Chapter 6 Insurance Coverage in an Environmental Case: Focus on Claims Handling
| Jurisdiction | United States |
MICHAEL T. SHARKEY is a partner in the Insurance Recovery group at Perkins Coie LLP. He concentrates his practice on representing policyholders in insurance coverage disputes nationwide. He has represented clients on a wide variety of insurance matters and policies, obtaining numerous significant and precedent-setting rulings on key insurance coverage issues. He is listed in The Best Lawyers in America in the field of Insurance Law, among other recognitions. Michael also advises clients on insurance coverage before a claim arises, providing advice on the scope of coverage under their existing or proposed policies and possible improvements to seek at renewal. He regularly advises clients on the insurance issues that arise in connection with corporate transactions, as well as on the drafting and interplay of insurance and indemnification provisions in contracts, with the goal of aligning the provisions with the parties' intent during the drafting process - before a dispute arises.
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This paper provides an overview of claims under standard insurance policies in the context of energy, natural resources, and environmental litigation. It will first examine a common exclusion often applicable to such claims, the pollution exclusion, and particularly its exception that provides "time element" pollution coverage.
The paper also will address key issues in handling underlying claims and coordinating with insurance companies in the defense and settlement of claims. These issues include when to notify and tender a claim to the insurance company, how to handle an insurance company's reservation of rights, the difference between the duty to defend and the duty to indemnify, and who controls the defense and settlement of the underlying claim.
I. Scope of Pollution Coverage Under Current Policies
Time Element Pollution Coverage
For many years at the end of the last century and the beginning of this one, environmental insurance coverage litigation, including litigation involving mining and energy companies, was dominated by actions involving coverage under decades worth of historic liability policies, for allegations of long-term pollution taking place in those years. This focus on historic insurance coverage resulted in part from the nature of "occurrence" based general liability insurance, which is triggered to respond by damage taking place during the policy period, even if it is not discovered until years later. It was also the result of the fact that policies in past decades either had no pollutions exclusions, or more limited pollution exclusions than those found in current policies, and so are a valuable source of recovery for those facing allegations of long-term pollution.
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Such "classic" environmental coverage actions are still being litigated to this day.2 Increasingly, however, even those companies with historic general liability coverage have settled those policies in prior insurance coverage actions, and other companies were not in existence at a time when the standard policies were more favorable to pollution coverage. As a result, an increasing portion of environmental insurance coverage litigation involves the pollution coverage available under current policy forms.
One type of pollution coverage available under current forms, including those purchased by participants in the mining and energy industries, is so-called "time element" pollution coverage. Policies providing such coverage generally contain a broad pollution exclusion, but that exclusion is subject to an exception for identifiable releases of pollution that are promptly detected by the policyholder, and notified to the insurance company. For example, one version of such an exclusion restores coverage when:
(i) the underlying incident was "abrupt and neither expected nor intended;" (ii) the incident occurred during the policy period; (iii) the insured became aware of the incident within seven days of its occurrence; (iv) the incident was reported in writing to Commerce within twenty-one (21) days of becoming known to the insured; and (v) the insured made reasonable efforts to address the situation.
Berkley National Insurance Co. v. XTO Energy, Inc., 556 F.Supp.3d 981, 1008 (D.N.D. 2021).
This paper will address some of the issues and potential areas of dispute that have arisen in the application of this type of time-element pollution coverage.
The Notice and Timing Requirement of Time Element Pollution Coverage
Courts taken different approaches to how strictly they will apply the short notice time period in time element pollution coverage. In Berkley National Insurance Co. v. XTO Energy, Inc., 556 F.Supp.3d 981, 1008-09 (D.N.D. 2021), a well owner was an additional insured under a subcontractor's umbrella liability policy, which contained the time-element exception to its pollution exclusion, as quoted in the previous section. The well owner, however, did not obtain a copy of the subcontractor's umbrella policy until nearly two years after the oil well explosion for which it sought coverage, and was previously unaware of its existence. Id. The insurance company argued that this precluded coverage, because it meant that the insured had not reported the incident to the insurance company within 21 days of the polluting incident. Id.
The court rejected the insurance company's argument, and found the exception to apply. The court first held that the insurance company had waived the 21 -day notice requirement by not raising it in its initial denial letter -- under North Dakota law (like some other jurisdictions) an insurance company that fails to raise late notice in an original denial cannot assert that defense
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later. Id. at 1009. In addition, the court held that South Dakota law requiring an insurance company to prove prejudice to succeed on a late notice argument applied to the 21 -day requirement in the time-element exception, and the insurance company had not shown prejudice.
Id.
The court in Topp's Mechanical, Inc. v. Kinsale Insurance Co., 968 F.3d 854 (8th Cir. 2020), however, applied a stricter view of the notice requirement in a time-element exception to a pollution exclusion. There, the policyholder had contacted the insurance company by phone within the 45-day notice period required by the exception, but was advised by the insurance company's representative not to submit a claim until the worker injured in the incident filed a formal claim or lawsuit, and so the policyholder did not submit a written notice to the insurance company at that time. Id. at 855. When the worker later brought a formal claim, well outside the 45-day period, the insurance company denied coverage on the grounds that the policyholder's written notice was too late to meet the requirements of the time-element exception. Id. The court held that the policyholder could not rely on the exception. Id. at 856. Despite the fact that the insurance company itself specifically directed the policyholder not to provide timely notice, the court held that the 45-day written notice requirement defined the basic scope of coverage for pollution, and waiver or estoppel could not be used to expand that scope. Id.
The court in QES Pressure Control, LLC v. Zurich American Insurance Co., 2022 WL 956178, at *3-*5 (S.D. Tex. March 29, 2022), used similar reasoning to hold that Texas's requirement that an insurance company must demonstrate prejudice in order to succeed on a late notice defense did not apply to the 90-day written notice requirement in a time-element exception to a pollution exclusion.
Thus, while there is some authority to the contrary, a policyholder with an exception to a pollution exclusion that requires notice to the insurance company within a limited window of time should make sure it has procedures in place to ensure that pollution incidents are promptly reported to the insurance company.
Was There a Release of Pollutants?
Before a coverage analysis even reaches the question whether a time element exception to a pollution exclusion applies, it must be determined whether the exclusion applies in the first place. Some policyholders have had success arguing that underlying actions do not involve (or do not exclusively involve) the release of pollutants, and therefore the exclusion does not apply in the first place to bar all coverage.
For example, in Atkins v. Massey Energy Co., C.A. No. 9-C-59, Order (W. Va. Cir. Ct. Dec. 6, 2011), the court held that allegations against a mining company did not clearly and entirely fall within a pollution exclusion, and so the company was entitled to a duty defend from its liability insurance company:
If portions of the extracted coal, rock, minerals and water are returned to the underground mine voids or above-ground impoundments, it is reasonable for Massey not to consider these
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materials to be thereby transformed into pollutants, because this material is a natural part of the environment where Massey routinely conducts its business.
Massey, Order at 5-6. The Massey court also relied on cases from other jurisdictions holding that an insurance company had a heavy burden to prove the applicability of a pollution exclusion to the policyholder's core products or operations. Id. at 4-5.
Similarly, the court in Hanover Insurance Company v. Superior Labor Services, Inc., 179 F.Supp.3d 656, 685 (E.D. La. 2016), the court found a duty to defend when the underlying complaint alleged injury from "silica dust and other harmful products." The Court held that these allegations did not establish that the alleged injuries fell entirely within the pollution exclusion, and so there was a duty to defend. Id. Other courts have applied the definition of "pollutants" more broadly. See, e.g., Doe Run Resources Corporation v. American Guarantee & Liability Insurance Co., 531 S.W.3d 508 (Mo. 2017) (holding that lead...
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