ENVIRONMENT: Court breathes new life into old insurance policies

In an important and recent case, the Michigan Supreme Court held that commercial general liability (CGL) insurers may have obligations to defend and reimburse policyholders for environmental contamination claims.

The Supreme Court’s decision came in a consolidation of cases generally known as Gelman Sciences Inc. vs. Fidelity and Casualty Company. The major issue in that case was whether a CGL insurer had the obligation to indemnify or defend its policyholders for environmental contamination discovered after the period of coverage under the policy expired.

Pivotal in these cases are facts which indicate whether contamination occurred and manifested itself during or after the coverage date.

This issue is important because the “trigger of coverage” drew a distinction as to whether the “occurrence” (liability relating event) happened during the period of coverage.

The insurance company argued that even if contaminating events occurred within the policy period, the actual contamination did not “manifest” itself until the policy coverage expired.

The Michigan Court of Appeal had previously recognized several trigger of coverage theories, including the manifestation theory (when the contamination manifested itself); the exposure theory (the earliest date of when contamination occurs); and the injury in fact theory (when the discharge of contaminants cause actual environmental injury).

The Supreme Court adopted the injury in fact theory and held that coverage under the policies was triggered when the hazardous substances deposited into the environment, causing actual environmental damage.

The Court stated that the position of the plaintiffs was more consistent with the policy language, which indicated that an occurrence triggering coverage manifested itself when a sudden and accidental release occurred, resulting in property damage.

This decision is important because it could provide coverage for businesses which had CGL policies before the advent of pollution exclusion language.

Prior to 1975, most general liability policies provided occurrence coverage without pollution exclusions. This occurrence coverage allowed for a claim to be made at any time, so long as the liability arose during the policy period.

Currently, most general liability policies are “claims made” policies, meaning that coverage is only provided if a claim is made during the effective date of the policy. Businesses can, but frequently don’t, purchase retroactive coverage which would allow a claim to be made based upon a liability that occurred during any previous policy dates.

The Supreme Court’s decision in this case may allow many businesses to make claims against their prior liability carriers, even if they don’t possess copies of the policies themselves.

The bottom line: Don’t stop at the investigation of only your current insurance policies to determine whether you may have coverage for a liability.

Joseph Quandt is a partner with the Traverse City law offices of Menmuir, Zimmerman, Kuhn, Taylor and Quandt. His practice focuses on environmental and business matters. Prior to private practice, he was an enforcement specialist with the Michigan Department of Natural Resources. This article is intended to address information of general interest. It does not provide, nor is it intended to provide, any legal advice regarding any particular situation or subject. BIZNEWS