January 1, 1999 by Cecil Jaipaul,
In the early days of environmental underwriting companies were often unaware of the full risk involved. For many companies the risks they took on and subsequent claims were not foreseen. For others, while the possibility of large claims may have been considered, the full consequences of the exposure were not.
Investigation and litigation of environmental claims and insurance coverage have become hard fought battles requiring specialised knowledge of the process involved, regulations and jurisdictions, specific coverages and understanding of the technical issues relating to environmental problems.
As with other forms of insurance, the extent of environmental coverage depends on the policy language and jurisdictional laws. However, unlike other forms of insurance, there never has been an industry “standard” environmental liability insurance policy. Environmental liability insuring agreements generally provide that the insurance company will pay:”…all sums which the insured shall become legally obligated to pay as compensatory damages because of bodily injury or property damage….” and “…reasonable and necessary cleanup costs incurred by the insured in the discharge of a legal obligation….”
As such, environmental liability insurance claims consultants are reminded of the fundamental distinction between a policy written on an “occurrence” basis and that written on a “claims made” basis.
The occurrence-based policy will only cover losses which occurred during the policy period. A claims made policy will cover any claim presented during the policy period even if the loss occurred outside the current policy period.
Therefore, every occurrence policy in force during the years of exposure can apply to the claim which may arise several years or decades after the initial exposure. Some policies may provide coverage for both occurrence and a claims made basis.
Call to Duty
As with most types of liability insurance policies, an environmental liability insurer owes its policyholder the duties to indemnify, reimburse and defend. After promising to indemnify a policyholder for “all sums” that the insured shall become legally obligated to pay, the “supplementary payments” provision of the policy may also contain a separate commitment to defend any suit against the insured.
Of particular concern to environmental insurers is the potential risk introduced by Y2K disruption. The Insurance Bureau of Canada (IBC) has circulated model Y2K exclusion clauses in this regard. However, in this soft market, it would be interesting to see how many insurers respond to the notifications under claims-made policies. I suspect that many will be driven by market conditions.
Risk management involvement
Claims consultants should have an ‘eye’ for underwriting to recommend pollution prevention activities. Pollution prevention activities not only reduce the risk of damage to the environment and property, it also benefits the insured and the insurer as the frequency and severity of losses are reduced.
To reward the insured, some insurance companies have introduced a three-tier structure in which premium reductions are tied to successive pollution reducing stages. Reducing claim costs starts with underwriting. Does your underwriting impose on your insureds an obligation to involve exposure avoidance, loss prevention and loss control as part of their own risk management program?
Insurers must be able to strike a balance between the client’s interest and their own bottom line. Many underwriters are now requesting compliance audits and assessments before granting coverage. Insurers are often at the deep end of the ‘deep pocket’ theory. In hindsight, was yesterday’s underwriting a good balance to pay today’s costs?
Generally, most environmental liability insurance policies are written on a “claims made” basis. As such, a claim is triggered when both of the following events take place during the policy period:
– The insured’s knowledge of the event and the notification to the insurance company of that claim. Often when the claim is reported to the insurer, the insured had prior knowledge of the loss and has already been involved with the regulators. The insurer’s first notice of the loss may be after the insured has commenced an action for indemnification or reimbursement – late notice may prejudice the insurer.
– “Foreseeability” is another issue involved, especially if the insured is aware that activities of the company has resulted in contamination. Obviously once an environmental regulator has warned the insured to desist from an activity causing an environmental concern, and this followed through, “then foreseeability comes to the forefront,” notes Bryan Baker at a recently held IBC environmental information forum.
Discussing the various triggers can become confusing and it is often difficult to determine exactly which one applies. The U.S. Courts have devised different theories about when coverage under an insurance policy is triggered. These theories are grouped into the following categories:
– Exposure or “release” trigger – the policy in force at the time the injured person or property was exposed to the harm is the one that provides coverage;
– Manifestation or “discovery” trigger – only the policy in force at the time the harm is first “manifest” is the one that provides coverage;
– “Triple” or “continuous” trigger – the policies in force at the time of the initial exposure, during the period of continued exposure, and at the time of manifestation of physical impairment would all be required to respond and provide coverage;
– “Injury-in-fact” trigger — the policy in force at the time the claimant suffers the actual injury.
One effective strategy for management of claims cost is to “get all of the facts upfront”. An excellent yardstick is “time equals money”. Along these lines, a seasoned claims professional recently referred in a discussion to what he calls the “faster rule” – the faster you get the facts, the faster you assess reaction to policy coverage, the faster you can get resolution.
More often than not, the insured has been involved with an environmental problem long before the insurer is brought in. The first thirty days of a loss are the most crucial. It becomes extremely difficult to gather information once the evidence or witnesses are gone.
As such, the adjuster’s course of action should include a discovery plan designed to obtain information needed to support the insurance company’s defence in the most effective manner. A well thought-out plan will cut cost and help claims management and defence lawyers focus on the significant issues of the claim.
Does the insured have an efficient claim reporting policy?
At the IBC environmental forum Baker offered the following advice to insurers facing environmental claims: “…as a practice, I insist . . . all new loss situations be investigated under a reservation of rights letter, and that the letter sets out to the insured the preliminary areas of coverage, including reference to policy terms, conditions, provisions and exclusions which might be an issue.”
According to Baker the investigation should achieve the following objectives:
– Develop sufficient facts to decide whether any contractual obligation exists;
– Determine whether the loss is within the scope of the insuring agreement;
– Rely on the provisions of a reservation of rights letter or non-waiver agreement;
– Consider the limit of liability under the policy;
– Investigate the pollution history of the insured;
– Interview past and present employees of the insured;
– Study the policy underwriting history;
– Retain experts when necessary.
Much of what makes a good environmental liability claims consultant comes from their ability to conduct a thorough and timely investigation and the knowledge of how to come up with the goods today to resolve a loss several years later. There is growing evidence that good management of environmental liability insurance claims can help an insurer to di
stinguish itself from the competition and gain a consumer advantage. Basically, the claims management should be pro-active and not reactive.
long-term nature of the business
A fellow claims consultant recently highlighted a case where a pollution loss had occurred in July 1985 and was not reported until June 1990 with the final settlement in October 1998. During the long period that an insured event occurrence has remained latent or has continued, an insured may have purchased many different insurance policies from different insurers, each having different coverage provisions, limits of liability, exclusions and period of insurance. Or, the insured may have been uninsured at the time of the loss event.
To adequately prepare for an environmental liability insurance claim, the consultant must thoroughly learn the facts of the case, formulate a theory of the case, and understand all of the relevant policies applying to the coverage. There is no substitute for detailed hard work when investigating an environmental liability claim.
The views expressed in this article are of the author alone.-