Expert Commentary

"Damages" under a 1973 CGL Insurance Policy

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.

April 2008

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.

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

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Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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