Contamination Coverage

In 1989, the oil tanker Exxon Valdez ran aground and discharged more than 10 million gallons of crude oil, polluting 1,300 miles of Alaskan coastline and over 10,000 square miles of ocean. Most environmental claims handled by loss adjusters are much less spectacular, but they happen frequently. This article discusses how to analyze environmental coverage.

Environmental claims may involve either bodily injury or property damage arising in various ways: oil spills from residential heating oil storage tanks; methane gas seeping into the basement of a home; gasoline getting into drinking water; the release of toxic fumes or substances; or the dumping or escape of toxic wastes. They may involve both first party coverage and liability coverage. Where coverage exists, adjusters must be careful to attribute it to the appropriate policy.

As in other claims, the policy obligations of both the insurer and the insured must be assessed, beginning with the scope of the insuring agreement. The loss adjuster considers whether an “accident” has occurred and whether there is any damage as defined by the policy.

Protecting the insurer’s rights

Environmental claims often require significant investigation because years may have passed between the damaging event and its discovery. Estoppel is a serious concern, and insurers typically send the insured a reservation of rights letter or ask the insured to sign a non-waiver agreement. The loss adjuster should explain any specific coverage issues that are in question.

Late reporting of claims is a serious issue. If the insurer is not notified of the potential for loss early enough, the insurer may be prejudiced by the delay because details of deductibles, facultative reinsurance and aggregate limits may be lost.

Moreover, some reinsurance agreements contain sunset clauses limiting coverage to losses reported within a prescribed period. These clauses put limits on the reinsurer’s exposure to long-tail liability losses, which is particularly relevant to environmental claims.

What happened when?

When damage occurs over a protracted period of time, an adjuster must determine whether the actual pollution-causing event can be pinpointed. For example, suppose drums containing toxic chemicals were buried or dumped. The loss would only be discovered once the drums had deteriorated, leaked and left detectable evidence of chemicals in the soil or the water table. The adjuster would have to try to establish when the actual “event” precipitating the leakage occurred.

Environmental claims often involve more than one policy term. An insurer on risk for more than one year may be exposed to the limits of each policy for each year of coverage. When more than one insurer is involved over the pollution period, they may be asked to share the costs of defence or indemnification.

Policy? What policy?

The task of verifying whether a policy was in existence, what the limits were, and what wording was used can be especially challenging. The onus of proving that a policy exists rests with the insured, who should be asked to produce the policy at the outset. If it is not available, the insured can be asked to produce other proof that coverage exists, such as correspondence from the insurer or broker, or proof of payment of premium. Other policies issued later may provide policy numbers or other references. Specialized policy search companies can be hired by the insured.

Once the insured proves that a policy exists, the onus shifts to the insurer to establish the existence of policy limits or exclusions. The loss adjuster may have to interview the underwriter for information on coverage issues. If nothing can be found in the insurer’s files, the broker may have records of policies going back many years. Former employees of the brokerage or the insurer may also be sources of information.

Containment and clean-up not covered

Liability policies generally do not cover measures to prevent the possibility of a claim, such as costs incurred to contain a spill. For example, if a toxic chemical leaks from an insured’s storage tank and threatens to pollute municipal drinking water, clean-up measures might be required to prevent the contamination. However, the insurer might argue that the “damage” has not yet occurred and therefore the clean-up does not qualify for coverage.

Insurers have also argued that the cost of clean-up represents part of the cost of doing business: the waste produced in a manufacturing process is foreseeable and should be dealt with by the manufacturer as a matter of course.

Explicit exclusions

Most liability policies contain a pollution exclusion. In older forms, exceptions to the exclusion provided limited coverage for certain events, whereas newer wordings contain a comprehensive exclusion (see sidebar) with options to buy back limited pollution coverage.

The broad wording of the pollution exclusion has led to some confusion about its intention. For example, courts have held that injury claims arising from inhalation of insecticide were not barred by an absolute pollution exclusion, on the grounds that a substance that can cause harm is not necessarily a pollutant — a pollutant is a toxic or particularly harmful material that is recognized as such in industry or by government regulators.

Another common exclusion is property owned, occupied or rented by the insured. In more current wordings this exclusion applies to real property. Suppose that a neighbourhood’s water supply has been contaminated and the source of the contaminant is the insured’s industrial site. Clean-up the site as ordered by the provincial authority entails the removal of contaminated soil from the insured’s premises. The insurer may argue the soil is property the insured owns or occupies and is therefore excluded.

The personal property exclusion concerning care, custody and control also applies to pollution claims, as it does to other claims.

The question of causation

Many different contaminants are present in the air we breathe, the water we drink, the food we eat, and the ground we walk on. Some are known to come from only one source; for example, dioxin contamination, which pollutes rivers and lakes, arises from the pulp-and-paper bleaching process. Other contaminants can have many possible sources, both industrial and natural, alone or in combination. In a claims situation, the exact nature of the contaminant that caused the damage must be clearly established.

Once the contaminant is discovered, its source must be identified. Perhaps the insured is not responsible, or perhaps someone else shared in the polluting activity.

Causation is a subject for careful claims investigation, which will be the focus of the Education Forum pages in the upcoming June/July issue of Claims Canada.

This article is based on excerpts from the study material in the Claims Professional Series of applied courses – a core of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.

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Exclusion Example

In a current CGL wording, coverage is excluded for any “pollution condition,” which is defined as:

A. the actual, alleged, or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”, or

B. the actual or alleged existence of “pollutants”, regardless of premises, site or location, whether or not owned by any insured.

Pollutants are defined in the policy as follows:

“Pollutants” means any solid, liquid or gaseous, or thermal irritant or contaminant including smoke, odour, vapour, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.