Category: Confidential Insurance Archeology®

The New York Appellate Court recently advised the Delaware Supreme Court on the complexities of New York insurance law on coverage allocation. In the matter of Viking Pump, Inc. & Warren Pumps LLC v. TIG, et al, TIG argued that it was only obligated to indemnify Viking Pump for the time they insured the company (Pro Rata), while Viking Pump sought coverage for the entirety of its defense (All Sums). The Delaware Supreme Court asked the New York Appellate Court to interpret its own laws in order to determine the answers to these questions: If excess insurance policies exist that have non-cumulation provisions and follow the form of underlying policies, which allocation method is appropriate? “All sums[1]” or “pro-rata[2]?” Is vertical or horizontal exhaustion[3] necessary in order to trigger this excess coverage? [AM4]

If an excess policy ‘follows form,’ it adopts, word-for-word, provisions from the underlying (primary and umbrella) coverage. The non-cumulation provision says, in effect: if your injury spans more than one policy period and an insurer other than us insured you for that period, then the amount we indemnify you for is going to be reduced by the amount your other insurer pays for the injury that occurred during their policy period. 

There was agreement from the court of Chancery all the way to the New York Appellate Court: in this case, the non-cumulation provisions in the underlying policies were clear in their intent to allocate using an all-sums method (which Liberty Mutual, the underlying insurer, customarily used).

TIG adopted the policy part-and-parcel by following form, but wanted a pro-rata approach – a legal fiction that takes an injury that occurred/continued to occur over multiple policy periods and treats it as if a discrete injury occurred in the separate policy periods. Pro-rata exists in a universe where, unless there was overlapping coverage, the injured party/insured can only recover under one policy at a time.

Non-cumulation policies, on the other hand, absolutely expect that more than one policy may be indemnifying the insured and, as a result, nullify a pro-rata approach. (A precept of contractual interpretation is that you do not interpret a provision of a contract in such a way as to nullify another provision in the contract rendering it redundant or insignificant; it’s called surplusage). In addition, several of the excess policies contained ‘continuing coverage’ provisions which expressly extend coverage past the policy period which, again, is completely incompatible with a pro-rata approach. The New York Appellate Court found for Viking Pump on the allocation question.

That left the second question to be answered. What kind of exhaustion applies to the excess policies: do the insureds need to exhaust all underlying coverage prior to triggering any excess policies (horizontal) or can the insureds simply exhaust one primary policy in order to trigger the overlying policy (vertical)? The court found that, mainly due to the fact that the excess policies’ form-following and specific identification of the underlying policies to which they provided excess coverage for meant that vertical exhaustion was the proper approach.

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[1] In “all sums,” instances one insurer may be responsible for paying “all sums” related to the defense of the policyholder. After (or perhaps during) the claim, the insurer may pursue other carriers for equitable contribution.
[2] In “pro rata,” instances, an individual carrier is only responsible for paying those sums that occur while the carrier was ‘on the risk’ or insuring the policyholder while a long-tail claim (like an environmental spill) is occurring.
[3] In vertical exhaustion, excess or umbrella coverage is triggered as soon as the policy underneath it is exhausted. In horizontal exhaustion, all primary policies must be exhausted before the first excess or umbrella policy is triggered.
 

A groundbreaking ruling in the environmental cleanup industry. The Ninth Circuit Court of Appeals recently issued a decision that effectively broadens the scope of protection of a policy holder by triggering an insurance company’s “duty to defend” more quickly for policy-holders living in the Ninth Circuit. In short, if the Environmental Protection Agency issues a request for information (a “104(e) letter”) regarding the release of a hazardous chemical, a property owner can go to his or her insurance companies and request that his or her insurer provide financial coverage for any legal defense needed during the regulatory process.

The facts in Ash Grove Cement Company v Liberty Mutual Insurance Company involved the EPA issuing a 104(e) letter to Ash Grove regarding contamination at the Portland Harbor Superfund Site, which is a 12-mile sediment cleanup project along the Willamette River in Portland, Oregon. Liberty Mutual denied coverage on the basis that their policy only covered “suits” and “property damage.” Luckily for Ash Grove, the circuit court found that a 104(e) letter or any other communication from the EPA that could result in a policy-holder being identified as a Potentially Responsible Party (PRP) order is considered a “suit,” under the theory that the information provided to the EPA by the insured could place them under some kind of liability. The court held that the imminent need for money to cover defense costs in court makes the letter the “functional equivalent” of a “suit.”

Moving forward, this decision is likely to have an impact in the way Superfund investigations and clean-ups are funded, particularly in the early stages. Insureds who may be Potentially Responsible Parties under CERCLA will be more inclined to come forward with information and historic records about their site, since it will be in their best interests, both environmentally and financially. They’ll also have more institutional control throughout the process, deciding costs of the investigation and cleanup with the EPA overseeing the project. The alternative is less forgiving to the insured: the EPA takes action, sends in its own crews to clean things up, and then files a lawsuit against the responsible party to recover the funds used on said cleanup. Although this decision only applies to the Ninth Circuit, it sets a strong legal precedent for courts in other circuits that have not yet decided this issue.

Yours is a middle-sized manufacturing company headquartered in the Midwest. Last year, the bank handling your company’s refinancing required that you conduct a Phase One environmental assessment. The Phase One report showed that past use of degreasers had contaminated the soil and possibly the groundwater beneath your plant. As required by law, you reported the findings to your state’s environmental authority. The state then sent a letter requiring that your company take action to determine the extent to which groundwater or adjoining land may have been polluted. Your attorney explained that your company’s general liability insurance policies from years past could provide coverage for the cost of responding to the state’s directives. So he asked you to provide him with copies of any and all general liability insurance policies in your company’s possession.

Your risk manager pulled together your policies from the last seven years and your attorney reviewed them. He then requested that you provide earlier policies because the policies you gave him have language that absolutely excludes pollution. Your risk manager informed you that those were all the insurance records he had in his files.  He then placed a call to your company’s current insurance agent who surprised everyone by saying that his agency has purged its files of policies older than seven years.

Stating that those insurance companies that issued your seven recent policies are likely the same ones that issued policies in the preceding years, your attorney wrote letters to each of them, placing them on notice of the potential property damage. Each of these carriers has now responded negatively, stating their policies do not cover and they can find no earlier policies issued to your company.  Now what?

INSURANCE ARCHEOLOGY

Your attorney’s latest suggestion is an odd one. Professionals that conduct searches for lost insurance policies, known as insurance archeologists, could expand the search beyond your risk management files and beyond your insurance agent in search of older policies.  Aware that hiring specialists may be expensive, you ask him to determine the cost of hiring an insurance archeologist and the likelihood that this new search for policies would be effective.

It turns out that most insurance archeologists are situated in large cities on the East Coast where they service America’s largest corporations by searching through the archives of the large insurance brokers.  Could they send someone out to your neck of the woods you wonder?  And how effective would they be in the Midwest?  After all, your company did not purchase its insurance from the large insurance brokers in New York.

Well fortunately, there are some insurance archeologists headquartered nearby. These work primarily for mid-sized Midwestern firms like your own. And their services are reasonably priced. They are acquainted with insurance agencies in the Midwest and would not require an expensive travel budget to visit them.  What is more, they routinely work for mid-sized manufacturers like yours and they have success rates in the 70% range. You have checked them out and have selected one but he wants to begin by coming to your place of business and reviewing your records. Wouldn’t this be a waste of money?  After all, your risk manager and your attorney have already pulled your policies together. No, actually not to allow the insurance archeologist to begin at the beginning would be a waste of money. Because insurance archeologists search for missing policies every day, they recognize evidence of insurance that the untrained eye might not recognize. They are not just looking for policies but parts of policies, such as endorsements or declarations; and searching for accounting records such as audits, premium notices, cancelled checks, etc. that might identify insurance.

Why wouldn’t you spend a few thousand dollars on an effort to retrieve old insurance policies that could net you several hundred thousand dollars in defense and indemnity costs? Hiring a Midwestern-based insurance archeologist will be the optimum way to approach this problem.  The proofs of insurance they provide your attorney will be the start of a process that ultimately settles this matter and allows you to move on to focus on running your business.

This blog post was originally posted on the PolicyFind website, located here.

About the Author:

David A. O’Neill, J.D.
Director of Investigations, PolicyFind

David A. O’Neill is the Director of Investigations for PolicyFind, the Insurance Archeology division of Environmental Forensic Investigations, Inc., where he has been locating proofs of lost and misplaced historical liability insurance policies for clients since 2003. Mr. O’Neill holds a law degree from Case Western Reserve University and has been engaged in insurance archeological investigation since 1993.

At PolicyFind, Mr. O’Neill has primarily worked on behalf of businesses in search of a defense to state environmental authority property damage enforcement actions. In this regard he has specialized in the location and retrieval of lost general liability policies for dry cleaners. Also, his activities have included finding lost product liability insurance policies for building supply companies defending against asbestos and silica exposure claims. Mr. O’Neill has also worked on projects managed by insurance company claims specialists seeking policies issued by other carriers in efforts to spread the risk in environmental or asbestos related claims defenses. Further, on occasion PolicyFind’s clients have included churches and school boards seeking to locate policies to provide defense against long-tail claims of sexual battery by teachers and clergy. He has served as an expert witness for policyholders engaged in litigation with their insurers.

As the Insurance Research Manager for Risk International Services, Inc. from 1993 to 1998, Mr. O’Neill’s primary responsibility was to locate proofs of insurance for a nationally known waste hauling corporation engaged in an effort to settle its claims and sell its policies back to insurers prior to a sale of its assets. This was an insurance archeology effort that spanned five years and focused on the retrieval of insurance policies issued to nearly 2000 acquisitions.

Mr. O’Neill previously spent several years investigating property damage claims for the insurers of major U.S. Corporations named as responsible parties at hazardous waste sites throughout the Midwest. Earlier, he conducted Potentially Responsible Party Searches as a subcontractor for United States Environmental Agency Regions V and VIII.

Mr. O’Neill is a member of the Insurance Library of Boston.