The Duty To Disclose Coverage: Insurance Company Admissions about the Pollution Exclusion

Insurance companies have a duty to disclose coverage to their policyholders. This duty is widely recognized as a component of the duty of good faith and fair dealing. In the environmental claims, however, this duty has been systematically violated by insurance companies which seek to conceal, rather than disclose, coverage for environmental claims.

The duty to disclose information regarding coverage is premised, in part, on an insurance company's duty of good faith and fairly dealing. In most jurisdictions, this duty dictates that in the handling of claims, an insurance company must (a) give equal consideration to the interest of its policyholder, and (b) not do anything to harm those interests. A leading insurance commentator has argued, however, that the duty of good faith and fair dealing is only one of several theoretical bases upon which an insurance company's duty to disclose is based:

Following notification of an occurrence, I believe an insurer is obligated to disclose all applicable benefits, or to clearly inform insureds about the existence of rights and duties regarding all coverages, or to explain why the insurance benefits will not be paid in order to (a) fulfill the insurer's contractual commitment, (b) comply with the obligation--implied as a matter of law in all contracts--to deal fairly and in good faith, (c) protect the insured's reasonable expectations, and (d) avoid omissions that could constitute fraudulent misrepresentation.

This last theoretical foundation--the doctrine of fraudulent misrepresentation--illustrates the way in which the courts have viewed the duty to disclose as an affirmative duty. If an insurance company fails to disclose information which might have assisted the policyholder in securing coverage, the insurance company's omission may constitute actionable misrepresentation.

All doubts are resolved in favor of coverage. In Mariscal v. Old Republic Life Ins. Co., 42 Cal. App. 4th, 1617, 1623 (1996), the court observed:

A trier of fact may find that an insurer acted unreasonably if the insurer ignores evidence available to it which supports the claim. The insurer may not just focus on those facts which justify denial of the claim . . .

An insurer must liberally construe claim forms and the policy in favor of coverage; exclusions are strictly interpreted against the insurer.

Travelers' briefs in the case of Travelers Insurance Co. v. Buffalo Reinsurance Co. confirm the duty to disclose coverage to a policyholder who does not believe there is coverage. Travelers sued its reinsurers to recover $9,000,000 of losses paid in hundreds of property damage claims against its policyholder, Koppers Company, Inc. The arose from premature failures of Koppers' "KMM" roofing system. In March 1984, Koppers representatives met with a team of professionals from Travelers claims and engineering department to discuss the claims. During that meeting, Koppers assumed that the losses were not covered for a variety of reasons -- including an erroneous view of exclusions and deductibles in the policy. Memorandum of The Travelers Insurance Company In Opposition to Defendants' Motions for Summary Judgment On Late Notice Grounds, The Travelers Insurance Co. v. Buffalo Reinsurance Co., 86 C.V. 3369, (JMC)(Spt. 26, 1988, at 13-14). In the face of the reinsurers' argument that Travelers should not have provided coverage where the policyholder itself did not believe there was coverage, Travelers responded that "it was bound by ethical claims-handling practices to apprise its insured . . . that indemnity coverage might exist." Id. at 14-15. Travelers reiterated the point:

Reinsurers argue that they were prejudiced by Travelers' decision to provide coverage at all, notwithstanding that Koppers had never claimed that coverage existed. [citation omitted]. However, once Travelers receives notice of claims that are potentially covered under its policies -- even where the insured may not recognize that coverage is available -- Travelers had an ethical obligation to advise its insured. Id. at 44-45.

Consider the recent case of Vann v. Travelers Companies, 39 Cal.App.4th 1610 (First Appellate District, November 13, 1995). Gordon Vann, individually and doing business as Vann's Auto Body Shop brought a declaratory judgment action against Travelers, seeking a duty to defend in a third party environmental action alleging environmental contamination arising out of the operation of Vann's Auto Body repair business. Travelers argued that the "sudden and accidental" pollution exclusion relieved it of its duty to defend. Relying upon Shell Oil Company v. Winterthur Swiss Ins. Co., 12 Cal.App.4th 715 (1993), and its progeny, Travelers argued that the phrase "sudden and accidental" necessarily contains a temporal element. That is, the pollution must happen quickly. Travelers succeeded in this argument in the trial court but lost on appeal. The First Appellate District held that the record before the court did not establish enough facts to warrant a decision on the "suddenness" issue.

The record at this stage of the proceeding provides nothing which conclusively explains the source of the contamination, or whether the release of pollutants came about exclusively as the result of the routine disposal of the hazardous by-products of Vann's Auto Body Shop or, in part, by a condition that developed so rapidly it could probably be described as a "sudden event".

The court therefore ordered Travelers to defend the action.

But Travelers did not inform the court of its prior interpretation of the pollution exclusion. Historically, Travelers took the position that the "sudden and accidental" pollution exclusion did not prevent coverage for gradually occurring events.

In 1970, insurance industry trade associations responsible for the development of standard form policy language submitted identical proposed pollution exclusions to state regulatory authorities in Ohio, West Virginia and numerous other states.

The Insurance Rating Board (the "IRB"), a nationwide insurance drafting and rating organization that is a predecessor to the present-day Insurance Services Office ("ISO"), drafted the standard industry "pollution exclusion" clause. The IRB filed the standard form clause with state insurance regulators across the nation on behalf of member companies. This caluse, known as IRB-G335, first was issued as a mandatory add-on endorsement, but in 1973 it was incorporated into the body of the standard-form policy. See, e.g., FC&S Bulletins, Contamination Or Pollution Exclusion, Public Liability, p. Cop.-2 (April 1985); Pollution Coverage Exclusions, 11 For The Defense 75 (June 1970); Pollution--The Risk and Insurance Problem, 12 For The Defense 77, 78 (Sept. 1971); Tyler & Wilcox, Pollution Exclusion Clauses: Problems In Liability Policy, 17 Idaho L.Rev. 497, 500 (1981). An identical endorsement also was filed with the state regulators by the Mutual Insurance Rating Bureau ("Mutual Bureau"). Pollution Coverage Exclusions, 11 For The Defense 75 (Sept. 1970).

Sayler & Zolensky, Pollution Coverage And The Intent Of The CGL Drafters: The Effect of Living Backwards, Mealey's Lit. Rpts. (Insurance) 4,425, 4,432. The exclusions submitted were the same as those eventually incorporated into standard form CGL policies. Joest, Will Insurance Companies Clean The Augean Stables? -- Insurance Coverage For The Landfill Operator, 258 Ins. Coun. J. 258 (Apr. 1983).

The Insurance Industry pollution exclusion, prepared by the Mutual Insurance Rating Board, stated that insurance does not apply:

to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course of body of water; but this exclusion does not apply if such discharge, disposal, release or escape is sudden and accidental.

Travelers developed a variation on this language for its standard pollution exclusion:

[this insurance does not apply]

to bodily injury or property damage arising out of any emission, discharge, seepage, release or escape of any liquid, solid, gaseous or thermal waste or pollutant

(i) if such emission, discharge, seepage, release or escape is either expected or intended from the standpoint of any Insured or any person or organization for whose actual emissions any Insured is liable . . .

The most comprehensive record of the representations made to insurance commissioners during their review of the pollution exclusion in 1970 has been preserved in West Virginia. The West Virginia Commissioner of Insurance held a public hearing on the pollution exclusion clause to determine whether under West Virginia law the clause was "inconsistent, ambiguous or misleading;" or whether the pollution exclusion resulted in a restriction of coverage. Sayler & Zolensky, supra at 4,433; Price, Evidence Supporting Policyholders In Insurance Coverage Disputes, 3 Natural Resource & Environment 17, 48 (Spring 1988). The Commissioner was prepared to order a rollback or reduction of premiums if the insurance industry intended to reduce coverage. The industry protested that no reduction in coverage was contemplated by the pollution exclusion. In July 1970, the insurance industry's Mutual Ratings Bureau responded to the West Virginia Commissioner's concerns:

It is the public interest that willful pollution of any type be stopped in order to preserve the ecological balance.

• • •

This endorsement is actually a clarification of the original intent, in that the definition of occurrence excludes damages that can be said to be expected or intended.

July 1970 Mutual Insurance Rating Bureau memorandum, quoted in Sayler & Zolensky, supra at 4,433 (emphasis added).

Of particular interest are the representations of Travelers as to the meaning of its pollution exclusion. Travelers took an active role in securing approval for its exclusion and made it known that its form of the exclusion was also intended only to bar coverage for intentional pollution. Indeed, Travelers' 1970 filing is perhaps the most revealing of the insurance industry's submissions. In Travelers' own words:

It was generally agreed that general liability policies, because of the occurrence definition, prevent coverage for injury expected or intended from the standpoint of the insured. The idea behind these endorsements is that the insurance industry does not consider intentional pollution to be insurable, and the industry wishes to make its position clear to the insured.

• • •

The IRB form . . . excludes contamination or pollution except when the discharge is sudden and accidental. The Travelers' form takes a slightly different approach. Rather than expecting [sic, i.e., "excepting"] the sudden and accidental clause, we define discharge as "if expected or intended." We believe the results of the two phrases are the same, but we feel that the positive wording that we have used will be clearer to the insured.

see also Sayler & Zolensky, supra at 4,434 (emphasis added).

Travelers thus stated that there is no difference between the two forms of pollution exclusion: "Sudden and accidental" is equivalent to "if expected or intended."

After considering the insurance companies' representations, the West Virginia Commissioner approved the pollution exclusion in a written order and stated, in part:

(1) The [insurance] companies and rating organizations have represented to the Insurance Commissioner, orally and in writing, that the proposed exclusions . . . are merely clarification of existing coverages as defined and limited in the definitions of the term "occurrence," contained in the respective policies to which said exclusions would be attached;

(2) To the extent that said exclusions are mere clarifications of existing coverages, the Insurance Commissioner finds that there is no objection to the approval of such exclusions ...

Travelers took the position before the State of New York Insurance Department that the phrase, "sudden and accidental" did not prevent coverage for gradual pollution. On January 13, 1982, Thomas A. Jackson, secretary of the product management division, wrote a letter to Mark Presser, associate insurance examiner, of the New York State Insurance Department, arguing persuasively for coverage under the "sudden and accidental" form.

"Sudden and accidental" as a term standing by itself is capable of many interpretations.

The word "sudden" in Webster's New Collegiate Dictionary is defined as 1(a): happening or coming unexpectedly; (b) changing angle or character all at once; (2) marked by or manifesting abruptness or haste; (3) made or brought about in a short time. The word "accidental" is similarly defined as: (1) arising from extrinsic causes; (2)(a) occurring unexpectedly or (2)(b) happening without intent or through carelessness and often with unfortunate results.

There is nothing in the term "sudden and accidental" which requires the elimination of gradually occurring events from the collective. A number of court decisions in many jurisdictions have essentially reached the same conclusion: There is nothing which prevents gradually occurring events from being considered to be "sudden and accidental" as long as there is no intent to cause injury or damages.

The New York law is sensibly applied only when it is interpreted to mean that deliberate polluters cannot be insured.

When it is interpreted to mean that unexpected or unintended gradual pollution may not be insured, it will deprive insureds and claimants of protection which should be available and which the insurance industry is willing to provide.

How, rationally, can the law be interpreted to prevent insurance for "non-sudden" or gradually occurring pollution liabilities created by accidental, unexpected or unintended actions?

Mr. Jackson's strongly held and eloquently presented beliefs reflect the official position of Travelers.

Mr. Jackson wrote a similar letter to Michael L. Averill, Manager, General Liability Division, Insurance Services Office, on October 13, 1983:

I have seen copies of the proposed occurrence and claims made forms, and while many improvements have been made, it still is mind-blowing to see a continuation of the attempt to exclude coverage for pollution that occurs gradually.

Speaking as an underwriter/marketing person, I cannot support this ill-fated effort because:

1. It won't do what it intends; it will not stand up in court -- the existing contract has already proved that.
2. It perpetuates a false security, it misleads naive primary underwriters, excess insurers and reinsurers about the actual loss exposure covered.
3. It promotes controversy between insureds and carriers about whether an incident is sudden or gradual.
4. It will in the case of one policy alleging only "sudden but accidental" and another alleging "gradual only" lead to possible denial of coverage by both and consequent litigation.
5. It denies on its face a protection all insureds need: it ignores the reality of the market place and government regulations that require complete coverage.
6. It promotes the growth of non-admitted or excess and surplus lines carriers by opening a market opportunity for them to provide the coverage ostensibly "denied" by primary carriers.
7. If a company wishes to provide complete pollution protection, it must deviate from ISO; if it deviates on this, it may encourage deviation on other aspects.

Why continue to maintain the fiction that any language will be precise enough to divide what is gradual from what is not?

Why ignore what insured need and the courts already state is provided under existing contract language?

Edwin J. Rineheimer, Associate Director of Travelers' Marketing Resource Division, supported Mr. Jackson in a letter dated October 27, 1983 to Mr. Averill:

Travelers has expressed its dissatisfaction with the . . . sudden and accidental approach to pollution generally in Mr. Jackson's October 13, 19983 letter. In that a final decision is being asked for on this subject, I will set forth Travelers recommendation as to how the pollution issue should be dealt with . . . sudden/gradual distinctions can't be made ... .

In its Liability Coverage Manual, § 20.1.1, dated October 1984, distributed to supervisory and non-supervisory employees for use Travelers explained its understanding of the "sudden and accidental" language.

Travelers' reasoning was and is:

• The use of "sudden and accidental" language would not prevent covering gradually occurring events. The courts by 1960 had eliminated "suddenness" as a coverage requirement.
• An exclusion of this sort embodied in an "occurrence' contract does not change:
• The policy definition of "occurrence"
• The limits of liability section referring to "one occurrence"
• Language of this sort introduces confusion; such confusion may be resolved in favor of the insured.
• Insureds needed coverage for both kinds of accident [i.e., gradual and non-gradual pollution] -- Travelers was willing to provide it. A business judgment was made to generally provide coverage for both kinds of accident.

(Emphasis added.)

In the late 1970's, Travelers recognized that the 1970 standard pollution exclusion was ambiguous, unenforceable, and had been worded far more restrictively than Travelers had intended. Travelers' Claims Administration Manual states:

Over the years, Travelers realized that parts of our standard general liability pollution exclusion resulted in "over-kill" in some circumstances. Strict interpretation denied coverage in instances where denial was not intended. For example, we do not intend to exclude coverage for a leak from a garage's underground fuel oil tank into a nearby stream.

(Emphasis added.)

The Special Liability Coverage Unit was established in 1986 to make coverage determinations in hazardous waste cases, and later, in asbestos property damage cases) for which Travelers believed there was no coverage. The purpose of the unit was to assert non-coverage for pollution claims. Thus, the SLCU was specifically designed to deny coverage. Its coverage determinations are predetermined and, therefore, in bad faith.

The SLCU was established due to anticipated litigation between Travelers and policyholders, due to disagreements as to coverage for hazardous waste. . .

Travelers' position is that there was no coverage for hazardous waste situations, but that it would investigate the facts and circumstances of each of the claims and look to the applicable coverage, and then advise the policyholder.

Deposition testimony of John J. Miller, a director of the SLCU, in Allied-Signal case at 212.

We don't feel that there is coverage for asbestos removal cases from the beginning, that they are fact intensive and that we have a group of people that are specifically dedicated to those kind of claims and those kind of issues and therefore it was decided that the asbestos removal cases would be sent to the SLCU.

Q. Is there a similar belief that Travelers doesn't feel that there is coverage from the beginning for hazardous waste claims?

A. That's correct.

Deposition testimony of Michael Stone, a vice president of claims, in Allied- Signal at 223.

Liberty Mutual, for example, has stated that:

Dump site cases, where the insured gave the pollutants to a third party in good faith, are considered sudden and accidental and coverage is afforded under the regular RP policy.

Adolph Coors v. American Ins. Co., N.D. Colo. No. 92-N-61, (1993)

U.S. Dist. Lexis 3732, 41 (1993).

Fireman's Fund did not consider this exclusion to restrict coverage for gradual pollution. In its Claims Manual, Fireman's Fund explains:

The 1966 form did not contain a pollution exclusion. In response to unfavorable court decisions broadening theories of recovery in pollution cases, a mandatory exclusion endorsement was added to policies written after mid-1970 (except Personal and Professional policies). The 1973 form incorporates the language of the endorsement intact in the Exclusions section. Whether in the form of endorsement or exclusion, coverage is saved, that is, there is coverage if the contamination is both sudden and accidental. This saving language is intended to coincide with the intent of the "occurrence" definition, that the injury or damage was neither expected nor intended. Note also that the definitions of bodily injury and property damage in the 1973 form limits coverage to injury or damage occurring during the policy period.

Tom Grzelinski, Vice President of CNA Insurance, told the Institute of Scrap Iron and Steel that the pollution exclusion is ambiguous. The Institute's minutes of their meeting held on October 19, 1980 in Chicago state that:

There was a lengthy discussion concerning coverage pertaining to hazardous waste. The current policy provides coverage only if there is a sudden and accidental occurrence. Mr. Grzelinski said the current policies are ambiguous.

How, then, can these insurance companies argue that "the sudden and accidental" pollution exclusion vastly restricts coverage, when they have admitted the opposite is true?

Comment (e) of Section 205 of the Restatement (2nd) of Contracts (1981) states:

(e) Good Faith in Enforcement. The obligation of good faith and fair dealing extends to the assertion, settlement in litigation of contract claims and offenses. See, e.g., §§73, 89. The obligation is violated by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one's own understanding, or falsification of facts. (Emphasis added)

Aetna Casualty and Surety Company has argued that this provision precludes a party from arguing a position contrary to its pre-litigation understanding.

The obligation of good faith and fair dealing is very basic; it is an obligation to be fair and honest. The RESTATEMENT is clear in stating that it is unfair and dishonest for a party seeking enforcement of a contract to assert an interpretation that is contrary to that party's pre-enforcement understanding. Whether the asserted interpretation is supported by evolving case law, learned treatises, or other authorities is irrelevant to the fundamental issues of fairness and honesty. A party cannot fairly or honestly use the benefit of 20/20 hindsight to excuse the unconscionability of asserting an argument that is entirely inconsistent with the actual fact of its own understanding of a contract. The violation of the covenant of good faith and fair dealing comes not from claiming "the benefit of legal rulings from" the courts, but from the basic unfairness and dishonesty inherent in a contracting party's assertion of a legal position contrary to its factual understanding. It is just not right.

Letter from Brian R. Ade to Honorable Robert E. Francis, Aetna Casualty and Surety v. Morton International, Inc., June 8, 1994.

Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 modified, 11 Cal.4th 219a (1995), laid to rest the notion that drafting history should not be used to interpret the standard form CGL policy. The court cited drafting history to refute the insurance company arguments.

In this case, we find the drafting history relevant in evaluating Admiral's argument that the insurance industry will be named by the adoption of a continuous injury trigger that the industry assertedly never anticipated would be applied to these policies. Id at 219c.

The court then went on to review several articles that were written at the time that the new "occurrence-based" policy form was introduced throughout the United States in 1966. The court concluded that these articles reaffirmed the court's analysis of the policy language:

As these materials demonstrate, the drafters of the standard occurrence-based CGL policy, and the experts advising the industry regarding its interpretation when formulated in 1966, contemplated that the policy would afford liability coverage for all property damage or injury occurring during the policy period resulting from an accident, or from injurious exposure to conditions. Nothing in this policy language purports to exclude damage or injury of a continuing or progressively deteriorating nature, as long as it occurs during the policy period. Id. at 672-73.

The court went a step further and found that the drafters considered, and specifically rejected, a manifestation trigger:

Indeed, the drafting history of the standard occurrence-based CGL policy reflects that ... the drafters ... specifically considered and rejected the suggestion that language establishing a manifestation trigger of coverage be incorporated into the standard form CGL policy. Id. at 688.

The court concluded that the "the insurance industry is on record as itself having identified several sound policy considerations favoring adoption of a continuous injury trigger of coverage in the third party liability insurance context." Id. at 688.

The court's use of drafting history to interpret standardized insurance policy language -- language found to be clear and unambiguous -- puts to rest a hotly debated issue about the use of "extrinsic evidence" to interpret insurance policies. Courts should now be more willing to examine drafting history and other interpretive materials -- which is often recited in cases involving the "sudden and accidental pollution exclusion." With few exception, courts which consider the representations made to state regulators in 1970 -- that the "sudden and accidental" language was a mere clarification of coverage and not a reduction in coverage -- find that there is coverage for contamination that takes place gradually.

See, e.g., Joy Technologies, Inc. v. Liberty Mut. Ins. Co., 421 S.E.2d 493 (W.Va. 1992), Morton Int'l, v. General Accident Ins. Co., 629 A.2d 831 (N.J. 1993), cert. denied, 114 S.Ct. 2764 (US 1994), reh'g denied, 115 S. Ct. (1994), New Castle County v. Hartford Accident & Indemn. Co., 933 F.2d 1162 (3rd Cir. 1991), on remand, 778 F. Supp. 812 (D. Del. 1991), rev'd on other grounds, 970 F.2d 1267 (3d Cir. 1992), cert. denied, 113 S. CT 1846 (1993).

Courts which do not examine the drafting history are more inclined to rule against the policyholder. See, e.g., Hybud Equip. Corp. v. Sphere drake Ins. Co., 597 N.E.2d 1096 (Ohio), reh'g. denied, 600 N.E.2d 686 (Ohio 1992), cert. denied, 113 S. CT 1585 (1993), Upjohn Co. v. New Hampshire Ins. Co., 476 N.W. 2d 392 (Mich.), reh'g denied, 503 N.W.2d 442 (Mich. 1991).

One of the most categorical rejections of drafting history is found in ACL Technologies, Inc. v. Northbrook Property & Cas. Ins. Co., 17 Cal. App. 4th 1773 (1993). The Fourth District Court of Appeal flatly rejected the use of drafting history for several reasons, asserting that drafting history cannot be used unless there is an ambiguity in the policies; that drafting history contravenes a layperson's understanding of the policies; and that drafting history assumes that individual insurance companies are bound by statements of "industry spokesmen." Id. at 1790-1794. The court concluded that "there is no legal authority for use of drafting history". Id. at 1972. These considerations have now been swept aside.

It is particularly noteworthy that the California Supreme Court considered statements by insurance industry drafters, recognizing that the standard-form CGL policy is an insurance industry product -- not merely the product of a particular insurance company. The repeated references to "standard CGL policy language" throughout the opinion removed any necessity of showing that Admiral Insurance Company itself made, subscribed to, or adopted any of the insurance industry's statements. The Court noted, for example, that "[p]olicy forms developed by ISO [Insurance Services Office] are approved by its constituent insurance carriers and then submitted to state agencies for review. Most carriers use the basic ISO forms, at least as the starting point for their general liability policies." Montrose, supra. 671, n. 13.

By implication, however, statements of particular insurance companies are also relevant. In an earlier Montrose decision, for example, the Court of Appeal referred not only to industry drafting history, but also cited a manual by Travelers Insurance Company rejecting manifestation as a trigger of coverage.

The Travelers Indemnity Company's amicus curiae brief in support of Admiral urges adoption of the `manifestation of loss' rule, at least in property damage cases. We give to this brief all the weight it deserves when it is juxtaposed with Travelers' own claim department's liability coverage manual's explanation that, under the standard 1966 CGL occurrence policies used by it and Admiral, the`injury must occur during the policy period because coverage is triggered by the injury, not the accident or wrongful act... When the injury is gradual, resulting from continuous or repeated exposures, and occurs over a period of time, coverage may be afforded under more than one policy -- the policies in effect during the period of injury.'

Montrose Chemical Corp. v. Admiral Ins. Co., 35 Cal. App. 335, 344, n. 7, 5 Cal.Rptr. 358, 362, n.7 (1992) (emphasis added).

These considerations suggest that California courts should look not only to general drafting history by the insurance industry, but also to particular statements by individual insurance companies. The courts should hold the insurance companies to their historical pre-litigation admissions about coverage.