Resolving Environmental Insurance Claims Gita F Rothschild Various unresolved coverage by ramhood17


									                 Resolving Environmental
                 Insurance Claims
                 Gita F. Rothschild

                 Various unresolved coverage issues impede the quick and efficient
                 settlement of many environmental insurance claims.

THE EXISTENCE OF COVERAGE for envi-                          stantly devise new defenses, various unresol-
ronmental cleanup responsibility under stan-                 ved coverage issues impede the quick and effi-
dard general liability insurance policies is now             cient settlement of many environmental insur-
well established. Moreover, extensive litigation
                                                             ance claims.
has defined the general bounds of available
coverage. However, because the case law leaves                 By now, two decades after the first claims
many questions open and because insurers con-                were asserted, the existence of coverage for en-

Gita F. Rothschild is a partner in McCarter & English, Newark, New Jersey. She is a frequent lecturer on insurance,
civil practice and procedure, including trial techniques, and toxic torts and products liability.

16     The Practical Real Estate Lawyer                                                      January 2004

vironmental cleanup responsibility under stan-        Farm Fire & Cas. Ins. Co., 385 S.E.2d 97 (Ga. Ct.
dard general liability insurance policies is well     App. 1989). California has ruled that defense
established. Moreover, extensive nationwide lit-      payments made in response to an administra-
igation over the interpretation and application       tive order or governmental proceeding are not
of operative policy terms (e.g., “occurrence”;        insured “damages.” See, e.g., Foster-Gardner, Inc.
“damages”; “suit”; “sudden and accidental”;           v. National Union Fire Ins. Co. of Pittsburgh Pa.,
and the like) has defined the general bounds of       959 P.2d 265 (Cal. 1998). And, a court’s determi-
available coverage in most jurisdictions.             nation of when coverage is “triggered” varies
    Initially, these issues were thought to be the    from state to state. In Texas, a “manifestation of
key to resolving environmental coverage dis-          loss” trigger theory has been accepted, which
putes; once they were decided, litigants would        holds that property damage is deemed to occur
be able to value cases realistically and relatively   when a defect first manifests itself or becomes
quickly. History has demonstrated, however,           apparent. See, e.g., Dorchester Dev. Corp. v. Safeco
that judicial rulings have not resulted in fewer      Ins. Co., 737 S.W.2d 380, 383 (Tex.Ct.App.1987).
cases being filed or less protracted litigation.      However, in New Jersey, the “continuous” trig-
Instead, either because the opinions inevitably       ger theory is recognized. Under this theory,
fail to answer all of the questions, or because the   property damage occurs continuously from the
insurers have devised new defenses in their           time of exposure to the hazardous conditions
continuing effort to avoid their contractual ob-      until the time such property damage manifests
ligations and delay payment, there continues to       itself. See, e.g., Owens-Illinois, Inc. v. United Ins.
exist a long list of largely unresolved issues pre-   Co., 650 A.2d 974, 981 (N.J. 1994). Thus, choice of
                                                      law can therefore be critical.
senting new impediments to the quick and effi-
cient settlement of environmental insurance
claims. Some of the more hotly contested issues       Choice Of Law Case Law
are dealt with in summary fashion, and in no             To date, few jurisdictions have specifically
particular order, below.                              decided choice of law for environmental cover-
CHOICE OF LAW • The threshold, and often
most important question in these cases, is often      The Place Of Contract
not easily answered: Which state’s law applies?           Some courts have recognized the applicabil-
   Most environmental insurance cases impli-          ity of lex loci contractus, the law of the place of
cate the interests of different states:               contracting, to these insurance contracts. See,
                                                      e.g., Briggs & Stratton Corp. v. Royal Globe Ins. Co.,
• The place where the contract was “made”;
                                                      64 F. Supp.2d 1340 (M.D. Ga. 1999) (holding that
• The place or places where the parties reside;       Georgia adheres to the lex loci contractus in
and                                                   matters involving insurance contracts, but
• The location of the sites being remediated          under Georgia’s choice of law rules, application
and for which coverage is sought.                     of another jurisdiction’s is limited to statutes
   The case law in these states may, of course,       and common law construing those statutes).
differ on key points. For example, unlike most
jurisdictions, Georgia bars coverage if notice is     The Place Of Performance
“late,” without regard to whether the insurer             Other courts have held that the law of the
has been prejudiced. See, e.g., Caldwell v. State     site applies to all issues. See, e.g., Reichhold Chem-
                                                                   Environmental Insurance Claims        17

icals, Inc. v. Hartford Acc. and Indem. Co., 703 A.2d   clusion even against insurers who weren’t in ex-
1132 (Conn. 1997).                                      istence at the time regulatory approval of the
                                                        provision was sought; cf., Sunbeam Corp. v.
Issue-By-Issue Approach                                 Liberty Mutual Ins. Co., 753 A.2d 1265 (Pa. 2000);
   Other courts have taken an issue-by-issue            or
approach involving some combination of the              • Other grounds, see, e.g., Vermont American
two. See, e.g., Pfizer Inc. v. Employers Ins. of        Corp. v. American Employers Ins. Co., No. 330-6-95
Wausau, 712 A.2d 634 (N.J. 1998); HM Holdings,          (Vt. Super. 1997) (holding that the exclusion was
Inc. v. Aetna Cas. & Sur. Co., 712 A.2d 645 (N.J.       not applied because pollution exclusions were
1998); Unisys Corp. v. Insurance Co. of N. Amer.,       not filed with or approved by the Vermont
712 A.2d 649 (N.J. 1998).                               Insurance Commissioner).
   Consequently, when the forum state has                  Accordingly, the insurers assert in virtually
made no definitive ruling on the issue, and             every case—no matter whether the policy con-
there are significant differences in the potential-     tains a pollution exclusion—that the damage
ly applicable law, the first fight—and therefore        for which coverage is sought was expected and
the first obstacle to settlement—is over what           intended by the policyholder.
law applies.                                               Two important questions attend to that de-
every liability policy at issue in environmental        Burden Of Proof
coverage litigation defines the insured “occur-             The first question concerns burden of proof.
rence” in substantially similar terms: an acci-         If the issue is raised only in the context of a non-
dent or repeated exposure to conditions result-         literal application of the pollution exclusion, the
ing in property damage during the policy peri-          matter is relatively simple: the insurer has the
od “neither expected nor intended” by the in-           burden of proving that the environmental harm
sured.                                                  was expected and intended. The burden of
   Some jurisdictions have interpreted the cov-         proving the application of an exclusion is al-
erage afforded by policies containing the sud-          most universally placed on the insurer. See, e.g.,
den and accidental pollution exclusion as co-ex-        Carter-Wallace v. Admiral Ins. Co., 712 A.2d 1116,
tensive with the coverage provided under the            1125 (1998).When the condition is articulated
“occurrence” definition, that is, for unexpected        only in the policy’s insuring provisions (i.e., as
and unintended injury. These jurisdictions have         part of the “occurrence” definition), however,
                                                        courts that have ruled on burden of proof—and
refused to enforce the “sudden and accidental”
                                                        not many have—are split. Compare Queen City
pollution exclusion literally based on:
                                                        Farms v. Central Nat’l Ins. Co. of Omaha, 882 P.2d
• Ambiguity, see, e.g., American States Ins. Co. v.     703, 716 (Wash. 1994) (holding that the burden
Kiger, 662 N.E.2d 945 (Ind.1996);                       of proof should be on the insured to establish
• Regulatory estoppel, Morton Int’l v. General          that subjective injury or damage was neither ex-
Acc. Ins. Co., 639 A.2d 831 (N.J. 1993) cert. denied,   pected nor intended); Consolidated Edison Co. of
114 S.Ct. 2764 (1994); see also, Essex Chemical         N.Y. v. Allstate Insurance Co., 98 N.Y.2d 208, 220
Corp. v. Hartford Acc. and Ind. Co., No. 00-1839,       (N.Y. 2002) (holding that “[t]he insured has the
Slip Op. (3d Cir., March 7, 2001), holding that         initial burden of proving that the damage was
regulatory estoppel bars enforcement of the ex-         the result of an “accident” or “occurrence.”) to
18     The Practical Real Estate Lawyer                                                     January 2004

Hoechst Celanese Corp. v. National Union Fire           ity of property damage, under liability policy’s
Insurance Co. of Pittsburgh, Pennsylvania, 1994         “occurrence” definition, is objective and in-
WL 721786, at *2 (Del. Super. Ct. April 22, 1994)       volves a higher degree of certainty than reason-
(ruling that “although jurisdictions differ on the      able foreseeability”) with Haisten v. Audubon
issue of whether the burden of proof should fall        Indem. Co., 642 So.2d 404, 406 (Ala. 1994) (hold-
on the insured when this seeming “exclusion” is         ing that “expected or intended,” requires a sub-
listed in a coverage provision[,] [t]his court is in    jective analysis of what the insured expected or
agreement with the courts which have held that          intended). Differing predictions concerning
the burden of proof is with the insurer.”)              these legal issues can result in differing litiga-
Although uncertainty regarding burden of                tion risk discounts applied to the expected and
proof alone probably does not hinder settle-            intended defense.
ment, when coupled with a lack of judicial stan-
                                                        PROPERTY DAMAGE DURING THE POL-
dards for application of the condition, viability
                                                        ICY PERIOD • As stated, most policies, under
of the expected and intended defense in the spe-
                                                        the “occurrence” definition, provide coverage
cific case can be a significant source of disagree-
                                                        only for property damage during the term of
ment. For instance, many courts have not de-
                                                        the policy. The burden of proving property
                                                        damage during a particular policy period is on
• Whether, to bar coverage, the insurer must            the policyholder.
prove that the property damage was expected                 When known spills or discharges have oc-
and intended, see, e.g., James Graham Brown             curred, this task may be relatively easy; an ex-
Found. v. St. Paul Fire and Marine Ins. Co., 814        pert hydrogeologist or other qualified witness
S.W.2d 273, 275 (Ky. 1991); Hecla Mining Co. v.         can testify (based on geologic and other envi-
New Hampshire Ins. Co., 811 P.2d 1083 (Colo.            ronmental conditions) on when the constituent
1991); or                                               first contaminated the soil and/or groundwater
• Whether it is enough to show that the act             and the continuing pollution thereafter occur-
that caused the damage (e.g., the discharge of          ring.
waste into a licensed landfill) was intentional.            When the contamination is the result of long-
See, e.g., Providence Journal Co. v. Travelers Indem.   term dumping activities or normal plant opera-
Co., 938 F. Supp. 1066 (D.R.I. 1996) (holding that      tions over many decades, however, establishing
where the discharge of pollutants, in contrast to       the timing of the damage may be more chal-
the damage, is expected or intended, the exclu-         lenging. Geologic dating methods exist, but are
sion applies to bar coverage).                          expensive to undertake and cannot be used in
                                                        every situation. More commonly, the policy-
Insured’s Knowledge                                     holder’s expert will rely on anecdotal evidence
   The second question concerns the standard            from long-time employees, combined with doc-
governing the insured’s knowledge. Many                 umentary evidence gleaned from plant records
courts have not yet determined whether the              (including drawings showing the location of
policyholder’s knowledge concerning the pol-            various plant operations and waste disposal
luting acts should be judged by a subjective or         processes and figures depicting sewer and san-
objective (reasonable person) standard. Com-            itary systems), municipal maps and files, and
pare Independent Sch. Dist. No. 197 v. Accident and     the like.
Cas. Ins. of Winterthur, 525 N.W.2d 600 (Minn.             When documents have been lost or de-
Ct. App. 1995) (holding standard for expectabil-        stroyed or potential witnesses have died, the ex-

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