The Insurance Services Office (ISO) is in the process of introducing mandatory endorsements to its Commercial General Liability (CGL) program which clarify that coverage is not provided for injury or damage known to the insured before the policy inception. The need for these endorsements stems from a 1995 California Appeals Court decision.
The case
The case is Montrose Chemical Corporation of California, Plaintiff and Appellant vs. Admiral Insurance Company, Defendant and Respondent. CA Supreme Court #S026013. Filed July 3, 1995. CCH 1995 Fire and Casualty Cases, Paragraph 5376.
Montrose Chemical Corporation of California, which had gone out of business, had manufactured the pesticide commonly called DDT (dichloro-diphenyl-trichlorethane) at one of its sites in Torrence, California. Montrose had manufactured this chemical from about 1947 until the time it went out of business in 1982. When federal law made it illegal to sell DDT domestically, Montrose continued production for export outside the United States.
It was determined that seven insurance companies provided policies for Montrose during the period of time DDT was manufactured, ending with Admiral Insurance Company. Admiral's policies provided coverage between 1982 and 1986.
Law suits were filed against Montrose for damage and injury from the disposal of hazardous or toxic wastes at a number of sites in California. Although the other six carriers provided defense under reservation of rights, Admiral denied coverage and defense contending that its policy did not have to respond--because the coverage trigger resulting in loss and injury did not occur during its policy periods--and that the actions were uninsurable as losses-in-progress existing prior to the inception of Admiral's policies.
The case of Montrose Chemical vs. Admiral Insurance addressed the issue of defense only. Other, separate cases have similarly addressed the coverage issues and affirmed the Montrose decision. One such case is Pittston Company, Ultramar America Limited, Ultramar Pittston Company, Ultramar American Limited, Ultramar Petroleum, Inc. v. Allianz Ins. Company, et. al., U.S. Court of Appeals for the Third Circuit, Nos. 96-5166 and 96-5167, August 27, 1997. (See box on page 42)
The original trial court, in a summary judgment, decided in favor of Admiral. Montrose appealed.
The California Court of Appeals overturned the summary judgment of the trial court. The appeals court based its ruling upon the fact that the property damage was a continuous, progressive deterioration that was still in progress throughout the period covered by Admiral's policies, thus triggering coverage. It further decided that the wording in the CGL policy was not strong enough to preclude such losses. It also decided that the loss-in-progress rule did not preclude coverage in this case. Finally, it ruled that the expected or intended exclusion did not bar coverage in a progressive damage situation.
The case went to the California Supreme Court where in July of 1995, the decision of the appeals court was affirmed.
The impact of Montrose
Over the last few years, the consequences of this decision have been debated. Decisions in other states have supported or complemented the California decision. So while it may not have been the intent of the original drafters of the CGL verbiage in use to provide coverage for known loss resulting from the occurrence of progressive or continuous exposure, courts have ruled that such coverage exists in the modern CGL.
Such decisions have significant impact for risks such as contractors, manufacturers or businesses with pollution exposures that regularly face progressive or continuous exposures involving more than one policy period--businesses that previously thought these exposures were uninsurable but now find they may be covered after all. Some examples of businesses that would benefit from the broad interpretation of loss-in-progress or known loss include:
* A building contractor that uses inferior plumbing material in a housing development and claims begin to arise from water damage developing from plumbing leaks (crumbling foundations, warped supports causing flooring to buckle and so forth).
* The manufacturer of the piping used by the contractor. The manufacturer had used a new chemical process to manufacture the piping which ended up deteriorating over time.
Prior to Montrose, if losses spanned more than one policy period, coverage triggers such as manifestation, exposure and continuous trigger needed to be evaluated to determine whether or not the current insurer could be called upon to respond. As a result of Montrose, damage that starts in a prior policy period could be covered under a subsequent carrier's policy if the damages were to other claimants who were not known at the time of policy inception; or if the insured was not aware that additional claims could or would be filed; or if the insured was not aware that he/she (the insured) could or would be held legally liable for that damage or injury.
Because of Montrose and subsequent cases, the wording of the CGL policy has undergone extensive scrutiny over the last few years. As a result, the Insurance Services Office, Inc. (ISO), has developed a new set of mandatory endorsements to address the issue.
The change--known injury, damage excluded
The new mandatory endorsements included in the 1999 CGL changes apply to each of the Commercial Liability Coverage Parts including the Commercial General Liability Coverage Part, the Owners and Contractors Protective Liability Coverage Part, the Railroad Protective Liability Coverage Part, the Products/Completed Operations Liability Coverage Part, the Liquor Liability Coverage Part (Occurrence Version) and CG 28 07-Principals Protective Liability Coverage. Note, however, that only the occurrence versions of the coverage parts are affected by these changes. The new endorsements revise the insuring agreements so that commercial liability policies will not respond to any injury or damage known by the insured (or an employee of the insured who was authorized to give or receive notice of injury, damage or claim) before the policy inception.
Because of the format of the new mandatory endorsements, where the entire insuring agreement is restated, these endorsements can be used with any edition of the CGL where the insuring agreement is found in Paragraph 1 of Section 1. In other words, the new Known Injury or Damage endorsements may be attached to the 1988, 1993, 1996 and 1998 editions of the CGL.
ISO has stated in its release of these new changes, that the revisions are not a reduction in coverage but merely a restatement of the original intent of the coverage provided. However, it should be noted that in those states where the wording was determined to cover known, continuous or progressive damage, this change will be viewed as a reduction in coverage.
The endorsement explains what the circumstances are or when an event is considered to be "known," which is the earliest of any of the following:
1. when the insured reports any part of any injury or damage to the current insurer or any other insurer
2. when the insured receives a written or verbal demand or claim for damages
3. when the insured first becomes aware by any means that injury or damage has occurred or has begun to occur
This defines and significantly broadens the application of what is a "known" loss or a "loss-in-progress."
The new mandatory commercial liability endorsements are:
* CG 00 57-Amendment Of Insuring Agreement-Known Injury Or Damage (use with the CGL)
* CG 00 58-Amendment Of Insuring Agreement-Known Injury Or Damage And Inspections And Surveys Condition (use with the OCP)
* CG 00 59-Amendment Of Insuring Agreement-Known Injury Or Damage And Inspections And Surveys Condition (use with the Railroad Protective Liability Policy)
* CG 00 60-Amendment Of Insuring Agreement-Known Injury Or Damage (use with the Products/Completed Operations Liability Policy-Occurrence Version)
* CG 00 61-Amendment Of Insuring Agreement-Known Injury Or Damage (use with the Liquor Liability Policy-Occurrence Version)
Revised similarly is the following endorsement:
CG 28 07-Principals Protective Liability Coverage
Other changes
1. The new mandatory endorsements for the Owners and Contractors Protective Liability Coverage Part and the Railroad Protective Liability Coverage Part also have a revision to the condition on inspections and surveys that has already been addressed in the most recent version of the Common Policy Conditions-IL 00 17, now used by the other commercial liability coverage parts.
The revision to the condition states that inspections, surveys, reports or recommendations made by the insurer do not warrant that the physical conditions are safe, healthful or comply with laws, codes or regulations--with one exception. If the inspection or survey pertains specifically to the certification of boilers, pressure vessels or elevators under state or municipal statute, the exclusion does not apply.
2. A new pollution exclusion endorsement has been developed to allow the exclusion of all pollution loss from a policy with the exception of injury from any smoke fumes, vapor or soot that may be released by building heating equipment; and injury or damage from the heat, smoke or fumes that result from a hostile fire. The new endorsement is:
CG 21 65-Total Pollution Exclusion With A Building Heating Equipment Exception And A Hostile Fire Exception
3. Two other pollution endorsements have been revised to make them compatible with the exclusion wording that has been amended in the CGL over the last couple of revisions. The revised endorsements are:
CG 21 49-Total Pollution Exclusion
CG 21 55-Total Pollution Exclusion With A Hostile Fire Exception
4. Finally, a number of other CGL endorsements have been updated to reflect the new wording and numbering in the commercial liability insuring agreements. Basically, the changes are editorial in nature. They are:
CG 22 65-Optical and Hearing Aid Establishments (use with CGL Policy)
CG 24 18-Seed Merchants-Coverage For Erroneous Delivery Or Mixture And Resulting Failure Of Seed To Germinate (use with CGL Policy)
CG 24 19-Seed Merchants-Coverage For Erroneous Delivery Or Mixture (Resulting Failure Of Seed To Germinate Not Included) (use with CGL Policy)
CG 24 20-Seed Merchants-Coverage For Erroneous Delivery Or Mixture And Resulting Failure Of Seed To Germinate (use with Products/Completed Operations Liability Policy)
CG 24 21-Seed Merchants-Coverage For Erroneous Delivery Or Mixture (Resulting Failure Of Seed To Germinate Not Included) (use with Products/Completed Operations Liability Policy) *
In 1954, Pittston Company purchased property that, until the 1930s, had been used as an oil refinery. Pittston would use the property as an oil storage and transfer facility.
Between 1954 and 1983, Pittston experienced three known, major oil spills at the property. Pittston was able to provide evidence that these spills were substantially cleaned up. No citations or demands were made against Pittston by regulatory authorities.
In 1979, Pittston commissioned an environmental study that showed the property had been substantially contaminated by oil, most likely from the prior operation when environmental concerns were not as prevalent and controls were not as stringent.
In 1983, Ultramar purchased the property and operation. As part of the purchase, Pittston agreed to indemnify Ultramar for contamination damages. Ultramar purchased insurance coverage for pollution and added Pittston as an additional insured.
Ultramar operated the facility briefly but closed the operation in 1985 because of the contamination. Ultramar was forced to begin a decontamination, cleanup process. As a result, Ultramar made a claim against Pittston for cleanup costs. Accordingly, Pittston filed claims with its insurance carriers.
Subsequently, Ultramar and Pittston reached an agreement between them, whereby Pittston was responsible for 80% of the costs and Ultramar 20%.
Pittston's insurers denied coverage based upon the "known" loss exclusion. Pittston began legal action against the insurers, and Ultramar later joined the action.
The District Court of the State of New Jersey issued a summary judgment in favor of the insurers which basically stated that liability for events or damages occurring prior to the 1979 study commissioned by Pittston were covered. Coverage for damages occurring after the 1979 study was precluded from coverage as "known" loss.
This decision was appealed to the United States Court of Appeals where it was overturned and remanded back to the lower courts for trial.
Pittston Company, Ultramar America Limited, Ultramar Pittston Company, Ultramar American Limited, Ultramar Petroleum, Inc. v. Allianz Ins. Company, et. al., US Court of Appeals for the Third Circuit, Nos. 96-5166 and 96-5167, August 27, 1997. CCH 1997 Fire and Casualty Cases, Paragraph 6242.
©COPYRIGHT: The Rough Notes Magazine, 1999