Cost-Cap Policies and Environmental Cleanup Costs
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.