CHAPTER 10 ISSUES IN INSURANCE COVERAGE FOR ENVIRONMENTAL LIABILITIES
| Jurisdiction | United States |
(Nov 1988)
ISSUES IN INSURANCE COVERAGE FOR ENVIRONMENTAL LIABILITIES
Spencer, Fane, Britt & Browne
Kansas City, Missouri
TABLE OF CONTENTS
I. THE BASIC INSURING AGREEMENTS
A. Historical Development
1. Pre-1966 Policies
2. 1966 Occurrence Form
3. 1973 Revision
4. Claims-Made Forms
B. The Scope of Coverage Under Accident Policies
II. ENVIRONMENTAL CLEANUP CLAIMS AS COVERED "DAMAGES" OR "PROPERTY DAMAGE"
A. Equitable Versus Legal Nature of Environmental Claims
B. Environmental Cleanup Costs as "Property Damage"
III. DAMAGE EXPECTED OR INTENDED BY THE INSURED
A. Intentional Act Versus Intentional Damage
B. The Standard of Measuring the Insured's Expectations
IV. TRIGGER OF COVERAGE
A. Exposure Trigger Theory
B. Manifestation Trigger Theory
C. Injury-in-Fact Trigger Theory
D. Triple-Trigger or Continuous Exposure Trigger Theory
E. Triggers of Coverage Applied to Environmental Damage Claims
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V. POLLUTION EXCLUSION CLAUSE
A. Cases Favoring Insureds
1. Ambiguities in the Clause
2. The Clause as a Restatement of "Occurrence" Definition
3. Other Principles
B. Cases Favoring Insurers
VI. OWNED PROPERTY EXCLUSION
VII. THE DUTY TO DEFEND
A. General Principles
B. Hazardous Waste Cases
C. What Constitutes a "Suit" Requiring the Insurer to Defend?
D. Damages for the Insurer's Refusal to Defend
E. Defense Under Reservation of Rights
VIII. INSURED'S LITIGATION STRATEGIES IN COVERAGE DISPUTES
A. Notification of the Insurer
1. General Requirements
2. Persons That Should Receive Notice
B. Rely on Principles of Insurance Policy Interpretation Favoring the Insured
1. Contra-Insurer Rules
2. Reasonable Expectations of the Policyholder
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C. Look for Inconsistent Interpretations by the Insurer of Its Own Policies
D. Look for Inconsistent Interpretations and Intent Expressed by Policy Draftsmen
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Introduction
The last few years have seen an explosion in litigation concerning the scope of coverage under comprehensive general liability ("CGL") insurance policies, brought about largely as a result of policyholders' efforts to secure coverage for liability that arises out of events that take place over several policy terms. The injuries that lead to such liability frequently take several years to progress, develop and become apparent.
The liability claims based on these long-term injuries often are referred to as "delayed-manifestation claims." Common examples of delayed-manifestation claims include lawsuits asserting liability against manufacturers of asbestos products and drugs, as well as hazardous waste site cleanup litigation.
The stakes are higher than ever. The federal government has estimated the cost of cleaning up toxic waste disposal sites to be in the tens of billions of dollars, leading some insurers and insureds to approach insurance coverage disputes involving delayed-manifestation claims as matters of economic warfare.
The objective of this report is to present an overview of the major issues in such insurance coverage disputes, focusing particularly on coverage for liability asserted against waste generators, transporters and site operators pursuant to statutes such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and the Resource Conservation and Recovery Act ("RCRA") that seek to remedy environmental contamination. This report discusses coverage under CGL policies as those policies typically were formulated before 1980. It does not address coverage under some of the more recent CGL policy forms, nor does it address coverage under insurance policies generally known as environmental impairment liability insurance policies.
I. THE BASIC INSURING AGREEMENTS
The basic provisions of CGL insurance policies largely have been drafted on an insurance industry-wide basis, through industry drafting and rating organizations such as the Insurance Services Office. Thus, most insurers' CGL policies have utilized common policy formats, common clauses, and common definitions. The standardization of basic policy terms generally holds true even for the so-called "manuscript" policies often written for the nation's largest insurance consumers.
The starting point in analyzing and understanding a CGL policy is the basic coverage clause, or insuring agreement. This applies in coverage claims involving environmental damages, despite the attention often given to the pollution exclusion clause found in most CGL policies issued after 1970. Indeed, insurers typically rely on several defenses based on the terms of the standard insuring agreements to disclaim coverage for environmental damage.
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A. Historical Development
1. Pre-1966 Policies
Before 1966 CGL policies typically covered liability "caused by accident." These policies are referred to as "accident" policies. A typical accident policy may contain the following insuring agreement:
[The insurer] agrees with the insured...to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages [because of bodily injury, sickness or disease, including death at any time resulting therefrom sustained by any person, or because of injury to or destruction of property, including loss of use thereof,] caused by accident.
The standard-form policy did not define the term "accident."
2. 1966 Occurrence Form
In 1966 the standard-form CGL policy was modified to cover the insured's liability for injuries caused by an "occurrence" instead of an "accident." Policies of this type are called "occurrence" policies. The text of a typical insuring agreement was as follows:
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 or B. 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 such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent...
The policy defined "occurrence" as follows:
"occurrence" means an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured.
The policy also defined "bodily injury" and "property damage."
3. 1973 Revision
The standard-form CGL policy was revised again in 1973. The occurrence definition was modified to make clear that an occurrence included "continuous or repeated exposure to conditions":
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"occurrence" means an accident, 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.
The definitions of bodily injury and property damage were revised to incorporate the requirement that such harm occur during the policy period. This previously had been part of the occurrence definition. The property damage definition was expanded.
The 1973 revision also included the pollution exclusion clause as one of the exclusions in the basic policy form. The pollution exclusion had been introduced in 1970 as a standardform endorsement to the 1966 policy form.
4. Claims-Made Forms
More recent insuring agreements often utilize "claims-made" forms, which generally are not addressed in this report. A claims-made policy provides coverage for claims made against the insured during the policy term. Coverage is based on the date on which a covered claim is made, without any necessary consideration for the dates of occurrence or harm. See, St. Paul Fire and Marine Ins. Co. v. Barry, 438 U.S. 531, 98 S.Ct. 2923 (1978) ("claims-made" policy protects holder only against claims made during life of the policy).
B. The Scope of Coverage Under Accident Policies
The 1966 CGL revision adopting the occurrence format made clear that CGL policies provide coverage for events that take place over a long period of time. Some insurance industry officials had expressed the view that the use of the term "accident" in the previous insuring agreement required that damages occur contemporaneously with the causative event for coverage to be provided. By the early 1960's, however, many courts had held that "accident" policies provided coverage for damages that took place over time. The industry-wide organizations drafting the standard-form CGL policy apparently wished to confirm that such coverage was intended, to standardize court coverage decisions and to standardize claims handling procedures. See, e.g., Nachman, The New Policy Provisions for General Liability Insurance, 18 The Annals 197, 199-200; Wendorff, The New Standard Comprehensive General Liability Insurance Policy, 1965-1966 Proceedings, American Bar Assn. Section of Insurance, Negligence & Compensation Law (Am. Bar Assn. 1966).
The scope of coverage under the pre-1966 accident policies is important for claims based on environmental contamination because often such contamination and resulting harm took place during such policies' terms, potentially triggering their coverage. Courts generally have construed "accident" policies to provide
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coverage for liability arising from delayed-manifestation claims involving long-term exposure to injurious conditions. See, e.g., Canadian Radium & Uranium Corp. v. Indemnity Ins. Co. of North America, 104 N.E.2d 250 (Ill. 1952) (collecting cases); Beryllium Corp. v. American Mutual Liability Ins. Co., 223 F.2d 71 (3rd Cir. 1955); White v. Smith, 440 S.W.2d 497, 510 (Mo. App. 1969) (["t]he accident mentioned in the policy need not be a blow but may be a process," citing, Travelers v. Humming Bird Coal Co., 371 S.W.2d 35, 38 (Ky. 1963)). But...
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