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Superfund Clean Up Costs Covered under CGL Insurance

November 3, 1999

Dear P2ers,
I am interested in P2 programs and insurance coverage.

Melody Peterson in her NY Times May 14, 1998 article (Cleaning Up in the
Dark) on nondisclosure of Superfund costs reports:

"Of all the groups expressing concerns, the insurance industry, which ends
up paying a lot of the cleanup costs, is most likely to get its way. The
industry wants companies to publish a list of their Superfund sites, along
with a case-by-case estimate of potential liability.  A draft proposal is
circulating for comment, but if it fails to be enacted by a rule-making
body, the insurers could make the added disclosure a condition of new

I have reviewed the insurance industry concerns with corporate
environmental cleanup liabilities and here are some of my conclusions:

1.Despite pollution exclusion clauses, Comprehensive General Liability
(CGL)insurance policies are being used by PRPs to pay for their Superfund
up costs in 40% of the states in the US.

2.There are less than 7000 active Environmental Impairment Liability (EIL)
policies according to a national survey by the underwriting firm Willis
Caroon and sales are very slow.  Competitition is very high among
underwriters to land EIL clients.

3.Publicly traded insurance firms do not account for their financial
performance using US general accepted accounting principles (GAAP) and
openly state they don't use the environmental remediation GAAP standard
SOP96-1 and SEC S-K environmental reporting requirements  in their annual
reports and do not have an environmental remediation accounting standard in
their own statuatory accounting standards.

4.According to A.M.Best reports, the insurance industry is not reporting
their estimated Superfund payment costs, and not reserving the necessary
funds for the expected hit estimated to range from $500 billion to $1

In my opinion, the property and casualty insurance industries do not want a
run on CGL policies by PRPs to compensate for Superfund remediation costs
(including transaction costs), and the Insurance Environmental Litigation
Association (IELA) in D.C. is lobbying Congress for a reduction in
underwriter obligations to pay up.

The insurance draft proposal reported by the NY Times calling for an
itemization of Superfund liabilities by corporations will only highlight
the amount of money the underwriters of CGL policies will have to pay.

Here's my last report on the situation and see Anderson Kill & Olick's
website. http://www.andersonkill.com/practice/pa09icl.htm

I look forward to your commentary.

Best Wishes,
Donald Sutherland
Consultant on Environmental Management Systems
205 Winter Street
Hopkinton, MA 01748
phone: 508-497-3676
fax: 508-497-3673
email: donaldsutherland-iso14000@worldnet.att.net

Superfund Awakes in State Supreme Courts
By Donald Sutherland

Superfund, often referred to as a sleeping giant, is waking up in state
courts with rulings the insurance industry is on the hook for a large
share of the nation's environmental cleanup.

While much of the publicity on the U.S.Environmental Protection Agency's
largest project to clean up hazardous waste is focused on the inaction of
Congress to reauthorize the Superfund legislation - many states are
passing laws favoring policyholders of comprehensive general liability
(CGL) to be compensated for their cleanup and litigation costs.

Step by step, state by state the Superfund giant has awaken in forty
percent of the state supreme courts with propolicyholder decisions effecting
half of the national total of sites.

The most recent addition to this list was on March 26, 1997 when the
Missouri Supreme Court passed a pro-policyholder ruling that corporate
environmental response costs incurred under Superfund and similar laws are
damages to be covered under CGL policies.

These propolicy rulings vary in terms from state to state, but their
collective action is giving the insurance industry grave concerns because
of the increase in settlements with CGL policyholders.

Underwriters argue CGL policies issued before the passage of the Superfund
legislation of the eighties don't cover expenses incurred under the new

After 1970, pollution exclusions became standard on CGL policies (unless
hazardous waste was sudden and accidental), and since 1985 all toxic
claims are barred from CGL policies and environmental insurance is sold

It is this CGL exclusion language which generates fierce litigation in the

Large corporations burdened with millions of dollars of Superfund spending
are turning to their insurance companies to pay up without having to
purchase separate environmental insurance.

It's a tangled affair, but many state supreme courts are ruling gradual
pollution (ie.Superfund sites) qualifies as sudden and accidental damage
to be covered under CGL policies to expedite clean up action.

Municipalities trying to limit their Superfund bills are also hoping to
benefit from state mandated CGL policy settlements.

"It's not so much a Superfund issue as it is a coverage concern," says
Paul Brown, director of government affairs for the policyholder organization
Risk and Insurance Management Society (RIMS).

"We're concerned the liability for policyholders will always be there
until Congress does it's job fixing the Superfund statutes, until then
is a state contract dispute," says Brown.

In Missouri, attorneys for the Fortune 500 company Farmland Industries (a
potential responsible party to 39 Superfund sites) view the state's
supreme court decision as a major hurdle overcome, but they still expect the
insurance companies involved to raise more arguments and exclusions to
preclude coverage.

The Missouri State Attorney General's office isn't waiting for insurance
appeals and intends to move on the court's ruling.

"We will go after companies stronger now using this ruling," said Kara
Johnson, attorney in the Environmental Water Division, "now we have two
sources (corporate and insurance) for money for cleanup."

In New Jersey (the state with the nation's largest concentration of
Superfund and spill sites) a ruling similar to Missouri's has resulted in
hundreds of millions of dollars in compensation settlements by the
insurance industry according to Rick Engel, State Deputy Attorney General.

"Sure, the insurance companies put up a myriad of routine counter defense
motions, but that hasn't stopped us from directly filing against them and
winning settlements," says Engel.

Many states have statutes for the attorney general (AG) to file direct
actions against insurers for not complying with state law to compensate

"We have such a statute, but even without legislation parties libel to the
state can sign their rights to the state attorney general to allow them to
enter an insurance contract suit," says Allen Williams, Assistant Attorney
General for Minnesota.

The insurance industry's strategy to decompose their liability obligations
is relying heavily on the inaction in Congress to reauthorize Superfund.

"These court fights go on and on, and argue mostly on the statutes of who
owes what, and who will pay what," says Taylor Caswell, a spokesman for
the Government Affairs Office of the Alliance of American Insurers.

"In almost every case the real fight is over the general liability
policies written before the enactment of the Superfund legislation, and the
insurance industry potentially stands to take a huge hit," says Caswell.

Caswell doesn't view the Missouri Supreme Court decision as setting a
national precedent because eventually the case will involve the EPA and
the Justice Department ruling on the liability status of the case, and
when politics will quagmire decision making.

"It's a tough wall to break before Missouri or any other state's ruling
makes its' way inside the Washington D.C. beltway, and till then it will
be the same old, same old for the rest of the country," says Caswell.

Jay Pendergrass, of the Washington DC based Environmental Law Institute
doesn't think the insurance industry should be so smug in relying on the
political stagnation inside the beltway.

"Barring congressional legislation, which isn't likely, the federal
government has no role in the private sector fight over CGL coverage of
Superfund, because it is governed by state law," says Pendergrass.

"There is little federal law can do to change state law decisions and
these state supreme courts propolicy cases stand to break up the bottleneck
delay for the insurers to compensate policyholders for clean ups," says

Policyholders in states with similar supreme court rulings to Missouri can
also have costs incurred under the Clean Water Act (CWA) covered under
general liability policies, he notes.

"There are certainly provision in the CWA (ie.hazardours substance spills)
that federal and state governments are authorized to clean up, and theses
are similar to the rules of CERCLA which require responsible parties to
pay for clean up costs."

According to the U.S. Government Accounting Office (GAO) and insurance
industry figures the national financial hit on environmental clean up is
huge and getting worse.

A 1997 GAO report cited over $1 billion in U.S.EPA allocated funds for
Superfund are spent annually with a majority of those moneys going not to
clean up but to transaction costs.

A.M.Best Company and the American Society of Actuaries insurance reports

total estimated Superfund and environmental clean up costs (including
transaction fees) estimate liabilities at over one trillion dollars.

The EPA's National Priority List (NPL) of 1,204 Superfund sites, as
entered in the Federal Registry for September 1997, listed only 142 sites
clean up completion, and the EPA estimates the NPL will grow to 2,100 by
the year 2000.

Add to this financial picture the remediation costs of over 450,000
Brownfield sites and you have an environmental giant of a problem.

Is there a giant killer out there?

Many legal analysis see the collective state supreme court rulings as
laying the roadwork for a group action similar to the recent national
industry settlement with state attorneys general.

"It's potentially the same strategy as the tobacco case because it would
be easier for insurers to settle (Superfund and Clean Water Act) payments on
a national level rather than individual," says Brian Zwit of the National
Association of State Attorneys General (NAAG).

Insurance analysis believe a group settlement is needed to help stem the
drain on insurance reserve funds.

"The bleeding hasn't stopped and our latest estimates show there is only
50 percent in needed environmental reserves," says W.Dolson Smith, senior
analyst at A.M.Best Company.

"Most of the commercial environmental liability underwriters are not
reserving sufficient amounts because they are facing competitive
management of earnings and margins to investors," says Smith.

Insurers and policyholers argue there are too many variables for a group
settlement and the threat of extended liability will always remain.

"It's very complex with a variety of bases on which CGL jurisdiction is
ruled on in each state," says Laura Foggan, spokeswoman for the Insurance
Environmental Litigation Association, "and it's less of a definable group
than the tobacco case."

Jim Engel, President of Property & Casualty Management Facility at CIGNA
adds that the multitude of insurance products written prior to the 1985
pollution exclusino cut off would greatly complicate a group settlement.

"The major issue for a group settlement is for the plantiffs to have a
commonality of interest, and the question is are the potential responsible
parties (PRPs) going to focus on insurance or liability issues," says

"One model might be in Minnesota where the state is trying to get a
portion of general liability compensation and release all CGL claims in
land fills to contributing insurers," says Pendergrass.

Indeed, many legal analysis feel state owned Superfund landfills strapped
with costs left them from default and bankrupt PRPs will be the most
likely candidate for a group insurance settlement.

The question is, is it worth waking a sleeping giant?

"You have to weigh the financial costs, and see who is getting on board,"
says a spokesman for the Monsanto Company, "but if it's about to happen
anyway then a group action is a countermeasure worth taking up."

(C) Donald Sutherland 1998