency orders are analogous to injunctive relief. Thus, they routinely argue that these are claims for equitable relief instead of damages. They also regularly contend that pollution is not property damage.
Courts in Washington and Idaho, as well as in much of the rest of the country, have generally rejected these arguments. Instead, they have held that the term "damages" should not be given a technical, arcane reading. Rather, the term should be interpreted from the perspective of an ordinary person whose common sense understanding of damages includes environmental clean-up costs. See Boeing v. Aetna Casualty & Surety Co., 113 Wash 2d 869, 784 P2d 507 (1990) (EPA response costs are damages under standard form CGL policy); Aetna Cas. and Sur., 948 F2d 1507 (Idaho case--clean-up costs are damages). In Weyerhaeuser Co. v. Aetna, 123 Wash 2d 891, 874 P2d 142 (1994), the Washington Supreme Court extended the scope of coverage damages to include voluntary clean-up costs, particularly where the cleanup prevented much greater damage and a statute clearly imposed liability for the property damage that had occurred.
It is also well settled in Oregon that contaminated property qualifies as covered "property damages." See St. Paul Fire, 126 Or App at 702 ("The fact that consent decrees require that costs must be expended for environmental cleanup does not change the fact that those costs resulted because of damage to property."); Lane Electric Coop. v. Federated Rural Electric, 114 Or App 156, 834 P2d 502 rev. denied, 314 Or 727 (1992) (clean-up costs due to groundwater contamination are property damages); Port of Portland v. Water Quality Ins. Syndicate, 796 F2d 1188 (9th Cir 1986) (Oregon case--cost of complying with governmental order constitutes damages). But see North Pacific, 138 Or App 166 (cost of government-mandated cleanup is excluded, while liability to others for clean-up costs is not).
The best-known decisions to the contrary are Continental Ins. v. Northeastern Pharmaceutical, 842 F2d 977 (8th Cir 1988), and Maryland Cas. Co. v. Armco, Inc., 822 F2d 1348 (4th Cir 1987).
Many courts draw a distinction between reimbursable damages (or defense costs) and ordinary costs of doing business. In Boeing, 113 Wash 2d 869, the Washington Supreme Court suggested that safety measures or other preventative costs incurred before pollution or other property damage has occurred (such as costs of compliance with government regulation) would be considered costs of doing business rather than damages. Although no Oregon or Idaho decisions appear to be on point, the general view in other jurisdictions is that at least some costs incurred before property damage occurs is an uninsurable cost of doing business. See, e.g., American Bumper v. Hartford Ins., 550 NW2d 475 (Mich 1996) (costs associated with obtaining or renewing license or permit, or making improvements to site, are costs of doing business rather than defense costs or damages); AIU Ins. Co. v. FMC Corp., 51 Cal 3d 807, 799 P2d 1253, 274 Cal Rptr 820 (1990) (preventative costs for measures taken in advance of any release of hazardous waste not covered by insurance).
- Has There Been an "Accident" or an "Occurrence"?
Before 1966, standard form CGL policies provided coverage for an "accident." The term "accident" was not defined. Insurers argued that coverage applied only to damages caused by a sudden event causing immediate injury. Courts largely rejected this interpretation on the ground that the term was ambiguous and should therefore be interpreted favorably to the insured. See Gruol Constr. v. Insurance Co., 11 Wash App 632, 524 P2d 427 (1974). In St. Paul Fire, 324 Or 184, the insurers argued that "accident" means a discrete event happening suddenly at a definite time. They also argued that contamination resulting from "the regular course of business" cannot be due to an accident. The Oregon Supreme Court rejected the insurers' arguments and held that accident meant an "‘incident or occurrence that happened by chance, without design and contrary to intention and expectation.'" 324 Or at 204 (citation omitted).
To clarify that CGL policies provided coverage for gradual injuries, the insurance industry modified the standard form CGL policy in 1966 and 1973 to provide coverage for property damage or bodily injury due to an "occurrence" rather than an "accident." See, Salisbury, supra, at 363-68. An "occurrence" was defined as an event "‘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.'" (Quoting 1973 CGL policy.) This confirmed that the 1966 CGL policy was intended to cover pollution liability from an injury-causing event that occurred over time. Id. at 370-71.
Insurers often disclaim coverage on the ground that an insured expected, or should have expected, to cause the pollution resulting from its regular operations. The majority of courts have held that the issue is not whether the insured expected or intended the act that caused the pollution but whether the damage that resulted was expected or intended. See Intern. Minerals v. Liberty Mut. Ins., 168 Ill App 3d 361, 522 NE2d 758 (1988).
A related issue is whether an objective or subjective test should be used to determine whether the damage was expected or intended. The majority of courts in this region now require proof that the insured subjectively expected or intended the property damage or bodily injury at issue to result from its operations. See Queen City Farms v. Central Nat. Ins. Co., 124 Wash 2d 536, 882 P2d 702 (1994) (adopting subjective test); Lane Electric Coop., 114 Or App at 160 (actual expectation of policyholder controls); City of Corvallis, No. 89-294-JU, 1991 WL 523876 (D Or May 30, 1991) (question of fact whether insured expected or intended pollution); State of Idaho, 647 F Supp 1064 (same). But see City of Carter Lake v. Aetna Cas. and Sur., 604 F2d 1052 (8th Cir 1979); American Motorists Ins. Co. v. General Host Corp., 667 F Supp 1423 (D Kan 1987) (adopting the insurers' position).
- Trigger of Coverage, or When Did the Occurrence Occur? CGL policies usually provide coverage for property damage that "occurs" during the policy period. Key and frequently litigated questions are when the property damage occurred and whether it occurred during the policy period. Policyholders often try to implicate pre-1973 policies because these policies may well not contain a pollution exclusion and will try to implicate a number of policies to recover up to the limits of each policy.
- Trigger-of-Coverage Theories. The issue of when a CGL policy's coverage is triggered has been analyzed in a number of cases, many of which have involved asbestosis and other bodily injuries. In analyzing the trigger issue, courts across the country have applied at least five "trigger-of-coverage" theories.
- The Exposure Theory. Under this theory, coverage is triggered when the exposure to the harmful substance that eventually causes the damage takes place. E.g., Ins. Co. North America v. Forty-Eight Insulations, 633 F2d 1212 (6th Cir 1980), modified 657 F2d 814 (1981) (exposure to asbestos); Hancock Laboratories, Inc. v. Admiral Ins., 777 F2d 520 (9th Cir 1985) (California law--implantation of contaminated heart valve). Thus, if the exposure occurred over a number of policy years, coverage in each year may be triggered. This theory has been adopted in several cases involving environmental claims. E.g., Fireman's Fund Ins. Companies v. Ex-Cell-O Corp., 662 F Supp 71 (ED Mich 1987) (Michigan law).
- The Manifestation Theory. Under this theory, coverage is triggered when the injury becomes apparent (i.e., when it is or should be discovered). E.g., Eagle-Picher Industries, Inc. v. Liberty Mut. Ins., 682 F2d 12 (1st Cir 1982). Because environmental contamination often is caused over decades but is not discovered until the policies containing the qualified or absolute pollution exclusion were in effect, this theory is favored by insurers. It was adopted in a pollution case, Mraz v. Canadian Universal Ins. Co., Ltd., 804 F2d 1325 (4th Cir 1986).
- The Injury-in-Fact Theory. Under this theory, an insurer is liable for damages arising out of injury to the insured during the policy period, regardless of when the exposure to the substance causing the injury or its manifestation took place. E.g., American Home Products Corp. v. Liberty Mut. Ins., 748 F2d 760, 765 (2d Cir 1984) (pharmaceutical-induced injury). Like the manifestation theory, this theory can be favorable to insurers. In environmental cases, it has been applied to hold that the injury occurred when the hazardous wastes were released because that was when the property was actually damaged. Centennial Ins. Co. v. Lumbermens Mut. Cas. Co., 677 F Supp 342 (ED Pa 1987). This was the theory adopted by the Oregon Court of Appeals and affirmed by the Oregon Supreme Court in St. Paul Fire, 324 Or 184.
- The Triple-Trigger Theory. Under this theory, coverage is triggered (1) when the exposure that eventually causes the damage takes place, (2) when the injury manifests itself and (3) at all times in between. E.g., Keene Corp. v. Ins. Co. of North America, 667 F2d 1034, 1047 (DC Cir 1981) (asbestos case).
- The Continuous Trigger Theory. Numerous courts have held that every policy in effect from the time the first release of contaminants occurs until the date a claim is asserted against the insured is triggered. E.g., New Castle County v. Continental Cas. Co. (CNA), 725 F Supp 800, 812 (D Del 1989), modified 933 F2d 1162 (3d Cir 1991); Liberty Mut. Ins. Co. v. Triangle Industries, Inc., 765 F Supp 881, 885 (ND W Va 1991); Armstrong World Ind. v. Aetna Cas. & Sur., 26 Cal Rptr 2d 35 (Cal App 1 Dist 1993).
- Cases from the Northwest.
- Oregon. Oregon appellate courts outside the pollution context have adopted a rule analogous to the exposure theory and have held that coverage is triggered when the injuring act occurred, regardless of the time of injury. State Bd. of Higher Ed. v. NW Pac. Indemnity Co., 69 Or App 456, 685 P2d 1026 (1984); Silver Eagle Co. v. Nat. Union Fire, 246 Or 398, 423 P2d 944 (1967); Interstate Fire & Cas. v. Portland Archdiocese, 747 F Supp 618 (D Or 1990), rev'd on other grounds 35 F3d 1325 (9th Cir 1994). But see North Pacific, 122 Or App 77 (Benton County Circuit Court also adopting manifestation theory).
In the recent St. Paul Fire case, the Oregon Supreme Court affirmed the decision of the Oregon Court of Appeals and held that the injury-in-fact test is the one to apply in a case involving unintended and unexpected soil and groundwater contamination which occurred over many years. The Oregon Supreme Court expressly rejected the manifestation theory.
- Washington. In Gruol Constr., 11 Wash App 632, the court adopted a "continuous damage" property damage theory that is comparable to the triple-trigger theory. Gruol involved a building that was damaged by dry rot. The dry rot was caused by improper backfilling during construction of the building. The court found that the damage to the building was continuous and imposed joint and several liability on the insurer at the time of the defective backfilling, the insurer at the time of discovery of the dry rot and the insurer that provided coverage during the period in between.
The Washington Supreme Court recently applied Gruol in the hazardous waste clean-up context. In B & L Trucking and Construction Co., Inc. v. Northern Ins. Co. Of New York, No. 64435-7, 1998 WL 65415 (Wash Feb. 19, 1998), the occurrence was property damage caused by leaching from smelter slag hauled and disposed of at a landfill by the insured. The insured had several policies in effect during the prolonged time period over which disposal was made. The waste hauler was uninsured for at least some period during which disposal occurred. The issue in B & L Trucking was the allocation of clean-up costs between multiple insurers and the insured. Citing to Gruol, the court held that all insurers providing coverage during any portion of the total time period of the continuing damage are liable for the total amount of the continuing property damage up to the policy liability limit. The court concluded that, absent a pro rata share clause, when an insurer agrees to pay "all sums" arising out of an "occurrence," once a policy is triggered each insurer is joint and severally liable for all sums for which the insured becomes legally obligated to pay.
The B & L Trucking decision and two recent federal court decisions suggest that Washington courts will now apply the continuous-trigger theory for insurance coverage involving environmental liability. See Time Oil, 743 F Supp 1400.
- Idaho. Idaho law is not clear on this issue.
- Personal Injury Coverage Under a CGL Policy.
In addition to coverage for property damage and bodily injury, CGL liability policies often provide coverage for allegations of "offenses" or "personal injuries," which include allegations of "wrongful eviction or other invasion of the right of private occupancy." Policyholders have argued that because environmental offenses are similar to the common law torts of trespass and nuisance, such claims are included in the phrase "wrongful entry" or "other invasion of the right of private occupancy." Insurers have argued that the coverage is limited to the landlord-tenant context.
The advantages to policyholders of personal injury coverage are that (1) it covers an "offense" and not an "occurrence," and thus the insured will not have to face the expected and intended argument and (2) the qualified pollution exclusion, by its terms, often does not apply to personal injury coverage, although the absolute pollution exclusion does. In the one reported appellate decision on the issues, Pipefitters Welfare Educ. Fund v. Westchester Fire, 976 F2d 1037 (7th Cir 1992), the court held that under Illinois law, the PCB contamination of a scrap-metal dealer's land constituted a "wrongful entry" onto the land and granted coverage to the seller of the PCB transformer. The Pipefitters case is an exciting development in this area and may lead to an increase in availability of coverage for environmental claims. See also Titan Holdings Syndicate v. City of Keene, N.H., 898 F2d 265 (1st Cir 1990) (under New Hampshire law, coverage applies to nuisance consisting of bright lights and loud noises).
We have also been told that a California trial court granted summary judgment in favor of Northrop Corporation's environmental claim submitted under personal injury coverage and that insurers have accepted tenders of defense of environmental claims under personal injury coverage.
A recent opinion of the California Court of Appeals, however, held that the personal injury portion of a CGL policy provides no coverage for environmental clean-up costs. Titan Corp v. Aetna Casualty and Surety Co., No. 619404 (Feb. 10, 1994). The insured had argued that harm to neighbor's land, as well as surface water and groundwater, involved the wrongful invasion of occupancy rights and therefore should be covered by the personal injury portion of the policy. The court rejected this argument and along with it the holding in Titan Holdings. The extent to which this will affect an insurer's willingness to defend, a duty that is broader than the duty to indemnify, is yet to be seen.
No affirmative decision holding that personal injury coverage applies to environmental clean-up costs has been published in the Northwest. In Unified Sewerage Agency of Washington County v. Northland Casualty Co., Civ No. 93-375-JO (D Or Jan. 26, 1993), Judge Jones appeared to implicitly recognize that the personal injury coverage will pay for such costs when he reluctantly denied a claim because "[a]bsent any alleged invasion of the claimant's right of private occupancy and absent any relief granted for any invasion of the right of private occupancy, plaintiff's claim * * * for ‘personal injury' simply fails." Id. at 13.
- Coverage Under Lost Policies.
Environmental insurance coverage claims may implicate decades-old policies. Due to modern record retention policies directing disposal of expired records every five to seven years, it is common that neither the policyholder, the insurer nor the insurance broker or agent has a copy of the actual policy. There is often only secondary documentary evidence (i.e., line sheets, policy renewal notices or specimen policies) concerning the issuance and terms of coverage. The Oregon, Washington and Idaho courts have held that if the insured has conducted a diligent and good-faith search for the policy, such secondary evidence of its contents is admissible. See High v. Davis, 283 Or 315, 584 P2d 725 (1978); Thompson-Cadillac Co. v. U.S. Cas. Co., 180 Wash 481, 40 P2d 170 (1935); Smith v. Smith, 95 Idaho 477, 511 P2d 294 (1973). In any coverage dispute, the policyholder is typically required to prove the existence and basic terms of the coverage. Safeco Ins. Co. v. Great American Ins. Co., et al., Civ No. 87-664-JU at 6 (D Or Jan. 14, 1990). The burden of proving the existence and applicability of exclusions, if any, and affirmative defenses, such as a failure to pay premiums, is then on the insurer. Id. at 7, 17. The Safeco court found that secondary evidence in the form of line sheets and specimen policies stating policy numbers, expiration dates and policy limits satisfied the policyholder's burden of proving the existence and contents of coverage. Id. at 18.
There are important reforms occurring in the Pacific Northwest to address the issue of lost policies. In Washington state, rules were adopted in April 1995 that require insurance companies to promptly investigate claims allegedly arising under lost policies. Insurers that cannot locate policies must provide copies of form policies to insureds and state which are most likely to have been issued to that insured and why. Failure to promptly investigate an environmental claim and failure to make payments under its duty to defend are among the actions that the insurance commissioner can consider deceptive acts. Oregon has considered similar reform at the legislative level but, to date, the bill is still in committee.
- Recovery of Attorneys' Fees and Costs. In Oregon and Idaho, a policyholder has a statutory right to its reasonable attorneys' fees in any successful action to recover under a policy. See ORS 742.061; Idaho Code § 41-1839 (Supp 1997); Unigard Ins. Co. v. United States Fidelity, 111 Idaho 891, 728 P2d 780 (Idaho App 1986) (policyholder entitled to fees in declaratory action brought by insurer). In Washington, "an award of fees is required in any legal action where the insurer compels the insured to assume the burden of legal action, to obtain the full benefit of his insurance contract * * *." Olympic Steamship v. Centennial Ins., 117 Wash 2d 37, 53, 811 P2d 673 (1991).
IV. THE "KNOWN LOSS" DOCTRINE AS A BAR TO COVERAGE
- Qualified Pollution Exclusion.
- Summary and Language. Before the early 1970s, CGL policies did not exclude coverage for property damages caused by pollution. The qualified pollution exclusion clause began appearing as an endorsement to the standard form CGL policy in 1970 and was incorporated in the standard form policy from 1973 to 1985. See Salisbury, supra, at 359, 369-77. The exclusion typically provides that the insurance
"does not apply to * * * property damage 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 watercourse or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental." Id. at 369 n 34.
The key language in the exclusion is the phrase "sudden and accidental." Litigation over the meaning of this exception has focused on (1) whether the polluting act must be unintended from the standpoint of the insured or whether just the resulting harm to the environment must be unintended and (2) whether "sudden" has a temporal meaning and so will not encompass gradually occurring contamination.
Insurers frequently assert that the pollution exclusion bars any coverage if the insured intentionally discharged the hazardous waste. Policyholders respond by arguing that the exclusion is simply a restatement of the "occurrence" definition found elsewhere in the policy and as a result does not prevent coverage unless the damage was expected or intended. They also contend that the clause is ambiguous and as such must be construed strictly against the insurer. Insurers counter by arguing that the pollution exclusion clause is not ambiguous and that the applicability of the exception in the clause hinges on whether the release was both sudden and accidental, not on whether the damage was neither expected nor intended.
- Cases Construing the Exclusion.
- Oregon. In a stunning development the Oregon Supreme Court decided in St. Paul Fire, 324 Or 184, that the words "sudden and accidental" are ambiguous and therefore should be construed against the insurers. The court concluded that the standard form pollution exclusion does not apply to discharges and releases, including those that occur in the ordinary course of business, that are unintended and unexpected. The Oregon Supreme Court, unlike many courts, did not examine or analyze at length the history surrounding the development and adoption of the pollution exclusion. A comprehensive discussion of the drafting history and insurance industry representations as to the intent behind the qualified pollution exclusion is contained in Salisbury, supra, at 357.
- Washington. In Queen City Farms, gradual contamination resulted from the insured's operation of a disposal pond. The Washington Supreme Court held that the qualified pollution exclusion was ambiguous and refused to accept the insurer's argument that "sudden" was meant in temporal terms in the exclusion. The court noted that at the time of the drafting of the exclusion, the insurance industry represented to state regulators that the exclusion was simply a restatement of the definition of "occurrence" and was not meant to deny coverage for "unexpected and unintended" releases where it had previously existed. See also Key Tronic v. Aetna (CIGNA) Fire Ins. Co., 124 Wash 2d 618, 881 P2d 201 (1994) Therefore, the court held that the exclusion did not exclude coverage for accidental, i.e., subjectively unintended, releases.
In Queen City Farms the insured's intended placement of waste in a containment pond was followed by the unexpected leaking of the pond and resulting contamination. The Queen City Farms court read the "occurrence" clause and the pollution exclusion together and found the unexpected leaking from the pond, not the intended release into the pond, to be the polluting occurrence. The court held that pollution resulting from the unintended leak, even though continuous and repeated, was neither intended nor expected and was covered under the "occurrence" clause. Thus, under Queen City Farms coverage is provided if damages result from the dispersal of materials into the environment from a place of containment where the insured subjectively believed the wastes would remain, and that dispersal was unexpected or unintended. See also Key Tronic, 881 P2d 201 (initial deposit of toxic materials at waste disposal site is not relevant polluting event under pollution exclusion where deposit was to landfill that insured believed would contain materials).
- Idaho. In Northern Pacific Ins. Co. v. Mai, 130 Idaho 251, 939 P2d 570 (Idaho 1997), the insured's used oil was transported for reclaiming and/or reprocessing to a hazardous material facility that later became a Superfund site. The court focused on the leaking from the landfill as the polluting event, not the insured's intended disposal at the landfill. The Northern Pacific Ins. court held that the CGL policy's "sudden and accidental" qualified pollution exclusion clause was unambiguous. The court accepted the insurer's argument that "sudden" is necessarily a temporal term and only includes events that occur over a short period of time. The court went on to interpret the term "accidental" to mean neither expected nor intended. Finally, the Northern Pacific Ins. court concluded that use of the term "accidental" in the context of the qualified pollution exclusion exception, which states, "the discharge, release * * * was sudden and accidental," dictates that "accidental" refers to conduct rather than to injury or damage. 939 P2d 573. The Northern Pacific Ins. court remanded on the issue of whether the discharge, dispersal, release or escape from the landfill was "sudden and accidental." Following Northern Pacific Ins., the "sudden and accidental" qualified pollution exclusion exception will trigger coverage only for releases of short duration that were neither expected nor intended.
- Law in Other Jurisdictions. Other jurisdictions have split on whether the qualified pollution exclusion is merely a restatement of the definition of "occurrence," as policyholders contend, or whether it unambiguously bars coverage for gradually occurring contamination, as insurers argue. A recent Ninth Circuit opinion held that under Arizona and California law, "sudden" means both temporally brief and unexpected; the court concluded that repeated releases of trichloroethylene ("TCE") by a manufacturer is not covered under a CGL policy due to the pollution exclusion. Smith v. Hughes Aircraft Co., Nos. 91-16758 et al. (9th Cir Nov. 26, 1993, amended May 3, 1994); see also FMC Corp. v. Plaisted and Companies, 72 Cal Rptr 2d 467, 475 (Cal App 6th Dist 1998) (sudden means at least "abrupt," and "does not apply to gradual releases of pollutants no matter how unexpected"); McMillan Development, Inc. v. Continental Insurance Co., et al, No. 936218 (Cal App 4th Dist Feb. 16, 1995) (holding "sudden * * * necessarily contains a temporal element in addition to its connotation of the unexpected"); cf. Just v. Land Reclamation Ltd., 155 Wis 2d 737, 456 NW2d 570 (1990); Compass Ins. Co. v. Cravens, Dargan & Co., 748 P2d 724 (Wyo 1988); New Castle County v. Hartford Acc. and Indem. Co., 933 F2d 1162 (3d Cir 1991) (adopting policyholder's interpretation); Lumbermens Mut. Cas. v. Belleville Ind., 407 Mass 675, 555 NE2d 568 (1990) (adopting insurer's interpretation).
In a recent case, Aydin Corp. v. First State Ins. Co., 18 Cal 4th 1183, 959 P2d 1213 (1998), the California Supreme Court held that the insured party bears the burden of showing that a release was sudden and accidental. In Aeroquip Corp. v. Aetna Cas. & Sur. Co., 26 F3d 893 (9th Cir 1994), the Ninth Circuit took the same position. The court also held that there is a temporal component under California law to the "sudden and accidental" exception to the pollution exclusion. The opinion cited one circuit court opinion, U.S. Fidelity & Guar. v. Morrison Grain Co., 734 F Supp 437 (D Kan 1990), aff'd 999 F2d 489 (10th Cir 1993), that held contrary on the burden issue.
The Missouri Supreme Court recently abrogated a Missouri Appellate Court decision and overruled an earlier Eighth Circuit decision interpreting Missouri law. In Farmland Indus., Inc. v. Republic Ins. Co., 941 SW2d 505 (Mo 1997), the parties disagreed on the question of whether equitable relief was included within the policy term "damages." The court concluded that a layperson would reasonably understand "damages" to include environmental response costs required by the government, abrogating the earlier holding of McDonough v. Liberty Mut. Ins. Co., Inc., 921 SW2d 90 (Mo App 1996), which limited "damages" to monetary damages and not equitable relief. The Farmland decision also overruled the Eighth Circuit decision in Continental Ins. v. Northeastern Pharmaceutical, 842 F2d 977 (8th Cir) (en banc), cert denied 488 US 821 (1988), that "damages" should be defined "in the insurance context" and that in the insurance context the ordinary definition of "damages" does not include response costs. Failing to find authority supporting Northeastern Pharmaceutical & Chem. Co.'s ("NEPACCO") "in the insurance context" test, the Farmland court held that NEPACCO misconstrued and circumvented Missouri law by authorizing a court to define the term "damages" "in the insurance context" rather than by Missouri's ordinary meaning test. Farmland demonstrates that policyholders should continue to pursue coverage, even in the face of an adverse federal court ruling, unless and until the controlling state Supreme Court speaks on the issue.
The New Jersey Supreme Court held that insurers are estopped from enforcing pollution exclusions in their policies because the industry deceived state regulators about the meaning of the language change when the provisions were approved for use in CGL policies in 1970. Morton Intern., Inc. v. General Acc. Ins. Co., 134 NJ 1, 629 A2d 831 (1993), cert denied 512 US 1245 (1994). This case was recently successfully cited by a policyholder in Anderson v. Minnesota Ins. Guaranty Assoc., No. C7-93-2490 (Minn App July 20, 1994) (court allowed plaintiff to add equitable estoppel claim in declaratory judgment action aimed at establishing insurer's liability).
The Utah Supreme Court held that the "sudden and accidental" clause in a policy pollution exclusion unambiguously contains a temporal element, reasoning that a contrary view would render the use of both "sudden" and "accidental" redundant. Sharon Steel v. Aetna Cas. and Sur., 931 P2d 127 (Utah 1997). The court looked to the 10th Circuit for guidance in reaching its conclusions. See U.S. Fidelity & Guar., 999 F2d 489. The court observed that courts are more likely to find that a discharge was sudden where the release of pollution occurred abruptly over a short period of time. The court concluded that, in order to encourage industrial responsibility, where incidents of pollution appear to be more akin to normal business operations, the costs of cleanup should be paid by the insured.
- The 1986 So-Called Absolute Pollution Exclusion.
In 1986, the existing pollution exclusion clause in the standard form CGL policy was replaced with language that excludes coverage for
"any loss, cost, or expense arising out of any governmental direction or request that [the insured] test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants."
This new language purports to exclude from coverage any damage caused by pollution. It does not contain the exception for damages arising out of "sudden and accidental" pollution incidents. Moreover, it expressly excludes clean-up costs. In cases clearly involving pollutants, the courts have uniformly refused to find coverage. See, e.g., Vantage Dev. v. American Env. Tech., 251 NJ Super 516, 598 A2d 948 (1991); E.I. Du Pont De Nemours & Co. v. Admiral Ins. Co., CA No. 89C-AU-99 (Del Super 1990). However, policyholders have gotten around the exclusion by suggesting that the injury was not caused by pollution. Reliance Ins. Co. v. Kent Corp., Inc., 896 F2d 501 (issue of fact whether fire fighter was injured by hazardous gases from dumpster fire or simply from fire), vacated 909 F2d 424 (11th Cir 1990) (case settled); In re Hub Recycling, Inc., 106 BR 372 (D NJ 1989) (recycled building materials not pollutants but wastes); Grow Group, Inc. v. North River Insurance Co., No. C92-2328 SC (ENE) (ND Cal Aug. 14, 1992) (absolute pollution exclusion does not bar coverage for bodily injury where fire resulted in release of chlorine gas fumes causing back injury during ensuing evacuation).
The case law has generally supported the carriers' arguments that this exclusion bars all claims based on bodily injury and property damage for pollution related damages. Policyholders have asserted that the personal injury coverage clause provides coverage for pollution related claims based on trespass and nuisance theories. See Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co., 976 F2d 1037 (7th Cir. 1992); Titan Holdings Syndicate, Inc. v. City of Keene, 898 F.2d 265 (1st Cir 1990.) This case law has provided the basis for similar claims in the Pacific Northwest. This is an area, which like the case law construing the qualified pollution exclusion, has been developing favorably from the policyholder perspective.
- Oregon. In United Sewerage Agency of Washington County v. Northland Casualty Company, Civ. No. 91-375-JO (D. Or. Jan. 22, 1993), Judge Jones ruled that Northland was not required to provide a defense to United Sewerage Agency under a post-1986 CGL policy with an absolute pollution exclusion. His ruling was based on the conclusion that in this particular instance the personal injury coverage section in the policy at issue did not create coverage. He did not, however, find that an Oregon court would as a matter of Oregon law deny a coverage claim for environmental contamination under the personal injury clause in all cases. Instead, after a review of the case law recognizing such coverage in other jurisdictions, he found that in the absence of alleged trespass or nuisance, mere interference with the use of a stream or decrease in property values due to nearby contamination does not provide for coverage since no third party had claimed that the policyholder's contamination of soil and/or water invaded the claimant's right of private occupancy, i.e., a trespass and/or nuisance claim. What his ruling strongly implied though was that such a policy provision should provide coverage where a neighbor does allege trespass or nuisance due to a spill or release.
- Washington. In Kitsap County v. Allstate Ins. Co., 136 Wn. 2d 567 (1998), the Washington Supreme Court held that the personal injury provision of a CGL policy provides coverage to Kitsap County for trespass/nuisance claims asserted by residents of a trailer park due to contaminants and odors from a waste disposal facility operated by the county and a privately owned landfill in which the County had disposed of municipal hazardous waste. The Court ruled that policies that provide coverage for personal injury arising from "wrongful entry" and/ or "other invasion of the right of private occupancy" provide defense and indemnity coverage in a case where third parties allege that they suffered damage to health and property based on theories of trespass, nuisance or other claims of personal injury.
In recent CGL coverage disputes insurers have raised the "known loss" or "continuous loss" defense in an effort to preclude coverage. The defense is typically raised in the context of an insurer who purchased a CGL policy at a time when it knew that certain of its activities, such as disposing of waste at a landfill, posed a risk of causing property damage. When in fact that damage does occur and an insured lodges a claim for coverage, insurers argue that coverage is precluded on the grounds that the insured knew of the risk that caused the resulting harm at the time the policy was purchased or that the policy does not cover liability for a loss that was in progress at the time of purchase.
Generally, courts reject this defense on the grounds that ordinary businesses are known to engage in activities with some level of risk and that a major function of a CGL policy is to cover that risk. Before issuing coverage, insurers assess and plan for these risks through screening practices, including conducting investigations into an applicant's operations, varying premium rates and denying coverage. Coupling this screening practice with the exclusion of CGL coverage for "expected or intended" damages, the need for a broad "known loss" doctrine is negated.
V. OWNED OR LEASED PROPERTY OR CARE, CUSTODY AND CONTROL EXCLUSIONS
- Cases from the Northwest.
In 1995, the Ninth Circuit affirmed an Oregon district court holding that the "known loss" defense was unavailable under Oregon law. Generali-U.S. Branch v. Bank of Montreal, 46 F3d 1141 (9th Cir 1995) (interpreting Oregon law). The Court looked to an Oregon Court of Appeals decision in which the court refused to apply the "known loss" doctrine where an insured took out a life insurance policy knowing at the time that he was terminally ill. Commercial Bankers Life Ins. Co. v. Kirk, 66 Or App 359, 675 P2d 1069 (1984). Based on the Kirk holding, the Ninth Circuit held that, under Oregon law, absent a showing that the insured fraudulently misrepresented or concealed a material fact, knowledge on the part of the insured of a risk of loss would not render the policy void.
There is, however, Oregon law applying the "known loss" doctrine in the environmental contamination context. City of Corvallis, 1991 WL 523876. In City of Corvallis, the city owned property that it leased out for use as a chrome-plating facility. The lessee deposited chrome in dry wells and plating tanks that later breached containment and contaminated the soil, surface water, and groundwater. Corvallis employees discovered chromium contamination of surface waters at some point between 1974 and 1977, DEQ began sampling surface and well water at the site in 1982, EPA began testing in 1983, the site was listed on the NPL in September 1983, and Corvallis received an EPA PRP letter in December 1983. The court held that any question as to whether the contamination at the site was an insurable "risk" or an uninsurable "loss in progress" vanished when Corvallis received the PRP letter. The court denied coverage for all policies issued after that date.
Washington case law precludes coverage under the "known loss" doctrine when, before purchasing coverage, the insured "subjectively knew" or expected that an occurrence would take place. Public Utility Dist. 1 of Klickitat County v. International Ins. Co., 124 Wash 2d 789, 881 P2d 1020 (1994) ("PUD"). The PUD court determined that the "known risk" doctrine only applies if the insured knew that there was a "substantial probability" that they would be sued. See also Time Oil Co. v. CIGNA Property & Cas. Ins. Co., 743 F Supp 1400 (WD Wash 1990) (insured's receipt of EPA PRP letter notified Time Oil that there was "substantial probability" that it would be required to pay response costs relating to contamination); see also Kitsap County v. Allstate Ins. Co., No. C93-5574R, 1995 WL 423912 (WD Wash March. 28, 1995) (applying "subjective knowledge of substantial probability" test in environmental contamination context). Most recently, the Washington Supreme Court addressed the "known loss" doctrine where, before purchasing coverage, an insured had received a letter from its maintenance supervisor acknowledging that water seepage had caused staining around the windows of a new building. Hillhaven v Sellen Const., 133 Wash 2d 751, 948 P2d 796 (1997). After receipt of the letter, minor repairs were made, seemingly resolving the problem. When water damage occurred the following winter, the insurer denied coverage. The court applied the PUD subjective knowledge test holding that the letter itself was not sufficient to establish the necessary knowledge of water seepage and damage at the time the policy was issued.
CGL policies typically exclude coverage for damage to property owned, leased or occupied by the insured or in the insured's care, custody or control. (This exclusion is obviously not present in first-party casualty policies, as discussed below.) In the environmental context, insurers will argue that this exclusion bars coverage for costs incurred to clean up the insured's facility, even if such costs are incurred upon the order of a governmental agency. Policyholders have been able to avoid the application of the exclusion by arguing that the costs have been incurred to prevent the migration of hazardous substances to the property of others and, thus, to avoid liability to third parties. This argument has been successful to the extent that the policyholder can prove that the costs are incurred to prevent migration. See, e.g., Claussen v. Aetna Cas. & Sur. Co., 754 F Supp 1576 (SD Ga 1990); Broadwell Realty v. Fidelity & Cas., 218 NJ Super 516, 528 A2d 76 (1987).
In Queen City Farms, the Washington trial court held that groundwater is the property of the public; therefore, costs incurred to clean up groundwater are not barred by the exclusion. This issue was not discussed by the court of appeals. It also appears that the exclusion will not bar coverage for the cost of cleaning up the source of contamination that would otherwise migrate off-site. See Boeing Co. v. Aetna Cas., 113 Wash 2d 869. In Olds-Olympic, Inc. v. Commercial Union Insurance Company, 129 Wash 2d 464, 918 P2d 923 (1996), the Washington Supreme Court confirmed that the owned property exclusion does not apply where contaminated groundwater is not essential to the policyholder's business, the policyholder did not have a state permit to use groundwater and no evidence of asserting control over groundwater existed. Moreover the court noted that clean-up costs necessary to prevent further degradation of property belonging to another is covered. The court's policyholder-favorable interpretation of the policies appeared to be due in part to the court's recognition that the carrier's coverage obligation under the CGL policies should be decided in a fashion consistent with the promise reflected in the name of the policy, namely that the insureds did not purchase "almost comprehensive," but rather "comprehensive" insurance coverage.
In City of Corvallis, though, the Oregon trial court held that coverage was barred because the groundwater was in the care, custody or control of the insured due to subsurface injection of contaminants. See also North Pacific, 939 P2d 570 (Oregon State trial court--adopting reasoning of City of Corvallis). However, these decisions were overruled in Lane Electric. The Oregon Court of Appeals rejected the insurance company's claim that groundwater contamination was not covered property damage because it was "‘owned, used or otherwise in the physical control of the insured.'" Lane Electric, 114 Or App at 161 (quoting policy). The court affirmed that groundwater is publicly owned in Oregon and, finding no evidence of ownership, use or control of the water, denied the insurer's request to apply the owned property exclusion to deny coverage. Id.; see also St. Paul Fire, 126 Or App 689. In Baumann v. North Pacific Ins. Co., 152 Or App 181, 952 P2d 1052 (1998), the Oregon Court of Appeals rejected the argument that coverage is triggered where an insured's removal of contaminated soil wholly located on his property prevented the contamination of groundwater. The court rejected the insured's claim that coverage existed where contamination created a "potential for third party property damage," 152 Or App 188, holding that coverage exists only if it occurs after actual damage has occurred to the tangible property of a third party. Baumann should not be viewed as determinative because it involved a residential setting and a residential policy with an absolute pollution exclusion, and no groundwater or other third party damage occurred.
In Idaho, the district court held in Unigard Mut. Ins. Co. v. McCarty's, Inc., 756 F Supp 1366 (D Idaho 1988), that costs sought by the EPA in a cost-recovery action were damages payable to a third party, even if incurred to clean up the insured's property.
VI. COVERAGE FOR ENVIRONMENTAL CLAIMS UNDER FIRST-PARTY CASUALTY POLICIES
First-party casualty policies cover, by definition, damages to the policyholder's property and do not cover liabilities to third parties, including the government. Therefore, clean-up costs have been segregated, if this is possible, between first- and third-party damages. See Intel Corp. v. Hartford Acc. and Indem. Co., 692 F Supp 1171 (ND Cal 1988); Avondale Industries, Inc. v. Travelers Indem. Co., 697 F Supp 1314 (SDNY 1988). Newer policies exclude injury to land; therefore, under these policies coverage is generally not available for remediation activities. Older policies, however, may be interpreted to cover damage to the insured's real property.
VII. PURCHASING INSURANCE FOR ENVIRONMENTAL CLAIMS
Insurance companies often respond to arguments that their standard policies should be interpreted against them by maintaining that policyholders are often sophisticated business entities that bargain over contractual terms. However, even for the most sophisticated insured, generally all that is bargained over is the premium and the deductible once a particular type of coverage is sought. Policyholders may have a choice among several coverage terms but what this really constitutes is a choice among various forms prepared by insurance industry organizations.
Nonetheless, it is important to take insurance companies at their word and attempt to make the best possible bargain by choosing among the most advantageous available policy provisions, particularly if there are millions of dollars potentially at stake in the case of environmental liabilities.
- Environmental Impairment Liability Insurance.
In the past decade, carriers have begun to offer environmental impairment liability ("EIL") coverage. These policies can vary greatly, so it is important to inspect the policy language carefully before purchasing coverage. The policies are on a claims-made basis, meaning that the policy will only respond to a claim made during the policy period. The policies often have retroactive date restrictions, limiting coverage for pollution occurring during the policy coverage or shortly before. EIL policies can also exclude preexisting conditions, which are those conditions of which the policyholder knew or should have known. Thus, an EIL policy is primarily useful for a discrete catastrophic event during the policy period, a large spill for example, but may also respond to unknown, previously existing contamination.
- Environmental Remediation Insurance.
Environmental remediation insurance ("ERI") is a first-party policy protecting purchasers of real property and lenders. ERI covers damages from contamination not discovered in a Phase I site assessment of the acquired property. ERI policies are claims-made policies triggered either by the discovery of the contamination or, more narrowly, by a government action against the insured. These policies typically have a number of exclusions that severely restrict the coverage provided. ERI policies may, for example, exclude contamination introduced onto the property after the commencement of the policy, coverage for personal injury or property damage, fines and punitive damages, naturally occurring pollution and liability from statutes not in existence at the commencement of the policy.
VIII. INSURER INSOLVENCY
Environmental claims often are not discovered for years or even decades after the issuance of the CGL policies that should respond to these claims. In the interim, it is not uncommon for one or more insurers to have become insolvent or be in liquidation. Mission Insurance Company of California, for example, is reported to be insolvent by $1.5 billion. Integrity Insurance Company, Midland Insurance Company and Transit Casualty Company have also become insolvent in the recent past. Typically, insurers in liquidation may pay only pennies on the dollar for claims, and the liquidation process itself may take from five to eight years. State guaranty funds offer some protection but have a cap on how much they will pay per claim. In Oregon, this cap is $300,000. See ORS 734.570.
To help protect against this risk, it is important to research the financial stability of an insurer and the policy terms before purchasing a policy. Particularly useful is language in excess policies requiring the excess insurer to "drop down" in case a lower level insurer is unable to respond to a claim.
Language requiring the excess insurer to pay the excess of the amount "recoverable" or "collectible" on the underlying policy has led to some recoveries from excess insurer. See Reserve Ins. Co. v. Pisciotta, 30 Cal 3d 800, 640 P2d 764, 180 Cal Rptr 628 (1982); Nasello v. Transit Cas. Co., 530 So 2d 1114 (La 1988). The intent to have the excess carrier cover losses not covered due to a lower level insurer's insolvency must be clearly stated in the policy, however. In Hoffman Construction Co. v. Fred S. James & Co., 313 Or 464, 836 P2d 703 (1992), the Oregon Supreme Court held that the duty to pay in excess of the amount recoverable on the lower carrier policies did not include the obligation to pay the amount due by an insolvent carrier. There the intent of the parties to have the excess carrier drop down was not clear and the court construed the policy against the policyholder. Similarly, language requiring the excess carrier simply to pay sums in excess of those "covered" by the underlying policy will probably bar a claim against an excess carrier. See Mission Nat. Ins. Co. v. Duke Transp. Co., Inc., 792 F2d 550 (5th Cir 1986).
Generally, policyholders have been unsuccessful in attempting to obtain directly the benefits on an insolvent carrier's reinsurance. See, e.g., Ascherman v. General Reinsurance Corp., 183 Cal App 3d 309, 228 Cal Rptr 1 (1986). The courts believe that reinsurance benefits are assets of the insolvent insurer that should be distributed to all claimants instead of a particular policyholder. A policyholder can insist that an insurer require its reinsurer to be directly liable to the policyholder, but this rarely occurs. But see Osborn Estate v. Gerling Global Life Ins., 529 So 2d 169 (Miss 1988). Certain states also permit "cut-through" endorsements in an underlying policy, which authorize a direct action against a reinsurer. E.g., Cal Ins Code § 922.2 (West Supp 1998).
An action against the broker that sold the insolvent insurer's policy is rarely successful. However, if the broker places the coverage with a carrier, generally a "surplus line," that is not licensed to do business in the state without following any statutory diligence requirements, the broker may be liable to its insured. See Kaperonis v. Underwriters at Lloyd's, London, 25 NC App 119, 212 SE2d 532 (1975); Inco Express, Inc. v. Marker Insurance Co., No. 80-2-04967-4 (Wash Super 1984).
Prompt action is necessary in the case of insurer insolvency. There are strict time limits for claims against both state guaranty funds and the insolvent company itself. Therefore, it is important to remain aware of the status of insurers. If there is any doubt as to whether a claim exists, the doubt should be resolved in favor of filing the claim. The claim can be amended when more information becomes available. This is particularly true for environmental claims, which can take years to mature.
IX. SIGNIFICANT DEVELOPMENTS IN OTHER JURISDICTIONS
The most significant development in property damage coverage of the early 1990s occurred in Joy Technologies v. Liberty Mut. Ins., 187 W Va 742, 421 SE 2d 493 (1992), in which the West Virginia Supreme Court, after closely inspecting insurers' submissions to the West Virginia Insurance Commission at the time of the adoption of the qualified pollution exclusion, reached the same result as Queen City Farms and held that the exclusion was a restatement of the "occurrence" definition. On July 21, 1992, the West Virginia Supreme Court issued an Order Denying Rehearing and Modified Decision barring Liberty Mutual from taking a position that contradicted its "studied, unambiguous, official and affirmative representations" in 1970 before the West Virginia Insurance Commissioner that the "pollution exclusion" did not restrict coverage for gradually occurring damages caused by contamination so long as it was neither expected nor intended. Policyholders can use this decision to argue that the insurers' submissions to the West Virginia Insurance Commissioner show their contemporaneous interpretation of the qualified pollution exclusion and estop them from putting forward other interpretations today.
In a different context, the U.S. District Court for the District of New Jersey has held that where a corporation has dissolved and distributed all of its assets (i.e., is "dead and buried"), no contribution suit can be brought to seek funds from that corporation's insurance company despite valid CGL policies having existed that would cover the pollution. AM Properties Corp v. GET Products Corp., No. 92-1728 (MLP) (D NJ Feb. 15, 1994).
In California, the supreme court has held that clean-up costs and the costs of complying with environmental injunctions constitute damages under a CGL policy. AIU Ins. Co. v. FMC Corp., 51 Cal 3d 807, 799 P2d 1253, 274 Cal Rptr 820 (1990). The California court of appeals in Shell Oil Co. v. Winterthur Swiss Ins. Co., No. A045544 (Cal Ct App Jan. 21, 1992), recently adopted a subjective standard for the meanings of an occurrence, requiring proof that the insured subjectively expected or intended damage to the environment to occur. The court also held that to establish the late notice defense, the insurer must show "substantial prejudice." This is a very difficult, if not impossible, burden to meet. However, the Shell Oil court adopted the insurer's view of the pollution exclusion, finding "sudden and accidental" to be unambiguous and sudden to mean "abrupt." A more recent California Court of Appeal case reaffirmed this position. FMC Corp. v. Plaisted and Companies, 72 Cal Rptr 2d 467 (Cal Ct App), rev den (1998). These rulings may foreclose coverage for gradual pollution in California.
In a startling development, the California Supreme Court recently held that an order of the state Environmental Protection Agency notifying insured that it was a responsible party for pollution and directing insured to remediate the pollution was not a suit triggering the insurer's duty to defend under a CGL policy. Foster-Gardner, Inc. v. National Union Fire Ins. Co., 77 Cal Rptr 2d 107, 959 P2d 265 (Cal 1998).
A 1994 California court of appeals case held that a company that purchases the assets of another company is not entitled to assert the seller's insurance coverage rights unless the insurer consents to the transfer. This was despite the events producing liability occurring prior to the sale. Quemetco Inc. v. Pacific Auto. Ins. Co., 24 Cal App 4th 494, 29 Cal Rptr 2d 627 (1994).
In Minnesota, the state supreme court recently held that allocation of liability among multiple insurers should be allocated proportionate to the amount of damage that occurred during the policy period. Where damage is continuous, allocation should be proportionate to the amount of time each carrier covered the site. Northern States Power Co. v. St. Paul Fire and Marine Ins. Co., No. C3-92-2363 (Minn Sup June 30, 1994) (Minnesota applies "actual injury" trigger of coverage).