CGL "Excess" Liability Insurers Not Responsible for Retroactive "CERCLA" Imposed Strict Liability for Environmental Cleanup Costs
February, 2002
In Rohm and Haas Co. v. Continental Casualty Co., 781 A.2d 1172 (2001), the Pennsylvania Supreme Court affirmed an appellate decision which vacated and remanded a trial judge’s decision granting insured (“Rohm”)’s motions for judgment notwithstanding the verdict (JNOV). A jury had ruled in favor of CGL “excess” liability insurers (“Insurers”) on their claims that Rohm violated the “known loss doctrine” and had certain knowledge of damage or injury for which there would be legal liability, as well as failed to disclose and deliberately concealed material information with the intent to deceive Insurers in connection with obtaining excess policies over the course of many years.
Facts
Rohm purchased a small pharmaceuticals company in June, 1964. Shortly thereafter they discovered the site was extensively polluted with arsenic. It was such a pervasive and potentially harmful problem that Rohm supplied drinking water to several neighbors and paid the hospitalization costs of one farmer who became ill. They also undertook remedial measures to clean up the site and yet arsenic waste continued to be produced as a result of Rohm’s operation. In 1978, Rohm sold the site to SmithKline Beecham.
As early as December 1964, Rohm added the site to existing CGL coverages with Insurers and periodically purchased additional policies covering the site and the laboratories thereon through the time they operated it. Rohm was aware at all times of the contamination and disclosed the problem to their primary insurer, their insurance broker, and Commonwealth authorities. However, there was no evidence that the excess Insurers were ever notified of the pollution problem.
Then in 1980, Congress enacted CERCLA, retroactively imposing strict liability for environmental cleanup costs. Thereafter, the EPA notified Rohm that they were potentially strictly liable for cleanup costs associated with the site. In 1988, “24 years after becoming aware of the severe pollution *** [Rohm] notified their excess insurers that they were asserting a claim to cover the *** cleanup costs, more than $21 million.” Naturally, litigation ensued.
The parties agreed to a bifurcated trial with liability issues tried before a jury. The jury responded to special interrogatories and determined that no coverage existed. It found in favor of Insurers on questions that the insured failed to disclose material facts about the arsenic pollution when it purchased the excess policies (the “fraud” issue). It also found Rohm knew of damage or injury for which there would be legal liability large enough to reach the excess policies (the “known loss” issue). The trial judge, however, entered JNOV on the jury’s verdict with respect to its answers to those questions.
The appellate court reversed with respect to both the fraud and known loss issues, as well as a late notice defense. This appeal followed.
Analysis
Three of the seven Supreme Court justices opined that Pennsylvania is adopting a broad form of the “known loss doctrine” and stated that Insurers escape liability for that reason (as a matter of first impression in the Commonwealth). They also held that Insurers escape liability by reason of established doctrines of insurance fraud (failure on the part of the insured to “reveal,” or “knowing concealment” of facts material to the application). They also found prejudice to Insurers by reason of the insured’s late notice. One of the seven justices concurred that Insurers should escape liability, but only upon the “fraud” ground, and filed a concurring opinion stating the majority did not need to visit the known loss or late notice defenses. Three justices lodged a dissenting opinion disagreeing with the four-justice majority opinion on the fraud defense and disagreeing with the three justices on both the known loss and late notice defenses. Some commentators have indicated that the known loss defense has been adopted by the Pennsylvania Supreme Court by a “plurality.” (This writer believes 33 is a tie. Except in certain sports a tie doesn’t even count, nor does it settle a debate over principle.)
The “known loss” doctrine had not been previously tested in Pennsylvania, but is recognized by courts of other states. The three concurring Supreme Court justices described the common law concept of the known loss doctrine, its relationship to the fundamental requirement of fortuity in insurance law and its essential provision that one may not obtain insurance for a loss that either has already taken place or is in progress. The Court acknowledged that state courts are divided as to the scope of the doctrine, some construing it narrowly (barring coverage only when the insured knew of certainty of damages and liability) and others more broadly, refusing to find coverage when the insured was substantially aware of the risk of loss.
The three justices hold that the standard for the known loss defense in this case should be “whether the evidence shows that the insured was charged with knowledge which reasonably shows that it was, or should have been, aware of a likely exposure to losses that would reach the levels of coverage.” The Court cited to undisputed testimony that Rohm first became aware of catastrophic levels of arsenic pollution at the site in 1964; that Rohm faced liability under the 1937 Clean Streams law; that Rohm’s legal department was concerned with the potential legal liability arising out of the situation; that it supplied drinking water and paid the medical bills of its neighbors; and that it considered the situation to be a grave emergency. This decision was reached against Rohm’s contention that it had no responsibility to reveal this ongoing problem at the time any of its excess policies were renewed, in part by virtue of the “don’t ask–don’t tell defense.” Insurers apparently did not ask specifically about the existence of pollution in the excess liability policy applications or renewal forms.
The dissenters disagree with both the “majority” and “concurring” opinions. According to the dissent, the legal liability is for CERCLA response costs only. CERCLA was not enacted until 1980, and the excess carriers were not impacted before the passage of CERCLA. No legal liability before CERCLA; hence, no need to notify the carriers before CERCLA and no prejudice to carriers in any event. The dissent disagrees wholeheartedly with the majority’s opinion on the fraud defense, the known loss doctrine, and the late notice question. It finds no evidence of “fraudulent misrepresentation” made with a “deliberate intent to deceive,” “material to the risk contractually assumed by the insurer” and states that the known loss defense formulation of the “majority” is “novel” and not subject to the clear and convincing standard for fraud nor “would it require a misrepresentation made with a deliberate intent to deceive.”
The dissent states in essence that since Insurers did not specifically ask, Rohm had no affirmative duty to tell. A footnote mentions that Insurers argued that they did require as a condition of coverage that Rohm affirm in writing that there were “no known losses” and that Rohm’s subsequent affirmation to that effect was false since they knew of the contamination. The dissent brushes that contention aside, and basically continues with its position that if you don’t ask, you’re not entitled to be told. Prior Pennsylvania decisions are cited in support of this proposition, but none are squarely on point.
COMMENT:
The 33 split (tie) of the Court on the known loss doctrine will fuel the debate in Pennsylvania in excess liability environmental coverage decisions. The 43 majority on the fraud defense seems firm since a majority of the Court adheres to the principle that there is an affirmative duty on the part of an insured to be candid and forthcoming with respect to matters of concern at its properties that could lead to grave third party liabilities. While the opinion reveals little on the issue, we offer a brief warning that there appears to have been something going on behind the scenes for years. Rohm told their primary carriers, their broker, and Commonwealth authorities of their concern at this specific site. But apparently neither Rohm, the broker, nor the primary carrier went upstream to the excess level in the underwriting process to keep information about the risks common to all carriers at all levels. The Court’s opinion disregards the excess policy application forms and instead disagrees over whether there is any legal duty to advise an insurer of these circumstances at all. We will never know from this opinion why the broker or primary carrier never sent such information to the excess carriers, but there seems no question Rohm did not offer this apparently critical information directly to its excess carriers.
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