The "Absolute" Pollution Exclusion

Posted by Gene Killian on March 30, 2012

In State Automobile Mutual Ins. Co. v. Flexdar, the Indiana Supreme Court has just held that the so-called “absolute” pollution exclusion contained in general liability insurance policies from 1986 forward is ambiguous and unenforceable.  The Court basically found that the exclusion does not define “pollutant” with sufficient specificity, and that, read literally, the exclusion would apply to any substance introduced into the environment.  (The Flexdar case itself dealt with TCE.)

The Court wrote:  “Applying basic contract principles, our decisions have consistently held that the insurer can (and should) specify what falls within its pollution exclusion. In fact, State Auto has over the years promulgated an Indiana ‘business operations’ endorsement…and an Indiana endorsement defining ‘pollutant’...Where an insurer's failure to be more specific renders its policy ambiguous, we construe the policy in favor of coverage. Our cases avoid both the sometimes untenable results produced by the literal approach and the constant judicial substance-by-substance analysis necessitated by the situational approach. In Indiana, whether the TCE contamination in this case would ‘ordinarily be characterized as pollution’ [as argued by the insurance company] is, in our view, beside the point. The question is whether the language in State Auto's policy is sufficiently unambiguous to identify TCE as a pollutant. We are compelled to conclude that it is not.”

New Jersey hasn't gone quite this far (yet), although in Nav-Its v. Selective, our Supremes ruled that the APE did not apply to toxic fumes from a floor sealant, and that the APE only applied to "traditional environmental pollution," whatever that means. 

Cost-Cap Policies and Environmental Cleanup Costs

Posted by Gene Killian on May 10, 2011

My first boss in this business, the late Gene Anderson, used to collect briefs filed by insurance companies in cases around the country.  Then, when a carrier attempted to take an inconsistent position in a case that he was handling, he would present the court with a brief filed by the carrier somewhere else, in which it had taken the exact opposite position.  I’m not actually sure that this technique ever had a real impact on the outcome of a case, but it used to make the carrier lawyers apoplectic, and so was definitely worth the entertainment value. 

Gene would have loved the recent tiff in Federal Insurance Company v. Ardell, a case in federal court here in New Jersey in which two carriers have been fighting over responsibility for environmental cleanup costs at an old razor blade factory.  One of the carriers – Federal – had insured the manufacturer under various pre-absolute-pollution-exclusion general liability policies.  When the manufacturer made claims for coverage under the policies, Federal and the manufacturer settled, and Federal took over responsibility for the cleanup.  Federal hired a company called Cherokee to assist with the remediation, and Cherokee bought a cost cap policy from AISLIC, naming Federal as an additional insured.  The cost cap policy had a period of June 11, 1998 through June 11, 2008, with a $2M limit and a retention of $766,015.

(A few words about “cost cap” coverage.  This sort of policy has been marketed aggressively by Chartis.  It’s basically “cost overrun” insurance.  For example, if a remedial action plan estimates that a site can be remediated for $500,000, a cost cap policy might include a deductible of $100,000, and anticipated exposure of $600,000. So, if total remediation costs exceed $600,000, insurance will make up the difference, up to the policy limits. A policy of this kind can make real estate buyers slightly less wary about taking on environmental risks.)

Federal and Cherokee sought payout under the AISLIC policy for $928,103.99 in expenses incurred as part of the environmental remediation project between June 11, 2008 and June 3, 2009.  But AISLIC argued that it was not required to pay any cleanup costs post-dating the policy’s termination date of June 11, 2008.  The relevant policy provision reads as follows: 

“[AISLIC] will indemnify the Insured for Loss which the Insured sustained for Cleanup Costs the Insured first incurs on or after the Inception Date [June 11, 1998] and before the termination date [June 11, 2008].  This Coverage applies only if the following conditions are satisfied:…2.  The Insured reports Cleanup Costs to the Company prior to the Termination Date.” 

How to get around the sticky issue of the termination date?  Federal (like any good policyholder!) argued that the AISLIC policy was ambiguous, and that AISLIC had a “continuing duty” to indemnify for costs that were “first incurred” before the termination date, even if the costs were expended and paid after that date. 

But Judge Freda Wolfson disagreed, writing:  “A plain reading of the Cost Cap Policy and its ten-year period of coverage shows that the parties agreed that the policy would cover only those expenses which Federal and Cherokee incurred within that coverage period, i.e. expended paid and reported.  It is apparent that Federal and/or Cherokee failed to complete the remediation project within the ten-year period and thus incurred various costs after the Termination  Date in order to fulfill their contractual obligations…It is not for the Court to draft a better insurance contract that would indemnify Federal and Cherokee for their expenses after the termination date.”

Observation:  It’s much harder for an insurance company to claim “ambiguity” than it is for a bona fide policyholder. 

Second observation:  Always be aware of, and comply with, policy deadlines.  Otherwise, you're in for a fight.

The statute of limitations for insurance claims

Posted by Gene Killian on February 25, 2011

A couple of weeks ago, we got a nice result ($13 million verdict) following a three-month trial in BASF Catalysts, LLC v. Allstate Insurance Company, one of the last great complex environmental coverage beasts.  We had the pleasure of co-counseling the matter with Dave Oberdick and his team from the Pittsburgh, PA firm of Meyer, Unkovic & Scott, LLP  – a wonderful group of professionals. 

One of the issues in the case involved the statute of limitations relating to insurance claims.  The carrier - OneBeacon - argued that it had sent a denial letter in 1993 and that we hadn’t brought suit until 2005.  The statute of limitations in New Jersey for contract matters is six years.

OneBeacon’s problem was that its denial letter included “CYA” language.   Specifically, while the letter denied coverage for the claim, it also stated:  “This correspondence is based upon presently known information.  [OneBeacon] will review any additional information which [the policyholder] believes should be considered in evaluating these matters.  Neither this letter nor any investigation of these matters undertaken by or on behalf of [OneBeacon] is intended to waive any rights or obligations of [OneBeacon] under the … policies issued to [the policyholder].”

OneBeacon’s claims handler testified at trial that, following this letter, he had never closed the claim file, and had in fact received supplemental information from BASF Catalysts (then known as Engelhard).

We argued that the “waffle” language inserted by the carrier, and the fact that the claim file had never been closed, meant that there was no unequivocal denial of coverage, and that the limitations period was therefore never triggered.  The Court agreed, writing in part:

“Toto v. Princeton Township, 404 N.J. Super. 604, 617, 962 A.2d 1150, 1157 (App. Div. 2009); Azze v. Hanover Insurance Co., 336 N.J. Super. 630, 641-43 (App. Div. 2001) require that a denial of coverage is required to be clear and unequivocal and cannot be ambiguous or open to multiple interpretations.  Nothing was presented at trial to change my earlier conclusion that [the so-called denial letter] is not unequivocal.”

The Court also found that the carrier had actively participated in the coverage case for five years before raising the issue, and therefore was estopped from doing so, holding:

“[OneBeacon] was an active participant in the lengthy fact discovery process as well as in the trial, and did not attempt to make its motion until all discovery was concluded and then again at the close of [the policyholder’s] evidence.  The timing of the motion was procedurally deficient because it was addressed to a ‘defense’ as to which [the policyholder] did not have the burden of proof.  In [Zaccardi v. Becker, 88 N.J. 245, 256-58, 440 A.2d 1329 (1982)], the Supreme Court determined that defendants were equitably estopped from asserting the limitations-period defense where they delayed for seventeen (17) months in informing the trial court and the plaintiffs that they were going to rely upon the defense.”   

By the way, there’s a pretty good – if a little dated – discussion of the statute of limitations with respect to insurance over at Marc Mayerson’s  Insurance Scrawl blog.  

Lessons: 

  1. If you’re a carrier and you intend to deny a claim, you’d better be clear and final in your language.
  2. If you’re a policyholder and you intend to prosecute a claim, don’t sit on your rights.  We won this one, but others may be lost because of inertia.
  3. Statute of limitations defenses are not like fine wine.  They don’t get better with age.  Neither do insurance claims.

The views expressed in this post are purely mine, and are not necessarily the views of BASF Catalysts, LLC.