The Lawsuit Trigger

By Donald C. Nanney, Esq. and Chris Falbo

Urban developers have grown more sophisticated in brownfield risk management. One risk management tool — pollution liability insurance — is touted by insurers to protect a developer’s interests.

However, some environmental insurance policies contain a hidden coverage gap. If you do not fix the gap before the policy is issued (and the premium paid), it will be too late. Environmental insurance is generally used to cover first-party cleanup costs, as well as third-party claims alleging bodily injury, cleanup costs or property damage due to pollution conditions. One expects coverage to apply when cleanup costs are incurred or when a claim is asserted — regardless whether a lawsuit is commenced.

The California Supreme Court has interpreted older comprehensive general liability (CGL) policies obligating the insurer to “pay all sums that the insured becomes legally obligated to pay as damages” arising from covered risks. Unfortunately, the court ruled that “damages” is not merely the plural of “damage,” but means “money ordered by a court.” Hence, a lawsuit is required and a cleanup order from an environmental agency is insufficient to trigger coverage.

Powerine I and II

One such case is Certain Underwriters at Lloyd’s of London v. Superior Court (Powerine Oil Company) (Powerine I). Relying on Powerine I, another insurer withdrew from an insurance settlement under a reservation of rights because no lawsuit existed, only a voluntary cleanup agreement with an agency. Insurers deny claims when they can. Environmental matters can be handled more economically when parties cooperate, rather than litigate. When insurance funding is critical, having to force a lawsuit to trigger coverage — or have no coverage — makes the consequence of the decision in Powerine I a potentially very expensive issue.

While Powerine I interpreted language under a primary CGL policy, the court ruled in favor of insureds  providing coverage for “damages… and expenses, all as more fully defined by the term ‘ultimate net loss’ on account of…property damage.” The term “ultimate net loss” includes claims as well as suits.

The court also held that “expenses” is broader than “damages” and requires no lawsuit. Hence, an umbrella policy is triggered by an administrative cleanup order or directive, even if the primary policy is not, as determined in Powerine Oil Company v. Superior Court (Central National Insurance Company of Omaha) (Powerine II).

However, yet another court decision, referred to as Ace Property & Casualty, found that nonstandard excess policy using the term “damages” rather than “expenses” is not triggered without a lawsuit.

The Impact

What is the impact on new environmental insurance? Consider whether the policy is governed by Powerine II (no lawsuit trigger requirement) or Powerine I and Ace Property & Casualty (applicable to California and states that similarly interpret “damages”).

With respect to first-party cleanup costs, typical language would obligate the company to “pay on behalf of the Insured, Cleanup Costs resulting from Pollution Conditions on or under the Insured Property…” Notably, first-party cleanup costs are defined as expenses, so the Powerine I problem should not apply.

With respect to third-party claims, typical language would require the insurer to “pay on behalf of the Insured, Loss that the Insured is [or becomes] legally obligated to pay as a result of Claims for Cleanup Costs, …Bodily Injury or Property Damage resulting from Pollution Conditions on or under the Insured Property….” Coverage appears to be triggered by a mere claim, overcoming the Powerine I issue.

“Loss” means “(1) monetary awards of compensatory damages … for Bodily Injury or Property Damage; (2) … [defense costs]… or (3) cleanup costs.” Without damages — money ordered by a court – there is no loss and hence, no coverage for third-party claims for bodily injury or property damage. (However, damages in loss item one does not refer to third-party cleanup costs, which include expenses; a claim,for these costs may be sufficient.)

Because “damages” has been tucked inside the “loss” definition, a lawsuit trigger may still be required to cover third-party claims for bodily injury or property damage — contrary to an insured’s reasonable expectations.

Solutions

We offer the following proven solutions:

• Obtain an endorsement from the insurer amending the definition of “loss.” Insurance companies rarely will, because it defines the risk they assume. But one major environmental insurer did so and more may follow.
• Obtain a comfort letter confirming that, notwithstanding the use of “damages” in the definition of “loss,” the intent is to provide claim coverage without a lawsuit trigger — providing a basis for a bad faith claim should the carrier later deny coverage because no third-party lawsuit was commenced.
• An insurer that will not clarify the intent is seeking wiggle room and may not deserve your business. New environmental insurance policies should be carefully reviewed for the lawsuit trigger and other issues. BFN

Donald C. Nanney heads the environmental law practice of Gilchrist & Rutter Professional Corporation in Santa Monica, California. Chris Falbo is a vice president with Arthur J. Gallagher Risk Management Services.