Insurance Recovery for Environmental Liabilities

Insurance Recovery for
Environmental Liabilities
I. Introduction
Despite the advent over the past 35 years of policy exclusions lim-
iting coverage for pollution-related liabilities, insurance remains an
important potential source of recovery for companies facing envi-
ronmental or toxic tort liabilities or legal proceedings by 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. Addi-
tionally, many companies today purchase specialty environmental
insurance policies specifically tailored to their operations or to fund
the remediation of a particular environmental site. In any case, the
possibility that investigative, defense, and remediation costs might
be covered in whole or in part always should be considered. This
chapter provides an overview of the most important coverage is-
sues arising in connection with each type of coverage that poten-
tially responds to environmental claims and related costs.
II. General Liability Policies
Businesses typically purchase comprehensive or commercial gen-
eral liability policies that cover a wide range of third-party liabili-
ties. These policies typically include, among other things, coverage
for property damage to third-party property arising out of the
policyholder’s business operations. Property damage encompasses
traditional environmental liability arising from waste disposal op-
erations, leaks and spills at manufacturing facilities (to the extent
that third-party property is affected), and the like. General 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 poli-
cyholders are standard-form, preprinted policies drafted by insur-
ance carriers in participation with other insurance industry members.
Even where policy forms are customized or manuscripted, the ac-
tual 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 indi-
vidual policies may differ from the standard-form language that has
evolved over the years.
Speaking broadly, there are two distinct populations of general
liability policies: 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 incident or
accident) or the damage for which the insured seeks coverage hap-
pened during the policy period, regardless of whether the suit is
brought long after the policy period has ended. By contrast, claim-
based policies, 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 claimed liability results from
harm caused years before.1 Because the widespread adoption of
claims-made general liability policies postdates the introduction of
the absolute pollution exclusion,2 it is the older occurrence-based
policies that generally will respond to environmental liabilities. Ac-
cordingly, this section addresses the most 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
first-dollar basis, perhaps subject to a deductible or reten-
Insurance Recovery for Environmental Liabilities 175
First-layer excess or umbrella policies, providing limits of
liability to supplement the first-dollar layer or “primary” cov-
erage; and
Upper-layer excess policies that often “follow form,” mean-
ing that they adopt the terms of an underlying policy.3
Excess policies supplement the limits of the underlying cover-
age, while umbrella policies both supplement the limits and pro-
vide gap-filling coverage that is broader in scope than that of the
underlying primary policies. Within the gap, umbrella policies ef-
fectively function as primary coverage (providing first-dollar in-
demnity and defense coverage, subject to a retained limit). Excess
policies often are written in layers. Sometimes a layer will be split
among more than one insurer, with each assuming a specified pro-
portion of the risk within the single layer of coverage. These are
referred to as “quota share” policies. The following model cover-
age chart represents the structure of a typical American corporate
coverage program:

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