\ •
^   £                           •    N.  .C.,
                               NOV 21 1985
                                                          ornrt or I«*OICIMIVT
                                                            ANO COMPLIANCI

    SUBJECT:  Procedural  Guidance  on Treatment of Insurers Under
    FROM:     Courtney M. Price  	
              Assistant Administrator for Enforcement
                and Compliance Monitoring

    TO:       Regional Administrators. I-X
              Regional Counsels,  I-X


         Defendants in EPA's CERCLA enforcement cases have begun
    to look to their insurance carriers for both legal representation
    and indemnification.  Ic is  expected that the number of
    collateral actions involving  the insurance carriers of CERCLA
    defendants will continue to  grow, particularly in CERCLA cases
    involving multiple parties. J[/

         The purpose of this guidance is to provide EPA Regional
    offices with the appropriate  procedures to follow in issuing
    notice letters, developing referrals, and tracking CERCLA
    enforcement cases that nay include insurers as third party
    defendants.  A separate reference notebook and memorandum
    of lav are being prepared by OECM and the Department of Justice
    to supplement this guidance-.  The memorandum of law will summarize
    the recent judicial decisions which have interpreted the
    applicability and coverage of insurance policies in hazardous
    waste cases*
    1/   Most insurance policies are effective on an annual basis
    ~"    and parties commonly changed carriers during the disposal
    period, or had several policies in effect at the same time.  .
    Therefore, large CERCLA  lawsuits could involve multiple insurance
    carriers and multiple policy periods.

                              -  2  -


      EPA Regional  offices are responsible for preparing and
 issuing  CERCLA notice letters to  potentially responsible
 parties.   These notice letters  generally include requests for
 information under  RCRA S3007(a)(3) and CERCLA S104(e)(4).  All
 information requests  should include a request for copies of
 insurance policies  in force during the PRP's association with
 the  site.   The requests should  solicit information regarding
 insurance policies  that are currently in effect as veil as
 those effective during Che period of activity ia question. 2_/

      The  information  request responses from potentially
 responsible parties should be reviewed by the Regional Counsel's
 Office to  determine the types of policies carried by the party
 and  the  extent  of coverage under each policy.  Insurance carriers
 determined to  have exposure should be notified at the same time
 we notify  the  insured  PRP.


     The  Department of Justice attempts to ascertain the
 existence  of insurance coverage aad.  where appropriate,^to
 aasert litigation theories which would enable the United States
 to proceed  against insurance carriers ia hazardous waste cases,
 or to involve  them in  settlement negotiations.  The Department
 of Justice  has  requested that EPA provide insurance information
 as a routine portion of our case development report and reterral

     All referrals of  hazardous waste cases to the Department of
 Justice should  include a brief summary of the iasuraace coverage
 of potential defeadaats.  This information is particularly
 important  for actions  involving bankrupt or potentially insolvent
 parties.                                 .            •
2/   See Memorandum "Procedures for Issuing Notice Letters"
~    Trom Ceae A. Lucero, Director EPA Office of Waste Programs
Enforcement, to Directors, waste Management Divisions Regions I-
X; Directors, Environaental Services Divisions Regions 1-X;
Regional Counsels, Regions I-X.  (October 12. 1984).  Pages 4-5.
and 24-25 discuss information requests regarding the insurance
policies of potentially responsible parties.

                                - 3 -


      The standard liability insurance policy is broken down
 into three sections:   1)  declarations; 2)  statement of general
 liability; and 3) Che standard coverage section.  The declara-
 tions section contains general statements  of the intent of
 the parties and che name  of Che insurer and  Che insured.  The
 statement of general  liability contain* che  definitions
 applicable co che policy  and cht provisions  common co che
 various  scaadard coverage sections.   The standard coverage
 sections constituce che bulk of che  policy and concain che
 insuring agreement and exclusions, including any po Hue ion
 exclusion provisiona.   The standard  coverage section usually
 includes che insurer's promise co pay on behalf of che insured
 and Che  insurer's duty co settle or  defend claims against che
 insured  alleging bodily injury or property damage covered
 under che policy. $/

      The-incerprecacion of che insurance policy should begin
 with a review of che  scandard coverage seccion co determine che
 theories upon vhich EPA can proceed.   Hose insurance policies
 only obligace the insurance carrier  co defend against any suic
 seeking  damages or to  pay on behalf  of che insured such damages
 which are covered' under che terms of  che policy.

      Thus,  it is importanc co examine che  scope of coverage of
 che insurance policy before referring an accion co che Department
 of  Justice vhich may have insurance  aspects.  Claims for injunccive
 or  equicable relief are usually noc  included wichin che coverage
 of.che insurance policy,  and che referral  for such relief need
 noc include che insurer as a potential defendanc.  1C may
 nevertheless be prudent to notify involved carriers of auch
 a claim.                                               •

      Where any CERCLA 1107 daaage claim is included aa a baaia
 for relief, the insurer may be identified  aa a potential
 defendant-.  Claims for punitive damages may  also be covered
 under the policy and  the  Regions should include insurers as
*3/    The insurance  carrier has  a  duty  co defend che insured
~*    even, if  the  claims  are groundless, false or fraudulent.

                              - A -

 defendants where punitive damages are sought.  */  The referral
 package prepared by the Region should also include  a discussion
 of the types of policies which were issued to  che responsible


      There are two types of  insurance policies.   The first  is
 the traditional casualty insurance  contract known as che
 Commercial General Liability Policy (CGL).  The standard CGL
 policy covers accidental or  sudden  bodily  injury  and property
 daaage.  The second type of  policy  is che  "claims-made" pollution
 liability policy or Environmental  Impairment Liability (E1L)
 policy.  The EIL policy covers  che  insured for liability for
 bodily injury and property damage resulting from  gradual pollu-
 tion,  or  clean up costs incurred by the insured.  EIL pollution
 liability policies  enable owners and  operators of hazardous
 waste  treatment,  storage, and disposal facilities co comply
 with RCRA's  financial  responsibility  requirements.

 CGL Policies

     There are  four separate areas  of coverage available under
 che' CGL policies  which  may be applicable co CERCLA actions.
 The firsc is  the  premises and operations hazard policy.  This
 policy  provides coverage for liabilities resulcing fro* a
 condicion on  the  insured's premises or from che insured's
 operations in progress  whether on or away from Che insured's
 premises.  This cype of policy would cover Che owner or operator
 of  a facilicy. whether  che hazardous wasce facility was accive
 or  inactive,  as long as the covered liability resulced in
 a condicion which originated during coverage.

     The  sacond area of coverage under che CGL policy is  the
 products  and  completed  operacions policy.   This policy provides
 coverage  for  liabilities arising afcer produces have left .che
 physical possession of  cht insured and afcer che work performed
 has bean  completed or abandoned.  This cype of  policy may
cover che generacor of  hazardous substances if  che wasce  can
be  characterized  as a final produce.
4/   Most policies are silent regarding coverage for punitive
"~    damages.  Some scates have allowed claims by che insured
for punitive damages paid to che federal government.

              TABLE OF CONTENTS
 INTRODUCTION                                           Page

 I.  Typ«i of Policies Issued                             3

     General Introduction   •                              3

     A:  The Coaprehens Ive General Liability (CCL)        5

     B.  Development of ehe Pollution Exclusion           7

     C.  The Environmental Impairment Liability           9
         (EIL)  Policy (appearing in the late
         1970 '•)

     D.  The Iniurance Services Office                    9
         (ISO)  Policy

II.  Judicial Construction of CCL and
     ^                        oli
    Pollution Exclusion Policies

A.  Construction of CGL Policies Generally          10

    1.  ".Accidents" under pre-1966 policies.        11

    2.  Definition of the "occurrence", under        12
        post-1966 policies.  (Discussion of
        the "exposure," "manifestation." and
        "triple- trigger" theories for deter-
        aining when an occurrence has taken
        place.               ^

    3.  Apportionment of liability among            17
        insurers and insureds.

    A.  The scope of "property daaafe"              17
        cover ase.  (Discussion of the extent
        to which medial activity is covered.)

    5.  Statute of liaitation questions.            18

    6.  Derfenses available to the insurer.          19

B.  Construction of OCL/ Pollution Exclusion         20

                          - ii -

 ISTRODUCTIOR (continued)                                  Pagc

III.  Construction of EIL and ISO Policies                 24

      A.   The EIL Policy                                   24

      B.   The ISO Policy     '                              25

 IV.  Statutory Insurance  Requirements                     25

      A.   RCRA Financial Responsibility                    25

      B.   CERCLA Financial Reeponaibiliey                   29

 V.  Potential Claim* Against  Insurers                    31

    _  A.   Claiaa Under Federal  Lav                         31

          1.   RCRA enforcement  claiaa                       31.

          2.   CCRCLA enforcement claiaa                    32

      B.,   Assigned or Subrogated Claiaa of the Insured:     36
          Assignaent After Judgment, Aasignaent Before
          Judgnent,  Assignaent  of Clalas for Breach of
          Duties,  and Assignaenta After Bankruptcy

      C.   Policy Provisions Allowing Direct Action         46

      D.   Common Lav Denial of  Direct  Action               47

      E.   State Direct Action Statutes                     48 '
      Sine* the passage of cht Comprehensive Environment*!
 Response,  Compensation,  and Liability Ace (CERCLA7  in 1980.
 ch« Environnental  Protection Agency (EPA) and tht Department
 of Justice (DOJ) have  initiated  more than 100 enforcenent
 actions against the  owners  and operators  of hazardous  waste
 facilities,  generators who  arranged  for the disposal of
 hazardous  substances,  and transporters who  handled hazardous
 substances.  Many  of these  eases,  some of which were built
 upon  prior claias  under  the Resource Conservation and  Recovery
           2/                                                  .
Ace (RCRA),  involve claims for  millions  of dollars of response
 costs.   Defendants in  these cases  generally have sought legal
 representation  and indemnification from their insurance
 carriers.  It  is expected that the number of collateral
 actions  involving  the  insurance  carriers  of RCRA and CERCLA
 defendants will continue  to grow,  particularly in cases.
 involving multiple parties.
      The first  purpose of this handbook is  to  provide  a basic
 understanding  of insurance  lav and potential claims for relief
 against insurers which will allow  EPA and DOJ  enforcement
I/  42 U.S.C. II 9601-9656.
y  42 U.S.C. II 6901, «C  sea, most  commonly 42 U.S.C. i 6973
2/  Host  insurance policies  are  effective  on an annual
""   basis,  and generators  commonly changed carriers
during  the  disposal  period or had  several  policies in
effect  at the same time.   Therefore,  large RCRA/CERCLA
lawsuits  can involve multiple insurance  carriers  and
multiple  policy  periods.

                          - 2 -

lawyers to litigate chese claims, as vtll as respond  co
defenses raised by insurance carriers.
     The second purpose of this handbook is to offer  an
understanding of the insurance requirements of RCRA and
CERCLA.  Under the financial responsibility regulations
promulgated pursuant to Section 3004(6) of RCRA.  each
owner or operator of a hazardous waste manaaenent facility
•ust maintain liability insurance against both sudden
and accidental occurrences.   An owner or operator of a
hazardous waste facility may also satisfy post-closure
care, financial assurance requirements by obtaining post-
closure insurance.'  The handbook will review these regu-
latory requirements and their  enforcement through compliance
actions, and will also briefly address the insurance program
provided for in Section 108 of CCRCLA. which has  yet to be
     Finally, the handbook is  intended to.serve as a basic
reference resource.  Some of the best articles  and notes on
insurance issues are included  as appendices and.  in the
ease of some issues, are referenced in lieu of primary
discussion.  In addition, an alphabetical compendium of
selected eases appears at the.back of the handbook.
4/  40 C.F.I. 264.147.
S/  40 C.F.R. 264.143(e)

                           - 3 -

 I.   Types of Policies Issued
     General Introduction
      The standard liability insurance policy i* broken down
 into three sections:  (1)  declarations;  (2)  the statement
 of  general liability; and  (3). the standard coverage  sections,
 The declarations section contains general  stateaents of  the
 incent of the parties and  che nanes  of the insurer and
 the insured.   The statement of general liability contains
 the definitions  applicable to the policy and the provisions
 common to the various standard coverage sections.  The
.standard coverage sections constitute the  bulk  of the
 policy and contain the insuring agreement  and exclusions,
 including any pollution exclusion provisions.    The  standard
coverage seecion usually includes the insurer's  promise
 to  pay on behalf of the insured and  the insurer's duty
 to  settle or  defend claims against the insured  alleging
bodily injury or property  damage covered under  the policy.
„,     The interpretation of the insurance policy should begin
 with a review of the standard coverage section.   Most
 insurance policies only obligate the insurance  carrier  to
&/   See pp.  20-24 for a detailed discussion of the  pollution
11   The insurance carrier has a duty to defend the  insured
~   even if  the claims are groundless,  false or fraudulent.
See Jackson  Township v. Hartford Ace. & Idem. Co..  186
TTTJ. super.  136,  loo (1982) Qinciuoea in the compendium).

                           - 4 -

 defend Again*c any cult seeking "damages"  or co pay on behalf
 of che insured "damages" covered under che terns of che
 policy.   Thus,  ic  is  important  co examine  che scope of
 coverage  of the insurance policy in  reviewing any potential
 referral  or suic against a  carrier.              ,
      Claims for injunccive  or ocher  equitable relief usually
 are not included expressly viehin  the  coverage  of  che  insurance
 policy.   Nonetheless, several courts have  sustained claims
 eo  recover  coses of abatement or response  incurred by  the
 insured.  See discussion below ac  pp.  17-18.  CERCLA Section
 107 damages and response cose claims generally will be
 covered, or a cognizable claim may be made.   Claims for
 penalties under CERCLA Section 106(b) or punitive damages
 under CERCLA Section 107(c)(3) «ay also be covered under
 Che policy, alchough tone insurance agreements specifically
 exclude coverage for punieive damages.'  The referral
 package prepared by EPA should include, if information is
 available, a discussion of the policies which were issued
 eo  ehe responsible party and 007ies of the policies.  •
     There arc  cwo basic types of insurance policy.  The
 first is the traditional casualty insurance contract known
 as the Comprehensive General Liability Policy (CCL).  The
 standard CCL policy covers accidental or sudden bodily injury
 and property damage from an "accident," or "occurrence," during
8/  Host policies are silent regarding coverage for punieive
~"   damages.  Some state* have allowed claims by che insured
for punitive damages paid to the federal government.

 th« policy period, regardless of when Che claim  is actually
 made.  Since about 1970. CGL policies generally  have attempted
 co exclude coverage of any hazardous substance injuries
 chac were noc "sudden and accidental" in nature and contain
 a "pollution exclusion" to chat effect.   These clauses
 have noc succeeded in excluding coverage in a broad range
 of situations involving hazardous waste  "damage."
      The second cype of policy is Che "claims-made" pollution
 liability,  or Environmental Impairment Liability (EIL)
 policy.   The EIL policy covers the insured'* liability for
-bodily injury and property damage resulting from gradual
 pollution or cleanup costs incurred.  It is called a "claims-
 made" policy because it covers only da las made during the
 term of the policy.  The EIL policy is Analogous to health
 or life insurance, where cne claimant is not required co
 make a showing of accidental injury.  One class of claims-
 made pollution"liability policies is specifically designed
 to enable owners and operators of hazardous waste treatment
 storage and disposal facilities to qomply with RCRA's finan-
 cial responsibility requirements.  For brief descriptions
 of the varioua types of policies which have been issued
 and key typical clauses, see Appendix A.
 A.  The Comprehensive 6
                           - 6 -

 coverage.   This  coverage  is for liabilities  resulting  froa
 A  condition on  Che  insured's premises or froa  the  insured's
 op«r«cion»  in progress, whether on or away from  che  Insured1a
 preaises.   This  type  of policy would cover che owner or
 operator of a facility,   whether the hazardous waate  facility
 was active  or inactive, as long as the disposal, storage or
 treaonent was still in progress.
     The second  and third areas of CCL coverage are product
 hazard coverage  and coapleted operations hazard coverage.
These two. originally combined,  are now separate and
distinct.  Product hazard coverage covers injuries arising
out of product use, and is probably irrelevant to virtually
all CERCLA claims, unless the court can be persuaded to
view a pollutant as a produce.   In addition,  the event of
release probably must take place after relinquishaent of
control by the generator, and avay from the generator's
premises.  Completed operations coverage may afford a
somewhat broader basis for recovery, but is nontheless
subject to limitations which would require appropriate
facts and careful pleading.  See Appendix C.  pp. 362-563
 for A summary discussion of key faces of boch produce hazard
and completed operations coverage.
     The standard coverage section of a genera,! liability
 policy sees out  the scope of che insurance agreement and
 the exclusions applicable to claims made by the insured.
10/  CERCLA Section 107(a), 42 U.S.C. 9607(a).

                            - 7 -
 The exclusions to eh* scope of ch« insurance coverage muse

 be clearly and precisely drafted"  The exclusion  which

 insurers invoke Against claims for damages  created by

 hazardous wastes is  the pollution exclusion.  The  standard

 pollution exclusion  reads:

      "This insurance does not apply ... to  bodily
      injury or property damage arising  out  of the
      discharge,  dispersal,  release or escape of
      smoke, vapors,  soot,  fumes,  acids,  alkalis,
      toxic chemicals.  liouids or  gases,  waste
      materials,  or other irritants,  contarnin<
      or  pollutants into  or  upon land, the atmosphere
      or  any water course or body  of  water;  but this
      exclusion does  not  apply if  such discharge,
      release or  escape  is sudden  and accidental."
   .  (Caphasis added.)

The historical development  of this exclusion to the standard

liability  policy provides a key to understanding recent

interpretations of the applicability of che pollution

exclusion  to hazardous waste  cases.

B.  Development of the Pollution  Exclusion

     The first standard, fora  for  general liability insurance

policies was developed in 1940.   The model policy provision

was drafted to Include liability  for all claims made by
                                •  —
ehe insured that ware "caused by  accident."  This provision

was widely interpreted by the courts to  include coverage

for common law nuisance  claims  for environmental damage if
11 /  Because the insurer  selects  the language for the policy,
    the exclusions are generally  interpreted in favor of the
insured.  An exclusion must be drafted with clear and exact
language to be given effect by the courts.  See «•!• Allstate
Ins. Co. v.-Klock Oil Co.. 426 H.Y.S. 2.d 603^.TTApp. 1980)
TTncluoed in tne Compendium).

                            - 8 -

 cht pcllutancs w«rt suddenly and''accideneally discharged"?"
      In 1966,  cht Insurance Racing Board developed a new
 •ode! contract which covered claias  "caused  by occurrence"
 rather than claim "caused  by accident."  The  Board  defined
 occurrence broadly to include "an  accident," including
 continuous or  repeated exposure  to conditions, which  results,
 during the policy period, "in bodily injury or property
 daaage neither expected or  intended fro* the standpoint of
 the  insured."   The new language  required a finding that the
 damages were not  foreseeable  or  intended.  However, the
 oourts continued  to hold insurance companies liable for
 environaental  daaages  even where the pollution was foreseeable
 if the daaages  were accidental.    In 1973. comprehensive
 general liability policies were revised to include the
 pollution  exclusion clause.  See p. 7 for the text of
 the  exclusion.  The courts which have interpreted the
 pollution  exclusion clause have agreed on three relevant
 points:  (1) the  insurer has  the burden of proving noncoverage;
 (2)  the exclusion  applies to the intentional polluter; -and
 (3)  the exclusion  does not apply to entitle* which neither
expect nor intend  their conduct to result in bodily injury
127 See Appendix C, Hour than, '"Insurance Coverage for Environ-
    lental Oaaage Claias" 15 Forua 551, 552 (1980).
13/  Grand River Liae Co. v. Ohio Casualty Ins. Co.. 32 Ohio
   -App. Zd. 178, ZB9 H.E. 2d ^60 (

                            - 9 -
 or  property daaage.   See  discussion at  pp.  20-24.
 C.   The Environmental Impairment  Liability  (EIL) Polie-y
     Regulations  promulgated  pursuant  eo. RCRA (see notes
 4 and  5)  have  prompted several  insurance carriers to offer
 first  party insurance coverage  —  that  is, coverage for
 injuries  caused  by che insured, obtained by the insured.
     The  vost  common  of these "claims-made" policies is the
 EIL  policy, which generally  provides  insurance coverage for
 personal  injury  and property daaage only froa gradual
 pollution,  but not that which is  sudden and accidental.
Off-site  cleanup costs, including  those incurred to avert
 a loss, are typically covered; on- site cleanup costs are
not.  Also  typically  excluded fro* EIL policies -are coverage
of oil  and  gas drilling,  liability arising from nuclear
fuel, daaage to  property  owned or  occupied by the insured,
 fines or  penalties, punitive damages, costs of cleaning up
 pre-existing conditions at any  site owned or leased by
 the  insured, and costs of maintenance or routine cleanup.
 t>.   Insurance  Services Office (ISO) Policy
     Another type of  "claims-Bade" policy is the ISO
 pollution liability policy — also developed in response
                                  \  •
 to BCRA regulatory insurance requirenents .  ISO policies
14/  For  a detailed  history of the development of  the pollution
     exclusion,  see  Appendix D,  S. Hurvitz & 0. Kohane, "The
Love Canal -  Insurance Coverage for Environmental  Accidents,"
Insurance Counsel  J.,  July 1983, p. 378.

                           - 10 -

 providt indemnification And defense coverage for pollution^
 caused bodily injury and property damage and reimbursement
 coverage for pollution cleanups iaposed by lav or voluntarily
 assuaed with the consent of 'the insured.  Insurance coverage
 under 'an ISO policy is also extended eo sices used by the
 insured for storage or treatment  buc which are operated
 by others.   Costs of defense are  provided  apart from
 the limits  of liability.  The  policy excludes from coverage
 damages which are expected  or  intended  by  the insured,
 costs  of cleanup for sites  owned, operated or used  by
 the  insured,  liability from  abandoned sites,  or liability
 arising from  the intentional violation  of  scatutes  or
 regulations,  buc does  cover  both gradual and  sudden and
 accidental damages  and  injuries.
     Despite an  increase in  "claims-made" environmental
 insurance policies, coverage for pollution-related
 damages under an  EIL or ISO policy is scill rare.   It is
 much more likely  that a potential EPA hazardous waste
 enforcement action will involve a general liability
 policy  (CCL).
 III.  Judicial Construction ofCCL and CCL/Pollution
      Exclusion Policies'  •
      A.  Construction of CCL Policies Generally
     Decisions generally construing  CCL policies have focused
on several issues:  whether a covered "accident" or "occurrence1
has taken place,  whether damage to che affected "property"

 is covered, what statute of  limitations  should  be  applied
 and in what manner, what defenses  are  available co insurers,
 and how should liability be  apportioned  aaong insurers and
 insured*.  A discussion of these issues  will be followed by
 a separate discussion of pollution exclusion clause construc-
     1.  "Accidents" under pre-1966 policies.
     CGL policies written prior to 1966  insured  against damage
or injury "caused by accident."  Early decisions considering
when events giving rise to an injury were covered  focused on
whether or not the event was "... (a]n event  that takes •
place without one's foresight or expectations;  an  undesigned
sudden and unexpected event, chance, contingency."  United
States Fidelity & Guaranty Co. v. Briseoe. 205  Okla. 618.
239 P.2d 734, 757 (1951) (included in the Coapendiua),
quoting from Uebster's International Dictionary.  Thus,
cases addressing injuries arising out of consequences of the
 insured's business which were typical and obvious  tended to
deny coverage while eases involving unintended  consequences.
 (even those arising out of failure to  foresee that which
 should have been seen) tended to affirm  coverage.  Two articles
 address these issues.  Appendix E, J. Coulka. "The Pollution
 Exclusion," VI Chca. & Rad.  Waste  Lit. Rptr. 745.  745-748,
 (1983) contains a  succinct  introduction  to these cases.
 Appendix  F,  C. Mitchell and  J. Tesoriero, "Uhen Does the
 Occurrence Exist Under  the  General Commercial Liability

                          - 12 -

 Policy?," VII Chem. & Rad. Uaste Lit. Rptr. 457  (1984),
 provides an additional detailed background on the history
 and development of both the "accident" and "occurrence"
     2.  "Occurrences" under post-1966 policies.
     In 1966. most CCL policies began to insure against
damages and injuries arising out of an "occurrence" during
the policy period — leaving open the central question
of when an "occurrence" has taken place and the related
issue of whether sequential or multiple occurrences have
cak-en place.  The former question is critical in evaluating
which policy or policies may provide coverage and occasionally
whether the statute of limitation may have run on the claim.
The latter question is critical to these issues, to what
policy limits or multiples of limits may apply,  and to issues
of apportionment among carriers.""
     CCL policies generally define an occurrence as "an
accident,  .including continuous or repeated exposure to
conditions,  which results in b 4ily injury or property
damage neither expected nor intended from the standpoint
IS/  If insurance coverage exists for the entire relevant
     period of time, but the plaintiff cannot establish when
the damage began or how it was apportioned during the period
of time, courts will normally only require the plaintiff to
prove that daaages occurred, and leave to the insurance
companies the burden of allocating the daaages among them-
selves.  See Appendix G. Hourihan. "Insurance Coverage for
Environmental Damage Claims," 15 Forum 551, 559 (1981).

                           - 13 -

 of the insured."  The theories upon which courts have
 determined whether and when a covered "occurrrence" has
 happened are several, having evolved eo meet generic fact
-patterns.  A discussion of cheat theories follows.  See
 generally Appendix T and Appendix 0, Charles Miner,
 "Asbestos Extravaganza," 5 Calif. Lawyer 60. 62-63 (June
      In sinple property damage cases noe involving slow
 accumulation of damage,  the general rule is  that there
 is no "occurrence" until the actual harm for which relief
 la .sought manifests itself.  Rational Aviation Underwriters.
 Inc. .v. Idaho Aviation Center. Inc.. 93 Idaho 668.  471
 P.2d  56 (1970).  See also Annot.. 57 A.L.R.  2d 1385 (1958).
 This  rule is generally known as the manifestation theory.
      On the other hand,  in cases where damages •*• sought
 for sickness or disease resulting from long  ten exposure
 to toxic substances,  courts have found that  actual injury
 occurred during the policy period in which exposure alone
 occurred.  Insurance Company of Horth America v. Forty-
 Eight'Insulations.. Inc.. 451 F.Supp. 1230 (E.D. Mich. 1978) ,
 affd 633 F.2d 1212 (6th Cir.  1990).  This rule is generally
•called the exposure theory. .In addition, in contrast to
 ordinary property damage cases where the manifestation
 theory applies, in property damage cases where damages
 slowly accumulate, courts have generally applied the
 exposure theory in determining insurance coverage.  So
 long  as there is any tangible damage (even if minute)

                          - 14 -

resulting from exposure, the courts have allowed coverage
froB ehac time, although che damage nay not manifest itself
until much later.  See, e.g.. Champion International Corp.
v. Continental Casualty Co.. 546 F.2d 502 (2d cir. 1976),
cert; denied, 434 U.S. 819 (1977); Porter v. American Optical
Corp.. 641 F. 2d 1128 (5ch Cir. 1981); Union Carbide Corp. v.
Travelers Indemnity Co.. 399 F.Supp. 12 (U.D._Pa. 1975);  and
Cruel Construction Co. v. Insurance Co. of North America.
11 V7aah. App. 632 524 P.2d 427 (Wash. Ct. App. 1974).
     Thus., it appears thac application of Che exposure theory
is- appropriate in the context of CCRCIA hazardous waste liti-
gation, since tangible injury and daaage to the environment
can occur soon after exposure to hazardous] wastes, although
daaage may not manifest itself until much later.  At least one
court has held that where a landfill leaches toxic wast* into
groundvater over a number of years and harm results, the
exposure theory should be applied.    Application of the
exposure theory in the CERCLA context means that coverage *"
would be triggered under the insurance policies from the
time when the environment was first exposed to the hazardous
waste.  Presumably, under the exposure theory, all policies
from the time of disposal forward would be implicated, so
long as some tangible damage to the environment could
be shown to have occurred at the time of exposure and to  .
have continued thereafter.
167  Jackson. Township v.. American Homes Assurance Co., Docket
     L-29Z3b*80  CN.J. Suaer.) Cunreporteo). eiteo in Jackson
Township v.  Hartford Ace. & Indemnity Co.. 186 H.J. Super.  156,
165-166 (1982) (included in the compendium).

                           -  15  -

      Notably, application  of ch*  exposure theory to  trigger
 insurance  coverage docs not  necessarily  rule  ouc application
 of  eh* manifestation theory  to  trigger subsequent coverage.
 In  some  cases,  in order that'the  purpose  of the  policy not
 be  undercut and  in order to  protect the reasonable expectations
 of  the insured,  the insurance coverage during the period of
 manifestation of the injury or damage is  also triggered.
 See Keene  Corporation v. Insurance Company of Worth America.
 667 F.2d 1034, 1045 (D.C. Cir. 1981).  This approach is
 commonly known as the "tripple-trigger" or "continuous injury".
     The application of the exposure, manifestation, and
 triple-trigger theories has frequently ri»«n in  the analogous
context of the asbestos-related disease cases,   in those
cases dealing with a slowly progressive disease  in which
 tissue damage occurs shortly after initial inhalation
 (exposure), the  courts have generally favored the more
generous exposure and triple-trigger theories.  See.  Porter
v.- American Optical Corp.. supra;  Insurance Co. of North
America v. Forty-Eight Insulations. Inc.. supra;  and Keene
Corp. v. Insurance Company of Berth America, supra.
 (applying  both the exposure and manifestation theories
 to  trigger maximum coverage under th« policies).   One district
 court, however,  has adopted  solely the manifestation theory
 in  an asbestos related disease case.  See Eaale-Pieher
 Industries v. .Liberty Mutual  Insurance Co.. 523  F.Supp.
 110 (D. Mass. 1981).

                            -  16 -

     Thtrtfore,  although only one unreporctd scat*  crial
 court  decision has addressed  chis issue in the hazardous
 wasce  context, there  is strong analogous authority  to
 support application of the Bare expansive exposure  theory
 to trigger insurance  coverage in waste cases.  Moreover.
 there  is some analogous authority to support application
 of both the manifestation and exposure theories to  trigger
 insurance coverage.   Consequently, once a pollution incident
 has been determined to constitute an "occurrence" not excluded
 from coverage under a pollution exclusion clause, there
 should be little problem in triggering coverage under the
maximum number of policies by application of these theories..
     Finally, the question must be answered of how many
"occurrences'* have taken place, where the injury continues
over « period of time and may manifest itself in distinct
and separate kinds of damages.  Courts determine the fre-
quency of the "occurrences."  for purposes of applying a
 policy's per occurrence limit or deductible provisions, by
 applying one of several teats.    For a discussion of each
of those testa, see generally Appendix G, pp. 559 et. seq.
 /  Generally, these testa include:  the "effect test"
~"   (looking to the vantage of the injured P»rty and  .
comonly finding more than one "occurrence") ; the
"causation test1* (widely accepted view baaed on examination
of cauae); the "time and apace test" (focusing on proximity
of cauaative factors in tiae and space). the "operative
hazard test" (examining the number of distinct causative
acts); and the "average person teat" (which is what it
seems — the favorite of judges not enamored with more
abstract, rationalized standards).

                            -  17  -

3.  Apportionment  of  liability among  insurers  and  insureds.
     Determinations concerning the  number and  duration of
"occurrences" can have a substantial  impact upon the extent
to which multiple carriers of a  single or many  insured parties
may be liable -- a problem greatly  compounded by the technical
complexity and large numbers of defendants typical in hazardous
vaste litigation.  For a thorough treatment of the theories
for determining when "occurrences" cake place and the conse-
quential application of those theories to apportionment
problems, see Appendix H, Note. "The Applicability of General
Liability Insurance to Hazardous Uaste Disposal," 57 So. C-al.
L. Rev. 745 (1984).
     4.  The scope of "property damage" coverage.
     Courts have become progressively more willing to extend
covered "property damage" eo costs of voluntary and compulsory
remediation — especially where the Insured is responding to
conditions which may result in further damage to property,
health or the environment, or where a governmental entity
may incur coses and seek eventual reimbursement.  See Lanseo.
Inc. v. Depe. of Environmental Protection. 138 H.J. Super.
27S (1975) (included  in the Compendium) (coverage of on-site
spill remediation  required by state law); US Aviex Co. v.
Travelers Ins. Co.. 123 Mich.  App. 579 (1983)  (included in
the Compendium)  (coverage of  investigative and  remedial
costs  for state-mandated groundwater  cleanup,  founded upon
holding  that  groundwater was not property of  the  insured);

                            -  18  -

 and  Rtehl  v.  Travelers  Ins. Co.. Civ.  No.  83-0085 (W.D.
 Pa.  Aug. 7,  1984),  VIII Chea. &  Rad. Waste Lit.  Rptr.  fl39
 (included  in  the  Compendium)  (coverage of  CERCLA potentially
 reponsible party's  abatement'costs).   For  a more detailed
 discussion of this  issue, see Appendix I, M. Rod burg and
 R. Chesler of Lowenstein, Sandier. Brochin. Kohl. Fisher,
 BoyIan & Meaner,  "Beyond the Pollution Exclusion: [etc.],
 (1984). pp. 364.369; and Appendix J. K. Rosenbaum,
 "Insurance, Hazardous Waste, and the Courts:  Unforeseen
 Injuries, Unforeseen Law." 13 ELR 10204. 10205-10207
 (July 1983).
     5.  Statute of limitation questions.
     In state common law suits for injuries or damage,  the
 court's choice among exposure, manifestation, and triple-'
 trigger theories of occurrence may have a substantial
 relationship  to the running of the applicable statute of
 limitations..  Fortunately, this choice of theories to
 determine when injury or* damage "occurs" within  the meaning
 of a comprehensive general liability policy would not
 determine when the statute of limitations should commence
 running under CERCLA.    Otherwise, the date that injury
IS./  Under Section 112(d) of CERCLA, 42 U.S.C. 9612(d)
        Mo claim may be .presented, nor may an
        action be commenced for damages under
        this title, unless that claim is
        presented or action commenced within
        three years from the date of discovery
        of the loss or the date or enactment
        of this Act. whichever is later . . .

                            - 19 -

 or dsaage it d*«Btd co occur for purposes of statutes of
. liaicacions it generally cht dace of manifestation.   Sec.
 e.g..  United States v. Kubrick. 444 U.S.   111.  123-24
 (1979);  Urtt v. Thompson.  337 U.S.  163.  170-71  (1949).
     6*.   Defenses available eo eht  insurer.
     Where an injured person may sue  ehe  insurer directly.
 before or after Judgment against che  insured, ehac suit  is
 generally subject to all ehe defenses  ehe  insurance company
 baa againsc ehe insured, including  ehe defense  that the
^insurance company has noe  received  noeice  of ehe underlying
 lawsuit  at per ehe policy  terns and deadlines,  and che
defense  chat che insured has  noc cooperaced with ehe
 insurance company.   Generally,  judgment credieors seand  in
ehe ahoes of che insured and  have rights no greaeer and  no
less ehan ehe  insured's  rights  would be if ie had paid ehe
judgment  and ehen sued les  insurance company eo recover  che
amount paid.  Creer v. Zurich Insurance Co.. 441 S.U. 2d
15,30  (Mo. 1969);  accord McHeal v.  Manchester Insurance  and
Indeaninter Co..  540 S.W. 2d  113, 119  (Mo. Ce.App. 1976)
 (righcs  of ehe injured person are derivaeive and can  rise
no higher than those of ehe insured) .  See also Appendix L,
Appleaan, Insurance Lav as  Praecice ii 4813-4817 (hereafter
     Problems  vich noeice,  etc., may pr'esene considerable
diffieuleies during attempts  by ehe Unieed Seaces co  recover
for CERCLA coses against insurance  companies.

                            • 20  -

     B.   Construction  of CCL/Pollucion  Exclusion  Policies
     In  response  co  Che judicial inccrprecacion of  the new
"occurrence" language  in CCL policioo cho insurance  induecry
developed a opocific ex duo ion co  its policies which was
ooanc. co clarify  inouranco coverage  for claimc for  pollucion
dosage.   Seo pp.  7-9 for excluoion language  and history.
Thio oxcluoion, roforrod to  ao tho "pollution exclusion,"
hao now boon incorporacod into tho printed provioiono
of nocc cottvcrcial inouranco forao.  It wao  intended by
the Inourance Rating Board not to  restrict coverage, buc
oornly to clarify coverage by tho  uoo of tho now  language.
Tho pollution exclusion dioallovo  claioo for bodily injury
or property dosage duo  to a  roloaoo  of  toxic chcaicalo, waoco
oatorialo, pollutanto or contcainonto into tho onvlronaont
unlooo tho roloaoo io "ouddon and  accidental."  There io a
oplit of authority regarding tho ECaning of  thooo corac.
Several courto have held that they are  asbiguoua, and have
conetrued tho clauoo broadly in  favor of tho incurod.  In
thooo caooo, eovoraQO of tho pcMuter hao boon upheld.  In
contract, ooao recent docioiono  have hold that tho  osclulfton
nay apply to cho  knowing, frequent hasardoua wooto  polluter.
and chat  there io no csbiguity in  the "ouddon and accidental"
clauoo in ouch caooo.
     Long-otanding principleo of inouranco contract construc-
tion include tho  requirement that  to bo effective,  an
exclusion muot bo eonopicuouo, plain, and clear,  and auoc
be  conscruod strictly  against cho  insurer and  liberally  in

                             - 21  -

  favor  of  tht insured.   See,  e.g..  Pepper  Industries, inc. v.
  Home Insurance Co.:  134 Cal.  Rpcr. 904, 67 C.A.3d 1012 4ch
  Diet,  (included in the Compendiua).  Any ambiguities muse
  be  resolved in favor of the  Insured.  See, e.g.. Abbie
  UriKuen Oldsmobile-Buick. Inc. v. United States Fidelity
  Ins. Co.. 95 Idaho SOt, 511 P.2d 783 (Idaho 1973) and noce
  11. supra.  The courts chat have considered the pollution
 exclusion clause have almost unanimously held it to  be
 ambiguous, since it is fairly susceptible to two different
 interpretations.   As such, they generally have resolved  that
 ambiguity in favor of the insured,   gee, e.g.. Dnion Pacific
 Insurance Co. v.  Van Westlake Union.  Inc..  supra; Niagara
 County v. Utica Mutual Insurance Co..  103  Misc. 2d 814. 427
 N.Y.S.  2d 171 aff'd 439, R.Y.S. 2d  538  (1981) (included  in
 the Compendium);  and MoIton.  Allen  t Williams.  Inc.  v. St. Paul
 Fire &  Marine Ins. Co..  347 So.2d 95. 99 (Ala.  1977)  (included
 in the  Compendium).
      The cerma  of the pollution exclusion  clause  focus on
 the insured's intent in  the actual  discharge  of the  pollutant.
The definition  of "occurrence," on  the  other  hand, focuaes
en the  insured's  expectation or intent  vith regard to
 causing damage  or harm.   The majority of courts,  taking a
broad view of insurance  carrier's liability,  have interpreted
'the pollution exclusion  clause, together with the definiton.
of "occurrence,"  to provide coverage except where there is
 an intentional  consequence, caused  by a polluter  who  expects
or intends his  conduct to cause damage.  See, e.g..  Allstate

                            - 22 -

 Insurance Co. v. Klock Oil Co.. supra (Included in the
 .Compendium); Union Pacific Insurance Co.  v. Van's Uestlake
 Union. Inc.. 34 Wash. App. 208, 664 P.2d 1262 (Uash._ 1983) :
-Jackson Tovmihlo Municipal Utilities Authority v.  Hartford
 Acctd«nt & Indemnity Co.. 186 H.J.   Super.  156. '451 A.2d
 990 (N.J. Sup«r App. Div. 1982) (included in eh* Compendium).
  	In Lansco Inc. v. Department of Environmental Protection,
 supra at p. 282 (included in the Compendium), the  court found
 that the ten "sudden." rather than meaning "brief or  of  short
 duration," mean* "happening without previous notice or on
 very brief notice; unforeseen* unexpected',  unprepared
 for."  The ten "accidental* me ana  happening "unexpectedly
 or by chance."  The court therefore concluded:  .
           ... under the definition of "occurrence"
           contained in the policy,  whether  the
           occurrence is accidental  must be  viewed
           from the standpoint of the insured and
           sine* the oil spill was neither expected
           nor intended by Lansco, it follows that  the
           spill was sudden and accidental under the
           exclusion clause even if  caused by the
           deliberate act of a third party.
           Similarly, in Union Pacific Insurance Co.. supra..
 a massive gasoline leak occurred at the insured*s  gas
 station.  Approximately 80,000 gallons of gasoline leaked
 out of a ssall hole in an underground gasoline  pipe over  a
 period of months.  Despite the policy's requirement that
 an occurrence be "sudden" or else subject to the pollution
 exclusion clause, the court held that the leaking  fron'the
 line was not .expected nor intended, nor was the resulting
 damage.  Therefore, tht pollution exclusion clause did not

                            - 23 -

exclude  coverage.   664  P.2d at 1266.   See also All«cac«
Insurance  Co..  supra  AC 605.,  where the court states  that
the discharge or escape of gasoline could be both  sudden
and accidental, even  chough undetected for a substantial
period, of  time, since "sudden." as used in pollution exclusion
clauses, "need not  ba liaited  to an instantaneous  happening."
     A few courts have  refused  to find any ambiguity in
tne tens  "sudden and accidental" where the insured knowingly
discharges a substance  as  a nonal feature of operations,
but.has  no expectation  of  intent to cause daaage.  In Great
Lakes Container Corp. v. Rational Union Fire  Ins.  Co.. 727	
F.2d 30  (1st Cir. 1984)  (included in the Compendium) the
court determined that no insurance coverage was provided to
Creat Lakes in connect ion" with  a CERCLA action by  the
United States against Great Lakes.and  others  for hazardous
waste contamination.  Notably,  the district court  and the
First Circuit focused on two documents in deciding, whether
insurance  coverage  was  triggered:   (1)  the comprehensive
general  liability insurance policy; and (2)  the United
States'  complaint against  Creat Lakes.   Because the United
States'  complaint alleged  that  Great Lakes was  liable for
contamination which "has taken  place as a concomitant of
its regular business  activity . . . ", the First Circuit
determined that no  sudden  or -accidental occurrence triggering
coverage was alleged.   The court found that there  is no
ambiguity  in the policy "when the policy is read against
the complaint."  Thus,  where insurance is or.may be  a

                            - 24 -

 factor, cart must be taken to avoid counterproductive
      The U.S. District Court for the Eaatern Diatrict of
. Michigan followed the Great takea deciaion in Aaerican
 Statea Inaurance Co. v. Maryland Casualty Co. 587_F. Supp.
 1549 (E.D. Mich. 1984)  (included in the Compendium).  The
 court held that the insurance companiea did not have a
 duty to defend or indemnify the  company becauae the under-
 lying National Drua litigation involved the continued,
 non-jaccidental dumping  of waate  at the aite.
      In summary, the general  and widely accepted view ia
 that CCL policies with  pollution exclusion clauses provide
 coverage for pollution  incidenta where either the discharge
 itself or the resulting damage is  unexpected or unintended.
 But,  under the First Circuit's decision in Great Lakes
 Container.  supra. the discharge  must  be "accidental."  For
 exaaple, coverage exists for  pollution incidents which
 involve gradual seepage or leaking which ia unexpected  or
                       «**                         '
 XII.  Construction of EIL and  ISO Policies
      A.  The EIL Policy
      The Environmental  Impairment  Liability (EIL)  policy
 was  developed to provide coverage  for liabilities not
 thought to be covered by CCL  policies following development
 of the pollution exclusion — that is,  claias for property
 damage and personal injury such  aa bodily  injury,  mental
 anguish, disability, death at any  time --  preeent or ir

                            - 25  -
 the  future — caused  by non-sudden,  non-accidental  "environ-
 mental impairment."   Thtst  policies  have  not  betn che subject
 of signIfleanC judicial construction.  For an excellent
 discussion of cheir terms,  issuance  and use,  see Appendix K
 P. MiIvy,  "Environmental Impairment  Liability Insurance
 and  Risk Assessment."   The  Environmental Forum,  Oct. 1982,
 p. 30.
     B.   The ISO Policy                              _
          The Insurance Services Office (ISO)  policy is
generally more limited.  The EIL policy — restricting
coverage  CO damages and losses arising out of a "pollution
incident," which includes only "direct" releases that result
in "injurious amounts"  of pollution  — is generally believed
eo cover only fortuitous daaagea, not those which are
"expected or intended." These policies have not been the
subject of significant  judicial construction,  but their
terms are discussed in*substantial detail and contrasted
wich chose of EIL policies  at Appendix A. pp.  449-453.
IV.  Statutory Insurance Requirements
     A.' fcCTA Financial Responsibility Requirements
     Under section 3004(6)  of RCRA.  EPA must establish
standards "as may be necessary or desirable" for .financial
responsibility, including financial  responsibility for
corrective action, applicable to owners and operators of
                        .'                                   i
hazardous waste treatment,  storage,  and disposal facilities.
V9/  *2 U.S.C. S  6924(a)(6).

                            - 26 -
                               **• *"
Tht 1984 aitendaents  co RCRA added  in  section  3004(c)  that
financial responsibility may b« established by any on*
or a combination of  chc following: insurance, guarantees,
tvxrtcy bonds, letters of credit, or qualification as  a
self-insurer.    RCRA also  requires owners and operators
of facilities with interia  status to certify  that the
facilities are in compliance with financial responsibility
     The regulations rtquire each facility owner or operator
to certify financial assurance for both closure and post-closure
activities and to maintain  liability insurance against both'
sudden accidental and non-sudden accidental occurrences.
The requirements constitute Subpart H of Parts 264 and 265
of 40 C.F.R.  Part 264 contains standards that apply  to
interia status facilities.  RCRA also provides for interia
authorization of state prograas that are substantially equiva-
lent to the federal prograa.  Many states have soae type of
financial requirements for closure and post-closure,  but
they vary considerably from state to state..
     The first step  to establish financial assurance  for
closure and poet-closure is to estimate the cost of closure
and the annual cost  of post-closure monitoring and maintenance.
20/  42 U.S.C. 56924(t).
217  42 U.S.C. Section 6925(e)(2)(B) and (e)(3)(B).

                            - 27 -

 The  aaount of  financial aaaurance muse at Lta«c equal  cht
 adjuated cost  estimatea.   The ovmer and operator say use ont
 or more of several  mechaniama allowed  by the  regulation* eo
 •••c the requirements.  Aa noted  above,  che poaaible mechanisms
 include eruae  fundi, aurccy  bonda  (ehae  eieher  guarantee pay-
 ment into a trust fund  or guarantee  performance of cloaure
 or poat-cloaure). letcera of credit, and  inauraace; or the
 owner or operator may Beet the  requirement by satisfying
 a financial  teat that providea  a  corporate guarantee of
 cloaure or  poat-cloeure.~~"   To  Beet  the  financial aaaurance
 requirementa, aa owner  or operator may uae more than one
 of the  optiona, except  the financial teat mechanism.
One option may be uaed  to aaaure  funda for all  facilities
of one  owner or operator.  The moat often uaed mechaniam
 ia the  financial teat (about 80 percent) and the leaat
 uaed  ia inauraace (about 2.7 percent).  EPA will release
 the  facility from the financial aaaurance requirementa
 after receiving certification that cloaure ha* been
 accoapliahed aa aet out ia Che  cloaure plaa.
      Cloaure aad poat-cloaure iaauraace muat aatiafy a number*
 of requireaenta.  The owner or  operator muat aubmit a certifi-
 cate of iaauraace to the Regional Administrator.  The policy
 muat be insured for a face amount ac leaat equal to the
227  40  C.F.R. 264.143. 265.143.

                           - 28 -

closure or post-closure cose estimate, and it must guarantee
that Che insurer will pay for the closure or post-closure
activities.  If the coat of cloaure or post-closure la
significantly greater Chan the fact anounc of tht policy.
EPA »ay withhold reimbursement of funds.   The owner or
operator aay noc terminate eh* policy without EPA approval.
nor may the insurer cancel the policy except for failure
to pay the premium.  Even upon failure to pay the premiun.
the insurer cannot cancel the policy if within 120 days
of"notice of failure, the facility is abandoned, interim
status is terminated, closure is ordered, or the owner or
operator is named a debtor in a bankruptcy proceeding.
     In addition to the closure and post-closure financial
Assurances, the owner or operator must deaonstrate financial
responsibility for claims arising from its operation for
personal injuries or property daaage to third parties.
For sudden accidental occurrences, the owner or operator
muat maintain liability coverage of at least SI million per
occurrence with an annual aggregate of at least $2 million.
For non-sudden accidental occurrences, the owner or operator
of a surface impoundment, landfill, or land treatment facility
muat maintain liability coverage of at least $3 million per
occurrence with an annual aggregate of $6 million.  The owner
23/  40 C.F.R. 264-143(eH8), 40n C.F.R. 265-143(d) (8).
24/  40 C.F.R. 264.147. 265.147.

                           - 29 -
 or operator nay demonstrate financial responsibility by
                                                     /       /•
 having liability insurance, as specified in the regulations'
 by passing a financial test for liability,  or by using both
 mechanisms.  Variances from these requirements are available
 if the owner or operator demonstrates that  the levels  of
 insurance are higher than necessary.   Conversely,  the  Regional
 Administrator Bay impose higher levels of coverage if  warrantee
      The owner or operator must continuously  provide liability
 coverage for a facility until final closure.   Therefore, after
 final closure,  claims for personal injury or  property  damage
 to third parties are no longer covered by insurance required
 by RCRA.   However,  upon eventual transfer of  liability.
 CERCLA's Post-Closure Liability Trust Fund  will-assume "the
 liability established by this section or  any  other law for
 the owner or operator of a hazardous  waste  facility. . .".
      CERCLA Section 108(a)   requires that  the owner or operate
'of each described vessel "carrying hazardous  substances
 as cargo" maintain  at least $5 million in "evidence of
 financial responsibility."  Proof may be  established by
 any rTnM"^*:^** of  "Lnaurance, guarantee, surety bond, or
 qualification a,a a  self-insurer." This requirement is
 essentially an expansion of preexisting spill response
 2_5/   242 C.F.R.  265.147(a)(l).
 267   42 U.S.C.  S 9607(K).   The  99th  Congress  is considering
   ^eliminating  the entire post-closure  liability transfer
 27/   42 U.S.C.  S 132Up).

                          -  30  -                   9834*5
program requirements under the  Clean Water Act.    Insurance
policies issued under these  programs should be considered
whenever a release frotn a vessel  is  involved.   CERCLA
Section 108(b)   requires that  the Administrator,  no       ~
earlier than December 11. 1985, promulgate financial respon-
sibility requirements for facilities not covered under the
RCRA subtitle C program.   Priority ia to be given  to "those
classes of facilities" which "present the  highest  level of
risk of injury."  This program has not begun,  but  should
be considered as a potential source  of coverage after
December 11.  1985.
     Two articles discuss many of the above issues in
greater detail.  Appendix B. D. Jernberg,  "Environmental
Risk Insurance," FIC Quarterly, Winter 1984, pp. 123,  et
seq.. briefly addresses the  RCRA and CERCLA insurance
schemes and follows with a detailed  discussion of  coverage
under different policy types and examines  various  develop-
ments in the writing of exclusions.   Appendix  C, A.  Light,
"The Long Tail of Liability, [etc.]," 2 Va. J.  Nat.  Res.
L. 179 (1982), discusses uncertainties concerning  coverage
as between RCRA program insurance and the  CERCLA post-closure
liability fund.
28_/  42 U.S.C. S 9608U).
29/  42 U.S.C. S 9608(b).

                            -  32  -

"for bad  filch  either  in negotiating or  in  falling  co
negotiate cht settlement of any  claia."  Thu«,  cht  United
States «ay assert teat* direct action elalas or assigned
bad faich clains in addition'to  its federal direct  action
     One  Likely enforcement issue occurs where  ehe  insured
is in bankruptcy.  RCRA Subsections 3004(t)(2)  and  (3)
leaves open the question of whether the insurance proceeds
are part  of the estate in bankruptcy.  Our probable position
will be that if the Judgment  is  not satisfied froa  the
•state after a  period of tiae specified by state law,
which is  likely since it is in bankruptcy, then the proceeds
are not part of the estate  and the government or other
claimants may take action directly against the  insurer for
the judgment.
     2.   CERCLA enforceaent claias.
     The  only express rights  of  action against  insurance
carriers  under  CZKCLA are authorized at subsections 108(c)
and (d),  42 O.S.C. 9608(c)  and (d), and which provide:
          (c) Any claim authorised by section 9607
     or 9611 of this title  say be asserted directly
     atainst any guarantor  providing evidence of
     financial  responsibility as requried under
     this section.   In defending such a claia,  the
     guarantor  aay invoke all rights and defenses which
     would be available  to  the owner or operator under
     this subchapter.  The  guarantor «ay also invoke
     the  defense  that  the  incident waa caused by the
     willful misconduct  of  the owner or operator, but
     such guarantor  may  not Invoke any other  defense
     that such  guarantor might have been entitled to
      invoke in  a proceeding brought by the  owner or
     operator  against  him.

                            -  33  -

          (d)  Any guarantor  acting  in  good
      faith against which  claims  under this
      Ace ar«  asserted as  a  guarantor  shall
      be liable- under stccion  9607  of  this
      title or section 9612(e) of this title
      only up  eo Che monetary.limits of the
      policy of insurance  or indemnity eoneracc
      such guarantor has undertaken or che
      guaranty of other evidence  of financial
      responsibility furnished under this
      section,  and only to the extent  that
      liability is not excluded by  restrictive
      endorsement:  Provided, that this  subsec-
      tion shall not alter the liability of any
      person under section 9607 of  this title.

      The authorization of a direct claia against a guarantor

                            -  34  -

establishes a framework  for iaposing  financial  responsibility
requirements on onshort  facilities, but on  a  prolonged
schedule.  Hoc later  than December  11, 1983,  che Preaidenc
is co identify Che classes  of facilieies  for  which  financial
responsibility requireaenca will be developed.  The actual
requirements are co be promulgated no earlier Chan  Deceaber
11, 1985.  When che regulacions are promulgaced, chey are
eo impose incremeneal financial vesponsibilicy requirements
over a period of noc less Chan chree years nor more chan
six years from che dace of  proaulgacion.  Thus, under the
framework established in Seccion 108(b), financial respon-
sibility requirements would noc begin uncil ac lease Deceaber
11, 1985, and consequently, a direcc claim againsc an
insurer under Seccion 108(c) could aoc be made uncil
afcer chac dace.
311(p) regulacions remain in full force and efface uncil
such tiae as ••etien 108(a) regulacions are issued.
    Financial reapensibilicy requireaencs and direce cause
of aceion provisions similar to chose contained in seecion  .
108 of CEJLCLA are also found in section 311(p) of the Clean
Water Act, 33 0,5.C. 1321(p). and in section 305 of che Outer
Continental Shelf Lands Act Amendments of 1978. 43 O.S.C.
    The authority to proaulgace financial responsibility
regulations required under CERCLA section 108Ca> retarding
vessels and offshore facilities was delegated to the Coast
Guard by Executive Order 12418 (May 5. 1983). 48 Fed.Reg-
20891 (Ilay 10. 1983).
31 /  This entire provision may be qualified  in the same
—   manner*aa set forth in RCRA Section 3004(t) during
reauchorization  of CZRCLA  in 1985.

                           - 35 -

     The nexc qutacion is whether soae ocher federal claim
afainac insurers nay be found or lap lied under CERCLA.
The two aecclona of CERCLA most relevant eo che possibility
of a righc of direct action'again*t an inaurer are Sectiona
107 and 108, 42 U.S.C. f 9607 and 9608.  Section 107 ia
the main liability provision of CERCLA and doea not by ita
terms include inaurera among the liac of reaponaible parties
listed in Section 107(a).  Section 107(«)  preserves the
validity of insurance agreements,  but doea not implicitly
or explicitly authorize actions directly against insurers
by a party other than the insured.   As noted above, an
analysis of the language of section 108 reveals a legislative
intent to permit actions directly against financial respon-
sibility insurers, but only under United conditions.
     A clear federal direct right of action under CERCLA
against insurance companies appears to be dependent upon the
issuance of financial responsibility regulations.   As to the
onshore facilities with which ve deal most frequently, such
regulations will not be promulgated until at least December
11. 1985.  In the interim, there is only a potential for
developing an interstitial federal common lav. based on
the need for a uniform approach to the ^assertion of claims
generally allowed under state law.  CERCLA section 302(c)
preserves financial responsibility regulations issued
under section 31 Up) of the Clean Water Act and RCRA, as
well as all state direct action claims which the United
States may be entitled to assert.

                            - 36 -

      B.  Assigned  or  Subrojated Claims  of  the Insured
         Assignment Afctr  Judgment,  Assignment Before
         Judgment, Assignment of "Claims for  Breach of
         Duties, and  Assignment* After  Bankruptcy
      Thit  •eeeion  will discuss whether  and under what condi-
tion* a defendant  or  potential defendant in  a RCRA or CZRCLA
case  could assign  its data  againet  it* liability  insurance
carrier to the United States.   AM with other  insurance issues,
these are  largely  issues of State lav.  Accordingly,  specific
state authorities should be consulted before  any strategic
decisions  are made.
      Resolution of assignment questions depends to a  sub-
stantial degree on the factual  context of the case.  This
discussion assunes that the United States has a RCPA  or
CERCLA claim against a defendant and that the defendant has
possible liability insurance coverage with respect to that
claim.  If the defendant is a "deep-pocket.1*  i.e., it will be
able  to satisfy any Judgment against it, the United States
probably would not want to take more than a passive role with
respect eo insurance, coverage issues.  Acordingly,  for purposes
erf further discussion, we can assume that the defendant has
little if  any assets to satisfy the CCRCLA Judgment and that
the United States'  primary hope for substantial recovery is
from  the insurance carrier.
                  Assignment After Judgment
      Fundamental issues regarding the prosecution of  direct
action claims against an insurer are usually dependent on

                            - 37 -

whether a Judgment has yet been entered against ch«  insureo
d«f«ndant on ch* claim.  If ie has, there are a number
of possible aechods for pursuing clalas directly against the
insurance carrier.  These nay include, depending on the
jurisdiction and the insurance policy involved,  proceeding
as a chird party beneficiary under the policy,  as a Judgment
creditor garnishee, as an assignee, or proceeding under
applicable statutory provisions allowing direct suit against
the insurance carrier.  See A. Vindt, Insurance Claims and
Disputes 365 (1984).  Of course, if the insurance carrier
has defended its insured vithout a reservation of its
right to deny coverage, it can be expected to pay the
Judgment, to the extent of policy limits,  without the need
for further proceedings.
     In the absence of a policy provision providing for
direct action by the injured party, the United States could
proceed after judgment via garnishment or applicable statutory
provisions allowing direct claims against the.insurer.
Alternatively, an assignment could be taken of the insured's
rights against its insurer, in partial or full settlement of
che On iced Scaces' claim againsc ehe insured.
     Liability insurance policies generally have a provision
prohibiting assignments.  The following provision is typical.
      Assignment.  Assignment of interest tinder chis
      policy shall noc bind che company until its
      consenc is endorsed hereon.
Nevertheless, courts have almost uniformly held chat the
prohibition is one against assigning the general coverage

                            - 38 -
provided by the policy before loos, and chac ic does noc

encompass a prohibition against assignment after a loss has

occurred.  The basis for this distinction has .been explained
as follows:

     Although chore is oome authority to the
     contrary, the groat Height of authority
     aupports the rule that general otipulations
     in policies prohibiting assignments thereof
     except with the concent of the insurer apply
     to aocignmcnto before looo only, and do not
     prevent an assignment after loss, for the
     obvious reason that the clause by its own
     terns ordinarily prohibits acrely the assign-
     ment of the policy, as distinguished from a
     claim arising thereunder, and the assignment
     before looo involves a transfer of a contractual
     relationship anile the assignment after loss
     is the transfer of a right to a money claim.

16 Couch on Insurance 2d {163:40 (Rev. od.); accord.  7

Appelman, Insurance Lav & Practice 94259; Mancikis v. St.	
Paul Insurance Co.. 655 F.2d B18. 826. (7th Cir. 1981) ("Policy

provision [against assignments], however, can only prohibit

assignment of policy coverage, not assignment of an accrued

cause of action.") ; International Rediscount Corp. v. Hartford

Accident & Indemnity Co.. 425 F.Supp. 669 (D. Del. 1977);

and Brown v. State Farm Mutual Automobile Insurance Asso-

ciation. 1 111. App. 3d 47, 272 H.E. 2d 261, 264 (1971)

               on, aa&i&nmcnt, the assignee atanda in. the
chocc of  the,  feaurod and will be subject to any defenses that

the  insurer hod against the insured prior to assignment.  See

A. Uindt,  supra . at 367.  Thus-, the insurer can assert. chac

the  claim is  not within the coverage of the policy or that

policy  conditions  have not been complied with.  Therefore,

                            - 39 -
 ch« value of any assignment should be examined carefully
 prior  to its acceptance as consideration for settlement.
                  Assignment Before Judgment
     While an assignment after Judgment is generally
 allowed, assignments before judgment present special
 problems and may not 'be appropriate in certain situations.
 At least two problems arise in Che prejudgment context.
     First, liability policies generally require the insured
 to cooperate with the insurer.  Assignment of a claim under
 the policy against the insurer could be construed AS a viola-
 tion of the cooperation requirement.   Such a construction
would be likely if the insurer has  agreed  to defend  and  has
not denied  coverage.   The cooperation clause of a liability
 insurance policy will be deemed  violated where the insured,
by collusive conduct, appears  to be assisting the claimant
 in the maintenance of his action.  14 Couch on Insurance.
 supra. S51.115;  and Brown v. State  Farm Mutual  Automobile
 Insurance Association,  supra.  272 N.  E.2d  at 264  ("[CJollusion
 in respect  to liability is, of course, a direct violation
of the non-cooper at ion clauses of the insurance policies"?  and
 if established is a defense to the  insurer's liability.").
     However,, in a situation where the insurer, haa denied
coverage and has refused to defend, an aee-ignoent »hould not
violate the cooperation requirement.   It has generally been
held that there  is no duty to  cooperate once she insurer has
denied coverage.  14  Couch on  Insurance, supra.  151.121; A.
Windt, supra,  at 97;  Shernoff  &  Levine, Insurance; Bad Faich

                             - 40 •

J.iti«ation.  I3.06[3]  (1984);  and «ec Cricg v. raraert  Insurance

 Croup.  230 Cal.  App.  2d 788,  41  Cal. Rptr. 401  (1964).   In

 Critt.  the court rejected eh* argument that an  assignment of

 righcs  against the insurer violated  the cooperation agreement

 of  the  policy  in a situation  where the inaurer  had itself

 failed  to  comply with the policy.  230 Cal.  App. 2d at 801.

 The Court  stated:

     Whatever  may be  [the insured'a]  obligation to
     the carrier,  it  does not demand that he bare
     his breast  to the continued danger of personal
     liability.   By executing the assignment, he
     attempts  only to shield  himself from the
     danger to which  the company has exposed him.
     He ia doubtless  less friendly to his inaurer
     than  he might otherwise  have been.  The
     absence of  cordiality is attributable not
     to the assignment, but to his fear that the
     insurer has callously exposed him to extensive
     personal  liability.  The insurer's breach  to
     narrows the policyholder's  duty of cooperation
     that  the  self-protective assignment does not
     violate it.

     The.other obstacle to an assignment before judgment is

 the standard policy provision — called the "no action"

 provision  — requiring a judgment against the insured, or a

 settlement consented  to by the insurer, before  suit is

 commenced  against the insurer.  One  such provision provides:

     Action Against Company.  No  action shall lie
S       ainst the company unless,  as a condition  precedent
       ereto, there shall have been full compliance with
     all of the terms of this policy, nor until  the
     amount of  the insured*s obligation to pay shall
     have been finally determined either by judgment
     against the insured after actual trial or by
     written agreement of the  insured, the claimant
     and the company.

                             - 41 -

 See generally. 11 Couch on Insurance, supra.  $§44:318-44:323.
 Again, in sicuaeions where ehe insurer -has agreed co defend
 its insured, this provision will likely prohibic any pre-
 judgment assignment.  However, an assignaent  aay be possible
 if ehe insurer refuses co defend.
      As noced above, ehe seandard  policy provision  requires,
 as a predicaee co ehe insurer's liabiliey,  a  Judgment or  a
 seeeleaene  among  ehe claimane,  ehe insured  and ehe  insurer.
 If ehe situation  which creates the desire for an  assignment
 is one; where ehe  insurer refuses  eo seeele, a setcleaene
 wiehoue ehe insurer's consene  would noe  ordinarily  creaee a  •
 basis  for liabiliey  by ehe  insurer.  However, ie  has been
 held that if the  insurer refuses to defend  the insured/the
 insured aay enter into a reasonable settlement and, there-
 after,  see.k reiaburseaene from ics  insurer.  This rule is
 Stated  by Appleaan as follows:
     If an  insurer unjuscifiably refuses  co defend  a
     suic,  ehe  insured  may aake a  reasonable  seeeleaene
     or coaproaise of the injured person's-claim, and is
     then entitled to reiaburseaene £roa  ehe  insurer,
     •ven though  the policy purports  to avoid liability
     for seeeleaene aade wiehoue the  insurer's consent.
 7C Appleaan,  supra.  $46.90.  In such  a situation, the insured
aay. as part  of a settlement, "simply assign certain rights to
 ehe plaintiff."   Zd.  See also  id. $4714.  In other words, the
 settlement  can  include  an assignaent.
    Maneikis v. St.  Paul Insurance  Co.. 655 F.2d 818 (7th
 Cir. 1981)  illustrates  this point.  There, Maneikis
 initially sued an  attorney, Solotke, who  represented hia

                            - 42 -

 in * prior  business aacter.   Solotke's professional liability
 insurer,  Sc.  Paul Insurance,  denied coverage and refused  co
 defend, claiaing  the aaccer  sued  upon was not within scope
 of the policy.  Thereafter, Maneikis and Solo eke entered
 into a* seeclenenc a* re en en t of  $200.000  to be satisfied by
 Soloeke's payaenc of $50.000  and  hie  aasignaenc  co  Maneikis
 of his righca against St. Paul.   Maneikis  su«d Sc.  Paul on
 che assignaenc.   The trial court  granted suaaary judgaent
 co  St. Paul.  The Seventh Circuit reversed,   le  found chat
 che policy provision prohibieing  assignments  did noc apply
 «o  assignaencs of an accrued  cause of accion  and that an
 "insurer's wrongful  refusal co defend peraies che insured
co negotiate a reasonable settlement."  ^d at 827.  See
also Career v. Aetna Ca«uateT~and Surety Co.. 473 F.2d
1071 (8th Cir. 1973); Crict v. Faraers Insurance Croup.
 supra; Season v. Transaaeriea Insuraaee Co..  30 Cal. 3d
220. 240-41, 178 Cal. ftptr. 343. 636 P. 2d 32 (1981);
Shernoff fc Levine. supra. 13.06(3) ("It has also been
held that when the inaurer denies coverage and refuses eo
defend* its insured,  the inaurYd need net notify the
 inaurer of any aasignaenc of his or her rights ajuiasc che
 inaurer prior to  judgaenc."); and 14 Couch on Insurance.
 supra. 151.72.  Couch states  the  rule as follow*:
     If che inaurer  unjustifiably refuses  to  defend
     an action against che insured, on che ground
     chat the action was based upon a clain noc
     covered by che  policy, it cannot successfully
     invoke the no erial clause co bar liability.
     for che reason  that when che settleaent  by
     che insured  azcer cbe unjuscified refusal co

      defend was  mad*  in absolute  good  faieh in
      order co  avoid che chance  of an adverse verdict
      for  a much  larger  SUB,  it  would seem  grossly
      unjust, if  not contrary to public policy,  to
      insist that there  must  be  in every case an
      actual trial and verdict.
      To summarize, where the United States  haa  not yet
 obtained  a judgment and where a defendant's  insurer has
 refused to defend,   a  settlement could be  considered with
 the defendant which included, among other things, assignment
 of the defendant's claims against its  insurer.  Specific
 state authority  should,  of course, be  consulted before such
 an assignment  ia negotiated  and accepted.
      Assignment of Claims for  Breach  Duties
     Another fact situation  in  which Che assignment issue
 frequently arises-involvts bad  faith refusal' to settle.
      It.is generally held that  an Insurance  carrier which in
 bad faith  refuaes to settle  a claim within  policy limits may
 thereafter be liable eo the  insured if a judgment is entered
 beyond the policy limits.  This subject ia discussed at length
 in 7C Aoplenan.  supra 114711-15;   See,  e.t.. Crltx v. Farmers
 Insurance  Croup.  SUPTW.
      For  example, assume that plaintiff sues defendant for
 $50,000.   Defendant has an insurance policy with a $25.000
 32/ An insurer may  frequently defend its insured with a reser-
    vation  of ics right to ultimately deny coverage*  There  is
 a  division  in authority as to whether such a reservation of
 rights, or  non-waiver  agreement, must be consented  to by the
 insured.  See 14 Couch on Insurance, supra. 1651:89.  As noted
 above,  if there  is  a defense by the insurer with reservation
'of rights,  it may be questionable whether the  defendant
 could  enter Into a  settlement without the insurer's consent
 and still preserve  its rights against the insurer.

                             • 44  •

 policy  Unit.  During  the courae  of  litigation, plaintiff
 offera  to  aectle  for $25.000.   If the  inaurance carrier in
 bad faith  refuses to accept  the settleaent and judgaent ia
 thereafter entered for $50.000. the  Inaurer will be, if ita
 bad faith  la eacabllahed. liable  to  pay the entire $50.000
 and Bay alao be aubject to a punitive daaage award.
 In the aituation deacribed. one aaaignaent iaaue ariaea if
 the inaurer. after judgaent. paya plaintiff $25.000 but
 refuaea to  pay the other $25,000.  Can the defendant aasign
Ita bad-faith-rafuaal-to-pay claim to plaintiff in aatiafac-
 tion of the Judfaent against it?  Moat eourta have aaid yea.
     Brown  v. State Fara Mutual Autoaoblle Insurance Aaaocia-
 tlon. aupra. illuatratea ehia aituation.  There., an inaured
waa aued for $40.000.  It had an  automobile liability
 policy for  $20,000.  After diacovery, the plaintiff offered
 to aettle  for $20,000.  The offer waa refuaed.  Judgaent
 waa entered for $40,000.  The inaurer then paid $20,000.  .
The inaured'a only aaaeta were $5,500 and a potential dais
 against the insurer for bad faith refusal to aetcle.  Those
 aaaeta were aaaigned eo plaintiff, who then sued the inaurer.
The Illinois appellate court allowed the assignment stating:
 "We find no valid reason in public policy why the cause of
 action should not be assignable.*  272 V.I. 2d at 264; accord.
 Murphy v.  Allstate Insurance Co.. 17 Cal. 3d 937. 132 Cal.
 Rptr. 424.  533 P.2d 584. 587 (1976)  ("The insured aay aaaign
 hia eauae  of action for breach of the duty to aettle without

                            - 45 -

conaenc of the  inaurance carrier, even when the policy provi-

iiona provide co  che contrary.").

     Bad faith  refuaal to pay claims aay well ariae in CERCLA

caaea. particularly aa the requireaenta of CERCLA become

more clearly establiahed.  In aituationa where the claim of

the United Statea exceeds policy liaits and the inaured haa

little if any aaaeta of ita own, it aay be adviaable for the

United Statea to conaider aaking a leea-ehan-poliey-lialta

aettlement offer.  If the offer ia refused and a judgment

beyojid policy liaita ia obtained, the United Statea can then

conaider taking an assignment of the insured'a claim against

the insurer for wrongful refusal to settle.

     Finally, assignaenta in the excess liability context.

i.e.. where a judgaent exceeds policy liaits.  are apparently

quite common and allow the judgment creditor to seek full

reimbursement from the insurer.  One treatiae  deacribea the

aicuation as follows:

     A common practice by which the injured third-
     party claiaant achieves full companaation. and
     the insured is absolved from tue liability
     judgment,  is an aaaignaent by the insured
     of his rights againat the Insurer to the
     insured*s judgaent-creditor.  In exchange
     for the aasignaent. the claiaant signs a
     covenant not to execute above the policy
     liaits against the insured.  The asaignaent
     thus becomes a convenient way for the insured
     to fully satisfy the injured party.  In
     situations where the insured is basically
     'judgment  proof,' it aay well net the injured
     party far more than execution of the judgaent
     against the insured.  One disadvantage of
     this technique for che claimant is that the
     riaka of collectibility and litigation
     againat the inaurer fall upon the claiaant.

1  Long, Law of  Liability Insurance 15*46.

                             -  47  -

 Allow*  a  party who  has  obtained Judgatnc  under  tht  policy
 co proceed against  the  insurer.   It provides:
     Any  person or  organization or the legal
     representative thereof who has secured
     such Judgment  or written  agreement shall
     thereafter be  entitled to recover under
     this policy  to the extent of the insurance
     afforded by  this policy.
     Where such provisions are present, they are probably
 required  by statute.
                                        - 337
     0.   Common Law Denial of  Direct Action
          Common law generally  denies claims by injured
persons against a tortfeasor's insurer.  Appieman, f 4861.
Liability and indemnity policies  (the first covers the
 insured's  liability, the second primarily serves to cover the
 insurer's  losses) typically contain clauses barring joinder
of the  insurer in actions against the insured, which are
upheld  in the absence of a statute to the contrary.  Applenan,
f 4861. .  Similarly, most jurisdictions do not allow the insurer
to intervene in an  action against the insured.  Appleman.
I 4861.   See, e.g., United States v. northeastern Pharmaceu-
tical and  Chemical  Co.. Inc..  Civ. Ho. 80-5066-CIV-S-4
 (V.D. Mo..  May 3. 1983) (included in the Compendium) (denying
 insurer intervention in a RCRA f 7003 and CZRCLA II 106 and
 107 action).
337  The discussion under  this heading and the next is
     derived largely from  two sources:  Appleman, Insurance
Law and Practice  (1981, Supplemented 1984), SI 4861. ct. seq
C"Appleman"; (Appendix L), sad American Insurance Asso-
ciation, Statutes Affecting Liaoilltr insurance U98i J
(A!A Survey) (A summary of direct action rules in the 50
states, Guam and  Puerto lico is presented at Appendix M.).

                             • 48 -

      There is on* notable exception to the  common law rule
 regarding direct action.   Some Jurisdictions  allow direct
 actions,  in the absence of a direct action  statuc.e, where
 the policy is required.  Alabama recognizes such  an exception,
 while Arizona does not.  In  Illinois,  it is recognized in
 actions on employer's  liability  and  compensation  policies.
 Appleman,  S 4862.  This exception  is sometimes qualified  for
 specific  forms  of  insurance.   See Appendix M.  Since states
 operating  approved RCRA regulatory programs will  probably
 require insurance  under state  lav, this exception'may be
      E.  State  Direct Action Statutes
         As of  1981. twenty-seven states, Puerto Rico and
Guaa had adopted sone fora of direct action statute.  See
Appendix M.  These statutes may allow joinder of insurers.
 independent prejudgment litigation against insurers, post-
judgment suits  to recover directly from insurers,  or some
combination of  these options.  These statutes typically
provide that liability policies muse contain provisions
allowing such suits,  or provide that such «uits may be
brought notwithstanding a policy  clause to the contrary.
     Frequently, authorized direct action claims are limited
by category or  are otherwise conditioned.  For example.
34/  The first direct action suit brought by the United States
     to recover from the-insurer of a RCRA/CERCLA judgment
debtor is United States v. Continental Insurance Co.. Civ.
No. 8S-3069-CV-5-* O.D. Missouri, Jiieo narcn 1983;.  The
complaint is presented as Appendix H.

                             -  49  -

 sixteen  states  allow post-Judgment  «utc»  against  insurers
 only  if  the judgment has  noc been bt B«C  by  execution upon
 the insured.  Only Louisiana,  Cuaa  and Puerto Rico allow
 broad  prejudgment direct  actions.   See Appendix M, and the
 AIA Survey, which contains details  of individual state
     Due to the extraordinary  variety of state statutes
 on this subject, the United  States nay be served best
 by arguing  the necessity of  a  uniform federal common law rule
 for direct action in RCRA and  CZRCLA cases, as has been done
 successfully for the similarly diverse issues of joint and
 several liability and contribution.  See United States v.
A t F Material*. 578 F. Supp.  1249, 1255-56  (S.O.  111. 19*4);
United States v. Chem-Dme.  et al.. 572 T. Supp.  802, 807
 (S.D. Ohio 1983; and Wehner  v. Syntex Agribusiness. Inc..
 Civ. No. 83-642 (2)  (E.D. Mo.  April 1. 1985) IX Chen. & Rad.
Waste Lit. Rptr. 879.
     F.  Other Procedures for  Litigation Between
         Insurers and the United States
         1.  Intervention by the  insurer in aa action by
             the United States against the insured.
             As indicated at p. 47. supra, the courts generally
 have not allowed insurers to intervene in suits against the
 insured.  This has proven true in all cases  in which the
 question has been tested under RCRA and CERCLA.  On the other
 hand,  if all parties to the  litigation support permissive
 intervention in an action by the  United States under an

                            - 50 -

environmental statute, ther* is no obvious reason why
intervention must be denied.
         2.  Declaratory judgment cults between che
             insurer and the insured.
             Private and governmental  civil  suits urder RCKA
and CCRCLA have spawned several suits  for declaratory relief
between insurers and purportedly insured waste site owners
and operators, transporters and generators.   A private
attorney reportedly stated in April.  1985 that Aetna Casualty
Ins. Co. (one of the major carriers in the field) was then
receiving an average of two hazardous  waste related claims
per day.  In several state court cases involving coverage
disputes between CERCLA responsible parties and Their insurers.
efforts have been made to join Che United Staes 'as a third
party defendant on the grounds tht it  is an interested party.
Hone of these efforts -has succeeded.
     Sovereign iamunity bars any suit  against the United States
in the absence of a specific congressional waiver.  There is'
no statute providing chat the United States  can be named as
a defendant in one of these eases.  The type of relief sought
does not seen to affect the applicability of the iamunity
one way or the other; and the cases generally hold that the
doctrine is absolute.  Thus, the state courts do not have
Jurisdiction over the United States in these insurance
suits.  Block v. North Dakota. 103 S.Ct. 1811. 1816  (1983);
United States v. Sherwood. 312 U.S. 584. 586 (

                                  "              9834,5

      Success by  che  insured  in  coverage  licigacion probably
 precludes the insurer  from contesting some or all questions
 of coverage in a subsequent  direct action by the United
 States.   The doctrine  of collateral estoppel, or issue pre-
 clusion,  holds that  where an issue of fact or lav was actually
 litigated and determined by a valid and final Judgment, that
 determination is conclusive in a subsequent action involving
 the sane  parties or  at least the same party as is sought to
 be held,  whether it  is on the sane or on a different  claim.
 Wright. Law  of Federal Courts S 100A (4th ed. 1983)  [hereinafter
 Wright] ,  and  cases cited.
     If the  United States is not a party to Che  litigation-,
 could  it  be  bound?  Ordinarily, persons  who were not  parties
 to the first  action will not be estopped.  18 C. Wright,  A.
Miller &  E. Cooper, Federal Practice,  Procedure, and  Juris-
 diction SS 4448-4449 (1981) and [hereinafter Wright and Miller]
 and cases cited.   Where a defendant is not subject to the
 jurisdiction of a court,  it can not be a party and thus can
 not be bound by collateral estoppel.   Zenith Radio Corp.  v.
 Hazeltine Research. Inc.. 395 U.S. 100.  110 (1969); Oil &
Os> V«ntag«ST Firat T95ft Fund. Ltd, v.  Rung.  250  F. Sttpp.
 744, 753-54  (S.O.N.Y. 1966);  and T8 Wright & Killer f 4449.
Thus.,  if  a. court could not exercise jurisdiction over the
 United States, the United States could not be considered  a
 party and could not be estopped by any decision  by the- court.

                            •52-               9834,5
     However, nonparties Co suits can sometimes be held to
be collaterally estopped — if the nonparty actively partic-
ipated in the prior case, and was a party in everything but
name; if the nonparty'a interests were specifically repre-
sented in the first action, e.g. a trustee or guardian was
involved in the first suit; if the nonparty had some actual
duty to either enter the lawsuit or give some notice that it
was not interested in the suit and would not -consider itself
bound by it; or, if there was a sufficient party to the
suit, e.g.. they held successive interests in the property
that was the subject of the suit.  18 Wright & Miller S 4449
and cases cited.
     The first two exceptions do not seen applicable to the
United States.  The latter two exceptions to the nonparty
rule might conceivably apply.  The first of these.latter
exceptions would extend preclusion to those persons that had
an opportunity to participate in the litigation, that did
not do so, that did not inform the actual parties that they
might raise the issue in the future, and thus lead the parties
to believe that they were not interested in the litigation.
This exception is primarily espoused in the works of commen-
tators and la re-ally a form of equitable estoppel.  Sec.
e.g.. 18 Wright & Miller ff 4432 and 4453; and Restatement
(Second) of Judgments } 62 (19ft1)»  tot th* rule* for applying
equitable estoppel against the United States are unique.  It
is by no means clear that the United States can be estopped
under any circumstances.  Some Circuit Courts of Appeal have

                             -  53  -

 stated chat estoppel cannot  lie against  eh*  federal govern-
 ment.  Hicks v. Harris. 606  F.2d 65, 68  (5eh Cir. 1979).
 Other Circuits havt allowed  the United States to be estopped
 under certain liaited circuastances, i.e.. where there has
 been a misrepresentation that rises to the level of "affirmative
 misconduct."  Community Health Services of Crawford County.
 Inc.. v. Califane. 698 F.wd 615, 620-21 (3rd Cir. 1983);
 Mendoza-Hernsndex v. INS. 664 F.2d 635. 639  (7th Cir.  1981).
These decisions allowing estoppel may not be in keeping with
 ehe Suprene Court's latest pronouncement on  the issue.
Schweiker v. Hansen. 450 U.S. 785. 788-91 (1981).  But  even
 if these decisions still are valid, getting  a ease dismissed
because a court has no jurisdiction and later raising the
 same issue in a court of competent jurisdiction does not
 seem to be "affirmative misconduct" — at least where there
 are no representations accompanying the dismissal of the
 first case that the issue will not be raised later.
     Even if this exception could be refuted successfully,
 it may be a better idea simply to moot it.  since the United •
States could do so with a minimum of effort.  All that  would
have to be done is to notify the parties after the United
 States is dismissed that it will not consider itself bound
by any determinations in the case.
     The second potentially  applicable exception to the
 nonparty rule holds that where there is some legal relationship
 between the nonparty and a party, such as where one isva
 predecessor in  interest  to the same claim or property, the

                             -  54  -

 nonparty  can  be  bound  in later suits.  An  insurance  coopany
 would  seen  to have  a basis  for estopping the  United  States
 froa retrying the insurance company's liability under its
 contract  on this basis  only if the United States actually
 has taken an  assignaent of  the assurer's claia against the
 carrier aad has  no  independent rights of action.
     The  preelusive effect on  a nonparty judgaent creditor
of a finding  of  no coverage  in a suit between the insurance
 coapany and its  insured was addressed in Hocken v. Allstate
 Insurance Co.. 147 S.W.24 182  (Mo Ct. App.  1941).  Hocken
filed suit against the  insured for personal injuries suffered
as a result of a car accident  and recovered a judgment for
$2.500.  While Hocken's suit was pending, the insurance
coapany filed suit against the  insured and Hocken seeking a
declaration that the policy was void due to fraudulent
aisrepresentations by the insured in the procureaent of the
policy.  For undisclosed reasons, the insurance company
dismissed Hocken aa a party and juagaent was rendered against
the insured prior Co the entry of a Judgment for $2.500 in
Hocken's  favor in the underlying personal injury suit.
     Hocken Later brought a garnishment proceeding against
the insurance coapany to recover the $2,500 Judgment.
In its defense;  the insurer contended that  the declaratory
judgment  against the insured was not subject to collateral
attack but was binding  on Hocken because she was in privity
with the  insured, having derived her rights against the
insurance coapany solely through the insured.  The trial

                            -55-               9834,5
 revtraed  and  remanded  che case for a new crial on the issue
                                ~fc"                    '
 of  coverage.
     The  crux of  the appellate court's decision was its
 holding that, contrary to the insurance company's assertion,
 the injured party was not a privy to the suit between the
 insurance company and the insured.   It reasoned that Hocken vas
 not privy because she acquired whatever rights she possessed
 under the policy  prior to the institution of the declaratory
 judgment action.  147 S.U.2d at 186.  "After those rights
 cane into existence the insured could not by any act, or by
 the submission eo the rendition of  judgment against him,
 lessen the interest vested in [the  injured party]." Id.
     Hocken's rights were acquired  before the institution
 of  the declaratory judgment action  because under Missouri lav
 the injured party acquires its rights to the insurance coverage
 at  the time of the accident or the  occurrence- of the injury.
 "It is true that  those rights were  originally derived through
 the insured, but by operation of law they are fixed  and
 independent of any control by the insured,  so that as to all act
 and relations subsequent  to the accident,  which gave rise to
 plaintiff'a rights, they  were not in privity." Id. at 188.
 See also Mathison v. Public Work Supply District.  401 S.W.
 2d 424. 431 (Mo.  1966)  ("to make on* "privy to an action he
must have acquired his ineerevr in the subject of "the ace ton
 subsequent to the commencement of the suit or rendition  of
judgment") .

                            - 56 -
     The rights of the United States against an insurer
in an environmental cas*e, under this analysis,  would be
acquired at the time of the accident or occurrence giving
rise to liability.
     Courts in other states are in accord with the logic
and holding in Hocken.  In United Farm Bureau Mutual
Insurance Co. v» Uampler. 406 R.E.2d 1195 (Ind. Ct.  App.
1980), an Injured party sought to execute a judgment against
the insured by proceeding against the insurer.   The  insurance
company asserted that a previous judgment against the  insured
on the issue of coverage was res judicata as to the  injured
party.  The court held that the injured party was not  in
privity with the insurer or the insured and not bound  by the
outcome of the declaratory judgment*  Id. at 1197.  The
court relied on 7 Am.Jur. 2d, Automobile Insurance ff(1963):
             A judgment determining, as b'etween
             an automobile liability insurer and the
             insured or a person claiming to be in-
             sured, a question of coverage in favor  of
             the insurer does not, as a matter  of res
             judicata, preclude the injured person
             from litigating the question of coverage
             in a subsequent action or proceeding in-
             stituted by him against the insurer, since
             the injured person is not in privity with
             any of the parties in the former proceeding.
     In Cladon v> Searle. 412. P.2d 116 (Wash. 1966).
while a suit by an injured party against the. insured WAS
pending, the insurance company commenced..an action against
the insured for a declaratory judgment as to coverage. . The
company did not notify or attempt to join the injured  party,
and a default judgment was entered in favor of the insurer

                             - 57 -

 after ch« insured failed co answer eht suit.  The injured
 party subsequently recovered a defaulc judgaenc againsc che
 injured and filed a garnishment action again*t the insurance
 company.  Judgaent was entered againat the insurer,  which
 appealed.  The court held that "third party claiaants  in an
 actioa of thi« nature are not  bound  by a  declaratory Judgaenc
 in which they were not made  a  party."  Jd at 11 a.
     The insurance company in  Sobina v. Busby.  210 R.E.
 769  (111. App.  Ct.  1963).  sought  to uae a Judgaent froa  a
 suit between  the  insurance coapany and  the insured as a
 defense  in an action  by the  injured parties  against  the  coapany
 to recover on a Judjtaent entered  againat  the insured.  Ci'ting
Hocken.  supra the court observed. "There  la  ample authority
 holding  that  the plaintiffs  in .the underlying .tort action
 are not  in privity with the  insured, that the insurance
 policy is one against  liability and not against loss, that
 the  plaintiffs' rights  accrued at the tiae of the accident
 and ware not  cut off  in a  later decree entered  in proceedings
 to which the  plaintiffs were not parties.* Id. ac 772-73.
     Southern Farm Bureau Casualty Insurance Co. v.
lobineon. 363 S.U.2d 434. 436 (Ark. 1963). addreeaed the
following question:
            Can a default  declaratory Judgaent
            between an insurer and an insured.
            instituted while suit is pending  in
            a foreign  jurisdiction between the
            injured and an injured person, which
            suit the  insurer is defending, destroy
            the rights of  the  injured person who was
            not a party of the'declaratory Judgaent

                             -  58  -

Tho court  oaid  "No," and  explained  that  the  riches of the
injured party arose at  the  time of  the injury  and arc
ontoQoniotie to tho righto  of  both  tho inouror and the insured
^d. at 457; OOP aloo 46 C.J.S. Incuranco 91191 , p. 123 ("The
richto of  tho injured poroon who  oay oaintain  an action
againat inouror arc to  bo dotdrained GO of tho time of the
accident out of which tho cauoo of  action grow ....)" and
Shapiro v.  Republic Indcainitv Co.. 341 P.2d  289 (Cal.
1959).  In Shapiro, the injured partioo recovered a judgment
againot tho Inourod and then brought an oction against the
inouror on a public liability  inouranco policy that covered
tho incurod.  Tho  inouror argued  that ito liability aunt bo
determined according to tho policy  ao it «ao reformed in a
pootaccidont action botwoon tho inouror and  tho inourod.
Tho court hold  that, ao third-party bonoficiarioo of the
inouranco policy,  tho injured  partioo had an interest that
could not bo altered or conditioned by tho independent action
of tho inouror  and tho  inourod in reforming  the policy.  Id.
at 291; accord  Boulter  v. CcoDoreiol Standard  Incuronce Co..
173 F.20 763. 766  (9th  Cir. 1949)(applying California lav).
     Tho Hew Jorooy Suprcoo Court hoc aloo rojoctod  the
argUDont that*  bocauoo  -the  injured  poroon otando  in  the shoos
of tho inourod, a judpoont  in  a ouit botvoon tho  inourod and
the  inouror io  conducive againat tho  injured party.
Dronofiold v. Citizens  Casualty Co.. 74  A.2d 304,  306
(N.J.  1950).  Tho court  in Dranofiold  reasoned that  the

                             - 59 -

 injured peraon haa a cauae of action ehc moment he or ah*
 ia injured and is noc in privicy with th« inaurtd.  Virginia  ~
 likewiaa haa htld chac,  even chough a Judgaent creditor atands
 in the inaured'a  ahoes.  the injured party ia  noc barred by  a
 plea of rea judicata. Storm v.  Nationvide  Inaurance Co.. 97
 S.E.2d 759 (Va. 1957).   "The inaured and  the  Company may
 noc litigate and  have [the injured parcy'a] righea  againac
 ehe Company, which had cheir incepcion AC che eiae  of her
 injury,  determined in an accion  co which  ahe  ia  noc a party."
 97  S.E.2d ac 764.  See alao Bailey  v.  Unieed Scaeea  Fidelity
-and Guaranty Co..  103 S.E.2d 638.  641  (S.C. 1937)  (injured
 party would not be privy,  and therefore noe bound by Judgment
 in  a auic* co which he was  noc a  parcy. where  her righea were
 acquired ae tiae  of Injury and prior Co ehe rendicion of  ehe.
      The coomencacora agree with ehia line  of caaea.  Couch
 acacea,  "A Judgaenc deceraing aa becween  an aucoaobile  liabilit;
 insurer and che insured  or a person claiaing  co  be  inaured |
 a queacion of coverage in favor  of che insurer does noc. aa
 a aacter of tea judieaea.  preclude ehe injured person froa
 licigacing ehe queaeion  of coverage in a  subsequent aceion
 or  proceeding inscicuced by hi*  againsc  ehe insurer,  since
 che injured person is aoc in privicy wich any of che partiea
 in  ehe foner proceeding."  Couch, Cyclopedia of Inaurance
 law. $45:945 (2nd ed.).   Likewise. Appleaan noces ehac  "an
 injured person can neither be bound by a judgaenc in favor
 of  che insured in a auic broughe by anocher claimant, nor by

                             - 60 -

 a judgment in favor of eh* insurer,  in an action brought
 upon the policy by the insured."  Appleaan,  111521;  see also
 69 ALR2d 858, 859.
      One Ohio case that is inconsistent with all of  these
 other cases.   In Conoid v. Stern.  35 N.E.Zd  133  (Ohio  1941),
 an injured party recovered a  Judgment  against  Che insured
 for personal  injuries  sustained  in an  automobile collision.
 The judgment  creditor  then brought an  action against the
 insurer  to recover the amount of the Judgment.   The  insured
 company  averred  as a defense  a judgment in an  action between
 the  in»urer and  a  different party  also injured in  the  same
 collision  in which the court  held  the  policy null  and  void
 due  eo the  insured's failure  to cooperate.   The  court  held
 that a judgment  in  favor of the Insurer in aa action by
 an  injured party on che question of noncooperation was res
 judieat'a in favor of the insurer in a later  action by another
 person injured in  Che  same accident.  Id.  at 140-41.   The
 court reaaoned that the right of the insured against the
 insurer was fully litigated la the suit by the first injured
party and the declaratory Judgment against the insured is a
bar against another injured party whose right, if any,  against
 the insurance company  is derived from and  dependent upon a
valid right of the insured against the insurance company.
     The decision  in Conoid nowhere mentions the issue of
 privity or when the rights of the injured  party arise,  but
 focuses solely on  the  rights of a judgment creditor being
derivative of the rights of the insured.   Also, the case

                             -  61  •

involves  an tecion by an  injured  party where judgment has
been entered  in  favor of  the incurtr  in  a  similar aceion by
another person injured  in eh*  same accident.  Most importantly,
although  eht aor« recent case  of  Ctltna  Mutual Insurance Co.
v. Sadler. 217 N.E.2d 255 (Ohio Ce. App. 1966), suggests
that. the  holding in Conoid is  scill the  law in Ohio, Conoid
has not been  followed by the courts of any other state.
Accordingly, although Conoid should caution the United States
against remaining a nonparty to an action in Ohio between an
insured another party injured  by  the  insured, it should  not
affect the decisions of the United States in other states.
     Yet  another exception to  the estoppel rule may be
applicable to our cases.  When collateral estoppel would
violate general notions of public policy, or would work an
injustice, it is not to be applied.   Specifically, where the
government is involved  in a case  designed to protect the
public, it should not be estopped by  previous cases to which*
it was not a  party.  Porter &  Dietsch. Inc.. v. FTC. 605
F.2d 294. 299-300 (7th  Cir. 1979); Defenders of Wildlife v.  .
Andnis. 77 FRO 448. 454 (D.D.C. 1978); Restatement (Second)
of Judgments  I 28 (1981); and  18  Wright  & Miller I 4426.
Hazardous waste  eases appear particularly apposite for applying
this principle.  The United States is attempting to fund the
containment and  removal of very serious  threats to health
and  the environment.  It  should not be hampered in these
efforts by estoppel  arising  out of litigation.  Moreover.
the  line  of cases discussed  in the context of  whether the

                            - 62 -

United States could be considered as having a relationship
with sense party, and thus be bound by his failure in litiga-
tion, is buttressed by the unique public responsibilities of
the government.
     Finally, although it is doubtful that the United States
will want eo intervene in declaratory Judgment actions between
liable parcies and their insurers,  it is not at all clear
that che court would allow such intervention in the absence
of a preexisting judgment and an independent direct action
claim.  See Independent Petrochemical Corp.. v. Aetna Casualty
and Surety Co..  Civ. No. 83-3347.  (S.D. Ohio. March 8. 1985)
22 ERC 1523. IX Chca. and Rad. Waste Lit. Rptr. 911  (included
in the Compendium), denying Rule 24(a)(2) intervention to
individuals asserting unresolved personal injury claims against
the bankrupt IPC; but cf. Re-Solve  v. Canadian Universal
Ins. Co.. (Mass. Super Cc.. CA No.  14767. May 14. 1984),
discussed at IX Chem. 6 Rad. Waste  Lit. *Rptr. 822 (allowing
the Commonwealth of Massachusetts to intervene In an action
between a polluter and its insurer).