Lost insurance policy? Continuation of long-term environmental liability coverage is always possible

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Companies facing liability for environmental clean-up typically face claims filed decades after the alleged polluting activity took place. This passage of time often results in the loss or disappearance of crucial historical documents, including insurance policies, necessary to respond to claims. Historic general liability insurance policies issued before pollution exclusions became commonplace in the 1970s are particularly useful in protecting a business from exposure to “long tail” environmental liability. Finding these policies, or evidence of their existence, is therefore a must. A recent decision by a federal court in New Jersey is a helpful reminder that when actual policies cannot be located, even limited documentary evidence of their existence, when supported by expert testimony from an insurance archaeologist accredited, may be sufficient to prove coverage and facilitate recovery.

In EM Sergeant Pulp & Chemical Co., Inc. v. Travelers Indemnity Co., Inc., civilian. No. 12-1741, 2015 WL 9413094 (DNJ 17 Jan. 2017), the plaintiff policyholder sought insurance coverage for the defense and indemnification of environmental pollution claims arising from a site from New Jersey. The policyholder, a distributor of heavy industrial inorganic chemicals and raw materials, owned property in Newark from 1942 to 1984. In 2004, the United States Environmental Protection Agency notified the policyholder of assurance that he was a potentially responsible party (“PRP”) with respect to the Diamond Alkali Superfund site. In 2009, the policyholder was sued as a third-party defendant in a lawsuit alleging property damage caused by environmental pollution from activities that occurred 50 to 75 years ago.

Faced with this potential cleanup liability, the insured performed a historical search of insurance policies covering the period of the alleged polluting activities. The search turned up no insurance policies, but produced a handful of documents with scattered information identifying a certain insurance company and possible years of cover, but no details on the terms of cover. The insurance company denied issuing a policy, so the policyholder sued it for coverage. On the insurer’s motion for summary judgment, the court found that the circumstantial (or secondary) documentary evidence of the policyholder’s coverage, while “rare”, was “barely sufficient” to dismiss the motion because it was supplemented by the expert opinion of an insurance archaeologist. with 30 years of experience.

The policyholder’s supporting documents consisted of (1) four pages of handwritten entries in his accounting records, (2) a claim made to another insurer in 1964, (3) a note relating to the claim, and (4) some standard policy forms he obtained from the insurance company in case of discovery. In addition to these supporting documents, the insured presented the opinions of an expert in the field of insurance archaeology, the field of reconstitution and audit of historical insurance coverage. The adjuster expressed his opinion that the missing policies provided cover for “civil liability”, including bodily injury and property damage to third parties, and that the cover was continuous from 1948 to 1965.

The court observed in its decision that a missing policy is not fatal to an insured’s claim for coverage, but pointed out that the insured bears the burden of proving the existence and terms of the missing policy by a preponderance of evidence under New Jersey law. He noted that other jurisdictions have used a higher standard of “clear and convincing” evidence. The key factor for EM Sergeant court, however, was the expert testimony that sufficiently illuminated the otherwise limited documentary evidence.

There are several important takeaways from this case for any company named PRP or sued in connection with Superfund or other environmental cleanup responsibilities:

  1. Look for pre-pollution exclusion policies or evidence of such policies. Prioritize locating general liability insurance policies for the period of the alleged polluting activity and, if they cannot be found, carefully search historical company records for any evidence of such coverage. A search should include not only the company’s insurance records, but also its financial records and claims records. As the Mr Sergeant demonstrated case, ledgers and other accounting records, including canceled checks, may identify insurance companies in entries noting premium payments or reimbursements, and may refer to specific policy numbers. Similarly, claim records can identify an insurance company that paid to defend or settle a claim in a given year.

  2. Check with your broker(s). A company’s insurance broker records can be a wealth of information. Brokers may have kept information about the placement of cover over the relevant years, including specific insurance companies, policy numbers, limits and conditions of cover, if not the policies themselves. It should be noted that in the Mr Sergeant In these cases, the broker’s records were not available, but they might have bolstered the otherwise meager documentary evidence of the policyholder.

  3. Consider engaging the services of an expert in insurance archaeology. The most important dish of Mr Sergeant is the singular importance of the opinions of the insurance adjuster archaeologist with regard to the documentary evidence in this case. The adjuster estimated, based on the available documents, that the missing policies included cover for third party property damage (i.e. environmental contamination) and that this cover continued for almost 40 years. As the court recognized, the expert’s opinion supplemented the documentary evidence and made the “difference” in a closed case. Insurance archaeologists can also assist in the search for secondary evidence of lost policies, both inside and outside the company. This can be especially warranted in situations where a company is accused of environmental liability inherited from an acquisition, compounding the already tedious task of researching historical records.

  4. Know your standard of proof. It may be that stronger secondary evidence of historical assurance than is available in Mr Sergeant would prove sufficient even without expert advice ‑‑ at least on the “preponderance” standard of proof. In states where the burden of proof is higher, however, an expert can be especially valuable. Regardless of the standard of proof, it is now incumbent on policyholders seeking coverage in a missing policy case to consider engaging the services of an insurance archeology expert to supplement the secondary evidence of coverage available. An experienced insurance attorney can provide helpful advice and recommendations on this and other complex issues in long-term environmental insurance.

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