Municipalities Learn to Recover Insurance Assets from Damaged Property

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Municipalities Learn to Recover Insurance Assets from Damaged Property Financing remediation of environmentally-damaged property Insurance is key to fiscally feasible brownfields development The city of Denver was able to take advantage of the pool of insurance money available to several generators of hazardous waste whose wastes were disposed of in the Lowry Landfill, one of the largest landfills in the country. By Daniel J. Struck and Matthew W. Cockrell EDITOR'S NOTE: This article is a general survey of the options available to
municipalities to recover the insurance assets of potentially responsible parties
(PRPs). The law concerning recovery strategies varies from state to state; any city
considering pursuing any of the strategies discussed in this article should promptly
conduct a thorough review of the applicable state's law. Instead of Brownfields being a drain on the resources of cities, a new key to cover the cost of
cleaning-up these substantial liabilities can be found in the insurance policies of the
polluting corporations. Cities face sizeable costs to remedy or develop environmentally-
impaired properties. As stated in Recycling America's Land: A National Report on
Brownfields Redevelopment by the U.S. Conference of Mayors , January 1998: "The report's findings indicate that the total number of Brownfields in 126
cities exceeded16,500 sites, representing over 47,000 acres of abandoned or
underutilized properties. Over 100 cities collectively estimated that they would
receive additional annual tax revenues in the range of $205 million - $500
million if they would return their Brownfields to productive economic use." In the report, 112 cities indicated that 236,000 jobs could be created if their Brownfields
were redeveloped. Cities cited increased local tax revenues and job creation as the most
important public benefit of Brownfield redevelopment, followed by neighborhood
revitalization, a ranking that supports the view that abandoned properties can negatively
affect entire neighborhoods. Of the cities answering the 1998 conference of mayors survey, 94 percent said that the
most frequently identified impediment to property clean-up was lack of money. Even more
significant are the tremendous social, public health and welfare costs of polluted sites
scattered throughout populated communities. Otherwise unproductive real estate can be
transformed into productive tax-generating revenue sources. While the costs of effective remediation appear beyond the already overextended means
of cities, the costs of doing nothing are even more catastrophic. Cities have means to finance Brownfields remediation Cities can obtain millions of dollars to clean-up polluted sites or Brownfields, however,
from the insurance policies of the parties who caused the environmental damage. The
insurance policies of all past owners, operators, generators or transporters, i.e., the
potentially responsible parties (PRPs), can be successfully used by local governments to fund
environmental remediation. This ability of governmental entities to access the insurance
assets of responsible parties has the potential to operate as a significant vehicle for
environmental revitalization. Far too often, cities view cleaning up "postage stamp" sized hazardous waste sites as an
expensive luxury at a time when scarce government resources are allocated for other uses.
Far too often, already overtaxed cities are forced to pay substantial portions of the cost of
cleaning hazardous waste sites because of the seeming unavailability of recovery from the
responsible parties. The means for funding the clean-up of environmentally-impaired
properties do exist; they require little more than a bit of creativity and expertise in the
principles of insurance law. This article is a practical introduction to some of the ways in which creative cities can use
existing cost-recovery strategies to achieve the effective environmental renewal of sites that
might otherwise be rejected. Insurance assets of responsible parties It is well-known in the private sector that insurance is available to PRPs to cover their
own environmental liabilities. Cities, however, can also reach the insurance assets of PRPs.
For example, in many circumstances, insurance assets can be used as a means of recovering
what would otherwise be orphan shares that would have to be assumed by governmental
landfill owners. Similarly, the insurance assets of former property owners can be used by
municipalities to stimulate the redevelopment of urban properties in the context of
Brownfields development. By being attuned to the insurance assets of responsible parties and
well-established principles of insurance law, cities can access a substantial pool of resources
to fund large and small environmental cleanups. These strategies were recently successfully employed by the city and county of Denver. In
City and County of Denver v. Mountain States Special Market, Inc., et al., filed in Colorado
District Court (the "Denver Insurance Action"), Denver successfully obtained money from
the insurance companies of two waste generators whose waste was hauled to the Lowry
Landfill, one of the nation's largest municipal landfills. In less than a year, and with minimal
litigation costs, Denver obtained a sizeable recovery from otherwise unreachable PRPs.
In a similar vein, the creative pursuit of the insurance assets of PRPs by cities can be a
powerful means of driving Brownfields redevelopment. Most large cities are pursuing
Brownfields redevelopment. This often entails the clean-up of either large hazardous waste
sites or "postage stamp" sites located in populated urban areas. The cities, and their counsels,
can identify former owners, operators and generators at these sites and, regardless of whether
they are monetarily judgment proof, obtain full recovery by pursuing the surviving insurance assets of the PRPs. By being sensitive to the availability of insurance -- including old,
historical coverage-municipalities may no longer face the "Hobson's choice" of either having
to abandon contaminated properties or paying for the cleanup of these types of sites out of
scarce city revenues. Through the aggressive pursuit of insurance assets, these sites can be
remediated fully at little cost to cities. Any city can achieve these results under the proper circumstances -- one need only be
aware of the widespread availability of insurance assets and be attuned to the means of
accessing these assets. Denver's example In the Denver Insurance Action, the U.S. Environmental Protection Agency sued the city
and county of Denver to remediate the Lowry Landfill in Arapahoe County, Colo. After
entering into a consent decree with EPA, Denver filed a cost recovery action against the many
generators of hazardous wastes whose wastes were disposed of at the site. The parties
calculated the volumetric shares of all the generating parties. The volumetric shares were
then used to calculate the liability of each of the generating PRPs. As is often the situation in
such cases, two of the PRPs demonstrated that they were unable to pay their shares of
$6,317,700 and $1,606,814, respectively. Instead of forcing these companies into bankruptcy or merely treating their volumetric
share as an orphan share to be assumed by the other PRPs and the city, Denver settled with
these two PRPs and received an assignment of their causes of action against their general
liability insurance carriers. In most instances, the insurance carriers had previously denied
coverage to these two PRPs. As pled in the Denver Insurance Action: "8. As part of the Lowry settlement, Denver obtained an assignment of any and
all chooses in action (legal claims), causes of action and claims (the PRPs)
have against their liability insurer n the defendants in this case n which
breached their insuring obligations by refusing to pay for the liabilities of (the
PRPs) arising out of the Lowry Litigation, which breaches are continuing as of
the date of this complaint. Said assignments by (the PRPs) were approved as
part of the Lowry settlement, have the full force and effect of law, and are
binding upon these defendants." The essence of this legal strategy is to identify liable PRPs with historic comprehensive
general liability policies and to treat these assets as a viable source of potential recoveries to
respond to environmental exposures. By virtue of their unique characteristics, comprehensive
general liability policies are an invaluable asset for the recovery of the costs of environmental
remediation. These policies have what is often referred to as a "long tail," meaning that they
cover property damage or other injury that took place during the particular policy period,
even though a claim for damages is not brought until long after the expiration of the policy.
Similarly, given the character of environmental injury that is often latent and not discovered
until after a given policy period, many years of insurance coverage are frequently triggered by
this exposure. Thus, there is often a substantial pool of funds available to pay for the costs of environmental cleanups available to cities even if the individual PRPs are themselves unable
to pay their fair share. Courts across the country are finding that environmental liabilities are covered under
these broad policies. The legal basis for environmental remediation costs constituting covered
"damages" is found in the following standard policy language: "The insurer will pay on behalf of the insured all sums which the insured shall
become obligated to pay as damages because of bodily injury or property
damage to which the insurance applies caused by an occurrence." The costs of remedying environmental damage are generally treated as "damages" for the
purposes of these policies. In United States Fidelity and Guaranty Co. v. Thomas Solvent Co.,
683 F. Supp. 1139, 1168 (W.D. Mich. 1988), for example, the court expressly rejected the
carriers' contentions that the "historical separation" of legal damages and equitable remedies
should apply to the construction of "damages:" "While such claims (government-imposed environmental actions) might be characterized
as seeking "equitable relief," the clean-up costs are essentially compensatory damages for
injury to common property. The short answer is that from the standpoint of the insured,
damages are being sought for injury to property." See also, Coakley v. Maine Bonding &
Casualty Co., 135 N.H. 402, 618 A.2d 777 (1992); Boeing Co. v. Aetna Casualty & Sur. Co.,
113 Wash, 2d 869, 784 P.2d 507 (1990); C.D. Spangler Const. Co. v. Industrial Crankshaft
& Eng'g Co., 326 N.C. 133, 388 S.E.2d 557 (1990). The pool of insurance assets available to a state or local government pursuing this
strategy can be quite large because all the policies in effect while the pollution took place may
be required to provide coverage. This frequently means that the city has decades of coverage
available to it. In order to recover insurance assets, cities must be aware of how the
characteristics of historical comprehensive general liability policies and environmental
damage interact to create a substantial pool of money for environmental remediation. These
policies are normally "triggered" by property damage taking place during the policy period,
not solely by the particular accident or condition. In a seminal decision, the California
Supreme Court in Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. App. 4th 645,
42 Cal. Rptr. 2d 324 (1995) concluded that property damage that is continuous or
progressive throughout successive policy periods is covered by all the insurance policies in
effect during those periods. In the Denver Insurance Action, Denver took advantage of the pool of insurance money
available to the PRPs when it would otherwise have received nothing because of the PRPs'
inability to contribute their volumetric share. Denver's counsel filed the Denver Insurance
Action in September 1997. Within one year, at a minimal cost, the firm successfully
recovered substantial money to cover the cost of cleaning up Lowry Landfill. Since Denver's
counsel was paid on a pure contingent fee basis out of the settlement, the lawsuit was
without significant risk to Denver. The situation facing the city of Denver was not unique. It is not unusual for cities to be
faced with significant gaps in their remediation plans because of the inability of liable PRPs to
pay. By being aware of the possible presence of a pool of insurance assets, and by structuring
settlements with PRPs, cities may recover money to pay for necessary environmental
remediation. Previously, such costs would have been paid from public funds. Strategies for recovering insurance assets With some variations, there are four specific theories under which cities can seek to
obtain insurance coverage to provide for the costs of environmental cleanups from policies
issued to PRPs. Recovery as a named insured Cities frequently are named as additional named insureds on the insurance policies of
their contractors. An additional named insured is provided the same coverage as that
provided to the primary insured. Thus, when a city is named as an additional named insured
directly on the insurance policies issued to a PRP, the governmental entity has a direct claim
to obtain coverage from the insurance companies under those policies. Recovery of assigned claims Causes of action under comprehensive general liability insurance policies can be assigned
from PRPs to cities if such assignments are properly executed, as in the Denver Insurance
Action model. When a PRP is sued by the city or by anyone else for environmental liabilities, it should
tender the defense of the lawsuit to its insurance companies. The insurance carriers will
likely refuse to provide a defense -- insurers almost invariably refuse to provide a defense for
environmental claims under their comprehensive general liability policies. In the typical
action seeking the recovery of environmental liabilities, there is tremendous pressure to
settle. A PRP may either settle or have a judgment entered against it. Since the PRPs'
insurance companies refused to afford it with a defense or indemnity, they are liable to the
PRP for breach of contract. It is a relatively simple matter for a PRP to assign this breach of
contract claim to the city as part of a settlement thereby allowing it to recover the full amount
of the PRPs' liability for the site. The city can then seek recovery against these insurance
companies. Some diligence and familiarity with the conditions for insurance coverage is required
before employing this strategy for recovering PRP insurance assets. As assignee, the city
stands in the shoes of the assignor and is subject to the same coverage defenses, such as late
notice, as the assignor-PRP. Accordingly, a close review of the PRPs coverage program and a
risk analysis of the anticipated policy defenses is required. With the proper selection of cases
in which to pursue this assignment strategy, cities can maximize their recovery of the costs of
environmental cleanups. Insurance for a judgment creditor In most states, there is a statutory requirement that all insurance policies issued in that
state contain a provision that the plaintiff (i.e., the city) who obtains a judgment against a
debtor (i,e., the PRP) can recover the judgment directly against the PRPs' insurance company.
For example, California Insurance Code Section 11580 states that all policies delivered in
California must provide: (2) A provision that whenever judgment is secured against the insured in an
action based upon bodily injury, death, or property damage, then an action
may be brought against the insurer on the policy and subject to its terms and
limitations, by such judgment creditor to recover on the judgment. Thus, cities have yet another key to funding their brownfield obligations by obtaining a
judgment against the PRP and then proceeding directly against the insurers for funding the
brownfield's cleanup. Direction action against insurers In Wisconsin and Louisiana, so-called "direct action" statutes have been enacted enabling
injured plaintiffs, in this case, a state or municipality, to sue the insurance companies of the
PRPs directly. For example, the Wisconsin direct action statute permits a party injured by the
negligence of an insured party to seek recovery directly from the insurer. Conclusion By being sensitive to the insurance assets of PRPs and by developing expertise in gaining
access to those assets, cities have the opportunity to recover some of the costs of
environmental cleanups. Instead of simply surrendering and accepting an orphan share or
other reduced settlement, the government can use PRP insurance money to collect full value
to complete the remediation of polluted sites. About the authors:
Daniel J. Struck is an attorney in the Chicago office.

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