Category Archives: Environmental

Court of Appeals Rejects Unavailability Rule in Long-Tail Coverage Disputes (NY)

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In Keyspan Gas East Corporation, v. Munich Reinsurance American, Inc., & Century Indemnity Company et al, the New York Court of Appeals recently rejected the “unavailability of insurance” exception in long-tail coverage disputes – i.e., where the injury is gradual and continuous and spans years in which insurance coverage was in place, as well as years in which no coverage was purchased.  We addressed the lower court’s decision from the Second Department in a prior post, on September 16, 2016.  The Court of Appeals hereby affirms that decision.

The Court of Appeals explained the courts generally use two methods to allocate liability in long-tail coverage cases – “All Sums” or “Pro Rata.” In all sums allocation, the insured can collect its total liability up to the policy limit of any policy in effect during the periods that the damage occurred. In pro rata allocation, the insurer’s liability is limited to losses during the policy period, “in other words, each insurance policy is allocated a ‘pro rata’ share of the total loss representing the portion of the loss that occurred during the policy period.” Within pro rata jurisdictions, there is a split regarding whether the policyholder should bear the risk for periods when insurance was unavailable. Keyspan marks the first instance of the Court of Appeals addressing this issue in New York.

The dispute arose around the turn of the 20th Century, when Keyspan’s predecessor,  (LILCO) built and operated several gas plants in Long Island. Long after those plants stopped operating, the New York Department of Environmental Conservation found evidence that those plants caused significant environmental damage in the surrounding areas. Because the damage occurred gradually, it was impossible to point to a specific occurrence during a specific insurance policy period.

Keyspan commenced a declaratory judgment action seeking a determination of liability owed under multiple insurance policies, including the policies Century issued. Century had issued a total of eight liability policies covering property damages between 1953 and 1969. The parties did not dispute that the environmental damage that occurred in any specific year was “unidentifiable and indivisible” from the damage as a whole. Keyspan did not dispute that it bore the risk for periods of time when insurance was available to, but not purchased by, LILCO. Because applicable coverage was unavailable for many of the years in which the harm occurred (as such policies did not exist), Keyspan argued that it should not be considered self-insured during those years, and Century should cover a share of those costs.

After decades of litigation, Century moved for partial summary judgment in 2014. The Supreme Court granted the motion in part, but held that because the harm could not be attributed to a specific time frame, that Century would have to indemnify Keyspan for the years that it provided coverage and for the years where applicable insurance coverage was unavailable. Century appealed, and the First Department held that Century did “not have to indemnify Keyspan for losses that [were] attributable to time periods when liability insurance was otherwise unavailable in the marketplace.” The First Department, recognizing that this was an issue of first impression in New York, certified the question to the Court of Appeals to decide whether their order was properly made.

The Court of Appeals discussed the split in pro rata jurisdictions about whether the policyholder should bear the risk for periods when insurance was unavailable. Some jurisdictions apply an “unavailability rule,” which functions as an exception to the general rule that the policyholder is considered self-insured for periods when they are without insurance coverage. In those jurisdictions, each insurance policy is allocated a ‘pro rata’ share of the total loss representing based upon the portion of the loss that occurred during its policy period and periods when such coverage was unavailable. According to the Court of Appeals, jurisdictions that have adopted the unavailability rule had “done so by relying heavily on public policy concerns and a desire to maximize resources available to claimants against a policyholder.”

In New York, there is no set rule to determine when to apply “all sum” or “pro rata” allocation. The Court explained under its prior precedent, the method of allocation was determined “foremost . . . by the relevant insurance policy.” In the Court’s prior cases, it analyzed policy language similar to that in the applicable Century policies, which limited the insurer’s liability to losses and occurrences happening “during the policy period.” There, the Court held that “pro rata allocation – rather than all sums allocation – was more consistent with such policy language because ‘the policies provide indemnification for liability incurred as a result of an accident or occurrence during the policy period, not outside that period.’” (quoting Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 224 (2002)).

According to the Court, it followed from the Consolidated Edison holding that the unavailability rule was inconsistent with the “during the policy period” limitation language that formed the foundation for the pro rata approach. To assign risk to an insurer for years outside the policy period would ignore not only the contract language, but also the pro rata approach. In addition, applying the unavailability rule would effectively provide coverage for years in which no premiums were paid. Moreover, while jurisdictions that applied the “unavailability rule” focused on public policy, the Court noted that foreseeability is a critical aspect of the insurance industry’s ability to spread risk.

The Court concluded that here, applying the “unavailability rule” would require ignoring Century’s policy language. This would be inconsistent with New York’s emphasis on policy language. Because the rule could not be reconciled with the pro rata approach, the Court refused to apply the unavailability rule.   Thanks to Evan King for his contribution to this post.  Please email Brian Gibbons with any questions.

Continuous Trigger Coverage Expanding in PA or Still Only About Asbestos?

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That was the question (effectively) posed before the Commonwealth Court in the case of Pennsylvania Manufacturers’ Association Insurance Company v. Johnson Matthey, et al. In the case (which was brought in the Commonwealth Court because PA’s Department of Environmental Protection was a defendant), Pennsylvania Manufacturers sought a declaration that it did not owe coverage for an environmental contamination lawsuit filed by DEP against Johnson Mathey. In the underlying lawsuit, DEP alleged that from 1951 through to 1969, a Johnson Mathey predecessor company allowed hazardous substances (arising out of the manufacture of alloy tubes) to escape into Chester County, PA. Pennsylvania Manufacturers insured Johnson Mathey from 1969 through to 1971. The contamination was not discovered until 1980 and thus no contamination at the Site was detected during the Policy period.

Pennsylvania Manufacturers, which assumed its insured’s defense under a reservation of rights, argued that for coverage to attach, the property damage must manifest itself during the policy period. The Commonwealth Court agreed with this basic coverage principle and noted that the “trigger of coverage under an “occurrence” insurance policy is ordinarily the first manifestation of the injury that is alleged to have been caused by the insured.” If only the decision had ended there!

However, the court went on to write that under the reasoning of the J.H. France Refractories Co. v. Allstate Insurance Co., 626 A.2d 502 (Pa. 1993) decision (which expanded the trigger of coverage with respect to asbestos bodily injury claims and held that all “occurrence” policies from the date of exposure to the date of first manifestation are triggered), there was no specific reason for continuous trigger coverage to be limited to asbestos cases. The Commonwealth Court wrote that “the justification for the multiple trigger of coverage was not the peculiar nature of asbestos disease, but the long latency of the claim for which coverage was sought.” Applying this reasoning to the facts at bar, the Commonwealth Court held “On the record before us, this case therefore presents the long latency of continuing, undetected injury or damage that supports a trigger of insurance coverage prior to manifestation under the Supreme Court’s decisions in J.H. France Refractories Co. and St. John.”

So, what does this mean for the insurance marketplace? What it means is that there are now, at least, two possible scenarios in which continuous trigger exposure applies in PA – asbestos and environmental pollution. We suspect to see the plaintiff’s bar citing Pennsylvania Manufacturers’ Association Insurance Company v. Johnson Matthey, et al. in other contexts – and our suspicion is that the attack will start in the construction defect arena. Stay tuned for what happens next!

For more information about this post please e-mail Bob Cosgrove.

EPA Notice Letter A Suit Under Policy (NJ)

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Cooper Industries v. Wasau is an insurance coverage dispute that arose out of a massive Passaic River cleanup effort by the EPA and State of New Jersey and their efforts to collect payment from potentially responsible parties (PRP).

Cooper received a PRP letter from the EPA stating that Cooper may be responsible for costs of the cleanup project due to alleged conditions created by manufacturing facilities owned by Cooper companies. Cooper alerted OneBeacon of this notice, but the insurer refused to cover the company’s defense costs in the EPA proceedings, asserting that the policy language provided that “OneBeacon “shall have the right and duty to defend any suit…” and that this letter was not a suit.

The Court looked to other jurisdictions that held that a PRP letter was, in essence, a pleading, and that these letters compelled information that would similarly be produced in discovery.  The Court also pointed out that the PRP letter stated that the EPA could initiate a lawsuit if Cooper declined to assist with the project. The Court found that the letter used the threat of legal proceedings to compel payment or conduct by a policyholder, which brought the letter within the definition of “suit” under the policies and ultimately found that OneBeacon must defend Cooper Industries in connection with the cleanup project.

Thanks to Chelsea Rendelman for her contribution to this post and please write to Mike Bono for more information.

 

 

 

Do The First and Second Circuits Disagree On The Meaning of “Sudden and Accidental”?

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The First and Second Circuits find themselves in potential conflict as a result of a suit for defense costs relating to environmental cleanup costs. The central issue is whether the discharge of pollutants fell within the policy’s pollution exclusion. When interpreting whether an event falls within a pollution exclusion, the threshold question is whether the event was “sudden and accidental.” If so, the event falls outside a policy’s relevant pollution exclusion and an insurer likely owes coverage.

In The Narragansett Electric Co. v. Century Indemnity Co., a cache of long buried waste was discovered, triggering a release of hazardous chemicals. Applying Massachusetts law, the district court found coverage was triggered and the event was “sudden and accidental,” which caused it to fall outside the policy’s relevant pollution exclusion. On appeal, the Second Circuit panel reversed, stating simply “any property damage alleged in this case plainly arose out of the NEC’s intentional disposal of wastes on the Mendon Road site.” The Narragansett Elec. Co., Plaintiff–Appellee–Cross–Appellant, v. Century Indem. Co., Defendant–Appellant–Cross–Appellee., No. 15-1137 -CV(L), 2016 WL 3450187, at *1 (2d Cir. June 23, 2016). Narraganset (“NEC”) claims the Second Circuit created a standard in which a policyholder will never be entitled to coverage once waste is disposed of on the subject property, no matter what may have triggered the dispersal of the dormant pollutants.

In response to the ruling, NEC filed a motion to reargue, claiming the Second Circuit failed to consider controlling law. To support their contention, they cite to the First Circuit’s decision in Millipore v. Travelers Indemnity Co. In Millipore, pollutants were released following attempts to douse a raging chemical fire at one of the covered properties. The First Circuit found the explosion was sudden and accidental as defined in the policy, and the remediation efforts were directly related to that event. Applying Massachusetts law, the First Circuit found the event qualified as “sudden and accidental” and was outside the pollution exclusion.

According to NEC, the facts in both cases are so similar the Second Circuit should have taken Millipore into account. NEC contends it was improper for the Second Circuit to distinguish the remediation efforts in Millipore with the accidental discovery of waste that had been buried for fifty years. In each case, Narragansett claims, the actions of a third party caused a separate, unexpected release that was potentially sudden and accidental.

In our view, Narragansett’s allegations fail on two grounds. First, they misconstrue the meaning and reasoning behind the Second Circuit’s ruling. The Second Circuit’s ruling was based almost entirely on the allegations in the complaint. The allegation in the underlying complaint in Narraganset stated “Maurice C. Brunelle uncovered blue sludge that was contaminated with chemical substances [from NEC’s waste]. … [and thereby] caused hazardous chemicals to be released to the environment.” The Narragansett Elec. Co., Plaintiff–Appellee–Cross–Appellant, v. Century Indem. Co., Defendant–Appellant–Cross–Appellee., No. 15-1137 -CV(L), 2016 WL 3450187, at *1 (2d Cir. June 23, 2016). The Second Circuit could find nothing in those allegations supporting a finding the release was “sudden and accidental.” As the Court wrote, “[T]he Commonwealth’s complaint, by contrast, ‘cannot reasonably be read’ to describe a ‘sudden and accidental’ release of pollutants separate from the NEC’s intentional release of pollutants into the environment over the course of decades.” Id at 1. On that basis, the Second Circuit found the Pollution Exclusion applied to bar coverage and thus no duty to defend. In contrast to the claims put forth by Narraganset, no precedent setting standard was created.

Second, the facts in Millipore and Narraganset are not as similar as NEC contends. In Millipore, an unanticipated fire and the ensuing remediation efforts were the direct causes of the hazardous release of pollutants. The insured was able to show the release was sudden and accidental. In Narraganset, the third party “uncovered blue sludge” which apparently spawned the release of dormant chemicals. NEC was unable to demonstrate the third party’s actions caused the spread of the pollutants or that the phenomenon was sudden and accidental. As such, the mere allegation of uncovering a pollutant did not present a scenario similar enough to implicate the ruling in Millipore.

In our view, Millipore and Narraganset are distinct enough to exist in harmony with one another.

Thanks to Joshua Gornitsky for his contribution to this post.  For more information, please email Dennis M. Wade at .

Is Lead Paint a Pollutant? That Depends on Who, and Where, You Ask

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While Total Pollution exclusions have generally been applied broadly, insurers must be cognizant of a fascinating conflict between different state’s jurisprudence. This conflict involves the question of whether lead or lead based products and by-products are considered “pollutants” under a total pollution exclusion.

This conflict was highlighted recently when the Georgia Supreme Court found that a policy’s pollution exclusion applied to an injury that resulted from the ingestion of lead-based paint. In Georgia Farm Bureau Mut. Ins. Co. v. Smith, 2016 Ga. LEXIS 245 (Ga. Mar. 21, 2016), a minor tenant was injured due to ingestion of lead-based paint chips. The plaintiff insurer moved to disclaim coverage based on the policy’s pollution exclusion. Following the insurer’s victory at the trial level, the Georgia Court of Appeals reversed, claiming that lead-based paint was not a “pollutant” as defined under the policy because it wasn’t specifically mentioned in the exclusion. The Georgia Supreme Court noted that the pollution exclusion was not limited to environmental harms and that the exclusion needs to be evaluated by its terms in accordance with Georgia law. Additionally, the court referenced a prior Georgia case, Reed v. Auto-Owners Ins. Co., 284 Ga. 286, 667 S.E.2d 90 (2008), where the court found that the pollution exclusion applied to a claim related to carbon monoxide poisoning despite carbon monoxide poisoning not being explicitly mentioned as a pollutant. Using the same analysis, the Supreme Court held for the insurer, declaring lead based paint to be a pollutant for the purposes of the pollution exclusion.

Notably, New York courts take the opposite stance. The case of Westview Associates v. Guar. Nat. Ins. Co., 95 N.Y.2d 334, 338, 740 N.E.2d 220, 222 (2000) concerned essentially identical facts as Georgia Farm Bureau, in that a minor suffered bodily injury due to the ingestion of lead-based paint chips. The New York Court of Appeals, equivalent in stature to the Georgia Supreme Court, held that the lead-based paint chips did not constitute a pollutant. The Court of Appeals reasoned that, if lead-based paint chips were meant to be excluded by the policy, as the insurer claimed, then they would have been specifically mentioned in the exclusion. Since they were not, the court ruled that the issue constituted an ambiguity in the policy and interpreted it against the insurer.

The key difference between each states approach resides in their respective analytical framework. Georgia courts have a history of enforcing pollution exclusions without requiring the pollutants to be explicitly named in the policy—taking a common sense view of what is regarded as a pollutant. By contrast, New York plays by the card, requiring more specificity. This decision, once again, calls upon Underwriters to develop wording with enough breadth to carve-out the risks they are unwilling to embrace. What works in Georgia may not work elsewhere. Insurers have to be cognizant of where a given action is being litigated and where a given policy is issued.

Thanks to Joshua Gornitsky for his contribution to this post.  For more information, please email Dennis M. Wade at .

ROR Letters Trump Estoppel Argument in DJ Action (PA)

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In 2011, Randy and Erin Shearer brought suit against a group of Nationwide Mutual Fire Insurance Company policyholders (Policyholders), who all held Nationwide homeowner insurance policies with identical language. The Shearers alleged that they purchased undeveloped land to build on, but that three years after purchasing the property, they discovered that multiple sewer pipes were discharging raw sewage, effluent, and wastewater onto their property. The Shearers asserted that the sewer pipes had drained from the neighboring proprieties of the Policyholders.

From the inception of this litigation, Nationwide began to defend each of the Policyholders under a reservation of rights. The reservation of rights letters (as well as the supplemental reservation of rights letters) sent to the Policyholders stated that Nationwide would investigate the circumstances surrounding the Shearer’s claims, and noted, that Nationwide specifically “reserve[d] the right to later deny coverage on the claim at the conclusion of its investigation.” The reservation of rights letters specifically informed Policyholders that the Shearer’s claims might fall within the bounds of the pollution exclusion and/or biological deterioration or damage exclusion.

Around three years later, Nationwide filed a Declaratory Judgment Act action against the Policyholders and moved for summary judgment. Nationwide sought a declaration that it did not owe the Policyholders defense or indemnity based on the pollution exclusion and/or biological deterioration or damage exclusion, which Nationwide had repeatedly cited in its reservation of rights and supplemental reservation of rights letters. In response, the Policyholders filed a motion seeking a dismissal.

After the district court addressed jurisdictional issues, it turned its attention to the Policyholders’ argument that Nationwide should be estopped from denying coverage. The Policyholders asserted that Nationwide had been defending them for more than three years and that they would suffer prejudice if they were forced to obtain new counsel so late in the proceeding.

However, the court disagreed. The court determined that each of the Policyholders received a timely reservation of rights letter, followed by a supplemental letter. Nationwide had clearly set forth its coverage position, and had only assumed the defense of the Policyholders subject to the reservation of rights. Furthermore, the court rejected the Policyholders’ argument that Nationwide should otherwise be estopped from denying coverage because Nationwide waited too long to bring this action. Instead, the court held that the Policyholders did not meet their burden of demonstrating that they were actually prejudiced by Nationwide’s delay in disclaiming coverage.

The moral to be gleaned from this Declaratory Judgment Act action is that a good reservation of rights letter can go a long way.  Thanks to Erica Woebse for her contribution to this post, and please email Brian Gibbons with any questions.

Do Subrogation Clauses Need to Be Strengthened?

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While there are always questions regarding the insured’s willingness to cooperate in a subrogation lawsuit, there has, until now, been little doubt that the subrogation clauses in insurance policies are sufficient to protect an insurer’s interests. This status quo has been called into question by the case of Chubb Custom Insurance Co. v. Space Systems/Loral, LLC, et al., a 9th Circuit case, which the US Supreme Court denied certiorari on earlier this week.

The facts of the case are as follows.

Chubb insured Taube-Koret, a retirement home that was located on polluted land formerly owned by Sun Microsystems Inc., Ford Aerospace & Communications Corp. and others. Taube-Koret, although it did not cause the problem, was ordered to clean up the pollution on the property pursuant to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). Chubb paid for the cleanup and then attempted to recover the costs from the original polluters under CERCLA Section 107.

A California federal judge dismissed the claims and the 9th Circuit affirmed. The basis for the dismissal was the courts’ conclusion that CERCLA Section 107 does not allow direct subrogation claims and that therefore the only way an insurer can recover its costs via subrogation is under CERCLA Section 112 that requires the claimant (i.e. the insured) to demand compensation from Superfund or a liable party. Because Taube-Koret never personally made such a claim, the dismissal was warranted. The Supreme Court’s instant refusal to hear the case means that the 9th Circuit’s decision is binding.

Why is all of this important? Because, under this case law, to have a viable pollution subrogation claim, an insurer must first instruct its insured to prosecute a claim again the culpable parties, which, of course, means that the insurer cannot have first paid the claim – otherwise there would be no damages. Even if permissible under the wording of a typical insurance policy (which is doubtful), it seems highly unlikely to expect an insured to first attempt (at its own cost) to sue a polluter before its insurance claim is paid. So, thought will have to be given to how policy wording can be changed to remedy this – perhaps (as in crisis management policies) insurer paid legal counsel can be assigned at first reporting to assist with the prosecution?

For more information about this post, please contact Bob Cosgrove at .