City of Littleton, Wallis, and Insurance for Multi-year Liability Claims

• Publication year: 2000
• Pages: 5

29 Colo.Law. 5 Colorado Lawyer 2000.

2000, February, Pg. 5. City of Littleton, Wallis, and Insurance For Multi-Year Liability Claims

---

5

Vol. 29, No. 2, Pg. 5

The Colorado Lawyer
February 2000
Vol. 29, No. 2 [Page 5]

Articles

City of Littleton, Wallis, and Insurance For Multi-Year Liability Claims
by William J. Brady, Lisa K. Mayers

Recently the Colorado Supreme Court decided two important cases arising in the environmental insurance coverage context. The decisions are expected to have a major impact on the availability of insurance coverage for Colorado policyholders. Coverage counsel, in-house corporate attorneys, insurance defense lawyers, environmental attorneys, and practitioners representing businesses will find this article helpful in understanding their clients' insurance policies, especially when multi-year claims are implicated

Affected businesses range from multi-national conglomerates to small "mom" and "pop," gasoline-dispensing convenience stores. These latest pronouncements from the Supreme Court are relevant to clients facing liability for damages spanning multiple coverage periods, such as groundwater contamination, asbestos exposure, and progressive construction defects and deterioration. Moreover, given the recent proliferation of Y2K insurance coverage suits being filed around the country the potential application of these precedent-setting cases beyond environmental and construction claims is significant

According to EPA statistics, the average Superfund cleanup costs $25 million and legal/consulting/transaction costs often more than double the indemnity exposure. By declining to follow prior precedent in the U.S. Court of Appeals for the Tenth Circuit, the City of Littleton and Wallis decisions will be welcome news to businesses across the country, as well as in Colorado, when facing federal- and state-mandated cleanups.

CGL POLICY COVERAGE AND DUTIES

The standard form comprehensive general liability insurance policy ("CGL") has been drafted on an industry-wide basis through organizations such as the Insurance Services Organization ("ISO") and its predecessor, the Insurance Rating Board. The standard form CGL policy contains common insuring agreements, definitions, exclusions, terms, and conditions and, in most respects, varies insignificantly from one policy to another when analyzing for environmental damage claims coverage.

The standard form CGL insurance policy insuring agreement provides:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

A. bodily injury,

B. property damage, or

C. personal injury

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. . . . (Emphasis added.)

"Occurrence" is defined in the standard form policy as an accident, including a continuous or repeated exposure to the same or similar conditions, which results, during the policy period, in bodily injury, property damage or personal injury, neither expected nor intended from the standpoint of the insured. Therefore, coverage exists whenever someone imposes or attempts to impose legal liability on a policyholder for an occurrence spanning multiple policy periods, unless a specific exclusion applies.

Duty to Defend: The Hecla Mining Co. Case

The preeminent case in Colorado addressing an insurance company's duty to defend is Hecla Mining Co. v. New Hampshire Ins. Co.1 Subsequent appellate court opinions build on the principles set forth in this case. In Hecla Mining Co., the Colorado Supreme Court ruled that an insurer's duty to defend arises when the underlying complaint against the insured alleges any facts that might arguably fall within coverage of the policy. In the environmental arena, this has proved to be a difficult duty to avoid. The opinion also states that an insurer is not excused from its duty to defend an insured, unless there is no factual or legal basis on which the insurer might eventually be held liable to indemnify the insured.

Once the analysis has established an "occurrence" under the applicable trigger of coverage theory,2 the next inquiry focuses on any policy conditions that might exclude coverage under the applicable facts. In the absence of a clear and explicit exclusion, the CGL policy provides coverage to policyholders arising out of pollution or environmental impairment. It is well settled that insurance companies must establish that the exclusion claimed applies in the particular case, and the exclusion is not subject to any other reasonable interpretation. If there is more than one reasonable interpretation, the provision is ambiguous and must be construed in favor of the policyholder.

The 1973 standard form CGL policy excludes the following from coverage:

Property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalies, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants, or pollutants into or upon land, the atmosphere, or any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental. (Emphasis added.)

Hecla Mining Co. established that since the term "sudden" is susceptible to more than one reasonable definition, the term is ambiguous, and the phrase "sudden and accidental" is construed against the insurer to mean "unexpected and unintended."3 Carriers seeking to avoid the duty to defend environmental liability claims will therefore attempt to prove that the policyholder intentionally engaged in conduct that produced the contaminant release.

Requirement of Timely Notice

Timely notification of a claim must be given to an insurance company under most CGL policies. Notice of a claim arguably within the ambit of insurance coverage gives rise to a duty to defend and preserves the policyholder's right to indemnification under the terms of the policy. Generally, the insurance company must receive reasonable notice in accordance with the policy terms. Failure to provide timely notice under a policy of insurance may relieve the insurer of liability under its policy and obviate the duty to defend. Notice should be given to the insurance company and its authorized agent or broker.

In the environmental context, if a potentially responsible party ("PRP") notice letter, a demand from a federal or state agency, a third-party complaint in a contribution action, or a letter merely notifying a policyholder of environmental damage is received, consideration should immediately be given to forwarding every demand, notice, summons, complaint, PRP notice letter or other process to the insurer.4

The Colorado Supreme Court recently held in the case of Compass Ins. Co. v. City of Littleton5 that the term "suit" found in the standard CGL policy would encompass not only traditional lawsuits, but also coercive administrative enforcement proceedings such as Environmental Protection Agency ("EPA") actions initiated by PRP letters under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").6 Liability insurers, therefore, should be notified as soon as a policyholder learns of potential property damage caused by an occurrence within the meaning of the policy, even in the absence of governmental notice or formal notification by third parties of the alleged damage.

Commonly, substantial amounts of time expire between the date when a municipality, private company, or individual policyholder discovers a pollution problem and the date when the financial manager, risk manager, or bookkeeper charged with the responsibility of insurance realizes there may be insurance coverage. Whether notice has been given in a reasonable and timely fashion depends on the facts and circumstances of the case, and, in some states unlike Colorado, the insurance company's ability to demonstrate prejudice from the failure to receive a more timely notification. Some jurisdictions have held that any delay in giving notice bars an otherwise valid claim only if the insurance company is able to demonstrate prejudice.7

In Colorado, on the other hand, prejudice or lack of prejudice is irrelevant.8 Untimely notice is a bar unless the delay is "reasonable under the circumstances" or "justifiably excused." If the policyholder can establish justifiable excuse, prejudice to the...