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Don’t Let ’em Fool Ya:
Bermuda Policies’ So-Called “Pollution Exclusions” May Not Bar Coverage for Liabilities Involving Petroleum and Chemical Products

By John N. Ellison, Richard P. Lewis, and Nicholas M. Insua

Many policyholders are facing difficulties obtaining the insurance coverage they purchased from companies using “Bermuda” form insurance policies of the type sold by ACE and XL. Although ACE and XL originated as something of a joint enterprise between large corporate policyholders and insurance companies, there is little left of the cooperative attitude that gave rise to the Bermuda market. Now, like their domestic cousins, insurance companies employing “occurrence first reported” forms are likely to assert a phalanx of reasons for denying coverage, often for the precise types of catastrophic losses that their forms were designed to address. For companies facing liabilities involving petroleum-related products, or other chemical compounds, a common defense to coverage invoked under Bermuda forms is the so-called “pollution exclusion.”

Yet an interesting combination of provisions in Bermuda forms largely undercuts the viability of many pollution-exclusion based denials. Specifically, most Bermuda forms mandate the application of New York law. On balance, New York law concerning recent pollution exclusions is pro-policyholder, which is to say, courts applying New York law generally attempt to give so-called “pollution exclusions” their historically intended meaning—to exclude only claims stemming from the intentional pollution of the environment that gives rise to liability under CERCLA and similar statutes. Still, some insurance companies nonetheless argue that other provisions in the Bermuda forms that prohibit the use of certain rules of insurance policy construction—such as that all ambiguities should be construed against the insurance company—essentially undo New York law on “pollution exclusions,” because decisions construing such provisions assertedly are based on courts finding inherent ambiguities in “pollution exclusions.”

However, even if the arbitration tribunal required by the Bermuda form is inclined to accept the above argument on the “pollution exclusion,” the application of New York law still may be helpful. New York recognizes the “concurrent causation” doctrine, meaning that when a loss arises from more than one cause, one that is excluded and one that is insured, the loss as a whole will be insured. In other words, only if all causes of a loss are excluded will a loss go uncovered.

How does this relate to Bermuda forms? To prevent the application of the concurrent causation doctrine, insurance companies created “anti-concurrent causation” clauses. Such clauses, as the name suggests, purport to exclude coverage arising “directly or indirectly,” or “in whole or in part” from a particular cause and, thus, are designed to capture and preclude coverage for all claims that arise from at least one excluded cause. Many exclusions drafted for use domestically, including so-called “absolute” and “total” pollution exclusions, contain such clauses. Similarly, some other exclusions in Bermuda forms contain such language. However, the so-called “pollution exclusion” in most Bermuda forms does not include an anti-concurrent causation clause. Hence, policyholders facing losses arising partly from “pollution” and partly from another cause—such as negligent design of a storage tank or negligent execution of a clean-up operation—should have coverage under Bermuda forms given New York’s concurrent-causation doctrine.

Maybe most interesting about that result is that it brings the effect of the “pollution exclusion” in the Bermuda form closer to both the original intent of the so-called “absolute” and “total” pollution exclusions, and the historical impetus driving the creation of the Bermuda market in the first place. As noted above, the so-called “absolute” and “total” pollution exclusions were designed to bar coverage for liabilities arising from the intentional pollution of the environment. The creation and adoption of these exclusions in the mid-1980s broadly coincided with the reauthorization of CERCLA from 1984–86, and heightened levels of enforcement by state environmental agencies. Those statutes and agencies were not targeting negligent acts with only a tangential relationship to the “discharge” of pollutants, but rather the actions of intentional polluters. It makes sense, then, that the pollution exclusion in the Bermuda form, which borrows much of the language from the “absolute” and “total” pollution exclusions, would have an equivalent exclusionary scope.

That conclusion is bolstered by reference to the historical context for the creation of the Bermuda market. Large domestic policyholders—in particular, those trading in petroleum and chemical products—started the Bermuda market to purchase insurance that would respond to the types of losses they might face, such as catastrophic losses involving their products. For the insurance industry members of the Bermuda market to draft a policy form that would not serve the needs of the market’s clientele is illogical.

With the ever-burgeoning use of Bermuda forms as critical components of insurance programs, policyholders should be aware that your catastrophic losses are not necessarily going to be treated any differently than they would be in United States courts. Although the forum and some of the procedures may be foreign, both literally and figuratively, the insurance you purchased has not become illusory. As disputes arise, remember that coverage for liabilities arising from your products should be available under Bermuda forms, particularly if that liability stems from at least one cause that is covered.

ABOUT THE AUTHORS

John N. Ellison is the Managing Shareholder of the Philadelphia office of Anderson Kill & Olick, P.C. Mr. Ellison’s practice consists exclusively of advancing policyholders’ rights and efforts to maximize their insurance coverage. Mr. Ellison can be reached at jellison@andersonkill.com or 215-568-4710.

Richard P. Lewis is a Shareholder and Nicholas M. Insua is an attorney in the New York office of Anderson Kill & Olick, P.C. Messrs. Lewis and Insua regularly represent policyholders in disputes with their insurance companies. Mr. Lewis can be reached at rlewis@andersonkill.com or 212-278-1822 and Mr. Insua can be reached at ninsua@andersonkill.com or 212-278-1299.

This article is reprinted with permission from the Winter 2004/2005 issue of AKO Petroleum and Chemical Insurance Alert, published by Anderson Kill & Olick, P.C.

The information in this article does not constitute legal advice or opinion. Such advice and opinion are provided by Anderson Kill & Olick, P.C. only upon engagement with respect to specific factual situations.

riskVue | The webzine for risk management professionals
July 2005