Chapter 10 - § 10.2 • TYPES OF POLICIES AND HOW COURTS INTERPRET THEM
| Jurisdiction | Colorado |
Insurance coverage from the date of the first episode of contamination should be viewed as a potential resource in addressing the question of funding hazardous waste cleanup. The panoply of policies available to the policyholder beyond CGL coverage may also include first-party property coverage, environmental impairment coverage, specialized environmental liability insurance (e.g., pollution legal liability, cost cap coverage, remediation stop loss, and secured creditor impaired property coverages), multiple layers of excess insurance beyond the primary CGL policy, reinsurance coverage, and under some circumstances, airport liability, products liability, automobile insurance, director's and officer's liability insurance, and other specialized activity coverage. By combining and stacking such policies, the insured policyholder may avoid catastrophic financial burdens threatening economic survival.
Affected businesses range from multinational conglomerates to small "mom and pop" gasoline-dispensing convenience stores and dry cleaners. The latest pronouncements from the Colorado 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.
§ 10.2.1—First-Party Property Policies
First-party insurance coverage generally insures the policyholder's own property, including its income stream. Loss due to perils specifically named and described in the policy of insurance covers physical damage caused by the insured's activities. "All risk" policies provide comprehensive coverage for damage to the policyholder's owned property caused by all risks not specifically excluded in the policy. Under both scenarios, the physical loss or loss of use must occur during the covered period, and only specific property expressly named under the policy is covered. Specific peril policies often exclude damages from pollution-causing activities.
Case law regarding first-party policy coverage for environmental damage claims is still developing and may remain in this posture for a considerable period of time. Damage to land or water is usually not covered, as it is often excluded under the first-party policy, or not scheduled. Where groundwater is deemed property owned by the state, a policyholder may have a claim under its CGL policy when facing a government-ordered cleanup or third-party action. In Colorado, unappropriated, nontributary groundwater is deemed property owned by the state.13 Any contamination may be viewed as trespass or nuisance, triggering the liability provisions of a CGL policy and the duty to defend.
In some instances, environmental claims may be covered under first-party property policies that insure against fire14 or vandalism.15
Delayed manifestation claims present significant problems under first-party property policies, in that such policies are usually more akin to "claims made" policies than "occurrence" policies. Further, because these policies do not generally cover liability to others or damage to property not owned by the insured, the carrier has no duty to defend the insured faced with an EPA-mandated cleanup or property claim brought by a third party.
Strict contractual limitation of actions provisions are often present under first-party property coverage. In Colorado, such contractual limitations periods in commercial first-party property policies are generally enforceable.16 Under most policies, suit must be brought within a specified period, often within one year, after "inception of the loss." A question arises as to whether the loss occurs at the time the insured first becomes aware (or in the exercise of reasonable care should have been aware) of the damage, or when the insured is forced by EPA mandate or third-party suit to pay the response costs caused by his or her damage. Several courts have held that loss occurs at the point that compensable damages arise, and that such damage may have occurred despite the policyholder's lack of knowledge.17
Finally, post-1985 policies issued by the Insurance Services Office include an "absolute" pollution exclusion clause much less susceptible to attack than the clause found in pre-1986 standard form policies (see discussion of the absolute pollution exclusion in § 10.2.4). The exclusion clause generally provides that the policy will not pay for loss or damage caused by or resulting from the release, discharge, or dispersal of pollutants unless the release, discharge, or dispersal is itself caused by any of the specified causes of loss.18
Attorney Fees in Litigation
Courts may assess attorney fees for environmental insurance claims under C.R.S. § 13-17-201, which the legislature enacted to discourage unnecessary litigation of tort claims.19 It applies not only to tort actions involving death or injury to person or property but also to tort actions involving mere economic injury.20 This statute essentially requires the trial court to award reasonable attorney fees to a defendant when two conditions are met: (1) the action lies in tort, and (2) the action is dismissed pursuant to Rule 12(b) of the Colorado Rules of Civil Procedure.21
Building On Our Best LLC v. Sentinel Insurance Co. 22 is instructive as to scenarios in which defendants can obtain attorney fees under C.R.S. § 13-17-201 from overly aggressive environmental insurance claims.23 There, Building On Our Best alleged that a hail and wind storm damaged parts of their building and submitted a claim to their insurer, Sentinel Insurance.24 Sentinel hired Donan, an engineering firm, which inspected the building and denied that the storm had caused enough damage to require replacements.25 Building On Our Best subsequently filed suit against both the insurance company and the engineering firm, using their own public adjuster's assessment of the damage and other evidence to assert claims of breach of contract, common law insurance bad faith, and statutory bad faith.26 Building On Our Best and Sentinel settled, and the court dismissed the remainder of the case with prejudice.27 The court granted Donan's motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim, and the case was dismissed with prejudice.28 Donan then moved for an award of reasonable attorney fees.29
The court first pointed out that federal courts apply the substantive law of the forum state when exercising jurisdiction over diversity cases.30 Accordingly, it applied C.R.S. § 13-17-201 and held that Donan was entitled to reasonable attorney fees because the claims were tort as opposed to contract claims and were dismissed on Rule 12(b) grounds.31 The court also pointed out that in order to recover fees pursuant to C.R.S. § 13-17-201, all claims against a single defendant must be dismissed on Rule 12(b) grounds, even though claims against other defendants may continue.32
The decision in Building On Our Best serves as a reminder to coverage counsel representing policyholders. Practitioners should carefully avoid overreaching and engaging in overly aggressive pleading practices when asserting claims for relief against experts and contractors retained by insurers investigating environmental damage and related claims.33
§ 10.2.2—Standard Form Commercial General Liability Policy
The standard form Commercial General Liability (CGL) insurance policy has been drafted on an industry-wide basis through organizations such as the Insurance Services Office and its predecessor, the Insurance Rating Board. The 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.
In addressing coverage for environmental claims, the first issue to consider is which insurance policies potentially provide coverage. For example, if an insured has been disposing of waste at a Superfund site for a period from 1975 through 1980, then each of the policy years during the period of discharge or dispersal of contaminants should be considered. Additionally, if the claim is made against the insured many years later for damage still ongoing at the site through the date of claim, then coverage through the notification date and any period of contamination ongoing thereafter should be considered. It is also important to remember that the insured may be held jointly and severally liable for all response costs because of his or her status as a Potentially Responsible Party (PRP), including costs for remediation prior to the date of his or her discharge or dispersal, even though caused by others prior to 1975 (as in the above example).
CGL policies generally provide insurance "for all sums the insured shall become legally obligated to pay as damages because of . . . bodily injury and/or property damage caused by an occurrence, including continuous and repeated exposure to such conditions."
§ 10.2.3—How To Locate Policies
The first step in reconstructing coverage is to identify any witnesses who may help in locating the policies or supplying or locating secondary evidence of coverage. As memories sometimes fade, affidavits should be prepared, preferably in a format properly authenticating the document and laying any necessary foundation. Key witnesses should also be prepared to conduct an exhaustive search and to testify as to the results of the search. Certainly, in the case of older witnesses, consideration should be given to taking depositions to preserve their testimony in anticipation of protracted litigation. Insurance companies will generally not provide much, if any, assistance in the process, since locating policies is against their interests. However, insurance agents and brokers can be invaluable in the process, particularly larger brokerages who have preserved their records. Additionally, there...
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