"Damages" under a 1973 CGL Insurance Policy
April 2008
One issue that has been frequently litigated
is whether the costs incurred by an insured to remediate pollution in compliance
with requests, demands, or orders of the U.S. Environmental Protection Agency
(EPA) or a companion state environmental enforcement agency qualify as "damages"
under the insuring agreement of the 1973 edition comprehensive general liability
(CGL) policy.
by
Rich Scislowski
IRMI
The controversy stems from legal history. At common law in England, there
were two entirely separate court systems. "Courts of law" were established to
hear "actions" for "damages," or monetary reparations for injuries caused in
tort. "Courts of equity," on the other hand, were established to entertain "suits"
for equitable remedies, like an injunction, in which no monetary damages were
sought.
In light of this history, some observers read the word "damages" in the 1973
insuring agreement as a technical, legal term referring to
money damages only. In other words, they
read the 1973 CGL as covering the insured's liability to pay a money judgment
that would have been entered in an historic court of law, but not the costs
to comply with an equitable injunction or a similar kind of court-ordered remedy
that would have been entered in an historic court of equity.
Environmental response costs are like the costs to comply with an equitable
injunction, which would not have been technically classified as "damages" in
the common law of England. Therefore, if the word "damages" in the 1973 insuring
agreement was interpreted to only cover traditional money judgments, the conclusion
would follow that the policy would not be triggered by an order of an environmental
enforcement agency to remediate pollution.
Different Approaches
As to this issue, the states can be divided into three groups: those favoring
the policyholder, those favoring the insurer, and those taking an intermediate
approach. Each group will be discussed in turn.
States Favoring the Policyholder
A vast majority of state supreme courts considering this issue have rejected
the technical, legal meaning of the word "damages" based on the historic distinction
between actions as law for "damages" and suits in equity for injunctions. Pro-policyholder
courts hold that the undefined word "damages" in the 1973 insuring agreement
should be given its plain, ordinary meaning as being costs the insured must
pay to satisfy any kind of legal obligation, including pollution response costs.
Representative of the pro-ipolicyholder line of cases is
U.S. v. Pepper's Steel & Alloys, Inc., 823 F.
Supp. 1574 (S.D. Fla. 1993), aff'd in part, rev'd
in part, 87 F.3d 1329 (11th Cir. 1996). In that case, the insured operated
a metal-scrap yard. During the process of recycling electrical transformers,
oil that was contaminated with polychlorinated biphenyls (PCBs) was accidentally
discharged on the ground. The U.S. EPA obtained a court order allowing access
to the insured’s premises to clean up the pollution. Later, the EPA filed suit
against the insured to recover in excess of $400,000 in response costs. The
insurers denied coverage, arguing that the undefined word "damages" in CGL policies
in effect from 1967 to 1981 was a technical term that only applied to monetary
damages as would have been awarded in a court of law, not restitutionary or
injunctive relief, as would have been awarded in a court of equity. The court
rejected their argument, reasoning as follows.
Florida law clearly mandates that the terms used in an insurance contract
must be read in the light of its common and ordinary meaning.
In determining the common and ordinary meaning of a term, the court may
look to the standard, nonlegal dictionary definition of the word. The term
"damages" typically is defined broadly in several popular dictionaries to
mean "the estimated money equivalent for detriment or injury sustained."
The plain meaning of the word "damages" does not distinguish between equitable
and nonequitable relief.
Any definition of "damages" which is grounded upon the ancient division
between law and equity would hardly be an "ordinary and accepted meaning"
in the eyes of a "reasonably prudent layperson."
If the insurers intended that the term "damages" should have only a legal
or technical meaning, they should have so indicated in the policies. Policyholders
would then have understood that cleanup costs incurred pursuant to government
mandate were not covered, and would have been able to enter into other insuring
arrangements.
Many pro-policyholder courts use very similar reasoning to reach the same
result.
States Favoring the Insurer
A few jurisdictions accept the technical, legal meaning of the word "damages"
and hold that environmental response costs do not qualify as "damages" and are
not covered by the 1973 CGL. This view was prevalent in federal decisions in
the late 1980s and early 1990s, particularly in the Eighth and Fourth Circuits.
See Continental
Ins. Cos. v. Northeastern Pharm. & Chem. Co. (NEPACCO), 842 F.2d 977
(8th Cir. 1988) (en banc) (applying Missouri law); Mraz
v. Canadian Universal Ins. Co., 804 F.2d 1325 (4th Cir. 1986) (applying
Maryland law).
The weight of this early federal law had initially persuaded the supreme
courts of two states, Massachusetts and Wisconsin, to likewise construe the
word "damages" narrowly so as to avoid coverage for Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) response costs.
Patrons Oxford Mut. Ins. Co. v. Marois, 573 A.2d
16 (Me. 1990); City of Edgerton v. General Cas. Co.,
184 Wis. 2d 750, 517 N.W.2d 463 (Wis. 1994).
Most of the early federal authority was predicated on educated guesses as
to how the state supreme courts would view this issue, which turned out to be
wrong, because most state supreme courts refused to read the word "damages"
that way. After 1994, virtually all state supreme courts considering this issue
rejected the insurers’ arguments and ruled in favor of the policyholders.
In Johnson Controls, Inc. v. Employers Ins. of Wausau,
264 Wis. 2d 60, 665 N.W.2d 257 (Wis. 2003), the Wisconsin Supreme Court had
an occasion to reevaluate its position. In light of the overwhelming state authority
favoring the policyholder on this issue, the Wisconsin Supreme Court reversed
its earlier decision in City of Edgerton and
held that an insured's costs of restoring and remediating damaged property,
whether the costs are based on remediation efforts by a third party (including
the government) or are incurred directly by the insured, are covered "damages"
under 1973 edition CGL insurance policies.
Now that Wisconsin has changed its position, Maine remains the only state
with a supreme court decision favoring insurers on this issue. Given the weight
of authority in the pro-policyholder camp, however, it is unlikely that Maine
will continue to be the lone holdout.
The wave of state supreme court decisions applying the ordinary, plain meaning
of the term "damages" as covering environmental response costs has decimated
the ranks of the early federal cases that initially applied the technical, legal
definition of the term "damages" as excluding them. However, small pockets of
federal pro-insurer law remain viable.
States Taking an Intermediate Approach
In the final group, states taking an intermediate approach generally reject
the historic distinction between actions as law for "damages" and suits in equity
for injunctions, but they do not cover all remediation costs under a 1973 edition
CGL insurance policy. They allow insurers to haggle over coverage for certain
discrete expense items.
Where no pollution exists yet, courts in the intermediate group have held
that costs incurred by the insured to prevent the future release of contamination
are not covered. For example, in CPS Chem. Co., Inc.
v. Continental Ins. Co., 222 N.J. Super. 175, 536 A.2d 311 (Super. App.
Div. 1988), the court held that the insurers' indemnity obligation under the
1973 edition CGL policy does not extend to the prophylactic costs of modifying
manufacturing or chemical processing procedures or mechanisms designed to prevent
future discharges or emissions of hazardous wastes.
Some intermediate courts hold that, since an insurer's duty to defend can
only be triggered where the insured has tendered a claim for a defense, an insurer
cannot be held liable for costs incurred before the tender of the defense. This
may include a situation where a policyholder begins a site investigation before
notifying the insurer of the environmental protection agency's inquiry in that
regard. Domtar, Inc. v. Niagara Fire Ins. Co.,
563 N.W.2d 724 (Minn. 1997) (insurer not liable for investigation costs incurred
before the tender of the defense).
Intermediate courts have also allowed insurers to challenge expenditures
made during a pollution remediation effort that the policyholder would have
made anyway without the pollution event. For example, in
American Bumper & Mfg. Co. v. Hartford Fire Ins. Co.,
452 Mich. 440, 550 N.W.2d 475 (1996), the insured applied for a Department of
Natural Resources groundwater permit during the course of a remedial investigation/feasibility
study (RI/FS) requested by the EPA. The Michigan Supreme Court held that actions
the insured would normally have taken in the ordinary course of its business
in the absence of the EPA claim, such as an ordinary application for a DNR groundwater
permit, are anticipated costs of doing business, not recoverable defense costs.
Standard Policy Fixes
Interpreting the word "damages" in the insuring agreement of the 1973 edition
CGL insurance policy as including environmental response costs had the effect
of expanding CGL insurers' defense and indemnity obligations. Insurance Services
Office, Inc. (ISO), therefore implemented several policy fixes in the mid-1980s
to correct this problem.
1984 Changes
The first policy fix for the problem of extending a defense to potentially
responsible party (PRP) letters came in 1984, when ISO drafted Endorsement CG
21 33 for use with the 1973 CGL policy. That endorsement contained a substantially
revised version of the pollution exclusion, which, among other things, contained
a new paragraph to eliminate coverage for:
Any loss, cost or expense arising out of any governmental direction or request
that the named insured test for, monitor, clean up, remove, contain, treat,
detoxify or neutralize pollutants.
The effect of this new provision was that, even if environmental response
costs were considered "damages" for purposes of the CGL policy's insuring agreement,
those kinds of expenses would now be expressly excluded. Therefore, the CGL
insurer would not owe a defense or indemnity.
1986 Changes
In 1986, ISO incorporated the text of the new pollution exclusion from the
endorsement into the body of the CGL coverage form itself. After 1986, all standard
CGL policies carried the enhanced "absolute" pollution exclusion, which included
the new language eliminating coverage for costs to comply with any "governmental
direction or request" to clean up pollutants. Without the possibility of coverage,
the insurer would not be required to defend those kinds of claims or fund those
kinds of expenses under a post-1986 CGL policy.
The 1984/1986 "governmental direction/request" exclusion was held to be clear
and unambiguous by several courts. See, e.g.,
Titan Corp. v. Aetna Cas. & Sur. Co., 22 Cal.
App. 4th 457, 27 Cal. Rptr. 2d 476 (Ct. App. 4th Dist. 1994).
For Further Information
Subscribers to Pollution Coverage Issues
in IRMI Online or SilverPlume Sage can access additional information on this
subject, including the following:
- A full analysis of the reasoning of courts in each group, including
other expense items that can be challenged in intermediate jurisdictions
(IRMI
Online;
Sage);
- A complete description of all of the ISO policy fixes discussed here,
plus two others made in 1988, and a list of additional cases upholding them
(IRMI
Online;
Sage);
- A table showing which states have joined which camp (IRMI
Online;
Sage);
- A hyperlinked map allowing the subscriber to click on a state and be
taken to a table listing and describing pertinent cases from that state
(IRMI
Online;
Sage); and
- A series of charts citing and summarizing the holdings of approximately
140 cases on this subject. (IRMI
Online;
Sage).
If you do not currently subscribe, learn more about
Pollution Coverage
Issues.
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