Daily Development for Friday,  April 11, 2003
by:  Patrick A. Randolph, Jr.
Elmer E. Pierson Professor of Law
UMKC School of Law

Of Counsel: Blackwell  Sanders Peper Martin
Kansas City, Missouri

INSURANCE; ENVIRONMENTAL LIABILITY: Under the "continuous trigger" theory
of environmental insurance coverage, an insured who could have but didn't
obtain affordable environmental insurance will bear a proportionate share
of losses from environmental damage as if it had been an insurance company
with a policy in force during the relevant times.

Champion Dying & Finishing Co., Inc. v. Centennial Insurance Company, 355
N.J. Super. 262, 810 A.2d 68 (App. Div. 2002).

In 1994, in Owens-Illinois, Inv. v. United Ins. Co., 138 N.J. 437 (1994)
the New Jersey Supreme Court "adopted a 'continuous- trigger' theory of
coverage under occurrence-based policies of comprehensive general liability
(CGL) insurance for the risks of progressive, indivisible bodily injury and
property damage arising from long-term exposure to asbestos and,
presumptively, other toxic and environmental agents. ... Under that theory,
each policy of insurance in effect from the date of first exposure to an
injury-producing substance to the date of manifestation of a progressive
injury caused by the substance was held to provide coverage for that injury."

When it adopted the "continuous trigger," the New Jersey court specifically
rejected "triggers of coverage based solely upon the date of first exposure
to the harmful product . . . or the date of manifestation of injury. . . ."

This case  raises issues "relating to the trigger of coverage and the
allocation of the duty to provide indemnification for progressive
environmental damage that commenced during a period of time in which
coverage was offered customarily on an occurrence basis and continued into
a period in which coverage was offered, if at all, on a claims-made basis."

At the beginning of 1973, the insurance industry adopted "what has come to
be known as a clarifying 'sudden and accidental' or 'standard' pollution
exclusion from coverage by CGL policies."  Unfortunately for the industry,
the intended restrictive effect was substantially nullified by New Jersey
Supreme Court decisions holding "that the insurance industry's sudden and
accidental pollution exclusion clause precluded coverage only for an
insured's intentional discharge of known pollutants."

In 1986, the industry responded by adopting an "absolute" pollution
exclusion that did not contain the "sudden and accidental" language.  In
large measure, "the absolute pollution exclusion has been judicially
enforced, thereby excluding all but a very narrow category of pollution
risks from coverage under CGL policies of insurance since 1986."  Further,
the industry developed other forms of non-standardized environmental
impairment coverage, almost always written on a "claims-made" basis, not on
the "occurrence basis construed by the earliest Supreme Court
decision.  This simplified the question as to which carrier would cover the
risk because "only those carriers providing coverage when the risk
manifests can be held liable."  Nonetheless, according to the Court, the
situation is "infinitely more complicated when the risk is covered by a
succession of policies written first on an occurrence and, in later years,
on a claims-made basis or, as in the case before [the Court], when the
insured's environmental risks were covered by policies of CGL insurance
until 1986, and were not covered by any form of insurance thereafter."

Here, the company sought reimbursement for investigation and remediation of
pollution liability arising from leaking fuel oil storage tanks that were
found in November of 1997.  The leakage was estimated to have begun in
January of 1980.  One insurance company had provided primary and excess CGL
coverage for 1980, 1981, and 1982.  From 1983 through 1986, primary and
excess coverage was provided by a second company.  All of those policies
were written on an occurrence basis and contained the "sudden and
accidental" pollution exclusion.  As noted, such an exclusion is
inapplicable "if the environmental damage giving rise to a claim was
neither expected nor intended by the insured.  After 1986, the second
insurance company and others insured the company with policies containing
an absolute pollution exclusion.  The insured claimed that it was unaware
of the absolute pollution exclusion and therefore did not seek alternate
coverage for those years.  In 1996, when it sought to obtain insurance for
air pollution, it was informed that it could not obtain such insurance nor
could it obtain insurance to cover pre-existing problems with underground
storage tanks.

The lower court held that the insured neither expected nor intended the
fuel oil contamination and thus coverage was not precluded under the
earlier policies.  It further held that the two carriers that insured from
1980 through 1986 were both liable to respond to the loss under the
"continuous trigger" doctrine.   But it interpreted the Owens-Illinois
decision to mean that the insurer's liability should be prorated, and that
the insured would bear the responsibility for that proportion of the risk
during those years that the pollution persisted and the insured could have,
but did not, obtain insurance that would have covered the risk at
issue.  It concluded that insurance was available after 1986, and  that the
insured could have afforded to pay for it, if it had chosen to do
so.   Consequently, it allocated 71% of the liability for the loss to the
insured, and the rest was split between the two insurers.

The insured appealed from that decision, claiming that it should not have
been allocated any part of the risk just because it did not buy later
insurance coverage. The Appellate Division rejected this aspect of the
appeal.   According to the Court, "[a] signal purpose of  the [first
Supreme Court] decision was to develop an allocation mechanism applicable
to the multitude of insurance disputes then pending, as well as to future
disputes."

The insured argued that "an industrial claimant should be required to
participate in the allocation of an environmental loss only if it
subjectively determined to 'go bare.'"   The Appellate Division rejected
that argument and agreed with the lower court that the insured's subjective
knowledge of the availability of Environmental Impairmen insurance (i.e.,
whether the insured subjectively chose to "go bare") [was] not relevant to
the allocation issue.
"An inquiry into the intent and motivations of an insured in failing to
obtain coverage constitutes an unnecessary and irrelevant diversion from
the essential question of the existence or not of available and affordable
coverage.  If coverage is unavailable, no 'decision' by the insured can be
meaningfully made; if coverage is found to exist, a focus on subjective
intent could encourage lack of diligence in obtaining such insurance on the
part of cash-strapped businesses

The insured also claimed that the two insurance companies had failed to
prove the availability and affordability of the environmental insurance
covering leaks from twenty year old underground storage tanks.  Lastly, it
argued that the lower court ignored the fact that the hypothetical
alternative pollution coverage was only available on a claims-made basis.