Insurance Recovery for Environmental Liabilities

• Pages: 173-238

CHAPTER 4

173

Insurance Recovery for

Environmental Liabilities

MARC S. MAYERSO N, STEPHEN A. KLEIN,

AND DO NALD R. McMINN

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

174 CHAPTER 4

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-

tion;

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: