Running For Cover, Not For Coverage Law360, New York (October 18, - PDF document

Portfolio Media. Inc. | 860 Broadway, 6th Floor | New York, NY 10003 | www.law360.com Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | customerservice@law360.com Running For Cover, Not For Coverage Law360, New York (October 18, 2010) -- Few court decisions have addressed insurance coverage under the new generation of pollution legal liability and related environmental insurance policies. Unfortunately, three recent decisions by federal courts indicate that insurers may have the same "run for cover, not for coverage" mentality with respect to these new policies that frustrated policyholders for so many years with respect to general liability policies. Robert D. Chelser New England Environmental Technologies v. American Safety Risk Retention Group, 2010 WL 3622250 (D.Mass. Sept. 15, 2010) concerned a "small, family-owned Massachusetts corporation engaged in the business of environmental consulting." New England Environmental Technologies (NEET) purchased consecutive claims made general liability policies from American Safety Risk Retention Group (American Safety) that contained environmental consultant's professional liability coverage. The first policy ended on March 2, 2007, and the next, identical policy incepted that same day. The policy contained an automatic extended reporting period (AERP) that stated: "Upon termination of this policy for any reason other than nonpayment of premium or noncompliance with the terms and conditions of this policy, a claim first made against the insured and reported to us, in writing, within 30 days of the end of the policy period will be deemed to have been made on the last day of the policy period."

The AERP provision also contains the following limitation: "The automatic extended reporting period shall only apply if no other similar insurance is in force at the time of the automatic extended reporting period. The automatic extended reporting period shall not in any way reinstate or increase the limits of insurance or extend the policy period." NEET's receptionist received an environmental demand letter on Feb. 14, 2007, but did not forward it to NEET's owners until Feb. 26, 2007. The owners gave notice to American Safety on March 6, four days after the first policy terminated and the new policy incepted. One might think that no problem would arise, because NEET gave notice to the insurer within the AERP. However, the insurer argued that the AERP only applied to claims first made against the insured and reported during the AERP. This is an astonishing assertion that finds no support in insurance law. For good measure, the insurer also asserted that since NEET had purchased a second consecutive policy, NEET had "similar insurance" so that the AERP in any case would not apply. NEET sued American Safety, and filed a dispositive motion on the duty to defend. The court found that since both NEET and American Safety presented reasonable arguments, the insured must win. What is frightening is that, on what should have been a slam dunk for the policyholder, the court needed an extended discussion. Peace College of Raleigh Inc. v. American International Specialty Lines Insurance Company (AISLIC), 2010 WL 3743539 (E.D.N.C. Sept. 16, 2010), was also decided on a duty to defend motion. Peace College was another sympathetic plaintiff; as the court noted, it was a nonprofit corporation affiliated with the Presbyterian Church. Peace College had insurance coverage for, inter alia, "cleanup costs resulting from pollution conditions."

Peace College received a letter from a potentially responsible party seeking contribution at the Ward Transformer Superfund Site. The Ward site opened in 1964, and contained PCB contamination from leaking transformers sent to the site for re-conditioning. Peace College sent transformers to Ward for re-conditioning and resale in 1983 and 1995. AISLIC found numerous reasons to deny coverage, only one of which had any legitimacy. The AISLIC policy contained an exclusion for waste disposal activities occurring before 1998. The court, on the duty to defend motion, found that this exclusion did not apply because there was no evidence of the date of the disposal in the underlying complaint. The court noted in a footnote that, "Although the undisputed records provided by plaintiff to defendants ... state that plaintiff sent eight transformers to Ward before July 1, 1998, these facts were not alleged in the complaint and have not been found by the trier of fact to be true in the CERCLA Action." This is the type of result-oriented decision that a sympathetic insured can obtain on a duty to defend motion. AISLIC also denied coverage on the basis of two exclusions. In both instances, AISLIC proposed interpretations of these exclusions that were clearly contrary to their intent. The first exclusion applied to: "Any loss arising from pollution conditions at any property owned, leased, rented or occupied [by plaintiff], which [plaintiff] sold, leased, gave away, abandoned or relinquished operational control of prior to [March 1, 2006]." AISLIC asserted that since Peace College relinquished the transformers prior to 2006, the exclusion barred coverage. The court correctly found that this exclusion was meant only to apply to real property. AISLIC also relied on an exclusion for: "[G]oods or products manufactured, sold, handled or distributed by [plaintiff] or others trading under [its] name, and includes containers (other than automobiles, rolling stock, vessels or aircraft), materials, parts or equipment furnished in connection therewith, and includes warranties or representations made at any time with respect to the fitness, quality, durability, performance or use thereof, or the failure to provide warnings or instructions." Again, the court found that this exclusion did not apply, and was meant to apply only to products.

Coffeyville Resources Refining and Marketing LLV v. Liberty Surplus Insurance Company, 2010 WL 1740887 (D.Kan. April 28, 2010) concerned the unusual situation of two Chartis Claims Inc. (formerly AIG Inc.) companies fighting each other. Coffeyville had an unusual collection of policies. Liberty issued a $25 million pollution legal liability policy that covered both cleanup costs and property damage. Liberty paid its policy limit. Illinois National issued an umbrella pollution legal liability policy for $25 million that covered property damage but not cleanup costs. National Union issued an umbrella general liability policy with a limit of $25 million. Subject to a $5 million deductible, this policy contained "time element pollution insurance" that applied to property damage and cleanup costs caused by an abrupt, unintended and unexpected discharge of pollutants. Coffeyville faced damages of $50 million resulting from flooding from a river that released crude oil from a refinery tank, polluting the surrounding neighborhood. The court's 90-page decision addressed several key issues. First, the court dealt with the issue of whether National Union or Illinois National provided coverage following the exhaustion of Liberty's primary limit on its pollution liability policy. The court found that Illinois National was immediately excess to the Liberty policy and should therefore respond before National Union. The court next examined the difference between property damage and cleanup costs. While the court's decision is not fully clear, it basically draws a line between the cost of restoring property to its pre-accident condition versus the costs incurred solely to comply with the government's administrative consent order, or solely for reasons of public health. In view of the obvious gray area involved here, the court did not grant summary judgment on this issue. Next, National Union contended that the release was neither abrupt nor unexpected or unintended. The court ruled for the insured on both issues. As to the abrupt issue, the court found that the release occurred over several hours, and not "years, months or even days," and was therefore abrupt. The court also rejected National Union's assertion that the spill was expected or intended. National Union argued that Coffeyville knew that a release would occur if it failed to close the supply line, as was the case. However, the court found

that "plaintiff could obviously foresee that a release would occur if it failed to close the supply line, but there is no evidence that the plaintiff 'expected or intended' such a release to occur." For policyholders, the positions taken by the insurers in these cases are both disappointing and alarming. With the exception of the issue of the pre-1998 disposal exclusion in Peace College, the insurers denied coverage on grounds that can generously be called dubious. Policyholders may now be facing the same kind of unjustified coverage disclaimers and resultant litigation that characterized environmental claims under pre-1986 general liability policies. --By Robert D. Chesler (pictured) and Michael D. Lichtenstein, Lowenstein Sandler PC Robert Chesler (rchesler@lowenstein.com) is chairman and Michael Lichtenstein (mlichtenstein@lowenstein.com) is co- chairman of Lowenstein Sandler's insurance practice group in the firm's Roseland, N.J., office. The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients or Portfolio Media, publisher of Law360.