Insurance Funding for Environmental Cleanups

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One of the greatest concerns to owners of contaminated property is the potential price tag for investigation and cleanup. Environmental cleanups in Oregon routinely cost in the tens of thousands of dollars and can reach hundreds of thousands and sometimes millions of dollars. Fortunately, generally liability insurance policies often cover these costs. Most Oregon entities, public and private, acquired comprehensive general liability (CGL) policies between the early 1900s and the mid-1980s that provide millions of dollars in coverage for a broad range of risks, including environmental contamination. Oregon law since the mid-1990s has been very favorable for policyholders in this area. The latest development, the enactment of Senate Bill 297 (SB 297) in the fall of 2003, makes it even easier for Oregon policyholders to obtain insurance funding to pay for environmental cleanups.

To those unfamiliar with this area of law, the scope of CGL coverage for environmental cleanup liability is surprisingly broad. CGL policies cover not only liability for the cleanup of contaminated property that the policyholder owned when its policies were in effect, but can even apply to property that the policyholder did not own at the time the policies were in effect (but during which time pollution occurs). This concept is often termed the "after-acquired" property doctrine. Although Oregon state courts have not yet addressed the issue, some courts applying Washington and California law have held that CGL policies cover environmental investigation costs where the contamination occurred during the policy period, even if the policyholder did not acquire the property until after the policy period expired. K F Dairies, Inc. v. Fireman’s Fund Insurance Co., 224 F3d 922, 925 (9th Cir 2000) (applying California law), Weyerhaeuser Co. v. Commercial Union Ins. Co., 142 Wash2d 654, 15 P3d 115 (2000); but see Dant & Russell, Inc. v. United Pacific Ins. Co., No. CV 89-915-PA, 1990 WL 543862 (D Or May 15, 1990) (rejecting after-acquired property claim). The after-acquired property rule is particularly promising to entities redeveloping brownfields sites today because it may allow them to access the potentially vast resources of insurance policies they purchased years ago.

A recent case suggests that current Oregon law might well allow after-acquired property claims. That case involved coverage for environmental claims arising out of property that the policyholders had owned and operated as a metal parts manufacturing plant in Milwaukee, Oregon, from 1973 to 1979. During that time, releases occurred that contaminated the property. The owners of that business later formed a new, unrelated business, Sierra Pacific Investment Company, and purchased insurance from Unigard to protect both the new investment business and themselves personally. In 1999, the Oregon Department of Environmental Quality (DEQ) required the policyholders to investigate the property. The policyholders claimed that Sierra Pacific’s 1985-1986 CGL policy should cover their investigation costs. The court agreed, even though the policyholders no longer owned or operated the property, and even though the manufacturing operations originally causing the contamination occurred years before the policy was issued. The court found that the underlying claim alleged that contamination began in the 1970s and continued to occur, thus continuing to cause "property damage" within the meaning of the policy. The court found nothing in the policies that limited the CGL coverage to properties owned during the duration of the policy. In fact, the policy defined the "policy territory" to include "the United States of America, it territories or possessions or Canada." Sierra Pacific Investment Co. v. Unigard Security Ins. Co., No. 03-366-AS (D Or Nov 17, 2003) (applying Oregon law) (findings and recommendations adopted Jan 26, 2004).

Not all environmental insurance recovery cases end up in the courtroom. In fact, due to the strength of Oregon environmental insurance law, especially given the recent passage of SB 297, insurers are often willing to accept their coverage obligations or settle environmental claims rather than risk litigation.

CGL policies provide cleanup funding by way of their two main coverage obligations. The first, the duty to defend, covers costs incurred to investigate the environmental claim and to take action to minimize the policyholder’s liability, such as costs incurred during the remedial investigation including attorney fees, environmental consulting fees, and DEQ oversight costs. The duty to defend applies to any claim with potential to result in environmental liability for the policyholder. Importantly, defense costs usually do not count against or reduce policy limits. Thus they are potentially unlimited. The second obligation, the duty to indemnify, applies to remediation activities that address contamination for which the policyholder is liable, that is, the cost to perform the work that extinguishes the policyholder’s legal liability. These costs reduce policy limits and may eventually exhaust the policy.

Obtaining coverage requires the policyholder to overcome a number of legal issues. Fortunately, Oregon law is policyholder-friendly on most. For example, most post-1971 CGL policies exclude coverage for environmental contamination unless it was caused by a "sudden and accidental" event. Oregon courts have interpreted this clause to allow coverage for pollution events that occurred gradually over many years so long as the polluting event was not intended. See St. Paul Fire v. McCormick & Baxter Creosoting, 324 Or 184, 923 P2d 1200 (1996). Another typical CGL policy exclusion prohibits coverage for damage to property owned by the policyholder. However, Oregon courts have held that this exclusion does not apply to groundwater contamination, which is at the heart of most environmental cleanups, because groundwater is the property of the state. St. Paul Fire & Marine Ins. Co. v. McCormick & Baxter Creosoting, 126 Or App 689, 700, 870 P2d 260 (1994) rev’d in part on other grounds 324 Or 184 (1996). Oregon policyholders have also been successful in convincing the legislature to enact laws that are favorable for policyholders. For example, the Oregon Environmental Assistance Cleanup Act, passed in 1999, ensures that favorable Oregon law will apply to Oregon sites. The law further states that insurers owe a duty to defend where a cleanup is performed under a DEQ or U.S. Environmental Protection Agency consent decree, order, or other voluntary agreement. See ORS 465.475-.480.

In September 2003, Governor Kulongoski signed SB 297, a bill that removes several other significant obstacles to coverage. Before SB 297, Oregon law was unclear on how to allocate cleanup costs between multiple insurance policies that applied to a cleanup. Under the insurer-favored "pro rata" allocation rule, some courts held the policyholder responsible for periods where policies had been lost and where insurers had become insolvent, and thus frequently imposed substantial costs on policyholders. SB 297 clarifies that, unless the policy explicitly provides to the contrary, the policyholder-favored "all sums" rule applies under Oregon law. The all sums rule allows the policyholder to choose to recover from a single insurer, or from several insurers, whose policy limits will cover the cleanup. These insurers are then obligated to pay the loss up to their policy limits, and thereafter may seek contribution from other insurers. The policyholder is not allocated the portion of the costs due to missing policies or insolvent insurers. The bill specifies that a policyholder will be responsible for coverage only for any period after January 1, 1971 in which the policyholder "failed to purchase and maintain" commercially available, occurrence-based coverage for environmental claims. This restriction does not affect the majority of policyholders, though, because most Oregon entities obtained occurrence-based, CGL policies for environmental risks until they were eliminated from the market in about 1986. Further, because the bill refers to this responsibility of the policyholder in the context of a contribution claim by the insurer, the insurer would have the burden to prove both that occurrence-based coverage was commercially available and that the policyholder failed to purchase it. Notably, the bill does not require the insured to prove the specific terms of that coverage.

Recognizing that many company’s insurance records are incomplete, SB 297 also established rules for coverage claims made under lost or missing policies. If the policyholder cannot reconstruct a missing policy from its records or those of its agents, the policyholder may require the insurer to begin a thorough investigation within 30 days of a written request. After researching its records, the insurer must disclose all facts regarding the missing policy, including documents establishing a policy’s issuance or terms. If a preponderance of the evidence shows that the insurer issued a policy, and a representative policy form exists, then coverage will be available. Once it is established that a policy was issued, the policyholder may offer evidence of policy terms and limits. Even if the policy’s limits cannot be proven, though, the policyholder is guaranteed the minimum coverage offered under the representative policy form. It is important to note that, if the preponderance of the evidence does not prove that a policy was issued, the policyholder is not allocated a share of investigation and cleanup costs. Rather, as discussed above, before the policyholder may be burdened with a share of the costs, the insurer must prove that the policyholder chose not to obtain occurrence-based coverage for environmental claims when it was commercially available.

SB 297 also creates a rebuttable presumption that the costs of preliminary assessments, remedial investigations, risk assessments and other necessary investigation are defense costs. The definition of defense costs is significant, because defense costs are usually not restricted by the policy’s indemnity cap, and thus defense coverage is a potentially limitless source of funds. Therefore, even a policy with low indemnity limits may provide substantial cleanup funding by covering environmental investigation activities. The law also establishes a rebuttable presumption that costs arising from removal actions and feasibility studies are indemnity costs.

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Joan P. Snyder
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