by Jordan S. Stanzler
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 Coverage
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:
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:
The Duty to Disclose Coverage When: The Policyholder Believes There is No Coverage
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:
The Failure To Disclose Coverage: Vann v. Travelers Companies
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 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.Submissions to State Regulators
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:
Travelers developed a variation on this language for its standard pollution exclusion:
[this insurance does not apply]
Filings In West Virginia
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:
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:
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:
Representation To The New York Department of Insurance in 1982
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.
Mr. Jackson's strongly held and eloquently presented beliefs reflect the official position of Travelers.Communications with ISO
Mr. Jackson wrote a similar letter to Michael L. Averill, Manager, General Liability Division, Insurance Services Office, on October 13, 1983:
Why continue to maintain the fiction that any language will be precise enough to divide what is gradual from what is not?
Edwin J. Rineheimer, Associate Director of Travelers' Marketing Resource Division, supported Mr. Jackson in a letter dated October 27, 1983 to Mr. Averill:
The Liability Coverage Manual
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:
(Emphasis added.)Leaking Underground Storage Tanks
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:
(Emphasis added.)COVERAGE DENIED: CREATION OF THE SLCU
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.
Deposition testimony of John J. Miller, a director of the SLCU, in Allied-Signal case at 212.
Deposition testimony of Michael Stone, a vice president of claims, in Allied- Signal at 223.LIBERTY MUTUAL
Liberty Mutual, for example, has stated that:
Adolph Coors v. American Ins. Co., N.D. Colo. No. 92-N-61, (1993)
U.S. Dist. Lexis 3732, 41 (1993).FIREMAN'S FUND
Fireman's Fund did not consider this exclusion to restrict coverage for gradual pollution. In its Claims Manual, Fireman's Fund explains:
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:
The Restatement of Contracts
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:
Aetna Casualty and Surety Company has argued that this provision precludes a party from arguing a position contrary to its pre-litigation understanding.
Letter from Brian R. Ade to Honorable Robert E. Francis, Aetna Casualty and Surety v. Morton International, Inc., June 8, 1994.DRAFTING HISTORY IN MONTROSE
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.
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:
The court went a step further and found that the drafters considered, and specifically rejected, a manifestation trigger:
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.USE OF DRAFTING HISTORY IN OTHER POLLUTION CASES
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.
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.
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