ENVIRONMENTAL INSURANCE: ARE YOU COVERED? BY KAREN SUTHERLAND Ogden Murphy The Model Toxics Control Act (MTCA) makes current and former property owners and business operators strictly liable for environmental contamination, even if they were not at fault. One significant aspect of MTCA is retroactive liability. Events that occurred 20 or 30 years ago can result in liability today. A business or property owner can be liable for spills or disposal of hazardous substances that occurred in the past even if the conduct was legal at the time. This turn of events has lead to some complex and interesting developments in insurance law. Policies that were written long ago did not anticipate that the policyholder would later become liable for things such as leaking underground oil and gasoline tanks, solvent spills, paint disposal and other events that occurred in the past, particularly when no claims were made when the policy was in effect or within a predictable time after the policy period. The Washington State Supreme Court recently decided several key environmental insurance issues in a case called Olds-Olympic, Inc. v. Commercial Union. The decision clarifies when insurance will pay for cleanup costs and pay for preventive measures to keep contamination from spreading to someone else's property. Olds-Olympic, the former owner of a home heating oil distribution facility, discovered that its underground storage tanks had leaked. Subsequent owners of the property demanded a cleanup. Olds-Olympic notified the Department of Ecology (Ecology) and conducted a voluntary cleanup with Ecology's oversight. Olds-Olympic reported the contamination to its insurers, seeking reimbursement for cleanup costs, damages and attorney's fees. The insurers denied the claim under the "owned property" exclusion, which is a standard insurance provision stating that the insurance does not cover damage to property owned, occupied, controlled or used by the insured. The insurers also questioned whether there were any "damages" as defined in the policies, and whether notice of the claim was too late. The Supreme Court ruled that groundwater is owned by the state, and that the "owned property" exclusion would not apply to any damage to groundwater. In other words, if there was damage to groundwater (which flows, at varying depths, under all land), the damage would be covered by insurance even though most of the damage was to the company's own property. The insurers also claimed that groundwater was within the "care, custody or control" of the company. The Supreme Court rejected this claim, stating that groundwater was not "essential to Olds-Olympic's business," that the company had no permit to use the groundwater, and that it had not exerted any control over the groundwater. The insurers argued that there was no "damage" to the groundwater, but that the cleanup had been a "preventive measure" to keep the contamination from spreading through the soil into the groundwater. The court responded by distinguishing between damages and preventive measures: "Under any CGL [commercial] policy, only those portions of cleanup costs necessary to prevent further degradation of property belonging to another will be covered, given the owned property exclusion. Any portion of the cleanup affecting only the insured's property would still be subject to such an exclusion." Many issues were left undecided by the Court, such as whether there was a duty to defend the company when no suit had been filed, and whether preventive measures taken before third-party damage occurs would be covered. Nevertheless, the ruling should be beneficial both to insurers and to businesses because it reduces some of the uncertainty in this complex area of the law. The Olds-Olympic ruling and other recent court decisions and regulations provide a framework for determining whether coverage exists. Coverage for each claim, though, is governed by the unique facts of that claim. Here are some guidelines for working with an insurer during the claims handling process: Cooperation is the key. "Cooperation between insureds and insurers in fairly and expeditiously resolving legitimate disputes and in reducing or eliminating nonmeritorious claims is in the public interest," according to recent State Insurance Commissioner regulations. Environmental claims are complicated by issues concerning events in the distant past. The Insurance Commissioner has recognized that these claims involve "uniquely challenging problems of both lost evidence and witnesses." In fact, insurance regulations adopted in 1995 require the parties to cooperate with each other. Give notice of the claim as soon as possible, and provide your insurer with everything you know. Give the insurer any relevant documents and names of witnesses, without waiting for the insurer to ask for them. The insurer will ask for all relevant information at some point, and providing it up front can speed the claims handling process. Also, if you give late notice of a claim and the insurer is prejudiced, your claim may be denied. Send the insurer a copy of your policy and any other documents relating to the policy. This can save a lot of time, particularly if the policy is more than 10 or 15 years old. Insurers do not keep policies forever. In fact, regulations regarding policy retention went into effect for the first time on July 1, 1996. Under the new regulations, insurers are required to keep records of new policies for 20 years. There was no such requirement 20 years ago, so don't expect your insurer to have a complete record of your 20-year-old policy today. Be realistic with your expectations. Read your policy before making a claim, and do not expect your insurer to pay 100 percent of your damages if there are substantial legal or factual issues regarding coverage or regarding the existence of a lost policy. Don't throw your business records away, even if you have retired or sold or closed your business. These old records may be crucial to establishing that someone else (such as a tenant or supplier) is responsible for the contamination, and to identify witnesses. Additionally, old records may assist your environmental consultant in determining what kind of contamination may be present. Get professional help dealing with regulatory agencies. Attorneys and environmental consultants experienced in negotiating with the Department of Ecology and the Environmental Protection Agency can speed up the regulatory review process and possibly reduce your cleanup costs. Do not purchase potentially contaminated property without a well-written agreement between buyer and seller that covers all aspects of the cleanup process, including access to the property for testing and monitoring over time and responsibility for cleanup costs. Your insurance will not cover a known loss, nor will it cover damage that occurs before the policy period. Therefore, protecting yourself and limiting your exposure to environmental liability will be your responsibility. Being aware of current law and following these guidelines should help make the environmental cleanup and claims handling process as painless as possible. Karen Sutherland is chair of the Northwest Environmental Claims Association and a member of the Environmental Law Department of Ogden Murphy Wallace, a multispecialty regional law firm with offices in Seattle and Wenatchee.