Winning Environmental Insurance Claim Trials: Was It an ‘Accident’ or ‘Occurrence?’

by | Jan 24, 2018

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Environmental insurance claims are the most complex insurance coverage claims, often with substantial sums at stake. There are many hurdles that the policyholder must clear in order to obtain coverage for environmental claims. Insurance companies often seek to end an environmental coverage action by making a motion for summary judgment, arguing that an insurance issue bars coverage as a matter of law, and thus that the action should be dismissed.

If the policyholder defeats the motion and the case cannot be settled, it will proceed to trial. The most important issue at the trial of an environmental insurance coverage action is whether the damage arose out of an “accident” or “occurrence,” as required under liability insurance policies. The result likely will determine if there is coverage for the claim. If the policyholder acts intelligently, it should rarely lose this issue. Understanding the ramifications of this issue and how best to address it at trial are critical to success.

Policies before 1966 typically provide coverage for liability from property damage caused by an accident. Most policies did not define accident, and many that did provided a definition that was not helpful. The 1966 standard primary liability insurance form changed accident to occurrence, which always is defined. Although not all definitions are the same, a common one is:

An accident, including continuous or repeated exposure to conditions, which result during the policy period in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

There are three threshold issues that have arisen from this language. First, most courts have read the word “expected” out of this definition on the basis that at some level injury or damage always is expected, and that to use that language could destroy any chance of coverage. The question thus is whether the damage was intentionally caused. If it was, there is no coverage. Second, most courts have applied a subjective test to determine what the policyholder intended rather than an objective, reasonable person test, which the insurance companies would prefer. The last issue is which party has the burden of proof on this issue. Some courts say that since the language is part of the insuring agreements, on which the policyholder usually has the burden of proof, the burden is on the policyholder. Other courts hold that the language operates to exclude coverage, and since the insurance company has the burden of proof on exclusions, it should have the burden here. The burden issue probably only matters where, because of age or acquisition of the policyholder, there are few records available of the operations of the facility. Nonetheless, regardless of who has the burden of proof on this issue, the policyholder needs to make the jury feel comfortable with how it conducted its business.

This issue is addressed largely through expert testimony, even if surviving witnesses who worked at the operation are available to testify. The insurance companies typically take two approaches at trial. First, they will point to areas of contamination caused by intentional disposal of waste. Any testimony supporting the insurance company’s point of view of former employees will be cited by their experts, who will speak as if they were applying the standards of today to the practices of yesterday. Second, they will point to contemporary literature involving discussions of issues at similar operations, perhaps nuisance problems at facilities using the same chemicals or practices at the time. They will cite to a “pollution prone” industry known to cause harm. They will argue that because of this knowledge, pollution problems should have been expected.

The attorney for the policyholder needs to respond to this barrage in a non-defensive way. First, to the degree possible, he must demonstrate the propriety of the plant’s operations, at least that it operated according to the standards of the day. If it recovered any otherwise harmful by-products and sold them or re-used them for any purpose, these early recycling efforts must be touted.

The policyholder should demonstrate wherever possible that contamination was caused not by intentional disposal activities, but by unintentional activities like leaks and spills. In many jurisdictions, the policyholder will prevail on this issue unless there was intentional disposal. If there were only underground leaks that were unknown to the policyholder, it should win this issue.

Even if there was intentional disposal, however, the policyholder should prevail on this issue unless there is independent evidence that the policyholder knew that its intentional conduct would cause property damage. Insurance covers the unintended results of even intentional conduct. Even insurance company expert witnesses have admitted that before the federal EPA promulgated regulations in 1980 under the Resource Conservation and Recovery Act governing the handling of hazardous waste “from cradle to grave,” it was standard practice to dispose of hazardous waste in pits, ponds and lagoons. It was not commonly understood how this caused substantial contamination, including of groundwater, before the time that the regulations were established in 1980. Whether there was an occurrence has to be judged at the time of the actions, not by 2017 standards. Former employees who can testify may prove to be especially valuable witnesses before a jury. They likely never thought that they were causing property damage, and typically viewed known incidents involving waste as merely housekeeping issues. They never purposefully would have harmed where they ate lunch every day or fished or swam with their children.

Contemporary literature about problems in other locations using similar practices or chemicals should not be admissible at trial for several reasons. First, unless there is evidence that the literature was read by the policyholder’s principals, it cannot be relevant. Even if it was read it still should be found to be irrelevant. Proof that a contemporary operation caused a nuisance is not relevant to other separate operations that were conducted without incident but today must be cleaned up because of chemical concentrations exceeding part per million or billion, concepts which may not have existed during operations. Finally, it is unlikely that the literature contains information demonstrating that merely by conducting these activities a company necessarily would cause property damage years later. At most they may have conveyed the idea that a business engaged in this activity might cause property damage. Conducting activities despite this warning might indicate negligence, but it is axiomatic that insurance covers the results of negligent acts. Indeed, proceeding in the face of a known risk does not lose insurance. The policyholder should argue that in addition to being irrelevant, the articles are highly prejudicial and should be excluded from trial, in addition to any expert testimony about them.

The policyholder should demonstrate that the business operated according to the standards of the day, and that it is being held liable today based on laws and standards that were developed long after operations ceased. It is cooperating with the relevant regulators to clean-up the problems that have been discovered today, but it bought insurance years ago to protect itself from such unknown liabilities. If it can support these contentions, it should prevail on the accident and occurrence issue and establish coverage for its environmental liabilities.

This article was contributed by David Elkind, a partner with Lowenstein Sandler. More about David here.

Pictured: Chemical plant; photo credit Chemical Superman, Flickr Creative Commons

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