ALI-ABA Course of Study Environmental Insurance: Emerging Issues and Latest Developments on the New Coverage and Insurance Cost Recovery

Transcription

1 339 ALI-ABA Course of Study Environmental Insurance: Emerging Issues and Latest Developments on the New Coverage and Insurance Cost Recovery May 8-9, 2008 Boston, Massachusetts Current Insurance Policies for Insuring Against Environmental Risks By Ann M. Waeger Farer Fersko, P.A. Westfield, New Jersey

2 340 2

3 341 CURRENT INSURANCE POLICIES FOR INSURING AGAINST ENVIRONMENTAL RISKS Ann M. Waeger* Farer Fersko Westfield, New Jersey I. Introduction Before the early 1970 s, when insurers added the so called "sudden and accidental" pollution exclusion as a standard provision in general liability insurance policies, coverage was generally available for unexpected and unintended bodily injury and property damage arising out of environmental conditions. However, once insurance companies started to become concerned about, and actually began to receive, costly claims arising out of environmental issues, the insurance industry decided to seek to limit coverage of environmental claims. This strategic shift gave birth to the sudden and accidental pollution exclusion. As time passed and environmental disasters such as Love Canal began to emerge, an array of federal and state laws were enacted governing liabilities for environmental ills. As a result, responsible insureds began to make claims under their general liability policies for the costs they incurred and suits filed against them in connection with environmental events and conditions. Disputes ultimately arose between the insureds and the insurance companies over the meaning of the sudden and accidental pollution exclusion, and the issue of whether insurance companies intended to cover environmental claims. * Copyright 2008 by Ann M. Waeger. The author gratefully acknowledges the assistance of Robert A. Stout in the update of this paper.

4 342 Insureds proposed that this exclusion was merely a restatement of the typical definition of occurrence in the policy, and was only meant to exclude expected and intended damage or injury relating to environmental harm. On the other hand, insurers proposed that the exclusion went far beyond the occurrence concept. They took the position that the policy did not provide coverage for pollution related claims at all unless the discharge of a pollutant was sudden and accidental in the temporal sense of that word; that is, a boom type of event, such as a catastrophic tank leak. Extensive case law throughout the United States examines the meaning of this pollution exclusion, not always reaching the same result. For example, New Jersey courts have interpreted this exclusion in a manner most favorable for the insured, and Ohio courts have repeatedly ruled in favor of the insurers, with a number of states falling in between those extremes, although many states do lean toward the insurers position. In the early days of this dispute over whether liability insurance policies covered environmental claims; especially during the early to mid-1980 s, a number of insurance companies recognized the opportunity to market an insurance policy to fill the gap in general liability coverage created by the sudden and accidental pollution exclusion. The result was the creation of the environmental impairment liability insurance policy. Various insurance companies marketed this product through subsidiaries or new entities separate and apart from their financially successful company. The reason for this was obvious; they wanted to protect their profit centers from the dangers of costly environmental claims. Insurance companies soon found these policies to be far from perfect, and as a result they ceased issuing most policies soon after they came into existence. The primary reason for the demise of these types of policies was that most insurance companies issuing these policies, with certain exceptions, such as American International Group ("AIG"), were overwhelmed by the number and cost of the claims presented. See the International Insurance case, Item XI, Number 21.

5 343 After this disastrous experiment with environmental coverage, and as the number of environmental claims grew, the property and casualty insurance industry decided to all but cease providing coverage for environmental exposures. By 1986, most general liability policies were issued with a so-called "absolute" pollution exclusion, which insurance companies maintain was designed to totally preclude coverage for environmental claims, with certain minor exceptions. This exclusion can be found in most general liability policies issued today, with the result that there is little or no insurance protection for environmental risks for owners or operators of real property. In fact, for an extensive period of time, insurers offered virtually no environmental insurance coverage at all. Furthermore, the coverage provided by those that did was in most cases prohibitively expensive, limited in term to maybe six months or one year, and very limited in scope. Then, in the late 1990 s, something happened that caused certain insurance companies to re-think their position on environmental risks and to again envision a possible market for some type of limited environmental coverage. A primary impetus for this market appears to have had its origins in the increased interest of federal and state governments, as well as the business community, in the redevelopment of contaminated properties, spurred on by emerging Brownfields initiatives in a number of states encouraging redevelopment. The marketing of these policies began slowly. AIG started first, then Reliance National Insurance Company and Zurich Insurance Company also came into the picture. In addition, about ten years ago the upstart, Kemper Environmental, (which is now out of the market) decided to enter the market with a vengeance, creating a groundswell of competition and creative marketing. In turn, this helped to stimulate the volatile situation we have witnessed in the environmental liability policy market. Today, a number of other insurers also offer certain types of environmental coverage, including XL Environmental, Chubb Insurance Company (which is working its way back into the market), ACE Insurance Company, Liberty Mutual Insurance

6 344 Company, Seneca Insurance Company, Arch Insurance Company and American Safety Insurance Company. In addition, Great American Insurance Company has plans to enter into this market. are: The largest insurance companies involved in the current environmental insurance market AIG Environmental (Lexington, Commerce & Industry and American International Surplus Lines Insurance Companies and others) XL Environmental (Indian Harbor Insurance Company and Greenwich Insurance Company) Zurich Insurance Company (Steadfast Insurance Company) ACE Insurance Company (Illinois Union Insurance Company) Chubb Insurance Company (Federal Insurance Company) Due to the unique nature of each environmental risk, environmental liability insurance policies are generally underwritten on a custom basis, unless the insurer has chosen to market a policy to potential insureds with minimal environmental risks. As a result, the industry has no consistent ratings structure to determine the precise amount of the premium on a policy-by-policy basis. Rather, when the insurer agrees to issue the policy, it carefully underwrites each policy and sets the premium on a case by case by-case basis. However, it should be noted that not all risks are insurable. Insurance companies are for the most part very careful about what they will insure and what they are not willing to insure, and if they do not feel comfortable with the risk, they will not insure it. Another factor affecting the risk tolerance of insurance companies are losses suffered under these types of policies. Over the last few years insurance companies received more claims than expected under these policies, especially from the cleanup cost cap type policies. In fact, XL Environmental has significantly reduced its cleanup cost cap business, and AIG has changed its underwriting of these policies to tolerate even less risk. In addition, the prevalence of large claims made under secured creditor policies (lenders only coverage), was a factor in AIG s withdrawal from that market, while certain of the remaining carriers only offer more limited types of such coverage. Additionally, reinsurers in general have begun to lose their comfort level with the long term risk associated