JurisdictionUnited States
Natural Resources & Environmental Litigation II
(May 1996)


Karen M. Zulauf
Buchanan, Jurdem & Zulauf, P.C.
Denver, Colorado

Lawsuits by third parties or governmental agencies for environmental contamination can result in multi-million dollar losses to a company. Faced with such an assault, most companies look to the Comprehensive General Liability ("CGL") insurance policies that they bought and paid for many years prior to learning of their environmental contamination problems. Unfortunately, rather than the support which your company believed it would have at this time, your insurance company's response will be, what is know in the industry, as a lengthy reservation of rights letter or a denial of claims.

A reservation of rights letter is a lengthy letter written generally by a claims adjuster listing all the reasons why your insurance company does not have to provide coverage for the environmental claim that your company has made, but not an outright denial for coverage. Insurance companies generally have standard reservation of rights that are set forth in letters to insureds making environmental claims. Receipt of a reservation of rights letter does not end your insurance company's obligation to provide you coverage. It is only the first of many controversies that will exist between your company and your insurance company.

This paper attempts to present a sampling of the case law interpreting the duties of an insurance company to its insureds, the types of reservation of rights claimed by insurance companies, along with the denials of coverage, and the reasons for the denials of coverage. Lastly, the paper presents various actions an insured can take against an insurance company that refuses to provide coverage.

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The following topics are addressed in this paper:

A. Duty To Defend Versus Duty To Indemnify: You Should Expect A Defense.

B. Pollution Exclusion Clause: Don't Be Scared Away.

1. Sudden And Accidental Are Unambiguous: Sudden Means Sudden.

2. Subjective Intent: A Favorable Analysis That Usually Results In Coverage.

A. Drafting History

B. Industry Statements

3. Does The "Pollution Exclusion Clause" Restate The Definition Of The "Occurrence" Term?

4. Gradual Or Continuous Contamination.

5. Absolute Pollution Exclusion Clause: Does It Really Mean No Coverage?

C. Trespass Coverage: A Hidden Asset In Most Absolute Pollution Exclusion Clause Policies.

D. Government Mandated Cleanup Costs: Do They Constitute A "Claim" Or "Suit"?

E. Owned Property Exclusion: Does This Exclusion Prevent Coverage For Cleanup Of The Insured's Property?

F. Notice: Your Responsibilities To Your Insurance Company.

G. Triggers: Gather Together All Your Policies.

1. Exposure Rule.

2. Manifestation Rule.

3. Contamination Or Disposal Rule.

4. Continuous Trigger Rule.

H. Bodily Injury: What Type Of Third Party Claims Does This Type Of Coverage Apply To?

I. Personal Injury: What Type Of Third Party Claims Does This Type Of Coverage Apply To?

J. Declaratory Judgment Actions And Bad Faith Breach Of Insurance Contract Actions: Actions An Insured Can Take Against Its Insurance Company.

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A. Duty To Defend Versus Duty To Indemnify: You Should Expect A Defense.

An insurance company's duty to defend an insured is separate and distinct from the insurance company's duty to indemnify the insured. According to Colorado law, an insurance company has a duty to defend its insured "when the underlying complaint against the insure[d] alleges any facts that might fall within coverage of the policy." Hecla Mining Company v. New Hampshire Insurance Company, 811 P.2d 1083, 1089 (Colo. 1991) citing Douglas v. Hartford Insurance Company, 602 F.2d 934 (10th Cir. 1979).

Hecla sets forth the following legal principals:

a. "The actual liability of the insured to the claimant is not the criterion which places upon the insurance company the obligation to defend." Id.

b. "[W]here the insurer's duty to defend is not apparent from the pleadings in the case against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim." Id.

c. "An insurer seeking to avoid its duty to defend an insured bears a heavy burden." Id.

Further, Hecla indicates that "[t]he appropriate course of action for an insurer who believes that it is under no obligation to defend, is to provide a defense to the insured under a reservation of rights to seek reimbursement should the facts at trial prove that the incident resulting in liability was not covered by the policy, or to file a declaratory judgment action after the underlying case has been adjudicated." Id. citing Reliance v. Martin, 467 N.E.2d 287, 290 (1984); City of Willoughby Hills v. Cincinnati Insurance Company, 459 N.E.2d 555, 558 (1984).

Hecla is the law in Colorado, however, most states have similar law and insurance companies are well aware that they have a responsibility to defend an insured, so long as the complaint alleges facts which fall within the coverage ambit of the policy. This is a well accepted standard of law. See generally, Grindheim v. Safeco Insurance Company, 908 F. Supp. 794 (D. Mont. 1995); LaSalle National Trust v. Schaffner, 818 F. Supp. 1161 (N.D. Ill. 1993); Pepper's Steel & Alloys v. USF&G, 668 F. Supp. 1541 (S.D. Fla. 1987); Voorhees v. Preferred Mutual Insurance Company, 607 A.2d 1255 (N.J. 1992).

Receipt of a reservation of rights letter does not relieve your insurance company of its responsibility to provide your

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company with a defense. It does, however, suggest that your insurance company may not pay any judgment that is entered against you, nor be willing to provide any money for settlement (indemnification). An insurance company that refuses to provide even a defense to its insured, and still claims a reservation of rights, takes on a heavy burden. Section J of this paper sets forth the courses of action available to an insured when their insurance company refuses to provide a defense or maintains a reservation of rights.

B. Pollution Exclusion Clause: Don't Be Scared Away.

The denials of coverage for pollution related lawsuits and the reservation of rights claimed by insurance companies for environmental lawsuits often focus on two terms in the policies. The first is the definition of "occurrence" contained in CGL policies beginning after 1966 and continuing through the present.1 The definition of "occurrence" is:

[A]n 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.

Secondly, insurance companies rely on the "pollution exclusion clause" contained in most CGL policies beginning in approximately 1970, to reserve their rights. This exclusion clause appears in CGL policies from that time through approximately 1983 to 1984. Policies issued prior to approximately 1966 to 1970, depending on when the specific insurer changed from the "accident" definition to the "occurrence" definition, do not contain a "pollution exclusion clause." In approximately 1986, the "pollution exclusion clause" was replaced with a stricter clause which is known in the industry as an "absolute pollution exclusion clause." (The effect of the "absolute pollution exclusion clause" is addressed later in Section B5.)

The language of the "pollution exclusion clause" is:

This insurance does not apply:

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[f] [T]o bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, alkalis, 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.2

Insurance companies use the "occurrence" and "sudden and accidental" policy provisions together to present a gate which their insured must be able to pass through in order to obtain insurance coverage for an environmental contamination lawsuit. In some jurisdictions, the insurers are extremely successful in denying insurance coverage to an insured claiming any type of insurance coverage for environmental contamination or pollution.

1. Sudden And Accidental Are Unambiguous: Sudden Means Sudden

Courts that routinely deny insurance coverage for most environmental lawsuits do so because they interpret the terms "sudden and accidental," in the pollution exclusion clause to have a temporal meaning. The term is held to be unambiguous and thus the more complicated, pro-insured analysis set forth below, in Section B2 is not found to be applicable. See, Hughes Aircraft Company v. Insurance Company of North America, 22 F.3d 1432 (9th Cir. 1993); Anaconda Minerals Company v. Stoeller Chemical Company, 990 F.2d 1175 (10th Cir. 1993); Bituminous Casualty Corporation v. Tonka Corporation, 9 F.3d 51 (8th Cir. 1993); Koppers Company v. Aetna Casualty & Surety, 840 F. Supp. 390 (W.D. Pa. 1993).

Coverage is provided only for those types of events which are sudden, occur without notice or warning, quickly or briefly in time. USF&G v. Morrison Grain Company, 999 F.2d 489 (10th Cir. 1993). Sudden cannot by definition be "unexpected" or "unintended." Hartford Accident & Indemnity Company v. USF&G, 962

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F.2d 1484 (10th Cir. 1992)3 See also, Auto Owners Insurance Company v. City of Clare, 521 N.W. 2d 480 (Mich. 1994); County of Fulton v. USF&G, 600 N.Y.S.2d 972 (New York, 1993); Dimmitt Chevrolet v. Southeastern Fidelity, 636 So.2d 700 (Fla. 1993); Krawczewski v. Western Casualty & Surety Company, 506 N.W.2d 656 (Minn. App. 1993); Mays v...

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