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Obtaining Money For Brownfields Development Under Old Insurance Policies

By Thomas C. Mielenhausen

Recovering Funds From Responsible Parties’ Old Insurance Policies

Developers, municipalities, and companies looking to acquire property have become increasingly interested in the opportunities associated with environmentally contaminated “Brownfield” properties — abandoned sites that can be restored to valuable (and tax-generating) status if cleaned up to pre-approved governmental standards. In some states, governmental grant money may be available to subsidize costs of cleaning up such a site, thereby facilitating real estate transactions and moving the property to productive status. But grant money is typically limited, or available for only certain types of sites.

An often overlooked source of funding for Brownfield site development is the old liability insurance of parties that historically operated, owned or are otherwise responsible for contamination at the site. Those policies typically insure the responsible party’s liabilities for damage and personal injury (e.g., trespass) to the property of others. Many states’ courts have recognized that contamination of groundwater and other natural resources is the type of damage and injury covered by those policies. Further, because the contamination often occurs for decades before it is discovered, many courts have ruled that the proceeds under the multiple policies in effect during that time may be aggregated. The result can be millions of dollars available for site investigation and cleanup costs, even when the responsible party was a small business.

A party responsible for Brownfield site contamination often does not have the incentive or ability to pursue insurance proceeds for site cleanup under its old policies. A third party interested in developing the site, however, may be able to obtain those proceeds if the right strategies are pursued. Many states allow a third-party claimant and a responsible party to enter into a special settlement agreement when the responsible party’s insurers deny coverage of the third party’s claim for damages associated with a contaminated site. Under the settlement, the responsible party is released from liability and, in exchange, the third party claimant receives a confession of judgment and assignment of the right to pursue the responsible party’s insurers.

What if the responsible party is insolvent? This should not preclude recovery. Historically, state statutes and standard insurance policies have mandated that the bankruptcy or insolvency of a policyholder shall not relieve its insurers of their obligations. If the appropriate strategies are pursued, a third-party claimant seeking cleanup of contaminated Brownfield property can pursue a direct action against the insolvent responsible party’s insurers.

What Insurance Policies Are Implicated?

Usually a Brownfelds site implicates each responsible party’s comprehensive general and umbrella excess liability insurance policies covering the period from the time site contamination first happened through the time it was discovered. Since the 1940s, most businesses bought these standard policies, with increasing six- to seven-figure coverage limits over the years, to insure the risk of liability for property damage or bodily injury to others. Beginning in the early- to mid-1970s, many businesses also paid extra premiums for personal injury liability insurance, an additional and separate coverage which insures “wrongful entry” offenses such as trespass and nuisance.

Many states’ courts have ruled that comprehensive general and excess liability insurance policies issued prior to the early 1970s typically cover a policyholder’s liabilities for injury or damage from environmental contamination if:

• Injury or damage happened during (or began to happen before) the policy period, and
• The policyholder did not intend the injury or damage, or expect the injury or damage with a high degree of certainty.

Courts have further ruled that liability insurance policies issued during the early 1970s to the mid-1980s typically cover a policyholder’s liabilities for environmental contamination if the above criteria are met, and:

• The evidence (direct or circumstantial) demonstrates that the injury or damage arose, in whole or in part, out of one or more sudden and accidental releases of contaminants; or
• The injury or damage was caused, in whole or in part, by the acts of a third party rather than the policyholder; or
• The policyholder did not receive valid notice of a change in pollution coverage.

According to some states’ courts, “sudden and accidental” requires that the contamination arose from one or more abrupt releases (e.g., from a spill, burst tank, broken pipe, or heavy rainstorm). Other courts have ruled that “sudden and accidental” requires only that the contamination was unexpected and unintended. Personal injury liability insurance is not subject to the “sudden and accidental” requirement noted above. At the time this special insurance was created, the insurance industry acknowledged that it covered pollution-related liabilities. A number of courts have so ruled.

Liability insurance policies issued after the mid-1980s typically contain a revised pollution exclusion, but those policies still cover contamination damage arising from a responsible party’s off-premises products or completed operations.

How Much Money May Be Available?

If the above criteria are established, and depending on a state’s caselaw, a responsible party’s insurers should be obligated to pay either all or a significant portion of site investigation and cleanup costs. Coverage will be maximized if a court rules that the insurers are severally and indivisibly obligated to pay all those costs, consistent with the plain language of their standard policies. If a court caps recovery from one responsible party’s insurers by applying a “pro rata” allocation, all or most costs may still be recovered if there are multiple parties with multiple sets of insurers from which allocated coverage can be aggregated. Even under an allocation among only one responsible party’s insurers, with excluded coverage after the early 1970s, over 50% of cleanup costs might be recovered if the site contamination began during the 1950s or 1960s.

Conclusion

Developers, municipalities and others interested in revitalizing Brownfields should consider responsible parties’ old liability insurance policies as a funding source for investigating and cleaning up those sites. Even when a responsible party is insolvent, its past insurance coverage typically remains as a recoverable asset to remedy historical contamination for which that party is responsible. If the right strategies are pursued, all or a significant portion of site investigation and cleanup costs might be recovered from the responsible party’s old insurance policies. 

riskVue | The webzine for risk management professionals
May 2002