City of Littleton, Wallis, and Insurance For Multi-Year Liability Claims

Article by William J. Brady and Lisa K. Mayers

Reprinted with permission of The Colorado Lawyer, Vol. 29, No. 2,

February, 2000

Recently the Colorado Supreme Court decided two important cases arising in the

environmental insurance coverage context. The decisions are expected to have a major

impact on the availability of insurance coverage for Colorado policyholders. Coverage

counsel, in-house corporate attorneys, insurance defense lawyers, environmental attorneys,

and practitioners representing businesses will find this article helpful in understanding

their clients' insurance policies, especially when multi-year claims are implicated.

Affected businesses range from multi-national conglomerates to small "mom"

and "pop," gasoline-dispensing convenience stores. These latest pronouncements

from the Supreme Court are relevant to clients facing liability for damages spanning

multiple coverage periods, such as groundwater contamination, asbestos exposure, and

progressive construction defects and deterioration. Moreover, given the recent

proliferation of Y2K insurance coverage suits being filed around the country, the

potential application of these precedent-setting cases beyond environmental and

construction claims is significant.

According to EPA statistics, the average Superfund cleanup costs $25 million and

legal/consulting/transaction costs often more than double the indemnity exposure. By

declining to follow prior precedent in the U.S. Court of Appeals for the Tenth Circuit,

the City of Littleton and Wallis decisions will be welcome news to businesses across the

country, as well as in Colorado, when facing federal- and state-mandated cleanups.

CGL POLICY COVERAGE AND DUTIES

The standard form comprehensive general liability insurance policy ("CGL")

has been drafted on an industry-wide basis through organizations such as the Insurance

Services Organization ("ISO") and its predecessor, the Insurance Rating Board.

The standard form CGL policy contains common insuring agreements, definitions, exclusions,

terms, and conditions and, in most respects, varies insignificantly from one policy to

another when analyzing for environmental damage claims coverage.

The standard form CGL insurance policy insuring agreement provides:

The company will pay on behalf of the insured all sums which the insured shall become

legally obligated to pay as damages because of

1. bodily injury,

2. property damage, or

3. personal injury

to which this insurance applies, caused by an occurrence, and the company shall have

the right and duty to defend any suit against the insured seeking damages. . . . (Emphasis

added.)

"Occurrence" is defined in the standard form policy as an accident, including

a continuous or repeated exposure to the same or similar conditions, which results, during

the policy period, in bodily injury, property damage or personal injury, neither expected

nor intended from the standpoint of the insured. Therefore, coverage exists whenever

someone imposes or attempts to impose legal liability on a policyholder for an occurrence

spanning multiple policy periods, unless a specific exclusion applies.

Duty to Defend: The Hecla Mining Co. Case

The preeminent case in Colorado addressing an insurance company's duty to defend is

Hecla Mining Co. v. New Hampshire Ins. Co.1 Subsequent appellate court opinions build on

the principles set forth in this case. In Hecla Mining Co., the Colorado Supreme Court

ruled that an insurer's duty to defend arises when the underlying complaint against the

insured alleges any facts that might arguably fall within coverage of the policy. In the

environmental arena, this has proved to be a difficult duty to avoid. The opinion also

states that an insurer is not excused from its duty to defend an insured, unless there is

no factual or legal basis on which the insurer might eventually be held liable to

indemnify the insured.

Once the analysis has established an "occurrence" under the applicable

trigger of coverage theory,2 the next inquiry focuses on any policy conditions that might

exclude coverage under the applicable facts. In the absence of a clear and explicit

exclusion, the CGL policy provides coverage to policyholders arising out of pollution or

environmental impairment. It is well settled that insurance companies must establish that

the exclusion claimed applies in the particular case, and the exclusion is not subject to

any other reasonable interpretation. If there is more than one reasonable interpretation,

the provision is ambiguous and must be construed in favor of the policyholder.

The 1973 standard form CGL policy excludes the following from coverage:

Property damage arising out of the discharge, dispersal, release or escape of smoke,

vapors, soot, fumes, acids, alkalies, toxic chemicals, liquids or gases, waste materials

or other irritants, contaminants, or pollutants into or upon land, the atmosphere, or any

water course or body of water, but this exclusion does not apply if such discharge,

dispersal, release or escape is sudden and accidental. (Emphasis added.)

Hecla Mining Co. established that since the term "sudden" is susceptible to

more than one reasonable definition, the term is ambiguous, and the phrase "sudden

and accidental" is construed against the insurer to mean "unexpected and

unintended."3 Carriers seeking to avoid the duty to defend environmental liability

claims will therefore attempt to prove that the policyholder intentionally engaged in

conduct that produced the contaminant release.

Requirement of Timely Notice

Timely notification of a claim must be given to an insurance company under most CGL

policies. Notice of a claim arguably within the ambit of insurance coverage gives rise to

a duty to defend and preserves the policyholder's right to indemnification under the terms

of the policy. Generally, the insurance company must receive reasonable notice in

accordance with the policy terms. Failure to provide timely notice under a policy of

insurance may relieve the insurer of liability under its policy and obviate the duty to

defend. Notice should be given to the insurance company and its authorized agent or

broker.

In the environmental context, if a potentially responsible party ("PRP")

notice letter, a demand from a federal or state agency, a third-party complaint in a

contribution action, or a letter merely notifying a policyholder of environmental damage

is received, consideration should immediately be given to forwarding every demand, notice,

summons, complaint, PRP notice letter or other process to the insurer.4

The Colorado Supreme Court recently held in the case of Compass Ins. Co. v. City of

Littleton5 that the term "suit" found in the standard CGL policy would encompass

not only traditional lawsuits, but also coercive administrative enforcement proceedings

such as Environmental Protection Agency ("EPA") actions initiated by PRP letters

under the Comprehensive Environmental Response, Compensation and Liability Act

("CERCLA").6 Liability insurers, therefore, should be notified as soon as a

policyholder learns of potential property damage caused by an occurrence within the

meaning of the policy, even in the absence of governmental notice or formal notification

by third parties of the alleged damage.

Commonly, substantial amounts of time expire between the date when a municipality,

private company, or individual policyholder discovers a pollution problem and the date

when the financial manager, risk manager, or bookkeeper charged with the responsibility of

insurance realizes there may be insurance coverage. Whether notice has been given in a

reasonable and timely fashion depends on the facts and circumstances of the case, and, in

some states unlike Colorado, the insurance company's ability to demonstrate prejudice from

the failure to receive a more timely notification. Some jurisdictions have held that any

delay in giving notice bars an otherwise valid claim only if the insurance company is able

to demonstrate prejudice.7

In Colorado, on the other hand, prejudice or lack of prejudice is irrelevant.8 Untimely

notice is a bar unless the delay is "reasonable under the circumstances" or

"justifiably excused." If the policyholder can establish justifiable excuse,

prejudice to the insurance company may not bar the claim.9 In other words, failure to

notify an insurance company within a reasonable time may constitute a breach of contract,

thus relieving the insurance company from liability thereunder, unless the policyholder

establishes a justifiable excuse or extenuating circumstances to reasonably explain away

the delay.10

Policyholders typically attempt to excuse their conduct by asserting that they were

unaware of the policy because old policies were lost, missing, or otherwise not retained.

Usually, the policyholder did not think that coverage was applicable, or otherwise

available, until being informed at a later date by experienced, knowledgeable coverage

counsel. An uninformed broker or agent, financial director, risk manager, bookkeeper, or

even legal counsel unfamiliar with coverage issues may not have realized that insurance

coverage was available. In some instances, a well-founded belief that the insured is not

liable for the damage claimed, perhaps based on the advice of a broker, insurance agent,

counsel, or otherwise, has been accepted as an excuse for untimely notice.11

However, in the 1997 case of Haller v. Hawkeye Security Ins. Co., the Colorado Court of

Appeals held as a matter of law that a belief in non-liability was not a justifiable

excuse for failing to notify an insurer of a suit or claim.12 Judge Metzger specially

concurred in the Haller opinion to clarify that justifiable excuse in giving notice is a

question of fact to be determined by all the facts and circumstances measured against a

reasonable person standard.

The issue of whether Haller applies retroactively to notice cases is a question

presently on appeal before the U.S Court...