\ •
5 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
^ £ • N. .C.,
NOV 21 1985
ornrt or I«*OICIMIVT
ANO COMPLIANCI
MEMORANDUM
SUBJECT: Procedural Guidance on Treatment of Insurers Under
CERCLA
FROM: Courtney M. Price
Assistant Administrator for Enforcement
and Compliance Monitoring
TO: Regional Administrators. I-X
Regional Counsels, I-X
INTRODUCTION
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.
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INSURANCE INFORMATION REQUESTS - IDENTIFICATION OF POTENTIAL
DEFENDANTS
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.
REFERRALS TO THE DEPARTMENT OF JUSTICE
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
package.
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.
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THE INSURANCE POLICY - DETERMINING THE SCOPE OF THE COVERAGE
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.
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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
party.
TYPES OF INSURANCE POLICIES
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.
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OUTLIEE OF INSURANCE ISSUES
TABLE OF CONTENTS
INTRODUCTION Page
I. Typ«i of Policies Issued 3
General Introduction • 3
A: The Coaprehens Ive General Liability (CCL) 5
Policy
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
Policies
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- 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
Requirements
B. CERCLA Financial Reeponaibiliey 29
Requireaents
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 '
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INTRODUCTION
Sine* the passage of cht Comprehensive Environment*!
I/
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.
i/
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.
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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
y
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
implemented.
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)
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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,
I/
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
y
bodily injury or property damage covered under the policy.
v
„, 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
exclusion.
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).
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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.
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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
2/
and key typical clauses, see Appendix A.
A. The Comprehensive 6
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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
I2/
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).
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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).
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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 (
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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.
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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-
tion.
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
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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"
clauses.
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).
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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
1985).
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)
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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
li/
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).
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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".
theory.
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).
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- 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
H/
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).
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- 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);
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- 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
187
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 . . .
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- 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
4*
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
"Appleman").
Problems vich noeice, etc., may pr'esene considerable
diffieuleies during attempts by ehe Unieed Seaces co recover
for CERCLA coses against insurance companies.
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• 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
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- 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
t
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).
e
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
i
'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
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- 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
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- 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
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- 24 -
factor, cart must be taken to avoid counterproductive
pleading.
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
T
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
unintended.
«** '
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
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- 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
v
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).
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- 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
£0/
self-insurer. RCRA also requires owners and operators
of facilities with interia status to certify that the
facilities are in compliance with financial responsibility
2i/
requirements.
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).
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- 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.
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- 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
237
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
24/
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.
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- 29 -
9834,5
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
2t
the owner or operator of a hazardous waste facility. . .".
B. CERCLA FINANCIAL RESPONSIBILITY REQUIREMENTS
277
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
scheme.
27/ 42 U.S.C. S 132Up).
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- 30 - 9834*5
287
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).
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- 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
claia."
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.
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- 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
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- 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
317
afcer chac dace.
[FOOTNOTE CONTINUED FROM PREVIOUS PACE]
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.
1815.
»
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.
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- 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.
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- 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
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- 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 -
9834,5
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 -
9834.5
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
I!/
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
significant.
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
statutes.
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
4
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
i
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 -
9834.5
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
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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
proceedings?
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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
N
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
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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.
judgaenc).
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
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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
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- 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
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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).
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