Unearthing Historical Environmental Liability Policies

For decades it has been routine business practice in Canada to purchase occurrence-based general liability insurance policies. In recent years governmental authorities have begun to require the clean up of environmental pollution resulting from corporate activities that occurred long ago. The liability associated with such clean up is arguably covered by insurance policies issued for the years when polluting activities occurred. A properly designed recovery program can efficiently and effectively collect insurance dollars to offset the costs of environmental compliance. Many major U.S. companies have already tapped into this significant source of revenue. Canadian companies are now starting to follow this precedent.

The language of historical Canadian liability policies is highly variable, and so it is important to carefully read each policy. Nonetheless, there is sufficient uniformity of concept to allow some meaningful generalization. Those claims that relate to pollution that happened in past years or to controlling the mobilization of historical pollutants can often be settled

Costs of cleaning up contamination deposed in the past could support recovery because such costs result from “occurrences” during the years of the old coverage. Claims may include the costs associated with “remediating” acid mine drainage, soil or groundwater contamination, monitoring and testing, impoundments and many other environmental issues. For example, if a new storm water capture system prevents mobilization of past contaminants, related costs may be recoverable. Most environmental costs incurred by Canadian companies pursuant to governmental regulatory schemes and/or third-party claims would fall within the relevant coverage criteria. There are, however, some exceptions. Costs of future pollution prevention (such as air scrubbers) would not support recovery because there is no “occurrence” that relates to the historical policies.

To make a claim, it is first necessary to find “old coverage”. Finding insurance policies that were issued in the 1950s or 1960s may not be easy. Established processes for conducting an insurance “archaeology” project are available. Many sources can be employed to identify historical coverage.

Some evidence of old coverage is secondary: that is, evidence can establish the existence and terms of the coverage even if the policy itself cannot be located. Some sources are internal to the insured company and some are external. Finding or reconstructing coverage can be tricky and may require expert consultation. It is important to be familiar with Canadian business practices and history, both with regard to the insurance industry and with regard to risk management across the range of Canadian businesses.

INSURER POSITION

General liability insurance was not specifically designed to insure against environmental liabilities. Insurers therefore do not readily admit coverage. Nevertheless, they will settle claims, albeit on a discounted basis.

Insurers often assert a variety of policy-based and extra-contractual defenses, ranging from various specific pollution exclusions to arguments that a policyholder gave late notice of a claim or intentionally polluted. However, policyholders should not simply accept the insurers’ “determination” that their historical policies do not cover environmental liabilities – after all, the insurance companies have a vested interest in trying to limit the amount of any claim.

It is important to recognize that each insurer defense invokes a risk of success or failure to both sides, and so constitutes only a basis for discounting a settlement as opposed to a reason to walk away from a claim. In fact, insurers have paid billions of dollars to settle such claims (including those in Canada), and collectively maintain billions of dollars in reserves to address future claims. A successful claim settlement process must build upon the economic motivations that drive decisions at the highest levels of insurance companies. Insurers make settlement determinations based upon modeled economic expectations that reflect the predictable success rate of claim defenses.

Most insurance companies, including the companies responsible for the majority of Canadian coverage, have developed complex modeling programs designed to assess the economic risk associated with coverage issues. This analytical framework facilitates a compromised solution to coverage disputes. Although coverage litigation is possible, it is not an economical way to recover environmental insurance proceeds. Insurers prefer for several reasons to settle claims. Settlement allows the insurer to expeditiously “close the books” on historical policies and so reduce reserves for such claims. It eliminates costly attorney fees and avoids the risk of unfavorable precedent. Where negotiation involves factual submissions by policyholders, insurers also benefit by being able to transmit that information, in turn, to reinsurers.

Finally, in some cases negotiated settlements allow insurers to maintain valuable business relationships with their customers. A properly modeled and documented settlement process supports all such goals. This process is particularly appropriate in Canada today, as claims begin to accelerate in a context that is not (as contrasted to the U.S.) otherwise prone towards litigation.

SETTLEMENT VALUE

The settlement value of environmental claims is dependent on many factors: actual past environmental costs incurred, identifiable future environmental risk, environmental budgets and reserves, the nature and coverage of historical insurance policies, time periods during which polluting activities occurred, and the contractual defenses asserted by insurers. Such analysis is particularly complex and difficult when many sites of environmental liability are included, or when the policyholder has engaged in acquisitions and divestitures over time, each with its own line of coverage. Appropriate modeling mechanisms are thus required to value settlement.

Business schools worldwide teach a capital management credo that idle assets should be liquefied and put to work at prevailing internal rates of return. While idle assets typically exist as plant or equipment, companies should also recognize assets in the form of old liability policies long consigned to the insurance department vault. These liability policies represent significant value in the context of negotiated settlement of environmental claims. Proceeds have the effect of offsetting environmental expenditures or bolstering the bottom-line.

It is important to note that some insurers are at risk of insolvency. Some are already deemed to be insolvent. For example, the historical Lloyd’s of London syndicates that covered portions of a large range of Canadian companies may not be able to pay in the future. Historical Lloyd’s of London risks are now being paid by Equitas, which is charged with the task of “buying-out” pre-1993 insurance policies and thus was founded with the idea of planned obsolescence. Additionally, many London market companies have entered into schemes of arrangement in view of their financial failure. With regard to these sorts of insurers, there is great risk to the insured if claims are not pursued now.

Insurers that can afford to settle claims put before them today may not be able to pay in the very near future. In this context, an opportunity delayed may turn out to be an opportunity lost.

CANADIAN LAW

While there have been literally thousands of legal cases in the U.S. providing guidance, the law with regard to environmental claims is still in the early stages of development in Canada. Cases addressing pertinent coverage issues are accelerating, and developments have been generally encouraging (see Uniroyal Chemical vs. Kansa [Ontario 1996], R.W. Hope Limited vs. Dominion of Canada General Insurance Co. [Ontario 2000], SCS Western vs. Dominion of Canada General Insurance Co. [Alberta 1998], City of Medicine Hat vs. Continental Casualty Co. [Alberta 2002], Atlantic Steel Industries vs. CIGNA Insurance Co. o
f Canada [Ontario 1997], Trafalgar Insurance Co. of Canada vs. Imperial Oil Ltd [Ontario 2001], Province of Ontario vs. Kansa General Insurance Co. [Ontario 1994]).

Where cases have reached a result adverse to the insured, they have provided guidance that will allow claims to be argued in a favorable manner. Although case law is still developing, support for successful settlement of claims is apparent. Therefore, corporations are well served by the tender and pursuit of insurance claims for environmental response costs. Historical liability policies can be unearthed and are responsive to such claims. A properly crafted process can result in significant recoveries.