The Role of Insurance in Environmental Liability

In recent years, individuals, companies, corporations and even financial institutions and cities, connected with the disposal or generation of INTRODUCTION hazardous substances, have faced unprecedented liability for pollution. The passage of the Comprehensive Environmental Response, Compensation and Liability Act
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  Fordham Environmental Law Review  Volume  3,  Issue  1 2011  Article  4 The Role of Insurance in EnvironmentalLiability Jeffrey Terence Knebel ∗ ∗ Copyright c  2011 by the authors.  Fordham Environmental Law Review   is produced by TheBerkeley Electronic Press (bepress).  THE ROLE OF INSURANCE IN ENVIRONMENTAL LIABILITY J FFR Y T KNE EL INTRODUCTION  N recent years, individuals, companies, corporations and even finan-cial institutions and cities, connected with the disposal or generation of hazardous substances, have faced unprecedented liability for pollution. The passage of the Comprehensive Environmental Response, Compensa- tion and Liability Act (CERCLA) in 1980,1 commonly known as the Superfund statute, has added a new dimension to the scope of business risks associated with owning property or operating a facility where haz- ardous substances have been released. In addition to property damageand personal injury suits from third parties, operators and generators are now liable for the cleanup costs of Superfund sites. 2 With this increased exposure, many companies have been demanding that their liability in- surers indemnify them for all expenses they incur in cleaning up contami- nated property. 3 The majority of these indemnity claims are based on Comprehensive (or Commercial) General Liability CGL) policies carried by most com-panies. CGL policies have historically been identical to or based on pol- icy terms in form contracts drafted by the Insurance Services Office (ISO).' However, the lack of uniformity in court decisions interpreting   Associate, Baker Botts, Austin, Texas; J.D. 1990 Baylor University School of Law. 1. 42 U.S.C. § § 9601-75 1988). 2. In general, CERCLA imposes liability, for the releases or threatened releases of  hazardous substances from a facility, on present owners and operators of the facility and those at the time of disposal, as well as persons who arranged for the transport or disposal of any hazardous substances at the site, and persons who transported any suchsubstances to the facility. The Superfund Act provides a wide range of liabilities for responsible parties, including any removal or remedial costs incurred by the government or private parties, any damages to natural resources and any costs associated with injunc- tive relief ordered by the government. 42 U.S.C. § 9607 (1988). Although the majority of the insurance coverage cases for environmental liabilities center around indemnifica- tion for Superfund cleanups, parties also seek coverage for costs incurred under otherstatutes such as the Resource Conservation and Recovery Act of 1976 42 U.S.C. § § 6901-92 (1988), the Clean Air Act Amendments of 1977, 42 U.S.C. § § 7401-7642 (1988), amended 1990 and the Clean Water Act of 1977, 33 U.S.C. § § 1251-1387 (1988). 3. In a February 5 1991 report, the Congressional General Accounting Office (GAO) concluded that insurance companies will continue to face substantial claim pay- ments in the future for hazardous waste cleanups. The report is a follow-up to GAO testimony at the September 27, 1990 hearing before the Policy Research and Insurance Subcommittee of the House Banking, Finance and Urban Affairs Committee. Althoughthe GAO report is based on rather scant data (i.e., only nine insurance companies re- sponded to the survey), GAO estimates a 26 billion to 200 billion potential loss for theproperty and casualty insurance industry due to claims based on environmental damage. 4. The ISO basically functions as an advisory organization and statistical agent for  22 FORDHAM ENVIRONMENTAL LAW REPORT [Vol. III whether liability for pollution is covered under CGL policy has troubled both insurers and those insured.The federal courts have not been able to effectuate a uniform approach under CERCLA because the determinative issues are governed by the law of the state with the most significant relationship to the negotiation of the insurance contract terms. Using the law of the relevant state to interpret contractual agreements has enabled courts to interpret nearlyidentical language to reach polar outcomes. The courts, by applying dif- ferent rules of interpretation and giving varying degrees of priority to different policy considerations, arrive at opposite conclusions about whether pollution coverage exists under a CGL policy. This paper dis-cusses the various terms that are typically in dispute, the rules of inter-pretation and policy considerations cited by various courts when determining this issue, and suggested methods for interpreting and ana- lyzing the question of coverage for environmental liabilities.' I. TROUBLING TERMS IN THE CGL The terms in the typical CGL policy that courts usually must address in deciding whether pollution coverage is available are occurrence, damages, property damage, and sudden and accidental. The first three terms are usually contained in the section of the CGL policy which sets out the scope of insurance coverage. For example, the text of the coverage provision in a standard CGL policy states that the insurer, will pay those sums that the insured shall become legally obligated to pay as 'damages' because of 'bodily injury' or 'property damage' to which this insurance applies caused by an 'occurrence.' As an initial matter in construing a CGL policy, a court must deter- mine whether the environmental liabilities were caused by an occurrence. Another critical inquiry in the environmental context is whether liabili-ties, such as injunctions and response costs under CERCLA, are covered damages caused by property damage. The standard CGL policy usually will not specifically define the term damages. However, property dam- age is typically defined as physical injury to tangible property, including all resulting loss of use of that property. 7 The sudden and accidental language is typically found in the pollu-tion exclusion clause, a provision included only in the more recent CGL policies. The pollution exclusion clause normally is found in the section the insurance industry. It was initially founded to provide policy forms and statistical and actuarial information to its members, which consist of property and casualty liability insurance companies. 5 The opinions and conclusions set forth in this paper are the personal views of the author. None of the matters set forth herein are represented to be the views of the au- thor's past, present or future clients or colleagues. 6. Commercial General Liability Coverage Form at 1 (Insurance Services Office, Inc., 1984 . 7 Id at 9.  1991] INSUR NCE IN ENVIRONMENTAL LIABILITY 23 of the policy that enumerates those instances in which the CGL policy will not provide indemnity. A standard pollution exclusion clause states that coverage: does not apply to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkaloids, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the at- mosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental. (emphasis added) 8 Therefore, the exclusion clause will bar coverage for damages from pollu- tion releases unless the discharge or damages are both sudden and accidental. II HAS THERE BEEN AN OCCURRENCE ? The standard CGL policy, which is a third party liability policy, pro- tects the insured from claims arising from damages to property belonging to someone other than the insured which are caused by an occurrence. Before 1966, coverage under a CGL policy was triggered by an acci- dent, which was undefined in the policy. This fact usually led to litiga- tion over whether an accident involved an event that occurred suddenly, 9 or whether it also included events occurring over a longer period of time.' I After 1966 the term occurrence replaced accident in the standard CGL policy and was defined as: an accident, including continuous or repeated injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neitherexpected nor intended from the standpoint of the insured. Although some courts have determined that there is no occurrence in situations involving environmental damages, 2 insureds facing such li- abilities do not usually encounter problems in proving the accident 8. Id. ee also E. Joshua Rosenkranz, Note, The Pollution Exclusion ClauseThrough the Looking Glass 74 GEO. L. J. 1237, 1251 (1986). 9. For an example, see City of Kimball v. St. Paul Fire & Marine Ins. Co., 206 N.W.2d 632, 637 (Neb. 1973). 10. ee American Casualty Co. v. Minnesota Farm Bureau Serv. Co., 270 F.2d 686, 690 (8th Cir. 1959). 11 The development of the concept of an occurrence in the CGL policy was acompromise between the conflicting positions of insurance companies and those insured. Under the pre-1966 accident policy, those insured argued and many courts accepted the idea that coverage should exist for injuries that were unexpected or unintended from the viewpoint of the insured, even if such injuries occurred over long periods of time.Conversely, insurers argued that an accident must be an identifiable event which oc- curs in a relatively brief period of time. To accommodate both of these theories, theinsurance industry developed the occurrence policy. 12. For example, in Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325 (4th Cir. 1986) (applying Maryland law), the Fourth Circuit held that there was no occurrence during the policy period. However, the case involved somewhat unique factual circum- stances since the policy was only in effect during 1969, and the insured's complaint did not indicate any damage to the government plaintiffs before 1981 or any release discovery
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