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DIRECTIVE NUMBER: 9477.00-6
TITLE: Guidance for Reviewing Exclusions for Pre-
Existing Conditions in RCRA TSDF Insurance
Policies
APPROVAL DATE: 29 December 1987
EFFECTIVE DATE: 29 December 1987
ORIGINATING OFFICE: Office of Solid Waste
Q FINAL
0 DRAFT
[ J A— Pending 0MB approval
STATUS; [ J B— Pending AA-OSWER approval
] C— For review &/or co ent
[ J D— In development or circulating
REFERENCE (other documinti):
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DIRECTIVE DIRECTIVE £
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his Request Meets OSWZR
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System Format
Signature of Lead Office Directives Coordinator
J JL4J L& A 7PJ WL
Standards
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Date
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Name and Title of Approving Official
Marci i Williams, Director, 05W
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EP
A Form 1315—17
OSWER
VE DIRECTIVE
OSWER
DIRECTIVE
8. Document to be distributed to States by Headquarters? Yes flNo
OSWER
DIRECTIVE
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OSWER DIRECTIVE $ 9477.00-6
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
OFFICE OF
SOLID WASTE AND EMERGENCY RESPONSE
MEMORANDUM
SUBJECT: Guidance for Reviewing Exclusions for Pre-Existing Conditions-in _ $
>. JJJU^"
FROM: Marcia Williams, Director, Office of Solid Waste -
TO: Regional Waste Management Division Directors, Regions I-X
SUMMARY
Under 40 CFR Parts 264 and 265, Subpart H, owners and operators of RCRA
treatment, storage and disposal facilities (TSDFs) may use insurance policies
to meet RCRA requirements for financial assurance for third-party property and
bodily injury damages. Insurance policy language generally begins with broad
coverage for damages, which is modified through the use of inserted exclusions
to limit the scope of the policy coverage. Because insurance is intended to
cover only possible future events, policies typically have exclusions limiting
the insurer's coverage of releases which occurred prior to the start of the
policy. Such "pre-existing conditions" exclusions are acceptable provided
that they do not so limit a policy that it no longer provides the coverage
required by Subpart H. While the Agency recognizes that it is inappropriate
to expect insurance to be provided to cover damage that is certain to occur or
that has already occurred, it does expect policies to cover future conditions
whose incidence is uncertain. This guidance describes acceptable pre-existing
conditions exclusions based on the Agency's interpretation of the Subtitle C
regulations .
BACKGROUND
Regulatory
On April 16, 1982 (47 fjl 16554), EPA promulgated regulations to require
owners and operators of TSDFs to provide financial assurance for third-party
compensation for bodily injury and property damage caused by accidental
occurrences arising from facility operations. Such damage should be "neither
expected nor intended" by the owner or operator of the facility (40 CFR
264.141(g) and 265.141(g)).
While the regulation defines accidental occurrence and other key terms,
it also provides that these definitions "are not intended to limit their
meanings in a way that conflicts with general insurance industry usage," but
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OSWER POLICY DIRECTIVE #9477.00-6
2
rather are intended to “be consistent with their common meanings within the
insurance industry.” Also, the definitions of bodily injury and property
damage would “not include those liabilities which, consistent with standard
industry practices, are excluded from coverage” (40 CFR 264.141 (g) and
265.141(g)).
Specific guidance on what constitutes industry practices was not deemed
necessary in 1982. Of late, however, it has become difficult to define
standard industry practice regarding exclusions. In response to court
decisions that interpreted policy language in a manner that expanded the
coverage intended by insurers, some insurers have tried to clarify the
coverage by modifying their pre-existing conditions exclusions. A variety of
such modified exclusions have been developed, some of which are inconsistent
with the accidental occurrence definition in §2 64 .14l(g). This guidance is
intended to assist in determining which exclusions are permissible under
current regulations.
GUIDANCE
Acceptable Exclusions
The range of pre-existing conditions exclusions can be divided into broad
and narrow exclusions. Broad exclusions are usually part of the basic policy
language used by an insurer, while narrow exclusions are added to specific
policies as endorsements to limit the scope of the basic policy for a
particular insured. The Agency reviewed a variety of both types of exclusions
and identified acceptable language for both. This guidance describes and
provides examples of that language.
Broad Exclusions
Broad pre-existing conditions exclusions are “generic” exclusions
applicable to all facilities covered by a particular type of policy. Such
exclusions generally apply to a specific type of occurrence (e.g., a pollution
incident known or expected by the insured or a release occurring prior to the
policy’s effective date) or a particular type of damage (e.g., contamination
of ground water).
Permissible broad exclusions may allow the insurer to limit its liability
for current and certain damages present at the start of the policy. Policies
that make clear that pre-existing conditions (releases likely to result in
damages) must be known or reasonably foreseeable to the owner/operator would
be acceptable.
The Agency has determined that the following provide examples of
acceptable broad pre-existing conditions exclusions:
“Insurance does not apply where the insured knew or could
have reasonably foreseen that claims would result.”
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OSWER POLICY DIRECTIVE 119477.00—6
3
“Insurance will pay on behalf of the insured ... provided
always that the claim is made during the policy period and
that the insured as of the ‘First Coverage Date’ did not
know or might not have reasonably foreseen that such a claim
would result.”
“The policy will pay on behalf of the insured for damages
caused by an occurrence ...,“ with occurrence defined as “a
happening resulting in bodily injury or property damage
neither expected nor intended from the standpoint of the insured.”
“The insurance does not apply to damages arising from any
environmental impairment that was known or should have been
known to the insured prior to the original policy inception
date.
“This insurance does not apply to ‘bodily injury,’ ‘property
damage’ or ‘environmental damage’ expected or intended from the
standpoint of the insured.”
“Insurance does not apply to damages from a release that the
insured knew or could reasonably have known had occurred.”
The language in these examples is specific enough to provide guidance to
insurers and is consistent with the intent of the definition of accidental
occurrence in its focus on whether damage, rather than a release, was expected
or intended, or on whether the impairment was known or should have been known.
These exclusions are also consistent with industry practice since they are now
used by some insurers.
The following sample language is representative of unacceptable broad
exclusions:
“This insurance does not apply to releases either expected
or intended by the insured.”
“This insurance does not apply to groundwater contamination.”
The first example, by excluding a release “expected” by the insured, could
severely limit coverage because any releases from hazardous waste facilities
could be deemed “expected” by the very nature of the materials involved. The
second example specifically excludes, in a blanket fashion, a particular type
of damage and therefore would be inconsistent with Subtitle C regulations.
Narrow Exclusions
Narrow exclusions are coverage exclusions for damages related to a
specific problem at a specific facility. Such exclusions may be written for a
particular area of contamination (e.g., contamination from waste unit X) or
for a particular type of damage at a specific facility (e.g., groundwater
contamination at facility A). Narrow exclusions are generally added, in an
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OSWER POLICY DIRECTIVE #9477.00-6
4
accompanying endorsement, to the basic policy’s broad exclusions and are
intended to tailor the policy to a specific facility.
Narrow exclusions should be specific enough to prevent excessive
limitations of policy coverage. A narrow exclusion should be described so
that there appears to be a basis for the exclusion (i.e., damage must be
expected from a known, actual release). To ensure that such a basis exists,
narrow exclusions should refer to a facility assessment 1 that identifies the
threatening contamination. An acceptable exclusion should include a
description of the media, type of contamination, and specific location
involved. Thus, such exclusions should specifically indicate a current and
reasonable belief that damage has occurred or is likely to occur.
Given this need for specificity, the Agency has identified the following
sample language as representative of acceptable narrow exclusions:
“All claims and costs resulting from
a) groundwater contamination as identified in the
facility assessment dated XX/XX/87
[ or)
b) groundwater contamination by light and gross
hydrocarbons as identified in the facility assessment
dated XX/XX/87
[ or]
c) contamination arising from a release at unit A and identified
in the facility assessment dated XX/XX/87
at facility XYZ in Smalitown, Any State, are not covered
by this policy.”
These types of exclusions specifically and clearly identify particular known
existing problems constituting current and certain -- i.e., known or expected
- - damages that an insurer should not be required to cover.
Less specific language, or language excluding certain damages from
coverage due to facility conditions causing insurers to suspect, rather than
know, there has been or will be a release, are unacceptable. There should be
clear evidence that a pre-existing condition in fact exists that has a
reasonable likelihood of resulting in damage. The Agency reviewed, and found
1 A facility assessment is similar a CERCLA preliminary assessment or
the preliminary review portion of the RCRA facility assessment. It is
generally based on a search of the files of the facility and regulating
agencies, and a windshield site review. The format for assessments will vary,
and we are not suggesting that any specific format is required. It is also
not necessary to review these assessments.
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OSWER POLICY DIRECTIVE #9477.00—6
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unacceptable, the following language:
“All claims and costs resulting from
a) groundwater contamination
[ or]
b) groundwater contamination by light and gross
hydrocarbons
at facility XYZ in Smalltown, Any State, are not covered
by this policy.”
These exclusions are insufficiently narrow to justify an exclusion of a pre-
existing condition. They could be interpreted to exclude all groundwater
damage, even that initially occurring during the policy period. The coverage
provided would thus be too limited to meet the § 264.l4l(g) and 265.141(g)
definition of accidental occurrence.
I mplementation
Current regulations (40 CFR 264.147 and 265.147) require the owner or
operator of a RCRA TSDF to submit a signed duplicate of the Hazardous Waste
Liability Endorsement or Certificate of Liability Insurance to the appropriate
EPA Regional Administrator(s). These certificates and endorsements state only
that coverage is provided in a particular amount and do not reveal specific
policy terms or endorsements. Therefore, to implement this guidance, EPA or
the authorized State should review the pre-existing conditions exclusions of
the policies being used to demonstrate financial assurance. Such a review
should routinely include the following steps:
1) Endorsements relating to pollution coverage should be
routinely requested. Any endorsements adding narrow
exclusions for pre-existing conditions should be
reviewed to determine if the exclusions are
acceptable based on the criteria described above.
2) If the narrow exclusions are determined to be
unacceptable, the owner/operator should be notified,
so that it can seek an acceptable policy (enforcement
action may also be determined to be appropriate).
3) If reason for broader concern arises, the Regional
Administrator or State may request signed copies of
liability policies from owners/operators (this
authority is granted under § 264.l47(a)(1)(i) and
(b)(l)(i) and 265.l47(a)(l)(i) and (b)(l)(i)).
4) Periodically, a review of selected basic policy
language should be undertaken to determine if its
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OSWER POLICY DIRECTIVE #9477.00—6
6
broad pre-existing conditions exclusion is acceptable
based on the criteria described above.
Apart from the acceptability of any narrow exclusions, their presence in
a policy may signal a need for corrective action at the facility. In some
cases, the need for corrective action will already have been determined by EPA
because exclusions are often written based on records from the RCRA permitting
and interim status programs. However, if a review of narrow exclusions
indicates a potential need for corrective action, the following is applicable:
5) Appropriate EPA Regional or State staff should be
notified if a narrow pre-existing conditions
exclusion points to a potential need for corrective
action. 2
For further assistance in implementing this guidance, please contact
Margaret Schneider, Chief, Closure and Financial Responsibility Section,
Office of Solid Waste (202 or FTS-382-4640).
cc: Regional Counsels
2 The presence of a narrow exclusion is merely one factor to consider in
determining the need for corrective action decisions. Consistent with
established priorities, these releases should be addressed using any or all
corrective action authorities.
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