Insurance Recovery for Environmental Liabilities

• Author: Marc S. Mayerson
• Pages: 141-187

141

CHAPTER 4

Insurance Recovery

for Environmental Liabilities

Marc S. Mayerson

I. INTRODUCTION

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.

II. NOTICE

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.

III. GENERAL LIABILITY POLICIES

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

years.

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

MARC S. MAYERSON

ET AL.

, Allocation of Insured Loss

between Claims-Made and Occurrence Coverage,

INS. ALLOCATION

(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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