News article: Superfund Awakes State Supreme Courts

Superfund Awakes in State Supreme Courts

Story posted December 5, 1997.

RiskWorld News Article*

By Donald Sutherland, e-mail: donaldsutherland-iso14000@worldnet.att.net

(Editor's note: The author is a consultant on environmental management systems and is based in St. Louis, Missouri. He has served as a member of U.S. Technical Advisory Group to TC207 on ISO14000, the U.S.EPA Environmental Accounting Project, and the St. Louis Regional Commerce and Growth Association's Environmental Council.)

Superfund, often referred to as a sleeping giant, is waking up in state courts with rulings that the insurance industry is on the hook for a large share of the nation's environmental cleanup.

While much of the publicity on the U.S. Environmental Protection Agency's largest project to clean up hazardous waste is focused on the inaction of Congress to reauthorize Superfund legislation, many states are passing laws favoring policyholders of comprehensive general liability insurance (CGL) to be compensated for their cleanup and litigation costs.

Step by step, state by state the Superfund giant has awakened in 40% of the state supreme courts with pro-policyholder decisions affecting over half of the sites in the nation.

The most recent addition to this list was on March 26, 1997, when the Missouri Supreme Court passed a pro-policyholder ruling that corporate environmental response costs incurred under Superfund and similar laws are damages to be covered under comprehensive general liability insurance policies.

These pro-policy rulings vary in terms from state to state, but their collective action is giving the insurance industry grave concerns because of the increase in settlements with policyholders.

Underwriters argue that comprehensive general liability insurance policies issued before the passage of the Superfund legislation of the 1980s don't cover expenses incurred under the new regulations. After 1970, pollution exclusions became standard on the policies unless hazardous waste was sudden and accidental. Since 1985 all toxic claims are barred from the policies, and environmental insurance is sold separately.

It is this comprehensive general liability insurance exclusion language which generates fierce litigation in the United States.

Large corporations burdened with millions of dollars of Superfund spending are turning to their insurance companies to pay up without the corporations having purchased separate environmental insurance.

It is a tangled affair, but many state supreme courts are ruling that gradual pollution (i.e. Superfund sites) qualifies as sudden and accidental damage to be covered under the policies to expedite cleanup action.

Municipalities trying to limit their Superfund bills are also hoping to benefit from state-mandated comprehensive general liability insurance policy settlements.

"It's not so much a Superfund issue as it is a coverage concern," says Paul Brown, director of government affairs for the policyholder organization Risk and Insurance Management Society. "We're concerned the liability for policyholders will always be there until Congress does its job fixing the Superfund statutes. Until then coverage is a state contract dispute," says Brown.

In Missouri, attorneys for the Fortune 500-company Farmland Industries (a potential responsible party for 39 Superfund sites) view the state's supreme court decision as a major hurdle they have overcome, but they still expect the insurance companies involved to raise more arguments and exclusions to preclude coverage.

The Missouri State Attorney General's office isn't waiting for insurance appeals and intends to move on the court's ruling.

"We will go after companies stronger using this ruling," said Kara Johnson, attorney in the Environmental Water Division. "Now we have two sources (corporate and insurance) for money for cleanup."

In New Jersey (the state with the nation's largest concentration of Superfund and spill sites) a ruling similar to Missouri's has resulted in hundreds of millions of dollars in compensation settlements by the insurance industry according to Rick Engel, State Deputy Attorney General.

"Sure, the insurance companies put up a myriad of routine counter defense motions, but that hasn't stopped us from directly filing against them and winning settlements," says Engel.

Many states have statutes for the attorney general to file direct actions against insurers for not complying with state law to compensate policyholders.

"We have such a statute, but even without legislation parties libel to the state can sign their rights to the state attorney general to allow them to enter an insurance contract suit," says Allen Williams, assistant attorney general for Minnesota.

The insurance industry's strategy to decompose their liability obligations is relying heavily on the inaction in Congress to reauthorize Superfund.

"These court fights go on and on and argue mostly on the statutes of who owes what, and who will pay what," says Taylor Caswell, a spokesman for the Government Affairs Office of the Alliance of American Insurers. "In almost every case the real fight is over the general liability policies written before the enactment of the Superfund legislation, and the insurance industry potentially stands to take a huge hit."

Caswell doesn't view the Missouri Supreme Court decision as setting a national precedent because eventually the case will involve the EPA and the U.S. Justice Department ruling on the liability status of the case, and that is when politics will quagmire decision making.

"It's a tough wall to break before Missouri or any other state's ruling makes its way inside the Washington D.C. beltway, and until then it will be the same old, same old for the rest of the country," says Caswell.

Jay Pendergrass of the Washington D.C.-based Environmental Law Institute says that the insurance industry should not rely on the political stagnation inside the beltway. "Barring congressional legislation, which isn't likely, the federal government has no role in the private sector fight over CGL coverage of Superfund because it is governed by state law," he says. "There is little federal law can do to change state law decisions and these state supreme courts' pro-policy cases stand to break up the bottleneck of delay for the insurers to compensate policyholders for cleanups."

Policyholders in states with similar supreme court rulings to Missouri can also have costs incurred under the Clean Water Act covered under general liability policies, he notes.

"There are certainly provisions in the Clean Water Act, i.e., hazardous substance spills, that federal and state governments are authorized to clean up, and these are similar to the rules of CERCLA, which require responsible parties to pay for cleanup costs," says Pendergrass. [Editor's note: The Comprehensive Environmental Response Compensation and Liability Act (CERCLA) is part of the legislation that comprises Superfund.]

According to the U.S. Government Accounting Office and insurance industry figures, the national financial cost of environmental cleanup is huge and is growing. A 1997 Government Accounting Office report cited that more than $1 billion in EPA funds allocated for Superfund is spent annually with a majority of those funds spent on transactions costs rather than cleanup costs.

A.M. Best Company and the American Society of Actuaries insurance reports on total estimated Superfund and environmental cleanup costs (including transaction fees) estimate liabilities at over $1 trillion.

The EPA's National Priority List of 1,204 Superfund sites, as entered in the Federal Registry for September 1997, listed only 142 sites meeting cleanup completion, and the EPA estimates the list will grow to 2,100 by the year 2000.

Add to this financial picture the remediation costs of over 450,000 Brownfield sites and there appears to be an environmental giant of a problem.

Many legal analysts see the collective state supreme court rulings as laying the roadwork for a group action similar to the recent national tobacco industry settlement with state attorneys general.

"It's potentially the same strategy as the tobacco case because it would be easier for insurers to settle [Superfund and Clean Water Act] payments on a national level rather than as an individual," says Brian Zwit of the National Association of State Attorneys General.

Insurance analysts believe a group settlement is needed to help stem the drain on insurance reserve funds.

"The bleeding hasn't stopped, and our latest estimates show there is only 50% in needed environmental reserves," says W. Dolson Smith, senior analyst at A.M. Best Company. "Most of the commercial environmental liability underwriters are not reserving sufficient amounts because they are facing competitive management of earnings and margins to investors."

Insurers and policyholders argue there are too many variables for a group settlement and that the threat of extended liability will always remain.

"It's very complex with a variety of bases on which CGL jurisdiction is ruled on in each state," says Laura Foggan, spokeswoman for the Insurance Environmental Litigation Association. "It's less of a definable group than the tobacco case."

Jim Engel, president of the Property & Casualty Management Facility at CIGNA adds that the multitude of insurance products written prior to the 1985 pollution exclusion cutoff would greatly complicate a group settlement.

"The major issue for a group settlement is for the plaintiffs to have a commonality of interest, and the question is whether the potential responsible parties are going to focus on insurance or liability issues?" says Pendergrass. "One model might be in Minnesota where the state is trying to get a portion of general liability compensation and release all CGL claims in municipal land fills to contributing insurers."

Indeed, many legal analysts say that the most likely candidates for group insurance settlements are state-owned Superfund landfills that are strapped with costs left from default and bankrupt potential responsible parties.

The question some ask is whether it is worth waking a sleeping giant.

"You have to weigh the financial costs and see who is getting on board, but if it's about to happen anyway, then a group action is a countermeasure worth taking up," says a spokesman for the Monsanto Company.

* This article and others by guest authors are published by RiskWorld as a service to the risk assessment community. The views presented are those of the author, and the information has not been independently verified or agreed to by RiskWorld staff.

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