Environmental Insurance

Property owners or operators faced with an environmental cleanup often incur significant expenses to cleanup their property.  Before starting the actual cleanup, property owners/operators should take the time to explore all possible avenues to obtain reimbursement for cleanup costs.  The first step should be to look at existing insurance coverage, particularly old comprehensive general liability (“CGL”) insurance policies.

Prior to 1986, most CGL policies contained a “sudden and accidental” exclusion.  This exclusion barred coverage for contamination unless it was caused by a “sudden and accidental” event (i.e., a spill).  Several states interpret this exclusion to preclude gradual pollution such as leaks from underground storage tanks.  But New Jersey does not and, regardless of whether the discharge was sudden or gradual, the “sudden and accidental” pollution exclusion does not preclude coverage in New Jersey.  Subsequent to 1986, insurers inserted the “Absolute Pollution Exclusion” into liability policies, which generally bars coverage for pollution regardless of whether it is gradual or sudden.

It is not uncommon for an insured to no longer have old policies.  The burden is on the insured to show that the policy existed and the terms and conditions of the policy.  Even if you are unable to find the policy, secondary information such as canceled checks, accountants’ ledger sheets, coverage charts prepared by insurance brokers or agents, corporate records, and loan documents can be used to establish that a policy existed.  Optimally, the property owner/operator needs to determine the name of the insurer, the policy number, the policy period and the limit of liability.  As to the specific terms and conditions of a policy, an insurance expert can assist with this task.

The bottom line is that old business records that take up space and clutter your storage area may in fact be a treasure trove in the event you need to locate/identify early insurance policies.  Before disposing of your old business records, you should review them carefully to determine if they contain information about early insurance coverage. Although it is a time consuming and tedious task, it could save your company a great deal of money if you are required to cleanup contamination at your property.

The New Jersey Supreme Court recently held that insurers can sue co-insurers to recoup defense costs.  In Potomac Ins. Co. of Ill. ex rel. OneBeacon Ins. Co. v. Pa. Mfrs. Ass’n. Ins. Co. (A-2-12) (September 16, 2013), the Township of Evesham (“Evesham”) sued its contractor, Roland Aristone, Inc. (“Aristone”), for property damage caused by construction defects.  OneBeacon Insurance Co. (“OneBeacon”) and another insurer paid Aristone’s defense costs in the underlying litigation.  Although Pennsylvania Manufacturers’ Insurance Company (“PMA”) did not contribute to Aristone’s defense  costs, PMA settled with Aristone whereby Aristone released its claims against PMA.

Aristone settled the underlying litigation with Evesham.  OneBeacon subsequently sued PMA seeking reimbursement from PMA for PMA’s share of defense costs.  PMA asserted that its settlement with Aristone barred OneBeacon’s complaint.

After a trial, the lower court ruled that the release between PMA and Aristone did not include OneBeacon, and that OneBeacon did not release its right to sue PMA for contribution to defense costs incurred by OneBeacon in the underlying lawsuit.  The trial court apportioned defense costs between PMA and OneBeacon in accordance with the allocation scheme articulated in Owens-Illinois  and Carter-Wallace.

The Appellate Division affirmed the trial court’s decision, and the New Jersey Supreme Court granted PMA’s petition for certification.  The Supreme Court ruled in favor of OneBeacon.  While acknowledging that this was a novel issue, the Court concluded that OneBeacon’s contribution suit was consistent with Owens-Illinois, which established that progressive damage occurring over a number of years must be allocated among all insurers based their assumed risk.

The Court recognized that allowing an insurer to seek contribution for defense costs from co-insurers is not only equitable but also promotes early settlement and creates an incentive for businesses to purchase sufficient insurance.  In addition, the Court concurred with the trial court that the release between Aristone and PMA did not waive OneBeacon’s right of contribution.

This was the first time the New Jersey Supreme Court applied the Owens-Illinois continuous trigger theory to construction defect cases.  While this decision encourages global settlements, it may also have a negative effect.  If an insured is unable to reach a global settlement, any individual settlement could require the insured to indemnify the insurer from claims by other co-insurers.  Although the decision could have mixed results, it provides a useful framework by which defense costs are allocated among insurers of a common insured, and allows insurers to overpay in a settlement knowing that they can then pursue other non-settling insurers for their fair share of defense costs.

On September 24, 2013, the New Jersey Supreme Court ruled that policyholders must look to its solvent insurers before seeking benefits from the New Jersey Property-Liability Insurance Guaranty Association (“Guaranty Association”).  Farmers Mut. Fire Ins. Co. of Salem v. N.J. Property-Liability Ins. Guar. Ass’n involved two environmental cleanup cases that were consolidated.  In both cases, Farmers Mutual Fire Insurance Company of Salem (“Farmers Mutual”) and an insolvent insurer had issued general liability insurance policies for the property.  Farmers Mutual paid all the remediation costs and then sought reimbursement from the Guaranty Association for the Guaranty Association’s allocable share of such costs.  The Guaranty Association was created by the New Jersey Property-Liability Insurance Guaranty Act (“PLIGA Act”) to provide coverage when an insurer becomes insolvent.

The Guaranty Association moved for summary judgment arguing that pursuant to the PLIGA Act, it is not responsible to contribute to the cleanup until the policy limits of solvent insurers are exhausted.  The lower court rejected this argument.  On appeal, the Appellate Division reversed, agreeing with the Guaranty Association.  The New Jersey Supreme Court granted certification to hear the case.

Farmers Mutual argued, among other things, that the Appellate Division’s decision disrupts the allocation scheme established by the Court in Owens-Illinois and subsequent cases.  Those cases provided a mechanism for apportioning liability for environmental cleanups among multiple insurers.  Typically, all insurers that provided coverage from when the contamination occurred are required to provide coverage in an allocated amount based upon the amount of risk each insurer assumed. 

The Court reviewed Owens-Illinois and its progeny, as well as the statutory history and language of the PLIGA Act and concluded that insureds must first exhaust the limits of the policies issued by the solvent insurers before seeking benefits from the Guaranty Association.  The Court also found that the PLIGA Act takes precedent over the common law principles stated in Owens-Illinois in that the Guaranty Association was to be the insurer of last resort.

Zurich American Insurance Company (“Zurich”) in its amicus curiae brief contended that if the PLIGA Act prevented insureds from seeking benefits from the Guaranty Association before solvent insurers’ policy limits are exhausted, then the insured should be responsible for the time period when the insolvent insurers provided coverage.  The Court stated that such an interpretation conflicts with the purpose of the PLIGA Act, which was to minimize financial loss to policyholders because of insolvent insurers.  The Court held that Zurich’s position would defeat that purpose if the insured was required to pay the share of an insolvent insurer before receiving any benefits from the Guaranty Association.

While it remains to be seen how this case impacts coverage for insureds, this case will change how damages are allocated among policies where there is an insolvent insurer.  This case suggests that coverage provided by an insolvent insurer should not be included in the allocation process, which should benefit insureds seeking coverage for damages.

Policyholders asserting claims against an insurer for damages arising from a fire, environmental contamination or other causes need to pay close attention to the “fine print” contained in their policy.  Assigning a claim without a thorough understanding of the policy terms is risky and may violate the provisions of the policy and render the assignment, and possibly coverage, void.  The New Jersey Appellate Division recently ruled that an anti-assignment clause in a homeowner insurance policy did not invalidate the assignment of benefits from the homeowner to a vendor.

In CPR Restoration and Cleaning Services, LLC v. Franklin Mut. Ins. Co., No. A-3858-10T2 (App. Div. June 21, 2012), Lou Witherspoon hired CPR Restoration and Cleaning Services, LLC to cleanup the damage to his home caused by a fire.  Witherspoon subsequently assigned to CPR his rights under the insurance policy issued by Franklin Mutual Insurance Company.  Franklin Mutual did not consent to the assignment.

The policy provided that “[n]o assignment of this policy or an interest here is binding on [Franklin Mutual] without [Franklin Mutual’s] written consent.”  Although Franklin Mutual settled with Witherspoon, CPR was not compensated for the work it performed and subsequently sued both Franklin Mutual and Witherspoon.

Franklin Mutual filed a motion for summary judgment.  The lower court on reconsideration held that because Franklin Mutual never agreed to be bound by the purported assignment, it was not obligated to pay CPR for services rendered.

On appeal, the Appellate Division reversed, initially noting that the purported assignment made by Witherspoon was “not an assignment of a policy, as Franklin Mutual argue[d], but an assignment of a right to receive payment under the policy.”  The court relying on the decision of the Elat, Inc. v. Aetna Cas. and Sur. Co., 280 N.J. Super. 62 (App. Div. 1995), held that Witherspoon’s assignment of his rights under the policy did not materially change Franklin Mutual’s duty.

The court next considered whether the anti-assignment clause in the policy prohibited the assignment of the claims.  The court noted that for an anti-assignment clause to void an assignment, it must state that “non-conforming assignments (i) shall be “void” or “invalid,” or (ii) “that the assignee shall acquire no rights or the a non-assigning party shall not recognize any such assignment.”  The court concluded that because the necessary language was lacking, the anti-assignment clause in the policy was simply a covenant not to assign, and the assignment of the claim to CPR was, therefore, valid.


In a recent unpublished opinion, a New Jersey Appellate Division court upheld the lower court’s dismissal of an insurance coverage action for environmental contamination. In Spartan Oil Company v. New Jersey Property-Liability Insurance Guaranty Association, decided June 8, 2012, Spartan Oil had purchased and subsequently renewed a commercial vehicle insurance policy from Planet Insurance Company for coverage for its fleet of vehicles used to deliver heating oil.  In the early 1990s, during the coverage period, Spartan delivered heating oil to a tenant leasing property owned by Morristown Associates. Spartan’s drivers pumped heating oil from its vehicles into an external intake pipe located on the property, and the fuel traveled through an internal feed line to an underground tank under the basement. Unbeknownst to Spartan, the fuel line was corroded and the oil spilled through holes that had developed in it, causing environmental contamination on the property.  The contamination was not discovered until 2003.

 In 2006, Morristown Associates filed suit against several oil delivery companies, including Spartan, alleging violations of the New Jersey Spill Compensation and Control Act and Water Pollution Control Act, as well as common law negligence.  Spartan was successful in its summary judgment motion because the statute of limitations had expired. 

Planet Insurance Company’s successor, Reliance Insurance Company, was insolvent. Spartan had thus filed a notice of a claim with the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”), seeking defense and indemnity costs. PLIGA denied Spartan’s claim for coverage based on the pollution exclusion provision of the policy, which stated that the insurance coverage did not apply to property damage “arising out of the actual . . . discharge of . . . pollutants” “[a]fter the pollutants . . . are moved from the covered ‘auto’ to [the] place where they are finally delivered.’”

Spartan then filed a declaratory judgment action seeking reimbursement for its defense costs, which exceeded $200,000.  The lower court ruled in favor of PLIGA after determining that the pollution occurred after the oil was delivered, and therefore, the pollution exclusion applied.

 Spartan appealed arguing that the trial court erred in looking beyond the face of the complaint filed by Morristown Associates and considering additional facts.  Relying on a recent NJ Supreme Court case, the Appellate Division reviewed both the complaint in the underlying action and the insurance policies.  Based on this review, it rejected Spartan’s argument that the complaint alleged that Spartan was negligent during the delivery of the heating oil to the property and held that the pollution exclusion did not apply.  Although the allegations in the compliant did not  specify whether Spartan’s negligence occurred during delivery or after the oil was “finally delivered,” the Appellate Division considered the common definition of “deliver” to conclude that “the delivery of the oil occurred upon the fuel entering the property and heating system of Spartan’s customer . . . . At that point, Spartan no longer had possession or control of the oil. It had been transferred into the possession of [the tenant].”  Therefore, because “Spartan had already and ‘finally’ delivered the oil before the contamination occurred, the pollution exclusion applied and the insurance policies did not cover liability for the contamination.”