Insurance Coverage for Agricultural Environmental Claims

A recent agricultural case highlighted the importance of agricultural counsel having a working knowledge of insurance coverage law. After apparently receiving a complaint from a neighbor, a dairy farm was served with a temporary restraining order prohibiting its operation from applying manure. The potential impact on the dairy's day-to-day operations was disastrous. Even worse, a long, drawn-out legal battle while the case was pending would be financially crippling, regardless of the ultimate outcome. The dairy farm turned to his insurance carrier to defend its interests. Instead, the dairy's insurance agent responded that there was no coverage because the claim arose out of "pollution." The dairy's insurance policy, like many others, contained a "pollution exclusion." If the dairy had accepted its agent's interpretation, this is where the story would have ended.

Fortunately, the dairy was willing to challenge its insurer's determination. Through a series of exchanges between its attorneys and the insurance carrier, the dairy farm's law firm was able to persuade the insurer that the "pollution exclusion" did not apply. The result: the insurance carrier reversed its initial denial of coverage and agreed to pay for the dairy's defense. The dairy now can afford to challenge the temporary restraining order.

This story teaches a very important lesson: if you are not willing to stand your ground with insurers, many of your client's claims will go unpaid. This article provides insurance coverage advice to attorneys who consider pursuing insurance coverage.

Insurance policy basics

When an agricultural client, whether a farmer, rancher, livestock producer, or different agri-business, comes to you with an environmental problem, a first step should be to take inventory of his insurance policies. Insurance professionals generally speak of policies as responding to two types of losses: first party and third party. A first party loss results when the policyholder suffers property damage, for instance, when a fire destroys a policyholder's barn. In contrast, a third party loss results when people other than the policyholder make a claim that the policyholder is liable. For example, if the policyholder's barn burns while it is storing a neighbor's hay crop, that hay crop would be a third party loss. Insurance companies often sell insurance packages that cover both first and third party losses.

Most traditional liability policies are "occurrence" based. They cover liability for property damage or bodily injury that occurs within the policy period, even if the third party makes the claim years later. Although this concept seems simple enough, the results of pursuing such coverage can be quite spectacular. Imagine a fertilizer spill that, ten years after it occurs, is discovered to have migrated into a local water supply. Users of this water supply then bring a claim against the person that caused the spill, who in turn, tenders a claim to his insurance company. The insured can look not only to his current policy, but each policy dating back to the date of the spill, because property damage "occurred" during each of these ten years. The end result is that he has not one year of coverage to respond to the loss, but ten. His policy limits have, in effect, multiplied tenfold. Even more spectacular, many insurance policies promise to pay for "all sums" for which the policyholder becomes liable as a result of an "occurrence." A number of state courts have interpreted this "all sums" language to mean that the policyholder can choose which year of all those triggered should respond to the occurrence. See e.g., Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1057-58 (Ind. 2001). For instance, in the ten-year example set out above, the policyholder could select the policy in effect during year three to respond to the spill. This is extremely valuable when insurers become insolvent, potentially leaving a policyholder with a reduced or no remedy.

Depending on the size of your agricultural client, you may find that he or she comes to you with a number of different policies. One typical policy is homeowner's insurance, providing first and third party coverage. Although a homeowner's policy usually will seek to exclude coverage for the business pursuits of the policyholder, a farmer's homeowner's policy may be different, or contain endorsements that extend coverage into farming-related activities. On the other hand, a larger corporate farmer...