Evolving CGL, plus RCRA

Until 1980, commercial comprehensive general liability (CGL) insurance covered pollution.

However, finding itself paying for an increasing number of major environmental claims never contemplated by the drafters of the CGL form, the insurance industry added a pollution exclusion clause in 1980. The intent of the drafters of the clause was to exclude long-term or gradual pollution, such as that resulting from years of waste dumping or chemical discharges, while continuing to provide coverage for sudden losses.

That clause proved to be short-lived. Frustrated by court rulings that narrowed the interpretation of the exclusion and faced with new exposures created by the proliferation of environmental regulations, the insurance industry excluded all forms of pollution under the CGL policy by the mid-1980s.

Thus, in response to the coverage gap created in the CGL policy and tightened environmental legislation — in the form of the Resource Conservation and Recovery Act (RCRA), originally enacted by the U.S. Congress in 1976 to regulate, among other things, hazardous waste treatment, storage, and disposal — the first EIL coverage appeared almost 20 years ago.

Since then, the insurance industry has developed products that address the specific needs not only of potential past and present polluters, but also of environmental consultants, who guide their clients through the maze of federal, state, and local environmental regulations in the United States, and environmental contractors, who clean up the country’s large number of polluted sites.

Targeted Coverages

Today, in the United States, the term “environmental insurance” refers to a range of environmental coverages that can meet the specific needs of any organization. The two basic forms of coverage are pollution and remediation legal liability (PARLL) and contractor’s pollution legal liability (CPL), which can be combined or customized, or both.

PARLL Coverage

A PARLL policy covers third-party bodily injury and property damage claims, remediation expense, and legal defense expense arising out of sudden and gradual pollution conditions on, at, under, or emanating from covered locations. The policy can be purchased with or without first-party on-site coverage, that is, cleanup of the polluter’s location.

PARLL Exposures

Not surprisingly, typical PARLL buyers are manufacturers and waste treatment, storage, and disposal facilities such as landfills, incinerators, and recycling facilities.

However, organizations traditionally perceived as “clean” are increasingly realizing they have PARLL exposures and are purchasing the coverage. Consider these two examples of the ever-broadening range of environmental risks in the United States:

Colleges and universities: Environmental exposures exist not only on campuses themselves — after all, they can have labs, hospitals, and extensive building complexes, among other facilities — but also on off-campus properties bequeathed by alumni and benefactors. At a U.S. university in the Midwest, for instance, an underground tank, used for the disposal of science lab waste, ruptured, contaminating the soil, a number of private wells, and the groundwater flowing into a nearby reservoir. Claims against the university totaled $450,000. Reservoir cleanup cost $1.1 million.

Golf courses: It is common practice at these facilities to use phosphorous-rich fertilizer to enhance the growth of grass. The phosphorous can be washed into nearby bodies of water during heavy rains. For example, a pond on a neighboring property may receive enough phosphorous to cause overgrowth of algae, known as algae bloom, which can lead to oxygen depletion and fish kill. In many instances, residential communities, some of which receive their water from private wells, surround courses. Over time, herbicides and pesticides used at golf courses may pollute the groundwater feeding the wells.

CPL and GCPL Coverages

A CPL policy covers third-party liability resulting from any act an environmental contractor may perform at a site that either creates or exacerbates a pollution condition. The same wording can also cover the professional services rendered by environmental consultants.

A derivative of the CPL is the GCPL, or general contractor’s pollution legal liability policy. The GCPL addresses the needs of non-environmental contractors, such as those handling road repairs, excavations, and building renovations. Exposures arise out of the paints, solvents, and asphalts they commonly use, as well as out of their complex earth-moving and pile-driving operations. In one case in the United States, a general contractor renovating a building faced a $10 million claim alleging negligence that resulted in the creation of unsafe air quality conditions in the building’s ventilation and air filtration systems, causing employees on the premises to be exposed to toxic fumes and airborne contaminants.

Risk Management: Universal Components

Although important, insurance is merely a means of financing a loss. To prevent and reduce environmental liability, organizations must establish an environmental risk management program. Any such program should include — in addition to risk avoidance, wherever possible — the following actions:

	Identify environmental exposures, no matter how small: Do exposures exist in the materials and products used or produced? Are there exposures in the way these materials are handled and disposed of? What are the exposures associated with the location of the premises and adjacent properties? Thorough risk assessment can pinpoint critical risk control areas.
	Make managing environmental risks part of routine: Environmental risk management procedures must be an integral part of day-to-day operations. For example, use of personal safety equipment and enforcement of proper material handling and disposal practices are daily procedures that can help minimize losses.
	Seek employee support and participation: Environmental risk management is everyone’s responsibility. On the job, any employee’s action can become an environmental liability. Providing proper equipment and training — and communicating environmental protection responsibilities to every employee — are fundamental risk management actions. Not only must environmental risk management tactics be effectively integrated to assure smooth and seamless procedures, they must also be effectively integrated into the thoughts and actions of each employee.
	Adopt a continuous process approach: Comprehensive environmental health and safety training for employees, environmental assessments, and auditing procedures must be ongoing. Organizations need to continuously monitor and manage exposures and seek ways to improve risk management.
	Prepare for all contingencies: To be sure, the goal of an environmental risk management plan is prevention, but, despite the best precautions, accidents happen. Emergency response plans for different scenarios must be prepared, kept up to date, and communicated to employees.
	Partner with the best professionals: Management of environmental claims requires immediate decisions. Often, the required emergency response involves sending environmental consultants and claims experts to the scene within hours of an incident. If the cleanup is handled improperly, an organization may face expanded liabilities. Therefore, pre-qualifying remediation contractors, third-party administrators, legal counsel, and other professionals can help to contain liabilities when incidents occur.
	Evaluate current prevention costs in relation to future savings: Prevention certainly costs less than losses. Pollution prevention, waste minimization, and proper disposal practices help meet compliance requirements — and save money in the long run. Organizations that also consistently stress safety training and protection of the environment as part of their culture are rewarded by a reduction in risk which, in turn, helps control claims and insurance costs.

Summing Up

The pollution-emitting smokestacks symbolizing our industrial past may be gone — or nearly gone — from the American landscape, but environmental hazards are here to stay. As awareness of environmental impacts has grown in the past 20 or so years, our view of what constitutes “dirty” and “clean” activities has changed radically and will continue to evolve, and the division between them has blurred. Our definition of environmental insurance has also changed: As environmental risk evolved, the insurance industry initially transferred coverage from general liability insurance to a separate but catch-all single policy and then to an array of products based on two policy forms. Changes — both good and bad — in response to the changing nature of environmental exposures are sure to continue in the insurance industry.

The only constant in the ever-evolving environmental sector is risk management. Irrespective of evolving concepts of “dirty” and “clean” activities and an evolving insurance market, the basic components of effective environmental risk management are known and can be implemented now. That’s good news, because these components are the best protection against loss occurrence today — and tomorrow.

Contributor:	Jeff Slivka, XL Environmental, Inc. (formerly ECS, Inc.), Exton, Pennsylvania, USA
Editor’s Note:	For definitions of environmental terminology, see the Environment category in our Glossary Agent™.
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NAIC Annual Statement

The 2001 Property and Casualty Lines of Business Appendix to the National Association of Insurance Commissioners’ (NAIC) Annual Statement — which is used for filing financial information with state regulators — defines a variety of insurance and reinsurance lines, including inland marine and ocean marine insurance. The definitions are:

“Inland marine — Coverage for property that may be in transit, held by a bailee at a fixed location, a movable good that is often at different locations (e.g., off-road construction equipment), or scheduled property (e.g., Homeowners Personal Property Floater) including items such as live animals, property with antique or collector’s value, etc. This line also includes instrumentalities of transportation and communication, such as bridges, tunnels, piers, wharves, docks, pipelines, power and phone lines, and radio and television towers.

Ocean marine — Coverage for ocean and inland water transportation exposures; goods or cargoes; ships or hulls; earnings; and liability.” [italics added]

These definitions, intended to provide insurers with guidelines on how to break out premium information on the NAIC Statement, provide little detail. Perhaps the only controversial point in the definitions is the inclusion of inland water transportation as an ocean marine exposure.

NAIC Model Law

The NAIC has also drafted a model law defining marine and inland marine exposures, first issued in 1933 and revised in 1953 and 1976. The model law, which goes into considerable more detail than the definitions given in the NAIC Statement Appendix, is intended, as the name implies, to be suggested wording for statutes.

The model law lists imports, exports, various types of instrumentalities of transportation and communication, floater risks, fine arts risks, a variety of dealers’ risks (such as jewelers, camera dealers, and music instrument dealers) as “marine, inland marine or transportation” exposures. All these risks can be inferred from the broad definitions given in the NAIC Statement Appendix.

However, under the heading “Commercial Property Floater Risks covering property pertaining to a business, profession or occupation,” the NAIC model law also includes — among other risks classified as “marine, inland marine or transportation” exposures — types of risks that cannot be readily inferred from the NAIC Statement definitions. These exposures, cited in its 1976 version, titled Nationwide Inland Marine Definition, are:

“(15) Accounts Receivable Policies, Valuable Papers and Records Policies.

...

(21) Domestic Bulk Liquids Policies, covering tanks and domestic bulk liquids stored therein.

(22) Difference in Conditions Coverage excluding fire and extended coverage perils.

(23) Electronic Data Processing Policies.”

Though the 1976 Nationwide Inland Marine Definition does not specifically categorize these types of insurance as inland marine as opposed to ocean marine or transportation insurance — the Definition does not distinguish among marine (i.e., ocean marine), inland marine, and transportation insurance — industry practice (and common sense, for that matter) would place them in the inland marine category (if it placed them in any of the three categories at all). The ocean marine category is completely unrelated to the types of insurance named above and the so-called transportation insurance category is not a separate category; rather, it is a generic name that encompasses ocean marine and inland marine insurance.

No Statutory Uniformity

The NAIC model law is merely suggested statutory wording. Not every U.S. jurisdiction (that is, the 50 states, plus American Samoa, District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands) has adopted it. Of those that have, not all have adopted the same version, nor have all of them adopted a particular version in its entirety.

For example, consider the three inland marine exposures noted as not readily inferable from the NAIC Statement definitions — domestic bulk liquid, difference in conditions, and electronic data processing risks:

In Missouri, the statutory marine and inland marine insurance definition copies the 1976 NAIC model law wording for bulk liquids, but diverges from it for difference in conditions and electronic data processing risks:

“21. Domestic bulk liquids policies, covering tanks and domestic bulk liquids stored in them.

22. Difference in conditions coverage excluding fire and extended coverage perils, except buildings.

23. Electronic data processing policies, except buildings.” [italics added]

In New York, Circular Letter 22 (2000), dated August 11, 2000, issued by the Insurance Department of the State of New York, establishes the following limitations with respect to these three exposures:

“Domestic bulk liquids — These risks may be written as inland marine, provided that the tank is part of a larger pipeline system...

Difference in condition (DIC) policies — These risks may be written as inland marine if and only if all of the underlying policies also qualify as inland marine. For example, DIC policies written to insure real property at a fixed site do not qualify as inland marine...

Electronic data processing policies — These risks may be written as inland marine if the equipment being insured is of a relatively transportable nature, and intended to be used in that manner. Equipment that is intended to be used as part of a larger network or system does not qualify as inland marine.

For example, a laptop or similar portable personal computer would qualify as inland marine. Personal computers designed to be used as terminals for a larger, mainframe network would not qualify as inland marine.”

Inland Marine Industry

Notwithstanding the absence of a uniform definition of inland marine risks, this line of insurance is a major revenue source for U.S. insurers. In 1999 (the latest year for which figures are available), direct written premiums for the inland marine industry in the United States totaled some $7.6 billion, virtually all of which is generated by the industry’s top 100 carriers.

Contributor:	Louis M. Cardillo, Editor / Publisher, Language Perils™
Notes:	A copy of the NAIC’s 1976 Nationwide Inland Marine Definition (publication IV-701-1) may be purchased from the NAIC Publications Office. Circular Letter No. 22 (2000), August 11, 2000, Insurance Department, State of New York. Rules of Department of Insurance, Division 500 — Property and Casualty, Chapter 1 — Property and Casualty Insurance in General, Code of State Regulations, State of Missouri. Additional information on the inland marine industry may be obtained from the Inland Marine Underwriters Association.
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Insurance archaeology is the search for and study of liability insurance artifacts, such as policies, broker and agent documentation, and other records, for the purpose of increasing knowledge of liability insurance programs over time — to obtain evidence of past liability policies that can cover claims arising out of past occurrences.

Insurance archaeology emerged in the 1970s in the United States because of the need to recover billions in insurance assets for corporate, governmental, and institutional policyholders, faced with dramatic increases in U.S. civil liability — particularly in asbestos and environmental cleanup cases — for acts dating back decades.

Initially just a dramatic search for one or several missing policy documents by a policyholder defendant, insurance archaeology has evolved into an important risk management discipline. It combines historical research, sleuthing, and sophisticated database technology to uncover, document, organize, reconstruct, and graphically portray an organization’s insurance program over time.

Mother of Invention: Necessity and Value

In the 1970s, asbestos-related claims, based on past exposure to asbestos and contraction of asbestosis, began to appear. These claims have occupied courts in the United States since that time. Other product-liability suits for past occurrences have also multiplied.

In December 1980, to clean up abandoned hazardous waste sites, the U.S. Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Commonly known as Superfund, CERCLA provides that organizations and successor organizations that allegedly contributed to a site’s pollution at any time in the past can be held responsible for cleanup. The U.S. Environmental Protection Agency, acting under that retroactive liability provision of CERCLA, has obtained — and continues to obtain — multi-million-dollar settlements from corporations, institutions, and government bodies for their past acts.

Another Superfund provision — whereby any organization that contributed to creating a polluted site can be held liable for cleaning up the entire site — has vastly increased the number of corporations, institutions, and government bodies faced with legally mandated environmental response costs.

Thus, asbestos and environmental claims, estimated in the billions of dollars — together with increased product-liability claims — created the need for protection for past acts among a large number of policyholders.

But need alone could not have fueled the high-stakes treasure hunts for often decades-old liability insurance policies characteristic of insurance archaeology.

Those long-forgotten policies had to be valuable. And, indeed, they are.

Comprehensive general liability (CGL) policies are “occurrence-based,” that is, they never expire if damage is shown to have occurred within the policy period. What’s more, generally speaking, the older a liability policy, the less restrictive it is likely to be. CGL policies from the 1940s, 1950s, and 1960s are particularly valuable because they generally contain no pollution exclusions, no aggregate limits, and no defense-cost limits. Policies from the 1970s, which contain a so-called “sudden and accidental” pollution exclusion, are easier to apply to Superfund liabilities than are policies purchased after 1985, which contain a less ambiguous “absolute pollution exclusion.”

Tutankhamen’s Treasure

The insurance policy limits “unearthed” by insurance archaeologists and used to pay claims are not inconsequential: It is estimated that insurance archaeology has recovered more than $50 billion in previously unknown, prepaid insurance assets in the past 15 years alone. Beneficiaries have included not only Fortune 500 companies, but also mid-sized companies and municipalities.

Key Component of Asset Management

No signs exist of any downward trend in either the amounts or types of civil liability in the United States. As for amounts, consider these figures from a study by Tillinghast-Towers Perrin: In 1995, the costs of civil liability in the United States totaled $161 billion, or 2.3% of the nation’s gross domestic product, up from 1.4% in 1970 and 0.6% in 1950. As for types: In recent years, major new sources of tort litigation have emerged — including pharmaceutical and medical devices, “sick-building syndrome,” workplace claims such as repetitive-stress injuries and noise-induced hearing losses, and computer-related “techno” torts.

With legal liabilities accounting for an increasingly larger proportion of exposures in the United States, managing an organization’s insurance portfolio over time has become an integral part of asset management, as essential as managing an organization’s other assets. Thus, in the past five to ten years, insurance archaeology has become far more than an ad hoc search for buried, lost assets. Organizations have increasingly recognized that a complete audit and preservation of past and present insurance policies constitute essential best practices in risk management.

As an asset management technique, insurance archaeology has expanded to include organizing all policy records, filling in gaps for missing and incomplete policies, and creating charts to illustrate an organization’s entire portfolio of policies over time.

It is not enough simply to maintain an index of past insurance policies. When presented with a complex and potentially expensive claim, an insurer is likely to demand a copy of the insurance policy. Although courts have upheld coverage when secondary evidence of a policy’s existence and terms is presented, availability of actual policy documents can avoid lengthy and costly insurance coverage litigation. Reconstructing and preserving policy records enable organizations to maximize coverage when they need it.

Taking action in advance to locate and organize past insurance policies and all secondary evidence of coverage can mean the difference between a covered and an uncovered loss.

Due Diligence

A corollary to insurance archaeology’s role in asset management is the role that it should play in due diligence preceding a merger or acquisition. Given the transferability of liabilities and insurance policies to corporate successors, a comprehensive audit of a potential acquisition’s insurance coverage, past and present, can spell the difference between acquiring a dynamic asset and acquiring a perpetual asset drain. Assessing a target company’s insurance coverage over time has proved to be as essential as auditing its more visible assets.

Dynamic, Sometimes Musty, Environment

To be sure, insurance archaeologists need not face the life-threatening challenges of the archaeologist Indiana Jones of novel- and film-fame, but they must confront and overcome a considerable number of challenges that, if not life-threatening, at least test their mettle as detectives, excavators, and historians.

Fifty to sixty years of relocations, restructurings, mergers, and acquisitions, not to mention the common practice of periodic purging of files — among policyholders, insurers, and brokers and agents alike — mean shortened institutional memories at best and lost files and policies at worst. And the quickened pace of mergers and acquisitions has created a need for lost policy searches going back as recently as the past decade.

Insurance archaeologists must cull through countless brokerage records in the United States and London, seek out and interview retirees and descendants of former personnel (and sometimes rummage through the records stored in their attics and garages), analyze accounting ledgers, search government archives, and venture (hopefully, with protective clothing) into radon- or asbestos-contaminated vaults in search of past, but still effective, insurance policies.

Increasingly Complex Task

Indeed, the task of an insurance archaeologist has become increasingly complex. The multiplication of exclusions and restrictions in CGL policies — such as the sudden and accidental pollution exclusion, the absolute pollution exclusion, the known prior acts exclusion applied to newly purchased subsidiaries, the employment practices exclusion, timely notice provisions and, most recently, year 2000 and date recognition exclusions — has created a maze of coverage over time.

As exclusions have been added to the CGL policy, the insurance industry has shifted coverage for those excluded liabilities to new, separate, policies such as pollution and remediation legal liability insurance and employment practices liability insurance.

More policies create more records to keep track of, which means — unless organizations take proactive action — more lost policies or claims excluded on the ground of missed “timely notice” deadlines.

Negotiate From Strength

Over the past decade, insurance archaeology has evolved into a powerful tool to help U.S. policyholders deal with a fundamental reality: In these litigious times, few large insurance claims go undisputed. The best response is to be prepared. The policyholder that has immediate access to its entire coverage profile, past and present, is ready to assert its claims effectively.

Portions of this contribution are based on the author’s article, “The Evolving Art of Insurance Archaeology,” The John Liner Review, Vol. 13, No. 1, Spring 1999. Copyright 1999, Standard Publishing Corp., Boston, Massachusetts, USA. All rights reserved.

Contributor:	Sheila Mulrennan, Founder and President, Insurance Archaeology Group, New York, New York, USA
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