Busting the Myth of the Unavailability of Insurance Rule's Application to Loss Allocation for Pollution Liability Claims Since 1986

ABSTRACT

Tens of millions of dollars in pollution liability losses have been mistakenly allocated to general liability insurers under the “Unavailability of Insurance” rule in jurisdictions that employ it. Under this rule, a policyholder is not allocated losses for years when they claim that pollution liability was unavailable – mainly after the advent of the 1986 “absolute” pollution exclusion. Recent research has been compiled to include thousands of pages of evidence that by 1986 and to this date there was and has been a viable pollution liability insurance market that would not only underwrite a current year's risks, but also erase any prior pollution insurance coverage gaps by insuring decades of prior acts. This article looks at this rule and the enormous impact it could have on insurers' pollution liability reserves if it continues to be misapplied.

Notes

1 Brad Maurer JD CPCU is an environmental risk management executive and expert witness with American Risk Management Resources Network LLC. Over his 25-year professional career Mr. Maurer has been a project scientist, environmental insurance underwriting director and national environmental risk broker. In addition, Mr. Maurer has been in-house counsel/risk manager at both a remediation services company as well as a guaranteed fixed-priced remediation provider. [email protected]

2 While most Pollution Liability Insurance forms have standard asbestos and lead exclusions, these exclusions are routinely removed when specifically underwritten. In addition, these policies have a “known pollution conditions” exclusion that either can be amended to insure known pollutions that have yet to manifest a claim. In later policies, this exclusion only applies to known pollution conditions that are not disclosed to the underwriter – placing the burden of excluding known and disclosed pollution conditions upon the underwriter.

3 See, e.g. The Hartford, National Indemnity Ink $1.5B Reinsurance Deal Covering Asbestos/Environmental Liability Reserves. Carrier Management (January 3, 2017) wherein The Hartford cedes $1.5B in adverse net loss reserve development above $1.7B in estimated net loss reserves for a $650 m premium; also, Liberty Mutual Enters into Reinsurance Agreement with National Indemnity. Liberty Mutual Press Release (July 17, 2014) wherein Liberty Mutual cedes $3.3B in existing liabilities and $3.2B in additional aggregate adverse development cover for a $3.0B premium.

4 See Restatement of the Law, Liability Insurance 2017 Draft revision § 42 Comment [c].

5 The ISO was formed in 1971. Previously, the Insurance Rating Board, the National Bureau of Casualty Underwriters, and the National Bureau of Casualty and Surety Underwriters developed standard liability policies.

6 Thomas M. Jones & Jon D. Hurwitz, An Introduction to Insurance Allocation Issues in Multiple-Trigger Cases, 10 Vill. Envtl. L.J. 25 (1999). P 14, § IV.

7 See Viking Pump, Inc., et al. v. TIG Insurance Co., et al., 2016 N.Y. LEXIS 1018 (N.Y. May 3, 2016). This case may be distinguished however as the court opined that the inclusion of the non-cumulation clauses (clauses that prevent a policyholder from adding together the limits of consecutive policies) rendered the pro rata method of allocation incompatible.

8 See Restatement of the Law, Liability Insurance 2017 Draft Revision § 42 Comment [c].

9 See Sybron Transition Corp. v. Security Ins., 258 F. 3d 595 (7th Cir. 2001); Boston Gas Co. v. Century Indem. Co., 529 F.3d 8 (1st Cir. 2008) Where the Court opines that application of the exception is inequitable because it “effectively provides insurance where insurers made the calculated decision not to assume risk and not to accept premiums.: Id. At 371–372.; Keyspan Gas E. Corp. v. Munich Reins. Am. Inc., 143 A.D.3d 86 (1st Dep't 2016) holding “There is no other additional contractual language in the policy justifying this exception. There are no express contract provisions requiring the insurer to cover damages outside of the policy period when insurance is otherwise unavailable in the marketplace.” Id. at 96.

10 See Scott M. Seeman & Jason R. Schulze. Allocation of Losses in Complex Insurance Coverage Claims § 4:3 [c][1] (Fifth Ed. 2016).

11 See John T. Waldron III, New Jersey Law on the Unavailability of Asbestos Insurance American Bar Association August 1, 2012.

12 See Robert M. Horkovich, Rene F. Hertzog, And Peter A. Halprin, Environmental Liability and Insurance Recovery (2012), The American Bar Association, Chapter 18 Site Pollution Liability Insurance ISBN: 9781614384977.

13 See William Kronenberg III, The Environmental Insurance Markets in the U.S. and Western Europe: A U.S. Underwriter's Observations. The Geneva Papers on Risk and Insurance, 20 (No. 76, July 1995), 336–347.

14 Pollution Legal Liability Select Policy, Form 76391 (2000) American International Group.

15 Ibid.

16 This exclusion is a hybrid of the AIG, Reliance Group and Zurich Known Conditions Exclusion which has been hybridized to incorporate the definitions of defined terms within the exclusion.

17 Underground Storage Tank standards compliance with the 1988 standards was mandatory by 1998. See 40 CFR Part 280, 40 CFR Part 281, and 40 CFR Parts 282.50–282.105.