United States: Allocating Insurance For Environmental Contamination Claims

Environmental claims brought by governments or private parties against owners or operators of property inevitably raise the question of whether insurance coverage is available to pay for all or some of the costs associated with such liabilities. In many cases the answer is yes, but properly assessing coverage prospects in cases of environmental damages claims can be a daunting prospect. This type of insurance claim often involves interpreting numerous historical policies, different layers of coverage, time periods that may span decades, uncertain facts, and competing court decisions interpreting similar policy language. Allocating responsibility among insurers is a task so complex, it has been labeled, in one case, as "both scientifically and administratively impossible." Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 351 (2009). Yet, it is an issue that policyholders are wise to pursue, with competent counsel, in light of the large potential liabilities such cases present, and the prospect of significant recovery from insurers.

A recent First Circuit decision in Boston Gas Co. v. Century Indem. Co., 708 F.3d 254 (2013), applying Massachusetts law, presents an opportunity to compare the approach of the New Hampshire Supreme Court and the Massachusetts Supreme Judicial Court in addressing the complexities presented by so-called long-tail environmental claims. Making this comparison also will demonstrate some of the difficulties insureds and their insurers confront in this area of the law.

When faced with allocating coverage for environmental damages across multiple commercial general liability policies, courts generally apply two principal methods: all-sums or pro-rata allocation. Under the all-sums approach (also known as "joint and several liability"), any policy triggered during the period when the damage occurred can be obligated to pay for the entirety of the loss, up to the policy limit. Keene Corp. v. Ins. Co. of North America, 667 F.2d 1034, 1050 (D.C. Cir. 1981). This method is frequently preferred by policyholders, as they only need to identify one insurance policy to respond to the claim, and that insurer may be required to pay "all sums" for which the insured is liable. Boston Gas, 454 Mass. at 352. Once the insurer pays, it may then bring contribution actions against other insurers. Until recently, the all-sums approach was the method prescribed by Massachusetts courts. Compare e.g., Rubenstein v. Royal Ins. Co., 44 Mass. App. Ct. 842, 852 (1998), applying the all-sums approach with Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 358 (2009), rejecting the all-sums approach used in Rubenstein.

The second approach, employed by New Hampshire and recently-adopted in Massachusetts, is known as the pro-rata approach. This method requires the court to determine the duration and quantity of the damage, and then allocate a proportional amount of liability to each triggered policy. EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd's, 156 N.H. 333, 338 (2007). The result spreads responsibility across the various policies in place over the time the damage occurred. Id. at 339. Importantly, the policyholder is held accountable for any periods of no insurance, self-insurance, or insufficient insurance. Id. at 340.

While New Hampshire and Massachusetts have both adopted the pro-rata method, their means of apportioning liability under this method differ. Massachusetts uses a simpler approach, known as pro-ration "by years." Under this method, an insurer's liability is directly proportional to the number of years the insurer provided coverage, or was "on the risk", divided by the number of years contamination was demonstrated to occur. Boston Gas Co., 454 Mass. at 352. Responsibility is distributed equally to each year during which the damage occurs. Id.

New Hampshire uses a more complicated approach called pro-ration "by years and limits." Energy North, 156 N.H. at 341. Under this method, the court will consider two factors: (1) how many years the insurer provided coverage during the environmental damage, and (2) the amount of the insurance policy's limit for each of those years. EnergyNorth, 156 N.H. at 344. While responsibility is still allocated to each individual year, those years with higher policy limits may bear greater liability. This additional "limit" factor provides a more accurate assessment of the insurer's true responsibility. Id.

These apparently simple formulas belie the actual complexity of such cases. The allocation of damages across numerous historical policies comes only after the insured has investigated and provided to the insurer the facts to withstand the myriad of defenses the insurer typically makes. These facts include establishing the existence of and terms of the policies, that the facts of the claim fit within the various terms of the policies, such as the definition of an occurrence (usually requiring the showing of some accidental or unintentional action causing harm to third parties) and that the policies are triggered, (a topic worthy of its own article). This list is not exclusive.

Under RSA 491:22-a, the insurer bears the burden of proof of disproving coverage once the insured provides evidence of insurance and facts relating to a claim covered by the insurance. If the insured wins its case, it is entitled to recover attorneys' fees and costs.  The insured should provide prompt notice to the insurer and be mindful of the statutory deadline to gain these burden-shifting benefits. Massachusetts does not have a comparable statute, but case law has held that the insurer has a similar burden of proof, Trustees of Tufts Univ. v. Comm. Union Ins. Co., 415 Mass. 844, 854 (1993), and that a prevailing insured may recover attorneys' fees and costs. Safety Ins. Co. v. Day, 65 Mass. App. Ct. 15, 25 (2005).

In addition, other state law may affect the outcome of policy interpretation. For example, under New Hampshire law, for purposes of insurance the state is deemed to own the groundwater. Coakley v. Maine Bonding and Cas. Co., 136 N.H. 402, 412 (1992). As a result, a private party's contamination of it results in third party harm. In Massachusetts, the commonwealth has a regulatory interest in groundwater under an insured's property, but not an ownership interest. Boston Gas, 708 F.3d at 264-65. Thus, state law affects how the two courts interpret the owned property exclusion found in most commercial policies.

Prosecuting a claim for insurance coverage in a long-tail environmental claim combines historical fact development, contract interpretation, legal reasoning, environmental science and trial strategy. Practitioners should be mindful that the nuances of insurance law between New Hampshire and Massachusetts can mean the difference of millions of dollars for insureds or their insurers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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