Settling Environmental Insurance Coverage Disputes

Andrew M. Reidy and Jodi T. Tuer
McKenna & Cuneo, L.L.P.
Washington, D.C.

Your client notified its insurance company in a timely manner of claims under its liability insurance policy. The insurance company issued a letter denying coverage. You advise your client to file a declaratory judgment action. However, the client is anxious to settle the claim and avoid substantial legal costs and delays. How can you achieve a speedy and prompt resolution of the claims without unnecessary protracted litigation?

This article will address overcoming some of the common obstacles to settlement in environmental insurance coverage litigation, and provide solutions for achieving settlement of claims in a timely and efficient manner.

Selecting the Right Forum

Although it might sound counterintuitive, one of the most important steps to settlement may be selecting the forum where an action is to be filed. Why does it matter? Insurance policies are interpreted under state law. Several critical issues in determining whether an environmental claim is covered have been decided differently by various state courts. Thus, it is important to choose a forum that may apply a favorable state’s law to resolve disputed coverage issues.

For example, in environmental insurance coverage disputes, insurers will deny coverage on the basis of untimely notice of claims. Although courts in the majority of states hold that late notice does not defeat a claim unless the insurer is prejudiced, there are some jurisdictions that do not require a showing of prejudice.

Similarly, courts differ over other issues including whether a "PRP letter" constitutes a "suit" within the meaning of a liability policy, whether the so-called "sudden and accidental" pollution exclusion applies to gradual pollution claims, and what policies apply when contamination spans multiple policy periods (i.e., the trigger of coverage). Thus, the first step in achieving settlement may be maximizing your chances that a favorable state’s law will be applied to your claim.

Identifying the Key Players

To settle claims in a timely manner in litigation or outside, you must negotiate with the right decision-makers. Not every agent, representative, or lawyer for that matter has settlement authority. Learn who the key players are up front and which ones are vested with the authority to settle the claim. Often times, sizeable environmental claims are within the "jurisdiction" of a special unit or a special committee that handles environmental claims or large dollar claims. Learn as much as you can about whether the committees have considered your claim, and what the role of the person who is handling your claim has, vis-a-vis the special unit or special committee.

Communicating the Important Facts

Information and communication will always move you closer to settlement. Insurers need factual information both to access the case and for reinsurance purposes. Anticipate what documents the insurer needs to settle the claim before they are requested. Be detail- oriented. For example, supporting documents for legal bills and factual basis for projected liability should be gathered and forwarded to the insurer as soon as possible. The description of exposure may be the key to accessing coverage. Key facts should be highlighted along with crucial testimony or facts. Forwarding the right documents to the insurer will not only have the effect of showing that you have established a mastery of the issues and facts, but will establish credibility and facilitate settlement discussions.

Creating Maximum Litigation Pressure

Bad Faith

In most jurisdictions, when an insurance company breaches its duty to defend or to settle, it is deemed to have acted in bad faith. The insurer will be liable to the policyholder for judgment or settlement beyond the policy limits. However, that may not be the entire extent of its liability. Additional damages may be imposed against the insurer such as lawyers’ fees, liability in excess of policy limits, and punitive or treble damages if there is bad faith.

In addition, many jurisdictions have passed unfair claims practices acts under which the insurer may be subjected to civil penalties if it breaches its duty to settle. Some states allow individual policyholders to maintain a private right of action for violations of the statute. In many states, an action for breach of duty to settle under the statute has several remedies that are extra contractual remedies. For example, the insurer may be liable for actual and consequential damages regardless of whether such damages were foreseeable, costs and lawyers’ fees, and even punitive damages. Thus, a valid bad faith claim may create litigation pressure that increases the potential for prompt settlement.

Internal Insurance Company Documents

A powerful weapon in litigation when asserting bad faith claims is obtaining internal insurance company documents. Gaining access to the insurance company’s inner workings will increase the company’s incentive to settle. When requesting documents in discovery, it is important not only to request the company’s claims files, but also any claims or underwriting manuals, drafting history documents, and reinsurance documents.

Obtaining copies of drafting history documents provides insight into various interpretations of policy language as well as invaluable examples as to when coverage may or may not apply. For example, courts are divided over whether language in the so called "sudden and accidental" pollution exclusion bars coverage for environmental damage that occurs gradually. Drafting history documents demonstrate the exclusion was intended to cover gradual pollution.

Reaching The Agreement

You finally reached an agreement. What now? The first step is to reduce the agreement to writing. The essential terms should be reduced to writing at the settlement conference and not when you return to the office. By doing this, you will accomplish two things: not only will this avoid any lapses in memory or misunderstandings, but by reducing the agreement to writing, any disputes regarding the scope of the release and indemnity provisions will be eliminated.

Scope of the Release

The scope of the release must be clearly defined and understood by all the parties. One of the goals of the insurer is to achieve finality of the resolution of the claims. The insurer may want a release of all known or unknown claims arising out of the site or event at issue. Sometimes the insurers even go further and seek a policy buy back that extinguishes the right to make any further claim. The policyholder should carefully consider its position on this issue because it often delays settlement while the parties consider preparation of the scope of the release.

Duty to Indemnify

Insurance companies will sometimes request that the policyholder indemnify the insurance company if the insurer is sued by anyone else as a result of the claim. The typical concern of the insurer is that some other insurance companies may sue for contribution. Thus, insurance companies seek an agreement that the policyholder will defend and indemnify such other claims. Such a provision may be unacceptable in total or acceptable only in particular circumstances. At a minimum, any such indemnification should be limited to the amount of the settlement.

Conclusion

In conclusion, reaching a settlement in environmental insurance coverage disputes can be obtained more readily if you are aware of the potential obstacles described in this article.