In the first of what could be a wave of a new kind of environmental litigation, Arco has sued more than 70 insurance carriers for reimbursement of the multimillion-dollar costs of restoring 50 hazardous-waste sites contaminated as far back as the 1930s.
Businesses around the country have been digging out old insurance policies in recent months as state supreme courts outside California have revived hopes that they can recover hazardous-waste cleanup costs from insurers.
But a ruling by the California Supreme Court two weeks ago may be the most legally influential development in the long battle over liability for this increasingly expensive work. It greased the way for the Arco suits.
The high court ruled that cleanup costs can be recovered from insurers under standard comprehensive general liability policies. They are the business world’s equivalent of homeowner’s insurance, at least when it comes to the provisions that pay for injuries to third parties.
Arco is suing Aetna Casualty and Surety Co. of America, Fireman’s Fund Insurance, Travelers Insurance, Lloyd’s of London and more than 24 other foreign companies. In the suits, filed in Los Angeles Superior Court shortly after the supreme court ruled, the oil company asked the court to clarify just when insurance companies must pay for toxic cleanup. Arco did not specify what the potential cost could be to the insurers if it wins in court.
The contaminated places range from areas in Montana described by an Arco attorney as “extremely large” to smaller sites in California and elsewhere.
“You bet there is going to be a lot of litigation over this,” said Joel Moskowitz, a partner specializing in environmental law with the law firm of Gibson, Dunn & Crutcher in Los Angeles. “Many other companies will be dusting off these old policies and seeing if they will fly.”
Insurers are viewing the future grimly.
“It’s extremely frustrating,” said Marc H. Rosenberg, vice president of federal affairs for the Insurance Information Institute, which represents more than 300 insurers around the country.
“Imagine how many years ago these companies closed the books on these policies.”
So far, supreme courts in four other states--Massachusetts, Minnesota, Washington and North Carolina--have ruled similarly. But the decision here is expected to have greater impact both because of the clarity of the California opinion and the state’s trend-setting influence on business.
“California is the bellwether state,” said Michele G. Pierro, vice president of New York-based IAG Ltd.
“It’s going to make older polices even more valuable than ever.”
IAG stands for Insurance Archeology Group, and Pierro is something of an Indiana Jones of old insurance policies. New York-based IAG and Philadelphia-based R. M. Fields & Co. specialize in excavating copies of policies that many companies routinely destroy as they expire. These tiny, relatively new companies, as well as some risk-assessment consultants, dig through companies’ corporate archives--as well as files of former brokers and the government--to piece together a company’s history of coverage.
Pierro said IAG has hunted policies for more than 200 companies, many of them Fortune-500-sized. Now, she expects to hear from more smaller firms.
“They definitely have an economic incentive to do so,” she said, “because the smaller the firm, the fewer financial resources are available to them” for cleanups.
The average cost of cleaning up a federal Superfund toxic site, according to the U.S. Environmental Protection Agency, has mushroomed from $9 million to $25 million in the past five years. Though the relevance of this figure has recently been questioned by a Rand Corp. study--which found that the vast majority came in at much lower cost--even a $1-million hit for the surprise discovery of an old toxic waste site can founder a smaller company.
Just who has to pay has been argued in court and business circles for years.
Insurance companies have generally beaten back companies’ attempts to use old liability coverage to pay for toxic cleanups, particularly since passage of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), better known as the federal Superfund law. The law mandated cleanup of past hazardous waste dumps, with the EPA required to retrieve as much of the cost as possible from the parties responsible--ranging from owners to operators to the companies that may have created the waste and transported it to the owner’s site in the first place.
These parties, in turn, have tried to recover their costs from their insurers.
“Superfund created, after the fact, enormous potential liabilities for activities that had previously been legal,” said Rosenberg. “In the 1960s and ‘70s, insurers would (examine a company’s business) and say, ‘Well, OK, you’re disposing of these things according to local ordinances.”’
Insurers began as early as the 1960s, however, to amend the policies they wrote. They included “pollution exclusion” clauses in the policies to avoid liability except when an incident was “sudden and accidental"--as when a tanker truck overturned or a pipeline ruptured. The intent was to exclude the potentially much larger, even unlimited, liability of a toxic waste dump built up over many years.
“That changed,” said Rosenberg, with passage of the Superfund law, “and since then, insurance companies (have) basically stopped writing coverage for pollution of any kind.”
The policies at issue today are both those that covered “sudden and accidental” pollution and traditional liability policies from decades back.
As to charges that the Superfund law unfairly changed the playing field for such liability, Arco’s attorneys are unmoved.
“The insurance industry is a sophisticated industry that has been around for a long time,” said Wondie Russell, a partner of the San Francisco firm of Heller, Ehrman, White & McAuliffe, lead attorney in the case. “They intentionally wrote these policies very broadly.”
Insurance companies are in the business of shifting risk to themselves, for a price, notes Russell, including risk of later changes in the law.
“I think it’s real clear that they always intended to bear the risk of changes in the law,” Russell said. “That was part of their own marketing strategy, to leave the wording broad, knowing that there would be changes. . . . These companies like Arco went out and said, ‘We want to shift the risk; what does it cost?’ And the industry has always known that that was the case.”
“It has little to do with anything but social policy,” said Rosenberg. “There just seems to be a hierarchy. ‘Get the polluter to pay, and if he can’t, get the insurance company to pay. That makes it kind of hard for insurance companies to decide what sort of rate they should charge, or how much of a reserve they should keep. And that’s why they got out of that line of business. But they are still stuck with these contracts from 10 or 20 years ago.”
Businesses and attorneys are seeing a sunnier side, however.
“Without this ruling, unquestionably, many companies and individuals faced bankruptcy due to the staggering costs of environmental cleanup,” said Randolph M. Fields, president of R. M. Fields. The old-policy hunters decided this week to open an office in Los Angeles in January.
“Our business in California is literally booming,” Fields said.