Almost any manufacturer can face environmental liability. The liability may stem from the nature of the product being manufactured, but it also may derive from chemicals used to clean the manufacturing equipment, changes made to the product after it leaves the manufacturer’s hands—or, in the case of a chemical manufacturer, in the way its product ultimately is used.
Often, liability emerges for underground pollution that began decades ago and may have continued for years or decades. The fact that the activities were legal at the time—and the manufacturer not negligent then—are irrelevant. Under federal and state environmental laws, liability arises today based on current environmental concerns—and liability is strict, meaning without negligence or fault. Cleanup often is required of chemicals exceeding standards of parts per million or even billion, levels that may not have been capable of being measured when the manufacturing occurred.
Insurance policies can provide valuable relief from environmental liabilities if coverage is pursued intelligently and aggressively. Unless a company has recently purchased specialized environmental liability insurance coverage, however, it will need to obtain coverage under its standard general liability coverage—in effect before 1985 in some states and 1970 in others, based on judicial decisions concerning standard insurance policy exclusions.
For the coverage to be valid, the damage must have taken place during the policy period. Manufacturers must notify their insurance companies when they are aware of contamination that may lead to liability. Once they do that, they can pursue coverage.
The Long Tail
While the 1970s and 1980s are long ago in our lived experience, those decades and earlier ones are the recent past with respect to environmental contamination that is still with us. Current liability for these "long-tail" claims is common—as is insurance recovery.
However, insurance companies make it difficult for the policyholder from the start of an environmental claim. Most respond to notice by listing more than a dozen defenses to coverage, then by asking four pages of questions, many of which can only be answered at great expense. Some policyholders give up at this stage, which is unfortunate.
Despite the seeming complexity, there really are four issues that typically must be overcome to establish coverage for an environmental claim. The first is a legal issue on which states have split. The other three must be successfully litigated to establish coverage, but a prepared policyholder should be successful.
1. The Pollution Exclusion
The legal issue concerns a common exclusion found in policies from the early 1970s until 1985 known as the “sudden and accidental” pollution exclusion. These policies exclude coverage for pollution, unless the discharge of pollutants was “sudden and accidental.”
The main issue is whether sudden means abrupt or unexpected. If it means abrupt, gradual pollution—the most common type of pollution in environmental claims—would be excluded from coverage. If it means unexpected, unexpected gradual pollution would be covered.
State high courts have split on this issue. The most interesting decision is the 1993 New Jersey Supreme Court decision in the Morton International case. The court agreed with the insurers that sudden meant abrupt, but because of the insurance industry representations in 1970 that the clause was intended to exclude only intentional pollution, the court held that sudden would be construed to mean unexpected. Thus, unexpected gradual pollution is not excluded in New Jersey under this pollution exclusion. In 1985, the insurance industry adopted the “absolute” pollution exclusion, which bars coverage for virtually all types of pollution after 1985.
2. The Timeliness of Notice
The major issue that the insurance companies pursue during discovery is whether the policyholder’s notice to the insurance companies was timely. Not only do the policies require notice of a claim, they also require notice of an “occurrence,” the event that causes the injury or damage at issue. If the policyholder knows that there has been pollution on the property that may lead to liability, it must give notice of an occurrence even before there has been a claim.
In most jurisdictions, even if notice is late, the insurance company cannot escape coverage, unless it was harmed or prejudiced by the late notice.
In a minority of states, the insurance company does not have to prove prejudice to prevail on late notice. There, the main issue will be what the policyholder knew and when. It should not be enough to show the knowledge of contamination to require notice, because under liability insurance policies, there has to be at least a threat of liability, typically from a regulator.
There are other arguments that the policyholder can make. If the coverage at issue involves older policies, the policyholder may be able to argue that it did not know that the policies were implicated because it did not know that damage had happened during the policy years.
3. The Owned Property Exclusion
The third issue involves a policy exclusion known as the “owned property” exclusion. It excludes coverage for damage solely to the policyholder’s own property. In most jurisdictions, the state owns groundwater, and demonstrating groundwater contamination is the easiest way to avoid the exclusion. Even in states where the policyholder owns groundwater under its property, contaminated groundwater often is flowing offsite, contaminating groundwater the policyholder doesn’t own or off-site surface water, which should render the exclusion ineffective.
4. Whether the Property Damage was Intentional
The main trial issue in an environmental coverage case concerns the nature and causes of the contamination. Insurance policies that may provide coverage for environmental claims require that the damage be caused by an “occurrence,” and the occurrence must result in damage “neither expected nor intended from the standpoint of the insured.”
Under the law of most jurisdictions, the question is whether the policyholder knowingly or intentionally caused the contamination. Unless there are eyewitnesses, how the contamination was caused usually is a matter for expert testimony.
There are two preliminary issues on which some states differ. The first is whether the standard is an objective one, in which case a reasonable person test is used, generally focusing on industry knowledge and practices. Most states apply a subjective test, which focuses solely on the policyholder’s knowledge and intent. The second issue is who has the burden of proof. Most states say that because the language reads like an exclusion, the burden should be on the insurance company. Others say since the language is in the insuring agreement, the policyholder has the burden.
The policyholder should never lose this issue unless it was intentionally disposing of contaminants in the modern environmental era, which fortunately most companies don’t do. If the policyholder intentionally disposed of contaminants before 1980, it needs an expert who can testify that this was the standard waste disposal practice in this country until 1980, when the federal EPA published regulations controlling the handling of hazardous waste from “cradle to grave.” Insurance policies cover the unintended consequences of intentional acts. Thus, unless the policyholder knew it was causing or intended to cause property damage, it should not lose coverage on this basis, even if it acted intentionally.
These are the issues that must be resolved in order to establish coverage. There are other issues that may affect the amount of damages, particularly whether the state requires that damages be allocated across all years of damage, or whether the insurance company must pay “all sums” of the policyholder’s liability, but that is after coverage has been established.
Environmental insurance coverage is expensive to establish, but if the claims are significant enough, it may be necessary. If the state’s highest court has decided the issue, the result under the sudden and accidental pollution exclusion should be predictable. Fortunately, the other issues that the policyholder needs to overcome to prevail are not that difficult to establish.
David L. Elkind is a member of Anderson Kill P.C.'s Insurance Recovery Group and practices in the firm's Washington, D.C. office.