Absolute Pollution Exclusions Are Not Absolute

Insurance is a crucial source of funding for most environmental cleanups. For the past 30 years, comprehensive general liability insurance policies have uniformly included an "absolute pollution exclusion" in some form or another. The earliest such exclusions appeared in the 1950's, but they became ubiquitous boilerplate in the mid-1980s. As a result, most applicable environmental coverage is found in policies pre-1985, and many policyholders incorrectly assume that their post-1985 policies provide no such coverage. This assumption stems from a string of court decisions finding that absolute pollution exclusions eliminate coverage for traditional industrial pollution under Oregon law. Martin v. State Farm Fire & Cas. Co., 146 Or. App. 270, 275-80, 932 P.2d 1207 (1997); Ind. Lumbermens Mut. Ins. Co. v. W. Or. Wood Prod., Inc., 268 F.3d 639 (9th Cir. 2001). While absolute pollution exclusions are broad, and often do exclude pollution from traditional sources, they do not eliminate all coverage for environmental claims, and policyholders should thoroughly review each of their policies to determine whether coverage exists.

Most absolute pollution exclusions are incorporated into standardized forms and use language originally written by the Insurance Services Office (the "ISO"). The ISO's pollution exclusion, which is widely referred to as the "absolute pollution exclusion," actually expressly creates coverage in certain circumstances. For example, the ISO's exclusion does not apply if contamination results from a "hostile fire" or from a failure of equipment used to heat, cool, or dehumidify a building. While the factual scenarios in which express coverage is created are limited, a policyholder should determine whether any such scenarios apply. Even if only part of the environmental claim falls within the scope of express coverage, the insurer may be required to provide a full defense under Oregon law. While the scenarios where coverage is expressly not excluded are few, it is important to review each such scenario at the outset to ensure that no coverage is missed.

Another important analysis is whether the environmental claim involves a pollutant as defined by the policy. If the contamination does not result from the release of a "pollutant," the exclusion typically will not bar coverage. The ISO exclusion includes a very broad definition of what constitutes a pollutant. While many courts have given the term "pollutant" a very broad interpretation, other courts have interpreted "pollutant" to include only traditional or inherently dangerous contaminants. MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 73 P.3d 1205, 3 Cal Rptr. 3d 228 (2003); In re Hub Recycling, Inc., 106 B.R. 372 (D.N.J. 1989). Determining whether a released substance is a pollutant often requires a review of how the substance was used and how it has impacted the property. While many courts have addressed whether commonly applied products, such as pesticides, can be considered pollutants, many of these questions remain unanswered under Oregon law. If contamination has resulted from something other than the accidental release of a regulated substance, a policyholder may have coverage despite the inclusion of an absolute pollution exclusion by showing that the substance is not a "pollutant."

Policyholders also need to be on the lookout for policies that include purported absolute pollution exclusions that do not utilize standardized ISO language. While most policies include standardized ISO exclusions, some insurers have used individualized exclusions that apply less broadly. For example, some of the early insurer-specific absolute pollution exclusions apply only to releases into waterbodies or to claims brought by government authorities. In these cases, coverage remains in place for releases onto land or claims brought by corporations. Insurer-specific absolute pollution exclusions are most commonly found in policies from the 1980s, but a policyholder may run into them at any time.

While absolute pollution exclusions often leave an insured without coverage, they are not as ironclad as their name suggests. The policyholder facing an environmental claim should retain coverage experts as soon as possible to determine which policies create coverage, including those policies that include purported absolute pollution exclusions.
           

Oregon District Court Provides Clarification on Environmental Coverage Issues

In the most recent opinion in the ongoing Marine Group litigation, Judge Acosta clarified two issues that recur in complex environmental insurance litigation: first, which party has the burden of proving that incurred defense costs were reasonable and necessary; and second, whether an insured can recover pre-tender defense costs.

Burden of Proving Reasonableness and Necessity

The issue of which party has the burden of proving, or disproving, that incurred defense costs were reasonable and necessary was addressed in Ash Grove Cement Co. v. Liberty Mut. Ins. Co. In that case, Judge Hernandez endorsed California's rule by holding that when" the insurer has breached its duty to defend, it is the insured that must carry the burden of proof on the existence and amount of the site investigation expenses, which are then presumed to be reasonable and necessary as defense costs, and it is the insurer that must carry the burden of proof that they are in fact unreasonable or unnecessary." Under the clear language of the Ash Grove opinion, a breaching insurer must prove the defense costs to be unreasonable and unnecessary, after the insured proves their existence and amount. Despite holding that this burden-shifting rule applies, Judge Hernandez's application of the rule was unclear, and several breaching insurers have questioned whether they do indeed have the burden of proving defense costs to be unreasonable and not necessary.

This question arose in Marine Group through a complicated motion to compel in which the relevancy of various documents was in question. In ruling on relevancy, Judge Acosta found that it was necessary to establish who has the burden on the issues of reasonableness and necessity. Judge Acosta endorsed the position taken by Judge Hernandez: that when a carrier has breached its duty to defend, the burden of proving the reasonableness and necessity of the fees shifts from the insured to the insurer. Thus, the insured's fees are presumed to be reasonable and necessary when an insurer has improperly breached its duty to defend. This is a win for policyholders, and should make it easier for insureds to recover fees when insurers have wrongfully refused to participate in a defense.

Another wrinkle in the Marine Group litigation is the presence of a paying insurer, Argonaut. Since early on in the defense, Argonaut has paid Marine Group's defense costs. Thus, most of the damages being sought are through a contribution action between insurers, and not a direct coverage claim. Marine Group, along with Argonaut, made the argument that since the claim is primarily a contribution action between insurers, the reasonableness and necessity of the fees was not at issue, but instead the issue is whether Argonaut acted as a reasonable insurer. Similarly, both parties made arguments under ORS 465.480(4)(d) that the common law of contribution was preempted and that the breaching insurers should be prohibited from questioning the defense costs incurred. Judge Acosta rejected this line of reasoning in holding that St. Paul could question the defense costs, but that it bore the burden of proving the fees to be unreasonable and not necessary.

Pre-Tender Defense Costs

While the Marine Group litigation primarily involves a contribution action between Argonaut and other insurers, Marine Group also has a direct contractual claim against its insurers for certain sums not paid by Argonaut. Some of these unpaid defense costs are pre-tender. In other words, they were incurred by Marine Group before it formally sent a letter to its insurers that detailed the claims faced and requested that a defense be provided.

Most states follow the rule that pre-tender defense costs cannot be recovered by an insurer; this underlines the importance of identifying, and tendering to, insurers at the earliest point of any litigation. Marine Group attempted to escape the strict application of the pre-tender rule by invoking the notice-prejudice rule, which does not allow an insurer to deny defense costs because of delayed notice, unless it can show that the delay caused prejudice to the insurer. Judge Acosta found the notice-prejudice rule to be inapplicable because the duty to defend did not arise until the tender occurred. Thus the court held that the notice-prejudice rule does not apply to pre-tender defense costs, because it applies only to covered claims.

Ultimately, Judge Acosta ruled that under Oregon law, pre-tender defense costs are not recoverable. This presents a particularly difficult situation for companies facing historic environmental liabilities. Typically, the only policies that cover historic pollution events were written before 1986. Many companies do not have readily available copies of these insurance contracts. Indeed, historic insurance archaeologists must often be retained to identify these policies. Judge Acosta's decision reinforces the rule that defense costs incurred while a party is looking for its insurance coverage are not recoverable, even to the extent that the delay does not meaningfully prejudice the insurers.

Oregon Environmental Coverage Mediation Program Launched

In 2013 the Oregon Legislature passed SB 814, which amends the Oregon Environmental Cleanup Assistance Act, a unique law regulating environmental coverage disputes.  Part of SB 814 required the State to set up a mediation program for such claims (and made a carrier's refusal to participate in mediation a prohibited claims practice).  That mediation program is now "live."  Here is the announcement from the State's ADR coordinator.

Mediation Case Manager (MCM) has been selected to manage the Environmental Claims Mediation Program established by SB 814 (2013.)  Under the terms of their contract, MCM begins offering environmental claims mediation services today, November 19, 2014.   MCM has established a program website that includes an initial list of qualified mediators and links to case initiation forms. That website is:  https://ecmp.mediationcasemanager.com/Site/index.html.     Additional program information, including the program rules effective October 31, 2014 , are available on the Department of Justice website at: http://www.doj.state.or.us/adr/pages/environmental_claims.aspx.  

We were honored to participate in drafting the regulations that set up this program and in helping select the vendor to administer this program, and are very pleased to see it up and running!

Or. Fed Court Rejects "Hail Mary" Insurer Argument Against Attorney Fees

The dispute between Schnitzer Steel and its carriers over defense at the Portland Harbor Superfund Site has been addressed many times in this blog, because it has raised many novel and fascinating (to me, anyway!) issues.  Here is the latest: on November 12, 2014 Judge Mosman ruled on Schnitzer's motion for attorney fees after Schnitzer prevailed completely at trial this last April, recovering more than $8 million in defense costs.  Schnitzer then requested nearly $3.5 million in fees under ORS 742.061.  In response, the carriers tried a "hail mary" to zap the fee entitlement entirely: they argued that because the statute applies only to actions brought on an insurance policy "in any court of this state," and because actions brought in federal court are brough in a court in Oregon but not of Oregon, the statute did not apply.

Judge Mosman found the argument worthy of some consideration, but ultimately rejected it.  Judge Mosman held that under Erie and consistent with the purposes of the statute, a federal court in Oregon is a court "of the state."  The court noted that any other result would produce an anomaly: a case in an Oregon state court applying Oregon law would result in a fee award, whereas the same case that was removed as of right by an insurance carrier to federal court would not.

This is another important development in the protection of one of the few levers available to policyholders in Oregon because other than in the environmental arena (as of last year), the conventional wisdom is that there is no "bad faith" remedy where an insurance carrier denies a defense under a liability policy.  However, given the size of the attorney fee award (nearly all of what Schnitzer requested), the carriers certainly have an incentive to raise this issue again on appeal.

Oregon Environmental Coverage Decision Emphasizes Importance of Early Tender

A new decision from the Oregon federal court emphasizes the need to tender any kind of potentially covered claim as early as possible.  The decision was, by and large, a win for the policyholder, but as noted at the end of this post the court carved out a large chunk of costs based on the timing of notice.

The decision, issued on October 28, 2014, came from Magistrate Judge Stewart in the long-running coverage dispute between Siltronic Corporation and its primary layer and excess carriers over costs for both cleanup of some of Siltronic's property within the Portland Harbor Superfund Site ordered by DEQ, and defense against the EPA claims at the Harbor.  The claims against Siltronic involved both contamination of soil, and river sediment, by TCE and MGP (Manufactured Gas Product).  Siltronic had seven potentially applicable policies, from 1978 through 1986, with Wausau as primary and Granite State as excess.  Wausau initially provided Siltronic with a defense under policies from 1980 through 1986, until Judge Stewart held that Wausau could stop defending the company because the primary insurer had paid to clean up TCE contamination and in so doing exhausted those six years of coverage.  Siltronic's excess layer carrier has been paying to defend the company since then.

The issue presented for Tuesday's ruling was what to do with the 1978 - 1980 policy.  Wausau had not been defending under that policy because Siltronic had not produced TCE until 1980, and Wausau contended that Siltronic had not tendered defense of  the MGP contamination.  Judge Stewart rejected that contention, noting that the DEQ letters and orders relating to the cleanup and included both MGP and TCE, and that therefore under the "eight-corners rule" in which the court only looks to the "four corners" of the policy and the "four corners" of the complaint (or equivalent), the tender had included MGP.  Wausau also contended that it had no duty to defend under the 1978 policy because Siltronic had not actually incurred costs to defend against MGP-related liability, because NW Natural Gas, the successor to the prior owner of the MGP-contaminated site, had agreed to pay for cleanup.  However, the evidence did not clearly establish that Siltronic had no potential future liability for the MGP contamination due to the agreement with NW Natural.   Questions about whether Siltronic had incurred defense costs related to MGP were questions for trial on damages, according to the ruling.

The court did exclude from consideration, however, a seemingly large chunk ($450,000) of defense costs incurred by Siltronic relating to the contamination.  It appears that Siltronic did not tender the DEQ and EPA communications to any carrier until TCE issues came to light, which was a few years after Siltronic had begun incurring costs relating to MGP.  Judge Stewart held that under the "voluntary payments" provision of the policies Wausau was under no obligation to pay any pre-tender defenses costs.  This reading of the voluntary payments provision has become the accepted wisdom among Oregon's federal courts, although policyholders continue to challenge it.

The take-away is this: tender early, and tender everything that could be a claim or suit, and do not equivocate about seeking a defense.

Fifth Circuit Certifies Whether "PRP" Letter Is a "Suit" to Texas Supreme Court

A new development, of sorts, in development of state law on whether a PRP letter constitutes a "suit" under legacy long-tail CGL policies: the Fifth Circuit has certified the question over to the Texas Supreme Court in McGinnes v. Phoenix Insurance.  Texas remains as one of the few states not to have addressed the question.  Most states have answered in the affirmative; a few have said "no."  Indeed the federal district court in McGinnes appears to have sided with the minority, holding that because CERCLA did not exist when the policies were issued, the parties could not have intended that the definition of "suit" would be broad enough to encompass administrative actions like a PRP letter.  That approach begs the question whether a policy should be interpreted based on modern "lay" understandings of terms, or based on lay understanding at the time of the policy.  Most courts (including Oregon) interpret GL policies -- which, after all, never "expire" -- based on current versions of the dictionary.  But the way the Fifth Circuit phrased the insurer's view on Texas law suggests that Texas law may be different, or at least may be open on that point.  As a very large state with a lot of industrial activity, Texas cases tend to get cited a lot and can have an outsized impact on insurance industry litigation strategy nationally.  The Texas Supreme Court is not required to accept the referral, so we will follow this to see what develops.

Update: The Texas Supreme Court has accepted the certified questions.