Insurance, Hazardous Waste, and the Courts: Unforeseen Injuries, Unforeseen Law

Kenneth L. Rosenbaum

Editors' Summary: In recent hazardous waste cases, courts have rejected liability insurers' attempts to limit their obligations for unforeseen hazardous pollution. Insurers have been forced to indemnify and defend policyholders for pollution damage arguably excluded from their policies, and have been held to pay the costs of complying with cleanup injunctions. The author reviews several recent cases and considers their implications for the parties, their insurers, and the continued role of insurance in hazardous waste control.He concludes that the uncertainty in the scope of insurers' liability in the aftermath of such cases will increase premiums or drive insurers from the market at the very time when government regulations are increasing the demand for hazardous waste coverage.

[13 ELR 10204]

The enormity of the damage that improper disposal of hazardous wastes can wreak has shocked environmental policymakers. Shocked too have been insurance companies that issued general liability policies to waste generators, transporters, and handlers. Today, waste handlers are suing to force their insurers to cover these unforeseen liabilities. In important cases, waste handlers have won.

These victories are of interest to a number of people. To those trying to clean up hazardous waste sites, they point to a possible source of funds. To insurers, they illustrate the pitfalls of offering coverage in an area about which little is known and in which the law is rapidly changing. And to policymakers, they have implications about the merits and availability of insurance to address the problems of hazardous waste.

This comment examines hazardous waste cases involving liabilities that probably neither the insurer nor the insured anticipated when the policy was issued. First, it examines cases where the liabilities were unanticipated because no one fully foresaw the ways in which hazardous waste handling would inflict injuries.¹ We are only beginning to appreciate the carcinogenic, mutagenic, and teratogenic effects of some chemicals and the tremendous consequences of small quantities of these chemicals leaching into the groundwater. Then it examines a case where the liabilities were unanticipated because no one foresaw how the law would change in reaction to threats from hazardous wastes.² Finally, it considers what implications these cases have for our present and future attempts to deal with hazardous waste pollution.

Unforeseen Injuries: The Pollution Exclusion Cases

A third-party liability insurance policy protects the insured against legal claims arising because of damages to the property or person of another. The insurer promises not only to pay such claims, but also to defend against them. No policy covers all possible liability claims. For example, it is against public policy in most states to insure against punitive damages, as this would defeat the purpose of such awards. Also, most policies exclude liability arising out of intentional torts. Such exclusions may be implied by law or expressly written into the policy.

In the late 1960s, insurers realized there was a huge potential liability from day-to-day discharges of air and water pollutants. Not wishing to assume liability for these discharges, insurers began including in their policies a pollution exclusion clause drafted by the Mutual Insurance Rating Bureau.³ This clause excluded discharge of pollutants from coverage unless the discharge was "sudden and accidental."⁴

Lansco, Inc. v. Department of Environmental Protection,⁵ [13 ELR 10205] though not a hazardous waste case, was the first to construe the pollution exclusion clause. Lansco arose after someone, perhaps vandals, left a valve open allowing oil to flow into the Hackensack River. Lansco's insurer disclaimed liability for the spill because, among other grounds, the discharge was not "sudden and accidental."

The claim brought out an ambiguity in the words "sudden and accidental." "Sudden" can mean rapid, but it can also mean unexpected.⁶ "Accidental" can mean unintentional but it can also mean fortuitous.⁷ The court resolved the ambiguity so as to fulfill the insured's expectations of coverage, holding the policy applied to unexpected discharges, even if deliberately caused by a third person.⁸

In a more recent case involving hazardous waste, Travelers Indemnity Co. v. Dingwell,⁹ the Maine Supreme Court had a chance to apply to pollution exclusion clause. Waste from Dingwell's site had allegedly entered the groundwater and polluted several drinking water wells. Three policies potentially covered Dingwell for claims by the well owners. Two of the policies had the standard pollution exclusion clause, while a third excluded "expected or intended" pollution. The trial court ruled that none of the policies protected Dingwell. First, the court read "sudden and accidental" into the third policy. Second, the court held that the pollution's spread through the groundwater was not alleged in the claims to be sudden and accidental — indeed, it must have been gradual.

The supreme court reversed, ruling first that it was error to read "sudden and accidental" into the third policy. Then it ruled that the critical event was the escape of pollutants from the site, not their spread through the groundwater. Ruling only on the insurers' duty to defend Dingwell, the court held that as long as the pleadings could be read to encompass a sudden, unintentional release, the insurers must defend.

Unforeseen Liabilities: Handling Claims Under New Laws

Modern hazardous waste laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),¹⁰ empower the government to seek abatement of imminent threats to be environment or to public health.¹¹ These abatement suits raise two important issues for insurers. First, if, as in most policies, coverage is limited to liability imposed as "damages," must the insurer pay the costs of complying with a cleanup injunction? Second, if, as in most policies, coverage is limited to damage suffered by third parties, must the insurer pay the costs of cleaning up the insured's own land?

United States Aviex, Inc. v. Travelers Insurance Co.,¹² raises these issues under Michigan law. Aviex had a liability policy with Travelers for its Niles, Michigan plant where toxic chemicals were handled. Fire struck the plant, and water used to put out the fire washed toxic chemicals into the ground, contaminating the groundwater. Under state order, Aviex hired a contractor to determine the extent of the pollution. The study estimated cleanup costs at over one million dollars. The state threatened to sue unless Aviex cleaned up the site. Aviex sought a declaratory judgment that Travelers was obligated to pay any claims arising out of the spill, including the costs of cleanup.

In its policy, Travelers promised to pay "all sums which the insured shall become obligated to pay by reason of liability imposed by law upon the insured … as damages because of … property damage," excluding "property owned by the insured."¹³ Travelers argued first that so long as the state elected to seek an injunction rather than its alternative statutory remedy of damages equal to the cost of cleanup, Travelers was not obligated by the policy. Second, Travelers argued that while it might have to indemnify Aviex when the pollution migrated onto property of another, it had no obligation to help clean up Aviex's property.

The "Damages" Issue

Travelers was able to cite to three cases for the proposition that in insurance law "damages" means legal, monetary damages and not the costs of complying with an injunction. In Aetna Casualty & Surety Co. v. Hanna,¹⁴ a trespass case involving an injunction to remove boulders and fill from neigboring shoreline property, in Ladd Construction Co. v. Insurance Company of North America,¹⁵ a trespass case involving an injunction to remove mining slag from a railroad right-of-way, and in Desrochers v. New York Casualty Co.,¹⁶ a nuisance case involving an injunction to remove an obstruction to a culvert to stop flooding, the courts ruled that the insurer did not need to pay the costs of complying with the injunction. As the Desrochers court drew the distinction, the insurer's obligation is to indemnify for "remedial rather than preventative"¹⁷ measures.

CERCLA and analogous state laws giving governments the option either to abate the threat from hazardous [13 ELR 10206] waste themselves and sue for costs¹⁸ or to seek an injunction ordering the responsible parties to abate the hazard¹⁹ have clouded the difference between legal and equitable relief in waste cases. In some recent cases having nothing to do with insurance, parties opposing injunctions have argued that the courts should consider the award of damages and issuance of an injunction to be equivalent.

For example, in United States v. Price,²⁰ the government sought a preliminary injunction under the Resource Conservation and Recovery Act (RCRA)²¹ and common law nuisance claims ordering defendants to do a study on the extent of toxic pollution from their landfill and to provide an alternative water supply to owners of contaminated wells. The district court denied the preliminary injunction, noting that plaintiff had as much power as defendants to redress the injury. Struck by the apparent equivalence in eventual result of awarding damages or issuing an injunction, the court ruled that it lacked authority to grant preliminary equitable relief.

On appeal, the Third Circuit²² let the ruling stand, deferring to the broad discretion of the trial court in granting preliminary relief. However, the court disagreed that the injunction would essentially be equivalent to a claim for damages and thus inappropriate. Noting that the harm alleged was ongoing and that the relief requested was preventative rather than compensatory, the court declared that equitablerelief would be proper.

In United States v. Johns-Manville Sales Corp.,²³ the issue of equivalence of relief arose in the context of bankruptcy.²⁴ The United States sought an injunction ordering Johns-Manville, a bankrupt, to clean up a landfill contaminated with asbestos wastes. Bankruptcy law prevented the United States from executing a judgment for damages against the defendant. Noting that an injunction would force Johns-Manville to spend much money, and noting that the United States could have elected to clean up the site itself and seek damages, the court refused to grant an injunction. The case is being appealed.²⁵

The Aviex court followed a rationale akin to that of the Johns-Manville court. It rejected the simple distinction earlier cases drew between damages and injunctions as too narrow.²⁶ Noting that the state could have pressed a claim for damages for the cost of cleanup, and noting that the state's choice of relief was "merely fortuitous," the court held that Travelers must defend and indemnify²⁷ Aviex for equitable cleanup costs.

But the earlier cases can be read to draw a distinction more subtle than the distinction between damages and injunctions. They can be read to distinguish relief that remedies an injury from relief that prevents injury.²⁸ Insurance covers remedial relief but not preventiative relief. If this is the rule, then under the Price characterization of cleanup studies and substitute water supplies as preventative,²⁹ these and other measures aimed at curtailing a foreseeable nuisance would be outside the coverage of insurance.

But despite the Price analysis, cleanup injunctions do have a strong remedial aspect. CERCLA and similar state acts have created a new legal wrong, namely "threatening environmental harm," the remedy for which is an injunction. Other than its unique remedy, nothing separates this new source of liability from all the other sources of liability covered by insurance. If a court issued an injunction aimed at preventing this wrong, e.g., an injunction to comply with applicable regulations governing waste disposal, insurance would not cover the costs of compliance. But insurance should cover the costs of remedying the wrong, i.e., the costs of cleanup.³⁰

The Property of Another Issue

In its second main argument, Travelers contended that the damage the state sought to rectify was merely damage to Aviex's own land, not to the property of a third party, and thus not covered by the policy.³¹ The court, however, ruled that under Michigan law, the groundwater under Aviex's land did not belong absolutely to Aviex.³² The court did not expressly say who owns the groundwater, but noted that the state had a statutory interest in the water great enough to support a suit for damages.³³

The New Jersey Superior Court in Lansco, discussed above,³⁴ relief on a similar standard in deciding whether [13 ELR 10207] the oil spill on the Hackensack River involved damage to property of another. Because the state had the statutory right to sue to recover damages from the spill, the state had a property interest that was damaged by the spill.

Implications

For the plaintiff in a hazardous waste case, the message of these cases is clear: always investigate the defendant's insurance holdings. Liability insurance will raise the possibility of involving the insurer, even in equitable actions. That possibility will be important in settlement negotiations even if the case for insurance coverage is weaker than the case in chief.

In cases where the insurance policy is limited by exclusions that might save the insurer from liability, shaping the pleadings can be most important in bringing in or excluding the insurer from the case. For example, in a case of apparently intentional pollution, if the policy excludes liability from intentional torts, it may be important to plead in the alternative that the damage was inflicted negligently.³⁵ This will bring the insurer into the case and will also give the insurer incentive to prove that the damage was intentional.

For the defendant in a hazardous waste case, the message of these cases is equally clear: as soon as there is notice of a claim, notify insurers and explore the possibility of coverage. Even if the claim may seem to include injuries not covered by a policy, if the claim is broad enough, it will likely trigger the insurer's duty to defend and could held defray some of the expenses of the case.³⁶

For insurers, and for those shaping our hazardous waste policies, the message of these cases is less clear. Insurance can play a key role in dealing with hazardous waste disposal risks.³⁷ We do not know how to make hazardous waste disposal entirely safe in the long run. The potential liabilities from our present disposal methods are high. Insurance is a means of taking the risk off the shoulders of the individual handler and spreading it across the industry. If all handlers were insured, victims of waste pollution would be guaranteed a source of compensation and the insurance marketplace would distribute the costs of compensation to the members of the waste industry in proportion to the risks they pose. The Environmental Protection Agency has found this prospect appealing, and its regulations will require all who treat, store, or dispose of hazardous waste to have insurance or to self-insure by 1985.³⁸

In order for this system to work well, insurers must know the risks that they are taking on. The insurance industry today knows much more about the potential harms wastes can cause than it knew five years ago. But for a given site, it may be next to impossible to discover if past or present practices could lead to future injuries. Also, although the major hazardous waste statutes may be already in place, questions remain about the extent of liability they impose. An insurer covering a generator, for example, does not now whether the generator could be held strictly and jointly and severally liable for the acts of the ultimate disposer of the waste.³⁹ Nor can the insurer anticipate liabilities that future statutes, regulations, or common law developments could add. In short, it is impossible for an insurer to estimate risks accurately either for a particular site or for the waste industry in general.⁴⁰

In the cases discussed in this comment, the courts have told the insurance industry that they will be held to account for the liabilities that are apparent when the claim is made, not necessarily the liabilities calculated into the cost of the policy. If the insurer cannot calculate its risks, it has a strong incentive not to offer insurance at all.⁴¹ We may see, at least in the short term, a wholesale retreat from the hazardous waste field by the insurance companies just at a time when government regulations are increasing the demand for insurance. A scarcity of carriers may eventually encourage tougher governmental regulatory action to minimize risks, or further expansion of government liability funds like the Superfund to compensate injured parties.

1. See infra text accompanying notes 3-9. For a list of some of the uncertainties about hazardous waste that plague insurers, see Abraham, Cost Internalization, Insurance, and Toxic Tort Compensation Funds, 2 VA. J. NAT. RESOURCES L. 123, 127-30 (1982).

2. See infra text accompanying notes 10-34. See also infra note 39 and accompanying text. Abraham, supra note 1, suggests some additional sources of legal uncertainty, at 129.

3. See Joest, Insurance Coverage for Hazardous Waste Litigation: The Pollution Exclusion Clause, 4 CHEM. & RADIATION WASTE LITIG. REP. 153 (1982).

4. Id. at 154.

5. 138 N.J. Super. 275, 350 A.2d 520, 6 ELR 20247 (N.J. Super. Ct. Ch. Div. 1975), aff'd, 145 N.J. Super. 433 (N.J. Super. Ct. App. Div. 1976), cert. denied, 72 N.J. 57 (1977).

6. THE AMERICAN HERITAGE DICTIONARY (new college ed. 1980) defines sudden as "1. Happening without warning; unforeseen … 3. Characterized by rapidity …" Id. at 1286.

7. THE AMERICAN HERITAGE DICTIONARY (new college ed. 1980) defines accidental as "1. Occuring unexpectedly and unintentionally; by change …. Synonyms: … fortuitous …." Id. at 8. (emphasis in original).

8. A canon of insurance law requires courts to interpret policies to reflect the reasonable expectations of the insured. See generally Abraham, Judge-Made Law and Judge-Made Insurance: Honoring the Reasonable Expectations of the Insured, 67 Va. L. Rev. 1151 (1981).

9. 414 A.2d 220, 12 ELR 21072 (Me. 1980).

10. 42 U.S.C. §§ 9601-9657, ELR STAT. 41941-55.

11. CERCLA § 106, 42 U.S.C. § 9606, ELR STAT. 41947.

12. 13 ELR 20577 (Mich. Ct. App. May 5, 1983).

13. 13 ELR at 20577.

14. 224 F.2d 499 (5th Cir. 1955).

15. 391 N.E.2d 568, 73 Ill. App. 3d 43 (1979).

16. 106 A.2d 196, 99 N.H. 129 (1954).

17. 106 A.2d at 198.

Af first glance, the "remedical rather than preventative" analysis may appear not to fit the trespass injunctions, which remedy an existing wrong. But the injunctions are primarily aimed at preventing future trespass and do nothing to redress the injuries caused by past trespasses.

18. CERCLA §§ 104 and 107, 42 U.S.C. §§ 9604 and 9607, ELR STAT. 41945, 41947.

19. CERCLA § 106, 42 U.S.C. § 9606, ELR STAT. 41947.

20. 523 F. Supp. 1055, 11 ELR 21047 (D.N.J. 1981), aff'd, 688 F.2d 204, 12 ELR 21020 (3d Cir. 1982).

21. 42 U.S.C. §§ 6901-6987, ELR STAT. 41901-24:5.

22. 688 F.2d 204, 12 ELR 21020 (3d Cir. 1982).

23. 13 ELR 20310 (D.N.H. Nov. 15, 1982), appeal docketed, No. 83-1152 (1st Cir. Mar. 3, 1983).

24. See generally Comment, Bankruptcy and Environmental Regulation: An Emerging Conflict, 13 ELR 10099 (1983).

25. No. 83-1152 (1st Cir. filed Mar. 3, 1983).

26. Aviex, 13 ELR at 20578.

27. Id. at 20579.

28. See supra text accompanying note 17.

The nuisance and trespass injunctions in the cases cited by Travelers do have remedial aspects, but their primary object was to prevent future nuisance or trespass, and they do nothing to redress the injuries of past wrongs.

29. See supra text accompanying note 22.

30. If you find the Price "preventative" position in the previous paragraph more convincing than the "novel remedy" position in this paragraph, consider the following question. Under some state hazardous waste acts, it may be possible to recover as damages the estimated cost of cleanup before the cleanup is done. Are these damages preventative and therefore not covered by insurance?

31. As a practical matter, even if Travelers had won this second argument, its loss of the first argument doomed it to clean up the spill. Soon enough, the pollution would have drifted away from the Aviex property, incontrovertibly injuring the property of another. At that point, under the first part of the ruling, Travelers would have to bear the costs of cleanup. An injunction to cure the damage to the neighbors would almost certainly involve abating the entire threat. Thus, when Travelers lost the damages issue, it really lost the entire case.

32. Travelers thus found itself in a variation of Shylock's dilemma. Shylock the money lender sued a debtor for a pound of flesh, penalty for default on a loan. The court, at the urging of the debtor's lawyer Portia, ruled that Shylock was entitled to his pound of flesh, but could not take one drop of blood. See W. SHAKESPEARE, THE MERCHANT OF VENICE. Travelers has no obligation to clean up Aviex's subsoil, but cannot leave one drop of dirty groundwater.

33. In some states, the property owner has absolute ownership of the groundwater under state law. Under CERCLA, the federal government has a cause of action to abate or to recover costs from abating hazardous waste pollution. It will be interesting to see if this CERCLA right is ever interpreted to rise to the level of a property right triggering liability in the insurer.

34. See supra text accompanying note 15.

35. See, e.g., Travelers Indemnity Co. v. Dingwell, 414 A.2d 220, 12 ELR 21072 (Me. 1980), discussed supra in text accompanying note 9. There, because the complaint alleged both intentional and negligent wrongs, the insurer was forced to defend.

36. See Joseph & Hurwitz, Our Opinion, 4 CHEM. & RADIATION WASTE LITIG. REP. 151 (1982) (urging defense counsel to consider the insurer's duty to defend in hazardous waste cases). See also An Interview with Sheldon Hurwitz, 4 CHEM. & RADIATION WASTE LITIG. REP. 163 (1982).

37. For discussions of the pros and cons of insurance as an injury compensation mechanism with hazardous substances, see Abraham, Cost Internalization, Insurance, and Toxic Tort Compensation Funds, 2 VA. J. NAT. RESOURCES L. 123 (1982); Nagle, RCRA Liability Insurance Rules — Evolution and Unresolved Issues, ENVTL. FORUM, NOV. 1982, at 16; Comment, Compensating Hazardous Waste Victims: RCRA Insurance and a Not So "Super" fund Act, 11 ENVTL. L. 689 (1981).

38. Under RCRA § 3004, 42 U.S.C. § 6924, ELR STAT. 41909, the Environmental Protection Agency (EPA) may promulgate standards for those who treat, store, or dispose of hazardous wastes. EPA's liability standards under this section are codified at 40 C.F.R. §§ 264.147 and 265.147, ELR REG. 47370-72, 47400:13-400:15. The regulations phase in an insurance or self-insurance requirement. Currently only owners or operators with sales or revenues of more than $10 million are required to meet the standards. By 1985, all owners and operators must meet the standards. Section 108 of CERCLA, 42 U.S.C. § 9608, ELR STAT. 41949, allows EPA to promulgate financial responsibility standards after December 1985 for those covered by CERCLA. Section 30 of the Motor Carriers Act, 49 U.S.C. § 10927 note, establishes financial responsibility requirements for transporters of hazardous waste.

39. The uncertainty over the extent of liability under CERCLA is discussed in Comment, Conservation Chemical: Generator Liability for Imminent Hazards on the Docket, 13 ELR 10208 (June 1983).

40. For discussions of insurance's ability to assess risks of hazardous waste pollution, see Abraham, supra note 37; Cheek, Risk-Spreaders or Risk-Eliminators? An Insurer's Perspective on the Liability and Financial Responsibility Provisions of RCRA and CERCLA, 2 VA. J. NAT. RESOURCES L. 149 (1982); Milvy, Environmental Impairment Liability Insurance and Risk Assessment, ENVTL. FORUM, Oct. 1982, at 30.

41. For a survey of pollution liability policies on the market in 1982, see Mahoney, A Risk Manager's Guide to Pollution Liability Policies, 4 CHEM. & RADIATION WASTE LITIG. REP. 383 (1982).