On March 5, 2001, the Pennsylvania Supreme Court will hear arguments in an environmental insurance case that will have important implications on the availability of liability insurance for environmental contamination. The Court will be asked to decide if the words "sudden and accidental" as used in standard Comprehensive General Liability policies from 1970-85 should be interpreted to cover or exclude gradual, accidental pollution. As can be expected, the stakes are high and both policyholders and the insurance industry are vigorously mustering support for their positions.

In 1970, the Mutual Insurance Rating Board ("MIRB") and Insurance Rating Board ("IRB") submitted identical provisions regarding pollution coverage to the Pennsylvania Department of Insurance and other state insurance departments throughout the country. This provision was to be used in the standard form comprehensive general liability insurance policy ("CGL Policy"). The standard form policy was in wide use throughout the industry and is the form of general liability insurance held by many commercial and industrial enterprises. Prior to 1970, it was generally accepted that the CGL Policy covered liability arising out of gradual pollution, although pollution was not specifically addressed in the policy. New Castle County v. Hartford Accident and Indemnity Co., 933 F.2d 1162, 1192, cert. denied, 507 US 1030. The 1970 submission by the MIRB and IRB to the state insurance departments consisted of an express exclusion for damages resulting from the discharge of pollutants, but with an exception for sudden and accidental discharges. The exclusion provides that coverage does not apply to:

It was accompanied by a brief explanation that the language of the proposed change was merely a clarification of existing coverage because, under the terms of the CGL Policy, pollution coverage was provided only when the damages could be said to be unexpected or unintended.

The MIRB and IRB also stated in their request for approval to the insurance regulators that:

The explanation did not mention that the qualifying accident must also be sudden.

A separate exclusion for oil spills was submitted to the Pennsylvania Insurance Department at the same time as the pollution exclusion and the MIRB and IRB’s explanation of its effect was somewhat different:

No premium reduction was proffered by the industry as part of the request for approval.

The Pennsylvania Department of Insurance approved the use of the exclusion and its exception, which became effective in November, 1970. It was inserted as an exclusion in new and renewal policies thereafter, and it remained unchanged in the standardized form until 1985, when it was replaced in the standard form with language excluding coverage for even accidental damages caused by pollution.

The exclusion garnered little attention at first, and the few cases which addressed it did so without analyzing regulatory history. Moreover, the insurance industry continued to pay claims for unintended and unexpected damages arising from pollution, often without even addressing the exclusion.

In the mid-1980s, the insurance industry’s position began to change when policyholders submitted claims resulting from the enormous costs associated with remediation under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for historical contamination. Insurers turned to the exclusion, arguing that it was not a clarification of existing coverage for accidental pollution, but provided coverage only for damages caused by an unexpected "boom" or abrupt event. In addition, the insurance industry advanced every defense to pollution claims it could muster, including assertions that: (1) cost of remediation pursuant to an EPA administrative order did not constitute "damages," (2) PRP letters did not trigger a right to indemnification for defense costs, (3) late notice precluded coverage where notice was not given when the discharge of contaminants occurred even if the damage was not known at the time, and (4) providing coverage would be contrary to public policy. As the issue was joined, the industry also began to narrow its interpretation of what constituted a sudden and accidental discharge arguing, inter alia, that the term "sudden" should be defined by the duration of the release as well as the abrupt nature of its trigger.

Since then, litigation has proliferated and the exclusion has been the subject of a number of conflicting and inconsistent interpretations. In 1994, the New Jersey Supreme Court held that regulatory estoppel precluded insurers from interpreting the exclusion to deny coverage for gradual accidental pollution, and described the MIRB and IRB clarification as "misleading," "camouflage" and "lacking in candor." Morton International, Inc. v. General Accident Insurance Co., 134 N.J. 1, 629 A.2d 831 (1993), cert denied, 512 U.S. 1245 (1994). The Supreme Court of West Virginia concluded that the exclusion should be treated as a clarification because that was the meaning the insurance industry put forward in the course of hearings before the West Virginia Insurance Department to gain approval for the exclusion. Joy Technologies, Inc. v. Liberty Mutual Ins. Co., 187 W.Va. 742, 421 S.E. 2d 493 (1992). On the other hand, the Ohio Supreme Court ruled that the sudden and accidental exception has a temporal element and excludes coverage for gradual pollution, even if the damages are unexpected and unintended. Hybud Equipment Co. v. Sphere Drake Insurance Co., 597 N.E.2d 1096 (Ohio 1992). The United States Third Circuit Court of Appeals has issued conflicting opinions on the clarity of the exclusion based on its perception of the difference in state law in Pennsylvania and Delaware. Compare New Castle County, supra, with Northern Insurance County v. Aardvark Associates, 942 F.2d 189 (3d Cir. 1991).

To date, the Pennsylvania Supreme Court has not ruled on the meaning or enforceability of the exclusion. Since the mid-1980s, the primary authority in Pennsylvania on the exclusion has been the Superior Court’s decision in Techalloy Company, Inc. v. Reliance Insurance Co., 338 Pa. Super. 1, 487 A.2d 820 (1984), alloc. den., 338 E.D. Alloc. Dkt. (1985) and Lower Paxton Township v. United States Fidelity & Guaranty Co., 557 A.2d 393 (Pa. Super. 1989), alloc. den., 523 Pa. 649, 567 A.2d 653 (1989). However, on March 5, 2001, the Pennsylvania Supreme Court will hear arguments in the case of Sunbeam Corporation, et al. v. Liberty Mutual Insurance co., No. 0032-WD, Appeal Docket 2000, on three issues relating to the exclusion:

1. Whether the insurers should be permitted to violate insurance regulatory laws by enforcing the exclusion in a manner different than was represented to gain approval for the exclusion’s use.
2. Is the term "sudden and accidental" as used in the standardized pollution exclusion ambiguous?
3. When interpreting the term "sudden and accidental" in an insurance contract, should the Court consider the surrounding circumstances, including evidence that the wording has acquired an accepted meaning through custom and usage in the trade?

As expected, the case has drawn a great deal of interest. Amicus briefs have been filed by individual policyholders, ad hoc policyholder groups, the Insurance Environmental Litigation Association, the Alliance of American Insurers, and Certain Underwriters at Lloyd’s of London and London Market Insurers.

The Pennsylvania Department of Environmental Protection has also submitted an amicus brief on behalf of policyholders. Specifically, addressing a point raised by the Superior Court in Lower Paxton, the DEP argues that policyholders will not have an incentive to pollute if coverage is afforded for unintended, abrupt discharges regardless of their duration or length of time before discovery. DEP also argues that requiring insurers to provide coverage will expedite cleanup and prevent the increasing use of public funds.

If the policyholders’ position is upheld by the Pennsylvania Supreme Court, it could open the door for policyholders in Pennsylvania to recover for their remediation costs.

At about the same time that the Pennsylvania Supreme Court will be deciding the fate of the exclusion under Pennsylvania law, the Court of Appeals for the Third Circuit will be deciding whether, under Pennsylvania law, unintended sudden but repeated pollution discharges are entitled to coverage. In that case, Dravo v. Liberty Mutual, U.S. Ct. of App., Case No. 00-3425, the District Court concluded that since the policyholder’s unintended discharges were of a similar nature, the individual discharges should be accumulated and therefore, not treated as sudden.

Reed Smith is counsel to the insured in the Dravo litigation and is participating as an amicus counsel in the Sunbeam appeal.

When the exclusion in the CGL Policy was changed to what has become known as an absolute pollution exclusion in 1985, the insurance industry began to offer a new product—environmental impairment insurance. It also offered a "buy back" of the coverage offered by the exclusion. This insurance was extraordinarily expensive and found few takers. Many companies did buy back their limited exclusion coverage, but its value today may depend on the state law which governs the interpretation of the original exclusion.

In the past few years, the insurance industry has developed a number of new environmental products which are significantly less expensive than the original environmental impairment insurance. They include insurance which protects PRP groups against an unexpected increase in the costs of a remediation, purchasers of property against unknown contamination and lenders against loan defaults caused by pollution. Despite the history of the industry in dealing with pollution claims, these products have gained acceptance because of their pricing, the insurance industry’s current belief that remediation costs can be accurately predicted, and the standardized nature of environmental assessments. These new forms of insurance have proved to be useful tools in such diverse roles as the settling of contribution claims, transferring, or securing financing for, potentially contaminated property and redeveloping brownfield sites. However, they still must be carefully scrutinized from an insurance coverage and an environmental law perspective, and the context in which they are written must be closely assessed.

Reed Smith’s lawyers have combined their knowledge of environmental statutory and regulatory requirements regarding the management of waste and the remediation of contamination with their understanding of the liability protection that can be garnered from state voluntary cleanup programs such as Pennsylvania’s Land Recycling and Environmental Remediation Standards Act ("Act 2") and the protection of corporate coffers provided by environmental insurance coverage enables us to deliver to our clients a broad-based approach to tackling your environmental problems. It is an approach which delivers maximum value to our clients.