| A Trial Lawyer's Perspective on the Pollution Exclusion |
| Stanley M. Spracker, Terry W. Bird, and Adam P. Strochak |
| Editors' Summary: State and federal appellate courts are almost evenly split on the meaning of the pollution exclusion clause in standard comprehensive general liability insurance policies. The authors of this Article argue that — even in jurisdictions where appellate decisions favor insurers — policyholders can win environmental insurance coverage cases at trial. The Article begins by reviewing general legal principles of insurance coverage, the evolution of policy language applicable to environmental coverage claims, and the recent case law. Next, the Article discusses trial strategy, offering practical advice about establishing a case theme, using expert witnesses, jury selection, jury instructions, and special verdict forms. The authors conclude that creative trial lawyers can persuade juries to find coverage despite adverse legal precedent. |
| Stanley M. Spracker is a partner at the Washington, D.C. office of Weil, Gotshal & Manges. Terry W. Bird is a partner at Bird, Marella, Boxer, Wolpert & Matz in Los Angeles. Adam P. Strochak is an associate at Weil, Gotshal & Manges. The authors served as co-counsel in the Purex insurance litigation in Los Angeles Superior Court which is discussed below. |
| [25 ELR 10065]
For over a decade, American industrial companies have fought a pitched legal battle with their insurers over who will pay the cost of cleaning up environmental contamination.1 In the 1970s and early 1980s, the U.S. Congress and virtually every state legislature enacted laws effectively imposing strict liability for the cost of cleaning up pollution.2 Faced with substantial liabilities for the cleanup of contaminated soil and groundwater, many companies turned to their comprehensive general liability (CGL) insurance carriers for defense and indemnification. But insurers resisted pollution claims, strenuously arguing that a pollution exclusion clause found in most CGL policies written after 1970 made it clear that such claims were not covered. The stage was thus set for a legal fray that spans every state and shows no sign of abating anytime in the near future. |
| In the initial years of pollution coverage litigation, attorneys for policyholders and insurers alike assumed that this battle would be won or lost in motions practice and appellate litigation. In particular, the applicability of the pollution exclusion clause seemed to be a quintessential question of law to be resolved on summary judgment and, ultimately, by appellate courts of last resort in the various states. Moreover, because early cases were filed in influential jurisdictions such as California, New York, and New Jersey, lawyers presumed that rulings in these states would be extremely persuasive authority for cases that followed in other jurisdictions. These early assumptions about environmental coverage litigation have proven overly optimistic. The hope that many of these cases could be adjudicated without full-blown trials has faded and attorneys — not to mention their clients — now find themselves faced with the prospect of long, multiphased trials concerning industrial practices that may have occurred decades ago. |
| Appellate decisions from state and federal courts are irreconcilably and almost evenly split on the meaning of the standard pollution exclusion clause.3 In addition, the meaning of the key policy term "occurrence" is subject to competing interpretations. Each side of the dispute maintains that a favorable ruling on the interpretation of these contract clauses is dispositive of the litigation. |
| In practice each case turns on its specific facts, requiring a trier of fact to determine, for example, whether the policyholder "expected or intended" its operations to cause groundwater pollution. Moreover, the timing of property damage is a complex, fact-dependant issue that determines in part which policies in a historic insurance program must provide coverage. These practical lessons have required coverage lawyers and insurance defense counsel to reevaluate their approach to environmental insurance litigation, focusing less on analyzing the words and reasoning of [25 ELR 10066] appellate decisions and more on developing the facts of their own case through percipient and expert witnesses. |
| This Article analyzes recent progress in environmental insurance coverage litigation and develops the authors' thesis that these cases will be won or lost on the facts adduced by counsel in discovery and at trial rather than before appellate tribunals. The Article first provides an overview of legal principles applicable to the interpretation of insurance policies and analyzes the effect of various policy clauses on pollution coverage. The Article then reviews significant case-law developments. In the final part of the Article, the authors discuss trial strategies, based on their experiences during a coverage trial in the Los Angeles Superior Court in 1992 and 1993. |
| CGL Policy Coverage |
| General Legal Principles of Insurance Coverage |
| The CGL policy provides coverage for known and unknown risks. Businesses buy liability insurance coverage to transfer risks that cannot be precisely estimated and managed in the ordinary course of business planning. Indeed, coverage for unknown risks is the most important aspect of CGL coverage. Insurers used this feature to market the policies successfully to industries operating in the United States, where new theories of liability evolve through case law and a complex array of regulatory and statutory obligations governing business poses ever increasing risks. Coverage for unknown risks includes coverage for forms of liability that do not come into existence until after the inception of the policy, such as new types of statutory liability or judicial expansions of existing doctrines.4 Liability for environmental cleanup is a culmination of exactly this type of risk — companies which bought policies in the 1960s and 1970s had no idea that the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) would be enacted in 1980 and would impose liability for past conduct, including the lawful disposal of hazardous substances. |
| Contracts of insurance differ significantly from ordinary commercial contracts. Foremost among these differences is the fact that insurance policies most often are standard-form contracts drafted by insurance trade associations and approved by state regulators. As a general rule, there is little or no dickering over the basic terms of insurance coverage: Businesses may purchase the same standardized coverage from virtually any insurer, but no alternative coverage is available if the standard terms prove unacceptable.5 |
| The standardization of policy language has been promoted and accomplished over the last half century by insurance trade associations including the National Bureau of Casualty Underwriters, the Mutual Insurance Rating Bureau, the Insurance Rating Board, and the Insurance Services Office. Policy forms and provisions are drafted through a process of constant revisions and commentary by committees of these associations and individuals within member insurance companies. In addition, the trade associations serve as clearinghouses for industrywide actuarial data. The extensive cooperation in policy drafting and the sharing of actuarial data between insurers is made possible by a rare exemption from federal antitrust laws.6 This exemption permits insurers to communicate with each other about their loss experiences and about policy terms and rates. Insurers have pooled their data, resources, and efforts to advance the needs of the industry as a whole. |
| The standardization of policy forms and provisions serves to maximize predictability of loss and efficiency of operations for individual insurers. By using standardized policy language, actuarial data from the entire insurance industry can be taken into account by underwriters evaluating particular risks. By comparing apples with apples, underwriters can make better predictions about future loss experiences, which serve as the basis for setting premiums and loss reserves. Furthermore, standardized policy language facilitates the provision of excess insurance coverage and reinsurance, obviating the need for excess carriers and reinsurers to reassess risks for each underlying policy. Uniformity of policy terms also facilitates the development of standard practices, interpretations, and procedures for issuing policies and evaluating claims. With respect to marketing and regulatory approval of policies, standardized language promotes uniform understanding of policy terms among risk managers, brokers, underwriters, and state insurance regulators. Finally, although not always the result in practice, standard policy terms in theory are designed to promote uniform judicial interpretation. |
| The standardization of policy terms has significant consequences on insurance jurisprudence. The unique nature of insurance contracts has led courts to adopt a set of special principles for insurance contract interpretation. As a general rule, the plain meaning of policy terms, interpreted in their ordinary and popular sense, controls judicial interpretation.7 If the meaning a layperson would ascribe to a policy term is ambiguous, the ambiguous language is construed against the party who caused the ambiguity to exist — usually the insurer which drafted the policy terms.8 Ambiguities, therefore, generally are resolved in favor of coverage. Similarly, where ambiguities exist, coverage clauses are interpreted broadly and exclusionary clauses are construed narrowly, protecting the objectively reasonable expectations of the insured.9 With these principles serving as the cornerstone for legal analysis of coverage questions, the battle over coverage for environmental cleanup costs focuses on interpretation [25 ELR 10067] of the CGL insuring agreement and the pollution exclusion clause. |
| Policy Language Applicable to Environmental Coverage Claims |
| The operative language of liability insurance policies has evolved over time and a brief overview of that evolution is important in understanding the legal arguments surrounding the interpretation of the pollution exclusion clause. Until the middle part of this century, most business insurance policies covered liability for personal injury or property damage caused by an "accident." The term "accident" was undefined and the classical accident generally was understood to cover a situation where the causative event (often described as a "boom" event) and the resultant damage happened simultaneously or nearly simultaneously, such as an automobile collision. Indeed, the term "caused by accident" was taken from automobile policies and incorporated into the first standard CGL policy in 1941.10 |
| By the early 1960s, however, the word "accident" had come to be understood as a distinction between intentional and unintentional harm or intentional and unintentional events. This change reflected expanding notions of liability, which caused a reevaluation of the meaning of accident coverage in the judiciary and among purchasers of CGL policies. For instance, courts began to impose liability in tort and products liability cases, such as lead poisoning, which involved continuous or cumulative exposures. It thus became clear that not all causal events resulting in liabilities to businesses could be characterized as classical accidents for purposes of insurance coverage. Accordingly, the coverage provided under standard accident policies became narrower than the scope of liabilities ordinarily incurred by the businesses which purchased those policies. The courts corrected for this discrepancy by expansively interpreting the term accident to cover not only classical accidents, but also continuous or repeated exposure to injurious conditions.11 |
| In light of these developments, corporate risk managers, as well as brokers who were sensitive to the marketplace, clamored for a broader brand of coverage and greater responsiveness on the part of insurers to the insurance needs of the insurance-buying market. Seeing an opportunity, a handful of influential insurers, including the Insurance Company of North America and Lloyd's of London, made a commercial attack on the accident-based policy form by offering expanded coverage. Ultimately, the combination of expanding judicial construction and competitive pressures compelled the insurance industry to change the CGL form to fit the contemporary marketplace.12 |
| In the mid-1960s, the commercial liability insurance industry undertook a major revision of its main product, the general business liability policy. This effort culminated in the introduction of a revised CGL policy in 1966. The drafters of the 1966 CGL bowed to what had become reality and modified the policy to make it clear that coverage was afforded for liabilities caused by events other than classical accidents. Recognizing that courts had broadened the scope of coverage available under accident policies, the insurance industry in 1966 conformed the language of its standard policy to those judicial interpretations. The 1966 CGL thereby explicitly avoided "the implication that there was no coverage for a continuing condition."13 |
| The 1966 CGL switched from accident-based coverage to occurrence-based coverage on an industrywide basis. The new policy promised coverage for "all sums which the Insured shall become liable to pay . . . as damages because of injury to or destruction of property . . . resulting from an occurrence." Occurrence was defined as "an accident, including continuous or repeated exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured."14 The 1966 revisions thus attempted to make clear that the duration of the causal event was no longer an issue; the new policy covered liabilities imposed as a result of long-term exposures as well as classical accidents. |
| The insurance industry introduced the 1966 CGL with much fanfare, billing the new occurrence definition as a significant expansion of coverage when compared to prior accident policies. Indeed, with respect to environmental claims, insurance industry commentary on the 1966 policy revision indicated that there was no intent to restrict coverage for pollution. Commenting on the 1966 form in a paper presented to the Mutual Insurance Technical Conference, Gilbert Bean, then Assistant Secretary for Liberty Mutual Insurance Company, noted "[I]t is in the waste disposal area that a manufacturers' premises-operation coverage is liberalized most substantially."15 Bean illustrated the availability of coverage for continuous exposures by noting that injury or damage could continue after waste disposal ceased, producing losses over several policy years and triggering coverage under numerous policies. |
| Other insurance executives echoed this sentiment. For instance, Lyman Baldwin Jr., Secretary of Underwriting for the Insurance Company of North America, expounded on the application of the occurrence definition to a chemical plant which emits noxious fumes during the course of its operations, damaging paint on surrounding buildings. Under the 1966 occurrence policy, Baldwin explained, coverage is provided "until such time as the insured becomes aware that the damage was being done."16 This commentary set the stage for the fight over pollution coverage which already was on the horizon. |
| By the late 1960s, public awareness of the risks of pollution had increased dramatically after several high-visibility catastrophes, including the Torrey Canyon shipwreck and the Santa Barbara, California, off-shore oil platform spill.17 The broadened coverage available under the 1966 [25 ELR 10068] CGL policy soon gave rise to questions about the ultimate scope of coverage available for pollution damage. Even though the catastrophic oil spills of the late 1960s could be categorized as classical accidents for insurance coverage purposes, these disasters made the insurance industry realize that long-term environmental pollution — a paradigm example of a covered occurrence under the 1966 policy form — presaged an impending increase in claims for environmental damages. Insurance industry policy-drafting organizations, aware of the broad coverage provided by the 1966 CGL form, began the process of creating a uniform pollution exclusion clause and formulating an approach to get that exclusion approved by insurance regulators in the various states.18 |
| The formulation of the pollution exclusion engendered much discord between different factions within the insurance industry. Underwriters and policy draftsmen recognized that the occurrence policy covered environmental liabilities except where the insured expected or intended pollution damage. This faction wanted to restrict the coverage for pollution in order to reduce the industry's exposure. Brokers and agents, on the other hand, aggressively marketed the CGL policy on the basis of its broad, "comprehensive" coverage and did not relish the prospect of explaining a reduction in coverage to their policyholders just a few years after introduction of the CGL revisions. This group, therefore, advocated language which would merely clarify that intentional pollution was not covered under the existing occurrence definition.19 |
| The resulting compromise between these competing factions was the standard pollution exclusion, introduced in 1970. The language of the pollution exclusion clause carved pollution damages out of the risks covered by the CGL policy, but left coverage intact for damages resulting from "sudden and accidental" discharges of contaminants: |
| This Policy Shall Not Apply: |
| To bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.20 |
| Because the exception purports to give back at least some of the coverage taken away by the pollution exclusion, the focus of the legal battle is the interpretation of the phrase "sudden and accidental." Seldom in the history of contract law have three words generated so much controversy.21 |
| Insurers' Lines of Defense |
| Taken together, the language of the 1966 CGL policy, as modified by the pollution exclusion, gives insurers three lines of defense. First, insurers argue that pollution caused by routine business operations is not a covered "occurrence," as that term is defined in CGL policies, because policyholders "expected or intended" property damage to happen as a result of their acts. The critical question in interpreting the "expected or intended" clause is whether it imposes an objective standard, barring coverage if a reasonable policyholder should have expected pollution damage to happen, or a subjective test, precluding coverage only if the policyholder itself actually expected or intended its activities to result in pollution damage to third-party property. This distinction has been the subject of much litigation in recent years and is discussed below in the context of case-law developments. |
| Insurers next assert that environmental cleanup costs, whether incurred by the insured in response to a government cleanup order or reimbursed by the policyholder to government agencies or private parties, are an equitable form of relief and therefore are not liabilities incurred "as damages" within the meaning of the insuring agreement of the CGL policy. The majority of courts considering this issue has rejected this hypertechnical reading of the insuring agreement. While there are several decisions to the contrary, most notably in the First, Fourth, and Eighth Circuits, this issue is for the most part resolved in favor of policyholders and is not discussed further.22 |
| The insurers' final defense is the pollution exclusion clause. Interpretation of the "sudden and accidental" pollution exclusion clause is the crux of the legal battle and is discussed in detail below. |
| Case-Law Developments |
| The "Expected or Intended" Clause of the Occurrence Definition |
| Insurers argue that the "expected or intended" clause of the CGL's occurrence definition should be interpreted as imposing an objective standard which hinges on the knowledge and state of mind a reasonable person in a similar situation would possess. Under this construction, no coverage would be afforded for property damage reasonably foreseeable as a result of the policyholder's actions or omissions. [25 ELR 10069] Policyholders, on the other hand, assert that the use of the words "expected" and "intended" requires a subjective test which looks to the insured's actual knowledge and state of mind. |
| Some courts have accepted the insurers' position and have adopted an objective test out of a concern that a policyholders' state of mind should be corroborated by evidence of state-of-the-art practices extant in the time period for which coverage is sought.23 Other decisions, however, hold the phrase "expected or intended" precludes coverage only for damages that the policyholder actually knew would flow directly and immediately from an intentional act.24 |
| The decision of the California Court of Appeal in Shell Oil Co. v. Winterthur Swiss Insurance Co.25 examined competing constructions of the "expected or intended" clause and concluded that a subjective test controlled. Reversing a trial court instruction which required the jury to deny coverage if it found the insured "should have known" pollution damage would result from its waste disposal practices, the California court looked to the plain meaning of the terms "expected or intended." That meaning, the court concluded, unambiguously "connotes subjective knowledge of or belief in an event's probability."26 Probability, the court explained, does not however equate with an absolute certainty. The Shell court therefore expressly distinguished earlier decisions in other jurisdictions which had concluded that the "expected or intended" clause excluded coverage only for damages which the insured "knew would flow directly from its intentional act."27 The appropriate test, according to the Shell decision, is "whether the insured knew or believed its conduct was substantially certain or highly likely" to result in property damage.28 Although the insured must show the actual knowledge or belief of the policyholder, that knowledge may be proved by circumstantial evidence.29 |
| As a practical matter, however, even with a subjective standard, insurers may still introduce evidence of state-of-the-art knowledge and practices. Often, testimony on standards and practices in the industry is accepted to challenge or corroborate the insured's credibility on the issue of its subjective knowledge. |
| The "Sudden and Accidental" Pollution Exclusion |
| Even if a policyholder clears the "expected or intended" hurdle under the occurrence definition, it still must navigate around the pollution exclusion found in most policies written after 1970. In efforts to persuade courts that the pollution exclusion does not bar coverage for pollution damages, policyholders argue the "sudden and accidental" exception is ambiguous and point to a considerable body of extrinsic evidence, which includes the drafting history of the clause, speeches, other public statements by insurance industry representatives, and the records of proceedings before state insurance regulators, as probative of the clause's proper interpretation. Insurers, for their part, argue the pollution exclusion is clear on its face and established legal principles bar resort to extrinsic evidence. Numerous courts have grappled with these arguments and the result is a judiciary sharply and almost evenly divided on the meaning of the "sudden and accidental" exception to the pollution exclusion.30 On this basis alone, some have argued that the provision is ambiguous and should be construed in favor of coverage.31 |
| Although there are many variations on the general themes, courts interpreting the pollution exclusion fall into three principle categories. One group, taking guidance from the drafting and regulatory history of the pollution exclusion clause, holds that the "sudden and accidental" exception to the pollution exclusion is ambiguous and interprets it as a mere restatement of the "expected or intended" clause from the occurrence definition. Accordingly, this first group concludes that damages arising from the discharge of pollutants are covered as long as those damages were neither expected nor intended by the policyholder. At the opposite end of the spectrum, a second group reasons that the pollution exclusion is clear on its face and concludes that the word "sudden" in the exception must be construed as having a temporal connotation. These cases, therefore, hold that the pollution exclusion allows coverage only for classical accidents and precludes coverage for gradual pollution. The third group of decisions attempts to harmonize the competing interpretations of the pollution exclusion through a variety of devices. |
| * Cases Holding that "Sudden" Means "Unexpected." Policyholders argue that any ambiguities in the pollution exclusion clause should be construed in favor of broader coverage for the insured, relying on well-established principles of contract interpretation. They contend that the sudden and accidental pollution exclusion clause is ambiguous because the word "sudden" reasonably is subject to different interpretations. [25 ELR 10070] A leading opinion articulating this reasoning is the decision of the Illinois Supreme Court in Outboard Marine Corp. v. Liberty Mutual Insurance Co.32 |
| In Outboard Marine, the Illinois Supreme Court reviewed dictionary definitions of "sudden" which indicated that the word means "happening unexpectedly, without notice or warning or unforeseen," but also may mean "abrupt."33 Concluding that the term reasonably may have more than one meaning, the Outboard Marine court applied the relevant rules of construction and held that "sudden" must be given the meaning most favorable to the insured — that is, "unexpected or unintended."34 |
| The obvious problem with the Outboard Marine approach is that unless "sudden" is given a temporal connotation, it seemingly does nothing more than duplicate the meaning of "accidental." The Illinois Supreme Court responded to this argument. The court looked to the occurrence definition and found that the term "occurrence" was defined to include "an accident, including continuous or repeated exposure to conditions."35 An accidental discharge of pollutants, the court reasoned, therefore must include gradual or continuous or repeated releases. Accordingly, to construe the word sudden as "abrupt" would require the court to find that the exception to the pollution exclusion retriggers coverage whenever a release is "abrupt" (sudden) and "continuous or repeated" (accidental). Finding this construction absurd, the Outboard Marine court declined to follow that path and opined that the policy would make no sense at all if "sudden" were given a temporal connotation.36 |
| Moreover, although the Illinois court did not raise the issue, the phase "sudden and accidental" has a long history of usage in the insurance industry which predates its introduction in the CGL pollution exclusion in the early 1970s. Industrial boiler and machinery policies had long contained a "sudden and accidental" clause and courts had uniformly construed the phrase as a whole to mean "unexpected and unintended."37 |
| In urging courts to conclude that the sudden and accidental pollution exclusion is a mere reiteration of the occurrence clause, policyholders have urged courts to examine the drafting and regulatory history of the pollution exclusion clause. This information, they argue, shows that in the early 1970s, in writings, speeches, and formal submissions to state regulatory agencies, the insurance industry explained the pollution exclusion as a mere "clarification" of existing coverage under the 1966 occurrence policy form rather than a drastic reduction in that coverage. |
| A leading example of this approach is the decision of the West Virginia Supreme Court in Joy Technologies, Inc. v. Liberty Mutual Insurance Co.38 On the basis of internal insurance company documents written at the time the 1966 occurrence policy was introduced, the West Virginia court reasoned that pollution caused by an insured's waste disposal practices over time would have been covered under the policies in question prior to introduction of the pollution exclusion clauseas long as the insured did not expect or intend property damage. The Joy Technologies court pointedly cited internal insurance company memoranda, drafted at the time of the 1966 CGL revision, which show that coverage for gradual pollution clearly was afforded under the occurrence policy, except where the damage was expected or intended by the insured. For example, a memorandum summarizing the changes introduced by the 1966 CGL policy explained that the policy provided "coverage for gradual BI [bodily injury] or gradual PD [property damage] resulting over a period of time from exposure to the insured's waste disposal."39 |
| The Joy Technologies court next reviewed insurance industry submissions to the West Virginia Insurance Commission at the time approval was sought for the pollution exclusion clause. In the early 1970s, the West Virginia Insurance Commissioner held hearings to consider the proposed language of the pollution exclusion clause. Although other states conducted the same review, the West Virginia regulatory history has been preserved intact and has proven influential both in West Virginia courts and in other jurisdictions. In a written order approving the sudden and accidental pollution exclusion for use in West Virginia, the Insurance Commissioner concluded that: |
| [t]he proposed exclusions . . . are merely clarifications of existing coverage as defined and limited in the definition of the term "occurrence" . . . To the extent that said exclusions are mere clarifications of existing coverages, the Insurance Commissioner finds there is no objection to the approval of such exclusions.40 |
| Those documents, according to the court, indicate that the "sudden and accidental" exception to the pollution exclusion was intended to clarify preexisting coverage under the occurrence clause.41 |
| Insurance industry publications also support this interpretation of the pollution exclusion clause. An excerpt from the Fire, Casualty & Surety Bulletin, used by insurance agents and brokers to interpret standard insurance policy provisions, confirms that the intent of the pollution exclusion was to clarify the definition of occurrence: |
| In one important respect, the [pollution] exclusion simply reinforces the definition of occurrence. That is, the policy states that it will not cover claims where the 'damage was expected or intended' by the insured and the exclusion states, in effect, that the policy will cover incidents which are sudden and accidental — unexpected and not intended.42 |
| Similarly, at industry gatherings in the early 1970s, insurance executives explained that the pollution exclusion clause barred coverage only where a policyholder knowingly caused pollution damage. Francis Bruton, an employee [25 ELR 10071] of Aetna, made the following remarks at a 1971 American Bar Association seminar: |
| [the pollution exclusion] allowed underwriters to perform their traditional function as insurers of the unexpected event and yet did not allow an insured to seek protection from his liability insurer if he knowingly pollutes.43 |
| Another national specialist on pollution claims explained, in seminars across the country that the pollution exclusion endorsement "is really a clarification of our previous underwriting position in regards to pollution losses."44 |
| When the intent of the 1966 policy revisions is combined with insurer statements at the time the pollution exclusion was introduced, a logical interpretation of the "sudden and accidental" exception emerges. If the sudden and accidental pollution exclusion was merely a "clarification" of existing coverage, the exclusion bars only that coverage which already was precluded under the occurrence clause — that is, pollution damage either expected or intended by the insured.45 Therefore, because the pollution exclusion merely "clarified" the coverage previously afforded, the Joy Technologies court, along with other courts, concluded that insurance policies containing a "sudden and accidental" pollution exclusion clause covered pollution damage, even if it resulted over a period of time and was gradual, so long as the property damage was not expected or intended.46 |
| * Cases Holding No Coverage for Gradual Pollution. Insurance companies fervently argue that the meaning of the sudden and accidental pollution exclusion is clear on its face because the word "sudden" unambiguously carries a temporal connotation and means abrupt, quick, or without prior notice. And while dictionary definitions of "sudden" may vary, insurers maintain that the context of the word in the policy precludes a holding that pollution damage arising from gradual discharges is covered. A leading case accepting this argument is the 1992 decision of the Ohio Supreme Court in Hybud Equipment Corp. v. Sphere Drake Insurance Co.47 |
| The Hybud court articulated three arguments in support of its conclusion. First, it reasoned that the most commonly used meaning of "sudden" is "happening quickly, abruptly, or without prior notice."48 Accordingly,because the term is clear, the plain-meaning rule governs and coverage is barred for pollution caused by the gradual discharge of waste from a landfill. Second, the Hybud court argued that "sudden" must be interpreted in the context in which it appears in the policy. Rather than standing alone, the word "sudden" is an integral part of the conjunctive phrase "sudden and accidental." The word "accidental" generally is understood to mean "unexpected." Accordingly, giving "sudden" anything other than a temporal connotation makes the phrase "sudden and accidental" hopelessly redundant, in violation of the rule of construction which dictates that a court interpreting a written instrument should give effect to all the words in that instrument. Finally, the Hybud court reasoned that the entire pollution exclusion clause would be superfluous if "sudden" were construed to mean "unexpected" because the occurrence clause already excluded coverage for property damage expected by the insured.49 |
| Different results are possible, however, even among courts that conclude "sudden" must carry a temporal connotation. In the most literal-minded opinions, courts have reasoned that to be "sudden" pollution must occur "instantaneously," or that the event causing the release must be "traumatic."50 This is consistent with the classical accident, a "boom" event. These courts fail, however, to distinguish between the onset of a release and its duration. Moreover, the conclusion that "sudden" unambiguously carries a temporal connotation is plagued by one critical flaw: A determination of what is temporally sudden is itself riddled with ambiguity. Claims representatives and underwriters offer radically different notions of what sudden means. Thus, the temporal reading of sudden is merely the beginning of ambiguity, rather than the end. |
| * Courts Harmonizing Competing Constructions. As the case law discussed above illustrates, the sudden and accidental pollution exclusion stubbornly has resisted judicial efforts to reach a consensus on its proper interpretation. A few courts have attempted to stake out a middle ground by harmonizing the competing interpretations of the pollution exclusion. |
| In New Castle County v. Hartford Accident & Indemnity Co.,51 the U.S. Court of Appeals for the Third Circuit reviewed the drafting history of the pollution exclusion and applied the rules of construction of insurance policies to conclude that "sudden" must be interpreted to mean "unexpected." The Third Circuit, however, noted that the occurrence clause refers to pollution damage while the pollution exclusion refers to the discharge of a pollutant.52 Reasoning that the damage/discharge distinction was critical to proper interpretation of the policy, the New Castle court reached a compromise position and held that the occurrence and pollution exclusion clauses are not coextensive. The critical question for application of the pollution exclusion clause, according to the New Castle court, is whether the insured expected hazardous substances to be discharged from its landfill, not whether it expected property damage to result from that discharge.53 [25 ELR 10072] The Third Circuit remanded the case to the district court for additional fact-finding on this issue, which had not been considered below. |
| By contrast, in Shell Oil, an intermediate appellate court concluded under California law that the pollution exclusion unambiguously carries a temporal connotation, precluding coverage for a discharge of pollutants which "happens gradually and continuously for years."54 According to the Shell court, "'sudden' conveys the sense of an unexpected event that is abrupt or immediate in nature."55 The court also drew a distinction between the onset of a pollution event and its duration, holding that "sudden" refers to the former but not the latter. Thus, "a sudden and accidental discharge of a dangerous pollutant could continue unabated for some period because of a negligent failure to discover it, technical problems or a lack or resources that delay curtailment [of the discharge]" and liability from such an event might be covered.56 |
| Although it articulated a suitable basis on which to harmonize competing constructions of the pollution exclusion clause, the Shell court's opinion ultimately proves internally inconsistent and intellectually unsatisfactory. In explaining, the court argued "[w]e cannot reasonably call 'sudden' a process that occurs slowly and incrementally over a long time."57 Episodic releases of pollutants from ongoing operations, however, can almost always be characterized as processes which occur incrementally over time, such as spills from drum filling operations. The Shell opinion thus appears to include something for everyone. Policyholders argue that spills and leaks causing pollution damage are "sudden" events which continued unabated for various reasons and therefore are covered under the Shell court's holding. Insurers, on the other hand, argue that these discharges are processes which continued for long periods of time and therefore cannot be found "sudden" under the appellate court's opinion. Shell, therefore, ultimately fails to bring clarity to the pollution exclusion clause and the dispute between policyholder and insurers continues in California as trial courts struggle to apply the ruling. |
| The New Jersey Supreme Court took a more dramatic approach in its effort to harmonize the competing interpretations of the pollution exclusion. In Morton International, Inc. v. General Accident Insurance Co.,58 the New Jersey court, in an exhaustive, 137-page opinion, catalogued dozens of decisions in pollution coverage cases and concluded that there was no intellectually honest way to harmonize the actual language of the exclusion with the interpretation of the exclusion proffered to insurance regulators by the insurance industry in the early 1970s. The New Jersey court therefore thought the critical issue before it to be |
| [W]hether the courts of this state should give effect to the literal meaning of an exclusionary clause that materially and dramatically reduces the coverage previously available for property damage caused by pollution, under circumstances in which the approval of the exclusionary clause by state regulatory authorities was induced by the insurance industry's representation that the clause merely "clarified" the scope of the prior coverage.59 |
| The court's answer, of course, should be clear upon reading the question. The Morton court held that the insurers were estopped from denying coverage because they misrepresented to insurance regulators that the sudden and accidental pollution exclusion "clarified" existing coverage under the occurrence policy when in reality the language of the exclusion unambiguously reduced the available coverage without a corresponding reduction in premium.60 Morton thus concluded that the pollution exclusion clause should be strictly interpreted, notwithstanding its literal terms, to mean exactly what the insurance industry said it meant in the early 1970s. The court held that pollution coverage is barred only in cases where the insured intentionally discharges a known pollutant into the environment, regardless of whether the resulting property damage is expected or intended.61 It remains to be seen whether the novel approach adopted by the New Jersey Supreme Court will be followed in other jurisdictions. |
| If there is a single principle to be drawn from the many pollution exclusion cases on the books it is that an appellate decision on the issue — even one from a court of last resort — does not put an end to coverage litigation. Triable issues of fact often remain even after appellate courts have spoken the final word on issues of policy interpretation. For example, in connection with the pollution exclusion, a trial may be necessary in jurisdictions following New Castle County to determine whether the insured expected a discharge of pollutants. Where "sudden" is given a temporal connotation, the evidence in some cases may convince a jury that pollution did in fact occur abruptly. Indeed, we submit that marshaling facts effectively at trial can overcome many adverse legal rulings on the critical contract terms. The following section of this Article discusses strategies for developing the evidence necessary to try an environmental coverage case and techniques for presenting that evidence to a judge or jury. |
| Trying an Environmental Insurance Coverage Case |
| The previous sections of this Article analyzed the legal arguments raised in environmental insurance coverage disputes. The following sections draw on that framework and discuss trial techniques which can lead to verdicts in favor of policyholders, despite confused or adverse appellate rulings. In large part, this analysis reflects the authors' experiences trying an insurance coverage case in Los Angeles Superior Court, which was governed by the California Court of Appeal decision in Shell discussed above.62 |
| As more pollution cases come to trial, experience shows that the pollution exclusion is increasingly a paper tiger. Even when armed with a temporal meaning for "sudden," the pollution exclusion can be and has been surmounted at trial.63 These recent successes are evidence that juries are [25 ELR 10073] moved more by facts sympathetic to insureds than by the arcane, cumbersome, and ambiguous provisions of the standard pollution exclusion. |
| These victories are not flukes. They can be replicated. Careful case preparation and presentation supported by crucial jury instructions and skillfully crafted special verdict forms can produce success. Recent experience suggests that the following factors are essential: |
| 1. A realistic view of how juries conceptualize coverage cases; |
| 2. The absence of shocking, wanton behavior by the insured; |
| 3. A practical, accurate, and sympathetic theme by which the insured's case is presented to the jury; |
| 4. A cohesive strategy for establishing that the contamination at issue was "sudden" and a discharge into or upon land, the atmosphere, a water course, or body of water; |
| 5. A thorough analysis of the pattern and timing of the contamination at issue; |
| 6. Proper use of expert testimony; |
| 7. Careful jury selection; |
| 8. Creative jury instructions; and |
| 9. Specialized jury verdict forms. |
| Understanding the Lay of the Land and Avoiding "Dead Ducks" |
| The first step toward defeating the pollution exclusion at trial is to avoid illusions. The truth is that 1990s juries do not like pollution or the corporations that cause it. Indeed, the public has a healthy skepticism about corporations and their actions. Consequently, the insured's battle with the pollution exclusion can be lost at the outset if the client or its counsel expect a corporation's expensive advertising campaign or its positive public persona to win the day. |
| Fortunately for policyholders, today's jury holds most industrial corporations in roughly the same stead as insurance companies, which is to say that jurors normally dislike and distrust both. Our conclusions are based on the reports of mock juries, voir dire answers, and posttrial juror interviews, as well as our study of recent jury verdicts from around the nation. The evidence from each source is that jurors' general preferences initially are split evenly between corporations which manufacture or handle pollutants on the one hand and insurance companies on the other. |
| The importance of this conclusion is clear. There are no easy pollution exclusion cases. Each case will require careful preparation and presentation. Most importantly, the jurors' naturalskepticism about both sides to these disputes means that triers of fact will weigh heavily whether the insured acted reasonably and honorably. In other words, jurors want to know whether the insured "did the right thing." |
| If, as in Shell Oil, the insured's employees dumped pollution into natural watercourses and knowingly killed wildlife or damaged the environment, the jury's natural skepticism will turn to disgust. If a pollution case involves the equivalent of Shell's "dead ducks" and there is no reasonable explanation for or counter to such evidence, the chances of persuading a jury that the pollution exclusion should not apply are slim. It is, accordingly, crucial that the insured carefully analyze all possible evidence of knowing or willful pollution, before deciding whether to proceed to trial. |
| Establishing the Case Theme |
| From the outset of voir dire, counsel for the policyholder must tell the client's story by way of an effective, clear, and sympathetic theme. The theme becomes the glue that binds seemingly disparate bits of evidence into an effective mosaic. The theme must be simple and consistent with the facts. It must not appear to be contrived or forced. In its essence, it must say to the jury that the insured acted the same way each juror would have expected and wanted it to act. |
| Because environmental coverage cases involve potential danger to life and property, juries will inevitably pass judgment on the insured's business operations. Did the insured act reasonably and appropriately? Were the policyholder's handling practices with regard to hazardous materials consistent with industry practice and custom? Did the insured know about the potential risk to the groundwater arising from the handling of hazardous material? Each of these questions is integral to the jury's decision. Each question requires the jury to second-guess the insured's actions 10, 20, 30, or 40 years after the fact. |
| One of the most effective themes to address such issues is that the insured acted with "common sense." Every juror of whatever age or experience knows what "common sense" is. Such a standard encompasses several key factors for environmental coverage cases, which a jury will want to consider, including (1) the level of knowledge about pollutants and the environment generally available at the relevant time; (2) the reasonableness of the corporation's actions; and (3) whether the insured had an economic incentive to avoid pollution. |
| Each action by the insured's employees and representatives should be measured against the "common sense" yardstick. The jury must be shown that it was common sense to discharge the subject chemicals in the volumes and locations at issue, or that it was common sense to believe that sufficient precautions were taken to avoid environmental problems, or that it was common sense to believe that current practices were not dangerous. Supporting evidence such as reliance on material safety data sheets or industrywide practices should be stressed. |
| A corollary to the "common sense" theme is the "do the right thing" argument. Jurors want to know and believe that policyholders and their employees were striving to not only comply with existing laws and regulations, but that when confronted with problems the insured chose to do what was right and not just what was legal. Insureds should develop evidence andarguments that management were vigilant and conscientious corporate citizens who cared about neighbors and neighborhoods. For example, if employees lived near the subject site they presumably would have been concerned about the safety of their own families. |
| Where available, a third effective theme is that previous site owners or operators were responsible for pollution which was in the ground and groundwater before the insured even owned or operated the site. The strict, joint and several, and retroactive liability created by CERCLA was [25 ELR 10074] revolutionary and far-reaching for corporate America. Most juries are sympathetic to an insured faced with this kind of after-the-fact legislation, which imposes liability simply because the corporation owned a site. |
| Finally, jurors can be misled into believing that unlike individuals, corporations have the capability of avoiding human errors. Insurers love to paint corporations as omniscient and foolproof. The truth is that the frailties of most corporations are commonplace. Insureds act through their employees and often are unable to avoid normal human mistakes. Put another way, try as one might, "stuff happens." |
| This theme is a particularly effective counter to the argument that there is no evidence that the discharge or dispersal was "accidental." Accidents happen in all workplaces, including the courtroom. Consequently, while such a theme should not be overused, it can be illustrated and applied in various colorful ways which will personalize and soften the insured's image with the jury. For instance, the policyholder's closing argument can refer to the inevitable courtroom errors which counsel has made. This self-effacing technique effectively demonstrates that "stuff happens" in every context, even in those settings where people are struggling mightily not to make errors. |
| Using the Expert Witness to Explain and Develop the Insured's Themes and Theories |
| There can be no success in defeating the pollution exclusion without a coherent strategy for dealing with its operative terms. The facts informing that strategy will differ from site-to-site and from contaminant-to-contaminant. For cases involving groundwater contamination, for example, the insured's strategy necessarily involves a careful presentation of hydrogeology and the specific hydrological circumstances by which the contaminants at issue entered the groundwater at the subject site. Of course, such a presentation is impossible without the right expert to make it. |
| At best, groundwater science or hydrology is dry, unfamiliar stuff. The insured's expert will quickly lose the jury's attention unless he or she explains, simply and clearly, how it is that contaminants were suddenly and accidentally introduced into the groundwater. The expert becomes the key to the process by which the jury applies obscure scientific data to oblique legal standards. The expert's ability to communicate well is of primary importance in establishing the trust that is crucial to victory. The properly selected and prepared expert will accomplish several goals for the insured, including: |
| 1. A clear articulation of the location, timing, and extent of contamination at the site; |
| 2. A clear explanation of the hydrological characteristics of the subject site that support a finding that the contamination was sudden and accidental; and |
| 3. A limit on or rebuttal to positions taken by the insurer. |
| The expert must be able to use simple language, graphics, charts, and apt analogies to tell the policyholder's story. In cases involving chlorinated solvents, for instance, the expert must clearly and simply explain how nonaqueous-phased-liquids (NAPLs) work.64 For example, the expert may analogize NAPLs to peppermint sticks which dissolve slowly but regularly over time as groundwater in an aquifer passes by the NAPL lodged in the aquifer's pores and interstices.65 |
| To testify effectively, the expert must have the ability to teach without being condescending or solicitous. One effective way of accomplishing this is for the expert to use hand drawn pictures rather than expensive, prepared graphics. The expert must maintain eye contact with the jurors and use common phrases while avoiding technical terms. |
| Substantively, the expert can be used to address several key issues in relation to the pollution exclusion and general coverage issues. First, the expert will establish the contamination of and damage to the third-party property, e.g., the groundwater. The expert will also link existing contamination in groundwater to the insured's above- or below-ground operations by analyzing soil-sample results according to their location, intensity, and consistency. |
| The expert's time and distance studies on the contamination plume can be used to estimate when the contamination first took place. If a predecessor company was responsible for some or all of the contamination, the expert's testimony will be crucial to pointing a finger away from the insured's operations. Of course, this will not alter the insured's legal liability under CERCLA, but it will score points with the jury's assessment of the insured's culpability and the question of whether the discharge or release was accidental. |
| One of the most important purposes of the expert's testimony is to establish the insured's case that the discharge or release was "sudden." In many instances the expert can opine that the hydrologic circumstances were such that the time period between discharge or release and contaminant contact with the groundwater could be measured in minutes or hours. At a minimum, the expert can help establish that contaminants move through the ground and groundwater in sucha way that the initial contaminant contact with groundwater is always abrupt. |
| Experts should also be used to anticipate or rebut key parts of the insurer's case. This can be done in various ways. For instance, the expert's study of the pattern of contamination at the site may allow the insured to isolate, limit, or distinguish contamination whose source was operations involving nonaccidental discharges or releases from contamination whose source was operations [25 ELR 10075] involving clearly accidental discharges or releases. By distinguishing one source from the other, the insured is able to effectively apply helpful defenses such as the concurrent cause doctrine.66 |
| The expert should also be used to establish that only small amounts of discharge are necessary to produce relatively large amounts of contamination and damage to groundwater. This fact will allow the insured to argue that since accidents are inevitable, at least some amount of contamination must have been accidental as well as sudden under any definition of "sudden and accidental." |
| Jury Selection |
| Shaping the case for the jury starts with jury selection. Few generalities can be applied to this process. The most reliable is that older, more experienced jurors better serve the insured's cause. Older jurors are able to remember when environmental issues were not as pressing as they are in today's world. Moreover, jurors who have experienced the societal transition from a lack of awareness to zealous protection of the environment are better able to understand that corporations could and did suffer environmental accidents. Such jurors more readily give the benefit of the doubt to insureds who tried but failed to learn how to avoid contamination caused by site operations. In contrast, younger jurors who do not relate to or remember the early days of environmental consciousness have far less tolerance for corporate miscues. |
| What can be said with more certainty about juries hearing these cases is that they will dedicate themselves to a serious assessment of the facts based on the court's instructions and verdict form. Each can be crucial to defeating the pollution exclusion. Consequently, the insured should generally look for jurors who will follow the court's instructions. Education and intelligence are usually helpful. |
| Jury Instructions |
| It bears repeating that environmental coverage cases with pollution exclusions that equate sudden to "abrupt" are eminently winnable. Perhaps the most important factor in winning a pollution exclusion case is careful assessment of how the case will be shaped for the jury by the jury instructions and the verdict form. If the court will endorse several key instructions, the insured can shape a close case so that a diligent jury will find for the insured even where some juror sentiments might lie for the carrier. Those key instructions concern: |
| 1. The burden of proof; |
| 2. The meaning of property damage; |
| 3. The definition of "occurrence"; |
| 4. The meaning of expected or intended; |
| 5. Corporate expectation/intention; |
| 6. Corporate predecessors; |
| 7. Concurrent causation and multiple occurrences; and |
| 8. The pollution exclusion and the meaning of "sudden and accidental." |
| The following discussion is based on jury instructions given at the conclusion of a coverage trial in Purex Industries, Inc. v. Harbor Insurance Co.67 In that case, a Los Angeles jury returned a verdict in favor of the policyholder in a dispute concerning coverage for environmental cleanup at a Garden City, Long Island solvent distribution facility. |
| * Burden of Proof. The Purex court required the policyholder to bear the burden of proving the facts necessary to establish a claim for coverage. This burden included establishing the existence and number of occurrences, and that the insured did not expect or intend property damage. Conversely, the insurer was responsible for proving the applicability of exclusionary language. Most significantly, the insurer was required to establish that the "sudden and accidental" exception to the pollution exclusion did not apply in order to defeat coverage. |
| The jury instruction on burden of proof was: |
| [The policyholder] has the burden of proving by a preponderance of the evidence: |
| 1. That there was property damage during each policy period for which the policyholder seeks coverage; |
| 2. That such property damage resulted from an occurrence or occurrences; and |
| 3. That such property damage was neither expected nor intended from the standpoint of the insured. |
| [The insurer] has the burden of proving by a preponderance of the evidence all the facts necessary to establish that an exclusion or any exclusionary language applies to limit or eliminate coverage. [The insurer] also has the burden of proving that an exception to an exclusion does not apply.68 |
| * Property damage. In Purex, the court issued the following instruction: |
| Property damage means injury to destruction of, or loss of use of third-party property, including subsurface groundwater. |
| Under the law, contamination of groundwater that requires cleanup is "property damage." |
| There is property damage in each policy year in which contaminants enter the groundwater.69 |
| The insured in Purex successfully argued that contamination of groundwater is "property damage" by focusing the jury's attention on the cleanup obligations associated with subsurface environmental problems. The meaning of "property damage" is especially important when multiple policies cover several years. In those cases, the instruction is the key to determining which policies are triggered. Obviously, policyholders seek to recover under as many policies as possible. |
| * Occurrence Definition. To establish coverage, the policyholder must prove an "occurrence" during the term of the policy. In Purex, the jury instruction on the occurrence definition made it clear to the jury that occurrences may take place [25 ELR 10076] over long periods of time and that it is the property damage, i.e., groundwater contamination, not necessarily the event causing damage that constitutes an occurrence. |
| The Purex court followed the Shell opinion70 requiring proof of "accidents" in addition to property damage, despite the policyholder's argument that such a requirement went beyond the language of the policy and applicable law. The occurrence instruction read: |
| An "occurrence" means an accident, including continuous or repeated exposure to conditions, which results in property damage neither expected nor intended from the standpoint of the insured. The term "accident" as used here means an unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown cause. An accident may take place over a long period of time. It is not necessary that the accident or exposure to conditions occurred during the policy period, so long as some property damage occurred during the policy period.71 |
| * Expected or Intended. Consistent with the opinion in Shell, the Purex court's instruction on the "expected or intended" requirement made it clear to the jury that it is the policyholder's subjective expectation or intent that is critical for purposes of finding or denying coverage. As formulated in the court's instruction, the test for defeating coverage is a demanding one. Thus, only if the policyholder knew that property damage was substantially certain or highly likely to cause groundwater contamination could the carrier prevail. The court gave the following instruction: |
| For purposes of determining whether [the policyholder] expected or intended to cause property damage, it does not matter what another person might have expected or intended in similar circumstances. It does not matter what [the policyholder] could have expected or intended, or even what [the policyholder] should have expected or intended. You must decide what [the policyholder] actually expected or intended. |
| The word "expected" has a different meaning from the word "intended." Property damage was "expected" if [the policyholder] knew or believed that such damage was substantially certain or highly likely to result in that kind of damage. Property damage was "intended" if [the policyholder] acted with the aim or intention of causing the damage.72 |
| Accordingly, evidence of custom and practice or literature on hazardousness of chemicals was not admissible to defeat coverage. Nonetheless, the court allowed some objective evidence to corroborate and refute the credibility of the insured's witnesses. |
| * Corporate Expectation/Intention. In reliance on Shell, in which the policyholder was a corporation, an additional instruction was necessary to clarify application of the "expected and intended" test to employees and management personnel within the corporation: |
| In determining whether [the policyholder] expected or intended the property damage, [the policyholder's] employees must have had: |
| (a) Knowledge that the conduct that caused the property damage was occurring; |
| (b) Responsibility for the conduct or responsibility for supervising the conduct; and |
| (c) The expectation or intention that the conduct would cause the property damage that occurred. |
| To be expected or intended by [the policyholder], these three elements must exist in a single employee of [the policyholder] or be communicated among several employees at or before the time the conduct occurred.73 |
| The critical factor in this test is knowledge that a release at the surface would cause groundwater contamination. In the case of chlorinated solvents, a policyholder can often make a credible case that employees did not learn about the effects of handling practices on groundwater until the early 1980s. |
| * Corporate Predecessors. One issue which may arise in an environmental coverage case is the insured's right to coverage for property damage arising out of discharges of contaminants caused by predecessors of the policyholder. As shown above, in jurisdictions where a subjective standard of "expected or intended" applies, it is the insured's expectation and intentions, not the predecessor's, that is relevant. The following instruction, prefaced with an introduction to the corporate entities involved, addresses this issue, making it clear that the policyholder will not be held responsible for knowledge its predecessors may have had about the environmental effects of business operations. |
| You may not consider whether [the policyholder] expected or intended any property damage based upon the knowledge or conduct of its predecessors before [the policyholder] acquired them.74 |
| * Concurrent Causation. Most CGL policies have both per occurrence and aggregate limits. Where a policy lacks one or both, the insured may wish to prove multiple occurrences during each policy period to maximize coverage. Similarly, where policy limits are exhausted, the insured may need to prove occurrences over several policy periods to obtain maximum reimbursement for cleanup outlays. Furthermore, by focussing the jury on discrete areas of contamination at the site, the policyholder can allow the jury to find coverage for some of the property damage while denying coverage where facts may rise to the level of "expected or intended" conduct. This doctrine of concurrent causation is well-recognized in many jurisdictions.75 |
| [25 ELR 10077]
If you determine that there is property damage and that an occurrence has taken place, you must also determine the number of occurrences that have taken place. |
| The number of occurrences is determined by the number of causes of property damage. To determine the cause you are to examine the underlying circumstances which resulted in the claim for damages. An ongoing harmful condition flowing from one process or location may constitute a single occurrence or multiple occurrences.76 |
| * Pollution Exclusion. In the Purex case, the court defined for the jury the cornerstone terms "sudden" and "accidental." The following instruction, based on the decision of the California Court of Appeal in Shell, illustrates the difficulty trial courts have in applying that decision: |
| "Sudden" conveys the sense of an unexpected event that is abrupt in time or immediate in nature. Sudden refers to the pollution's commencement and does not require that the polluting event terminate quickly or have only a brief duration. Accidental means an unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown cause. "Sudden" does not include a process that occurs slowly or incrementally over a relatively long time, no matter how unexpected or unintended the process. It is for you to determine under the circumstances of this case whether a discharge was sudden and accidental.77 |
| The policyholder may successfully establish that the release to the groundwater commenced abruptly, satisfying part of Shell. The carrier argues in rebuttal that the groundwater contamination arises out of a "process" that occurs over a relatively long period of time. Because of the internal inconsistency of Shell, it is the facts, and the persuasiveness of the parties' presentations, not the Court of Appeal that will determine who prevails. |
| Special Verdict Form |
| Given the general complexity of coverage cases and jury instructions in such cases, a special verdict form may assist jurors in applying relevant legal principles to the facts at hand. For that reason, many courts have been willing to use such a tool in management of coverage cases. As a tactical matter, counsel may find a special verdict form useful as a means of overcoming unbridled juror discretion by directing the jury through a set of specific questions on the case. In addition, a special verdict form allows jurors to find potential compromises if they are bothered by weaknesses in either side's case. |
| A special verdict form encourages a disciplined review of the critical legal issues and facts. For example, the special verdict form can address the critical contract questions: |
| 1. Did property damage occur at the site, and when did it occur? |
| 2. Was there an occurrence? |
| 3. Was the property damage "expected or intended"? |
| 4. Was the pollution "sudden and accidental"? |
| When multiple policies are involved, each question may be subdivided by year to determine if some or all of the coverage periods are triggered. |
| In addition, the special verdict form can address particular issues arising during trial. For example, in Purex, the jury was asked to determine whether some or all of the property damage occurred before Purex owned the facility. If so, that evidence would support Purex's contention that it could not expect or intend the harm. A second question of particular importance to Purex related to the number of causes of contamination at the facility. A finding of multiple causes, e.g., several hot spots, can increase the pool of available coverage for policies without aggregate limits, and can allow juries to find coverage for some, if not all, of the conduct at issue. Additionally, in Purex, the jury was asked to decide whether all of the property damage in each policy period arose "from a discharge, dispersal, release or escape that was not 'sudden and accidental.'"78 Even if a jury finds that some of the property damage was caused by discharges that were not "sudden and accidental," such a special verdict form still leads jurors to a verdict in favor of coverage for the policyholder. |
| Conclusion |
| The lesson learned from trial experience is that the pollution exclusion clause can be beaten and that policyholders can win environmental insurance coverage cases at trial. Although the case law on the exclusion is almost evenly split between constructions favoring policyholders and interpretations preferred by insurers, even adverse decisions leave ample room for creative trial lawyers to persuade a jury that environmental cleanup costs are covered. |
| In the final analysis, much coverage litigation will turn on the skills of the counsel in selecting a jury, developing cogent themes, presenting the environmental facts through witnesses, explaining complicated matters of hydrogeology clearly and concisely to the jury through expert testimony, and arguing persuasively for jury instructions and special verdict forms that will lead jurors to the right decision. |
| 1. The authors are not alone in noting the allegory to war. See ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 22 Cal. Rptr. 2d 206, 207 (Cal. Ct. App. 1993). |
| 2. The most important of these is the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund), 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA §§ 101-405, first enacted in 1980. |
| 3. See, e.g., Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Co., 37 Env't Rep. Cas. (BNA) 1006, 1009 (Fla. 1993) (noting the division of authority). |
| 4. AIU Ins. Co. v. Superior Court of Santa Clara County, 274 Cal. Rptr. 820, 831 & n.8, 21 ELR 20315, 20319 & n.8 (Cal. 1990). See also 1A ROWLAND H. LONG, THE LAW OF LIABILITY INSURANCE § 10A.01[2] (1994) ("Companies in the business of insurance charge premiums for the assumption of risks based upon actuarially computed estimates which take into consideration, among other factors, past loss experience, anticipated future trends and the general economy. Included within anticipated future trends are the consequences of judicial and legislative decisions which have the effect of broadening coverage under existing insurance policies."). |
| 5. Outboard Marine Corp. v. Liberty Mutual Ins. Co., 607 N.E.2d 1204, 1219 (Ill. 1992). |
| 6. 15 U.S.C. § 1012(b); see generally ROBERT E. KEETON & ALAN I. WIDESS, INSURANCE LAW § 8.1(a) (1988). |
| 7. AIU, 274 Cal. Rptr. at 831, 21 ELR at 20319. |
| 8. Id. This is an application of the doctrine of contra preferentem, which holds the drafter of a contract responsible for any ambiguities. See LONG, supra note 4, § 10A.03[2]. |
| 9. AIU, 274 Cal. Rptr. at 831, 21 ELR at 20319. |
| 10. LONG, supra note 4, § 10A.04[1][a]. |
| 11. See, e.g., Anchor Casualty Co. v. McCaleb, 178 F.2d 322 (5th Cir. 1949) (holding that accident policy covered damage resulting from oil flow over a two-day period); Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d 831, 849 (N.J. 1993) (citing examples); New Castle County v. Hartford Acc. & Indem. Co., 933 F.2d 1162, 1196, 21 ELR 21153, ELR 21174 (3d Cir. 1991) (same). |
| 12. See, e.g., Morton, 629 A.2d at 849-50. |
| 13. E. Joshua Rosencranz, The Pollution Exclusion Through the Looking Glass, 74 GEO. L.J. 1237, 1247 (1986). |
| 14. New Castle County, 933 F.2d at 1167, 21 ELR at 21155 (emphasis added). |
| 15. Just v. Land Reclamation, Ltd., 456 N.W.2d 570, 574, 20 ELR 21407, 21409 (Wis. 1990) (emphasis added). |
| 16. Id. |
| 17. Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d 831, 850 (N.J. 1993). |
| 18. LONG, supra note 4, § 10A.04[2]; Morton, 629 A.2d at 850. |
| 19. Testimony of Richard Stewart, Purex Indus., Inc. v. Procter [case name later changed to Purex Indus., Inc. v. Harbor Ins. Co.], No. C-446-935, record at 6011-17, 6068-78 (Cal. Super. Ct. Los Angeles County Dec. 3 & 4, 1992). |
| 20. LONG, supra note 4, § 10A.04[2] (emphasis added). |
| 21. In 1985, the insurance industry again revised the CGL policy and adopted an "absolute" pollution exclusion which eliminates the "sudden and accidental" exception. See id. at § 10A.04[3]. |
| 22. See, e.g., Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d at 843-46 (holding that environmental remediation costs are "damages" within the meaning of standard CGL policy and citing 16 cases in support of that conclusion); AIU Ins. Co. v. Superior Court of Santa Clara County, 274 Cal. Rptr. 820, 839, 21 ELR 20325 (Cal. 1990) (holding that environmental remediation costs are "damages" within the meaning of standard CGL policy); Boeing Co. v. Aetna Casualty & Surety Co., 784 P.2d 507, 510-15, 20 ELR 20362, 20363-66 (Wash. 1990) (same). Contra A. Johnson & Co. v. Aetna Casualty & Surety Co., 933 F.2d 66, 69 (1st Cir. 1991) (holding that under Maine law environmental remediation costs are not "damages" within the meaning of standard CGL policies); Continental Ins. Co. v. Northeastern Pharmaceutical & Chem. Co., 842 F.2d 977, 985, 18 ELR 20819, 20824 (8th Cir.) (en banc) (same under Missouri law), cert. denied, 488 U.S. 821 (1988); Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348, 1352 (4th Cir. 1987), 17 ELR 21277, 21279 (same under Maryland law), cert. denied, 484 U.S. 1008 (1988). |
| 23. See, e.g., Truck Ins. Exch. v. Pickering, 642 S.W.2d 113, 116 (Mo. Ct. App. 1982). |
| 24. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1088 (Colo. 1991). |
| 25. 15 Cal. Rptr. 2d 815 (Cal. Ct. App. 1993). |
| 26. Id. at 835. |
| 27. Id. (distinguishing Hecla, 811 P.2d at 1088). |
| 28. Id. at 836. |
| 29. Id. at 834. |
| 30. As an example of the division of appellate authority on this question, consider the situation in Florida. In September 1992, the Florida Supreme Court, in a 4-3 decision, held that the pollution exclusion was ambiguous and concluded that coverage for the policyholder's CERCLA cleanup liability was available so long as the contamination was unexpected and unintentional on the part of the insured. Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Co., 35 Env't Rep. Cas. (BNA) 1700, 1706 (Fla. 1992). On rehearing in the same case, the swing vote reconsidered and concluded that what had been ambiguous in 1992 was unequivocal in 1993. The court, in a stunning reversal, withdrew its earlier opinion and held that no coverage was available for pollution which took place over several years because it was not "sudden" within the meaning of the policy language. Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Co., 37 Env't Rep. Cas. (BNA) 1010, 1011 (Fla. 1993). Asked by the policyholder to reconsider the case yet again, the Florida court declined to do so in March 1994. |
| 31. See New Castle County v. Hartford Acc. & Indem. Co., 933 F.2d 1162, 1196, 21 ELR 21153, 21174 (3d Cir. 1991) (division of authority suggests "sudden" is susceptible of more than one reasonable definition); Little v. MGIC Indemnity Corp., 836 F.2d 789, 796 (3d Cir. 1987) (fact that courts have arrived at conflicting interpretations is strongly indicative of ambiguity in an insurance policy); Just v. Land Redemption, Ltd., 456 N.W.2d 570, 577-78, 20 ELR 21407, 21411 (Wis. 1990) (fact that substantial conflicting authority exists strengthens the conclusion that the terms are susceptible to more than one meaning). |
| 32. 607 N.E.2d 1204 (Ill. 1992). |
| 33. Outboard Marine Corp., 607 N.E.2d at 1218. |
| 34. Id. |
| 35. Id. at 1219. |
| 36. Id. |
| 37. See, e.g., New Castle County v. Hartford Acc. & Indem. Co., 933 F.2d 1162, 1197, 21 ELR 21153, 21175 (3d Cir. 1991); Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d 831, 864-865 (N.J. 1993); Anderson & Middleton Lumber Co. v. Lumbermens Mutual Casualty Co., 333 P.2d 938 (Wash. 1959). |
| 38. 421 S.E.2d 493 (W. Va. 1992). See also Just v. Land Reclamation, Ltd., 456 N.W.2d 570, 574-75, 20 ELR 21407, 21408-09 (Wis. 1990). |
| 39. Joy Technologies, 421 S.E.2d at 498. |
| 40. Id. at 499. |
| 41. Id. at 498-99. |
| 42. Just, 456 N.W.2d at 575, 20 ELR at 21409. |
| 43. Robert N. Sayler, The Emperor's Newest Clothes, 5 MEALEY'S LITIG. REP. (INS.), Oct. 8, 1991, at 27, 33 (quoting Francis X. Bruton, Historical Liability and Insurance Aspects of Pollution Claims, 1971 ABA Proceedings Section on Insurance, Negligence, and Compensation 303, 311). |
| 44. Id. at 35 (quoting M. Maliner, Memorandum for Liability Seminar 19). |
| 45. See Joy Technologies, Inc. v. Liberty Mutual Ins. Co., 421 S.E.2d 493, 500 (W. Va. 1992); Just, 456 N.W.2d at 578-79, 20 ELR at 21409. |
| 46. Joy Technologies, 421 S.E.2d at 500; see also Just, 456 N.W.2d at 578, 20 ELR at 21411. |
| 47. 597 N.E.2d 1096 (Ohio 1992). See also Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Ins. Co., 37 Env't Rep. Cas. (BNA) 1006, 1010 (Fla. 1993); Lumbermens Mutual Casualty v. Belleville Indus., Inc., 555 N.E.2d 568, 20 ELR 21454 (Mass. 1990); Upjohn v. New Hampshire Ins. Co., 476 N.W.2d 392 (Mich. 1991); Waste Management of the Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374 (N.C. 1986), 17 ELR 20145. |
| 48. Hybud, 597 N.E.2d at 1102. |
| 49. Id. at 1102-03. |
| 50. ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 22 Cal. Rptr. 2d 206, 220 (Cal. Ct. App. 1993). |
| 51. 933 F.2d 1162, 21 ELR 21153 (3d Cir. 1991). |
| 52. New Castle County, 933 F.2d at 1199-1203, 21 ELR at 21176-78. |
| 53. Other courts have reached the same conclusion, although not articulating the damage/discharge distinction to the same degree as did the New Castle court. See, e.g., Claussen v. Aetna Casualty & Surety Co., 380 S.E.2d 686, 688 (Ga. 1989). |
| 54. Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d 815, 841 (Cal. Ct. App. 1993). |
| 55. Id. |
| 56. Id. at 839. |
| 57. Id. at 841 (emphasis added). |
| 58. 629 A.2d 831 (N.J. 1993) |
| 59. Id. at 872-73. |
| 60. Id. at 873-76. |
| 61. Id. at 875. |
| 62. See supra note 25. |
| 63. See, e.g., Aydin Corp. v. American Employers' Ins. Co., No. 857826 (Cal. Super. Ct. San Francisco County verdict delivered July 29, 1993); Mapco Alaska Petroleum, Inc. v. Central Nat'l Ins. Co., No. A89-470 (D. Alaska verdict delivered June 15, 1993); Carter-Wallace, Inc. v. Admiral Ins. Co., No. L-12287-89 (N.J. Super. Ct. L. Div. Middlesex County verdict delivered May 4, 1994). |
| 64. NAPLs are liquids that move in the subsurface independent of the movement of water. Since they are heavy liquids, it can take only minutes for them to move from the surface to shallow water tables. If releases of chlorinated solvents take place from underground storage tanks buried in soil with a high water table, the discharge, dispersal or release to a body of water or watercourse will have taken place even more rapidly. Testimony of John H. Guswa, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935, record at 4152 (Cal. Super. Ct. Los Angeles County Mar. 2, 1993). The quick movement of NAPLs in the environment can support an argument that pollution was "sudden and accidental." |
| 65. NAPLs, such as chlorinated solvents, are not easily dissolved in water. They tend to exist in undissolved globules or continuous lengths of the contaminant. Consequently, they exist in aquifers for decades or longer. While suspended between the pores and interstices of the aquifer, the chlorinated solvents globules will release or chip off into groundwater in small amounts on a regular basis. Such releases into the aquifer are abrupt and take place on a moment-to-moment basis over long periods of time. Id. at 4153. |
| 66. See infra note 75 and accompanying text. |
| 67. No. C-446-935 (Cal. Super. Ct. Los Angeles County verdict delivered Mar. 29, 1993). |
| 68. Jury Instruction 24, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 69. Jury Instruction 25, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 70. See supra note 25. |
| 71. Jury Instruction 26, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 72. Jury Instruction 27, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993) (emphasis added). |
| 73. Jury Instruction 29, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 74. Jury Instruction 28, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 75. See, e.g., State Farm Mut. Auto Ins. Co. v. Partridge, 10 Cal. 3d 94, 109 Cal. Rptr. 811 (1973) (coverage found where injury results from both covered and excluded actions); Salem Group v. Oliver, 590 A.2d 1194 (N.J. Super. App. Div.), aff'd, 607 A.2d 138 (N.J. 1991) (same); Cooperative Fire Ins. Co. v. Vondrak, 346 N.Y.S.2d 965 (1973) (same); see also Francis J. MacLaughlin & Jasmina A. Theodore, California's Concurrent Cause Doctrine Can Nullify Polluters Exclusions, 7 MEALEY'S LITIG. REP. (INS.), Sept. 21, 1993, at 17. |
| 76. Jury Instruction 30, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 77. Jury Instruction 32, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County, given Mar. 17, 1993). |
| 78. Special Verdict Question No. 6, Purex Indus., Inc. v. Harbor Ins. Co., No. C-446-935 (Cal. Super. Ct. Los Angeles County verdict delivered Mar. 29, 1993). |
25 ELR 10065 | Environmental Law Reporter | copyright © 1995 | All rights reserved
