Insurance Recovery for Environmental Liabilities

AuthorMarc S. Mayerson
Insurance Recovery
for Environmental Liabilities
Marc S. Mayerson
Insurance is an important potential source of recovery for companies facing envi-
ronmental or toxic tort liabilities or legal proceedings by municipal, state, or
federal regulatory agencies. There may be coverage under older general liability
policies for pollution that is alleged to have taken place before the inception of the
pollution exclusion, or with respect to “polluting events” to which such exclusions
do not apply. Additionally, many companies today purchase specialty environmen-
tal insurance policies specifically tailored to their operations, or to fund the reme-
diation of a particular environmental site. Transactional lawyers need to be aware
of the possibility of absorbing the risk of liability depending on whether assets are
being acquired, stock is being transferred, or some form of corporate reorganiza-
tion is taking place. At all points, the possibility that investigative, defense, and
remediation costs might be covered in whole or in part always should be consid-
ered. This chapter provides an overview of several coverage issues arising in con-
nection with each type of coverage that can potentially respond to environmental
claims and related costs.
Insurance companies need to be informed as soon as practicable that their help
and money are requested, and policyholders promise to notify the insurer of inci-
dents and claims.
Lawyers who lack insurance expertise have been sued for legal malprac-
tice when insurance issues are overlooked, resulting in the pertinent insurance
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142 Environmental Litigation
company being notified late or in a manner that forfeits or curbs insurance recov-
ery.1 Thus, in any situation in which environmental liabilities, cleanup costs, or
regulatory compliance arises, counsel should consider insurance implications. It
is not enough to review whatever current insurance policies might be in effect;
counsel should determine whether there are entities with which the client might
have contracted that might have added the client to the contracting party’s insur-
ance. Counsel should create a record of his or her investigation into applicable
insurance policies in the event that it is later discovered that a policy exists and
notice later is provided; such documentation will help show that the search for
policies was conducted reasonably diligently, and that the policyholder (or the
lawyer) acted with appropriate attention to the potential for insurance recovery.
Private and public entities typically purchase comprehensive or commercial
general liability policies that cover a wide range of third-party liabilities. These
policies typically include, among other things, coverage for property damage to
third-party property arising out of the policyholder’s business operations. Prop-
erty damage encompasses traditional environmental liability arising from waste
disposal operations, leaks and spills at manufacturing facilities (to the extent
that third-party property is affected), and the like. Subject to their terms, gen-
eral liability policies will cover the cost of judgments, orders, and settlements
under the indemnity portion of the coverage, as well as the costs of lawyers and
experts under the defense portion.
Most general liability insurance policies sold to corporate policyholders are
standard-form, preprinted policies drafted by insurance carriers in participation
with other insurance industry members. Even where policy forms are custom-
ized or manuscripted, the actual language is largely lifted from standard-form
policies. Although most policies contain language that is similar or identical to
that found in policies sold to numerous policyholders, the terms of individual
policies may differ from the standard-form language that has evolved over the
Speaking broadly, there are two distinct populations of general liability pol-
icies: those written on an occurrence basis and those written on a claims-made
basis. In general terms, occurrence-based policies respond when the occurrence
(the unintentional injury or accident) or the damage for which the insured seeks
coverage happened during the policy period, regardless of whether the suit is
brought long after the policy period has ended. By contrast, claim-based poli-
cies, which have become more commonplace since the mid-1980s, respond to
claims made against an insured during the policy period even if the basis for the
1. See, e.g., Jordache Enters., Inc. v. Brobeck, Phleger & Harrison, 958 P.2d 1062 (Cal. 1998).
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Insurance Recovery for Environmental Liabilities 143
claimed liability results from harm caused years before.2 Because the widespread
adoption of claims-made general liability policies postdates the introduction of
the absolute pollution exclusion,3 it is usually only the older occurrence-based
policies (and even earlier-in-the-20th-century “accident”-based policies) that
might respond to environmental liabilities. Accordingly, this section addresses
common and important issues pertaining to occurrence-based general liability
policies with respect to environmental liabilities.
A. Determining the Coverage Program
A typical corporation’s coverage program involves the purchase of:
• Comprehensive general liability policies that respond on a rst-dollar
basis, perhaps subject to a deductible or retention;
• First-layer excess or “umbrella” policies, providing limits of liability to
supplement the rst-dollar layer or “primary” coverage; and
• Upper-layer excess policies that often “follow form,” meaning that they
adopt the terms of an underlying policy.4
Excess policies supplement the limits of the underlying coverage, while umbrella
policies both supplement the limits and provide gap-filling coverage that is broader
in scope than that of the underlying primary policies. Within the gap, umbrella pol-
icies effectively function as primary coverage, providing first-dollar indemnity and
defense coverage, subject to a retained limit. Excess policies often are written in lay-
ers. Sometimes a layer will be split among more than one insurer, with each assum-
ing a specified proportion of the risk within the single layer of coverage. These are
referred to as “quota share” policies. The following model coverage chart represents
the structure of a typical American corporate coverage program:
2. The presence of both occurrence- and claim-based policies in an insured’s program can have
some unexpected results on recovery. See generally
, Allocation of Insured Loss
between Claims-Made and Occurrence Coverage,
(Mealey’s 2003).
3. See discussion infra section II.E.2.
4. A “follow form” policy incorporates the terms of the underlying policies. Upper-layer excess pol-
icies generally “follow form” to an underlying policy or policies, though identifying which underlying
policy is the governing form may be difficult. See, e.g., World Trade Ctr. Props. v. Hartford Ins. Co., 345
F.3d 154, 169–82 (2d Cir. 2003).
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