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PHILADELPHIA-A large group of liability and marine insurers is asking a federal appeals court to reconsider a ruling that imposes strict limitations on insurers' use of the so-called "known loss" doctrine to deny coverage.
A three-judge panel of the 3rd U.S. Circuit Court of Appeals late last month handed the loss to a group of several dozen insurers facing indemnity demands from three policyholders that had suffered losses before they purchased their general liability and marine insurance.
In a 3-0 decision Aug. 27, the 3rd Circuit panel ruled that insurers may not impose the "known loss" doctrine and deny coverage if policyholders did not know with certainty before purchasing coverage that they were liable for those existing losses.
The ruling overturned a New Jersey federal district court's November 1996 ruling that gave insurers far greater latitude to invoke the doctrine. The district court ruled that an insurer could bar coverage under the doctrine even when a policyholder's liability for an earlier loss had not been established at the time coverage was purchased. An insurer could bar coverage as long as the policyholder knew it potentially could be held liable for the earlier loss, the overturned decision had held.
The insurers involved in the case have asked the full 3rd Circuit on Sept. 10 and 11 to reconsider the panel's decision. Among the insurers from around the world involved in the case are Allianz Insurance Co., a subsidiary of Allianz A.G. Holding; Employers Insurance of Wausau, a subsidiary of Nationwide Group; Insurance Co. of North America, a subsidiary of CIGNA Corp., Travelers Indemnity Co., a subsidiary of Travelers/Aetna Property Casualty Group; and underwriters at Lloyd's of London.
The 3rd Circuit panel's decision, which relied heavily on a 1995 California Supreme Court decision and two 2nd Circuit rulings, is the most expansive and persuasive decision on the "known loss" issue, policyholder attorneys said. While the ruling sets precedent only for 3rd Circuit federal district courts in cases that require the courts to interpret New Jersey law, policyholder attorneys expect the decision will be influential around the country.
Insurer attorneys disagreed. Even so, one insurer attorney said the decision is more dangerous for insurers than were earlier policyholder victories on this issue. That is because insurers maintain that policyholder liability in the 3rd Circuit case was far less speculative than was policyholder liability in the earlier cases, explained Neal M. Glazer, a partner with D'Amato & Lynch of New York. Mr. Glazer represents several insurers in the case, including Lloyd's underwriters.
Still, policyholder attorneys say the decision is not a total victory for policyholders, because the court still gives credibility to the "known loss" doctrine.
The doctrine, sometimes referred to as the "known risk" and the "loss in progress" doctrines, is meant to ensure insurers' fundamental requirement that losses must be fortuitous. The doctrine is not stated in liability insurance policies, though. Instead, courts have imposed it on insurance contracts as a matter of public policy.
In general, state courts have varied widely in interpreting the doctrine.
Insurers contend they should be able to invoke the doctrine if policyholders are substantially aware of a risk of loss at the time they purchase coverage.
Policyholders contend that if the doctrine were applied so broadly, then policyholders would have little chance of ever recovering insurance for losses.
"It's almost always possible for an insurance company to say you knew there was a risk, just by the virtue of the fact that you decided to shell out millions for coverage," observed policyholder attorney Robert N. Sayler, who represents Richmond, Va.-based Pittston Co., one of the policyholders involved in the 3rd Circuit's decision.
Pittston purchased an oil storage and transfer facility in New York Harbor in Jersey City, N.J., in 1954. The site likely had been contaminated under previous ownership, court papers say. In addition, three major spills occurred at the site between 1976 and 1983, though Pittston said it cleaned up all three.
A 1979 environmental study Pittston commissioned found that the site, called Tankport, was contaminated.
Pittston purchased comprehensive general liability policies beginning in 1961 and marine liability package policies from 1978 through 1984.
New Jersey environmental authorities first took action against the facility in 1985, two years after Ultramar America Ltd. and Ultramar Petroleum Inc. purchased Tankport by acquiring a Pittston subsidiary, Pittston Petroleum Co. LASMO P.L.C. of London has since acquired the Ultramar companies.
The regulatory action was triggered by Ultramar's own 1984 environmental study of the site and the company's subsequent decision to close the facility.
Ultramar purchased CGL coverage from June 1982 through June 1984. It purchased marine liability package policies from April 1983 through April 1984.
Attorneys in the case said the cost to clean the site could range from $2 million to $30 million. The insurance limits at stake in the case far exceed the companies' potential environmental cleanup liabilities, attorneys agree.
The insurers argue that several factors show the policyholders knew before they purchased coverage that Tankport was contaminated. The policyholders dispute those arguments.
But, even if the policyholders knew about the environmental damage, that damage had not yet resulted in liability or a loss, said Ultramar attorney Steven N. Gersten, a senior associate at Howrey & Simon in Washington.
And, "arguably, the insurers had more knowledge than Ultramar did," said John Heintz, a partner with Howrey & Simon. Ultramar purchased coverage from some of the same insurers that had inspected the site and insured Pittston previously, he said.
Both sides argued that a 1995 New Jersey appellate court decision supported their definitions of the "known loss" doctrine. The federal district court sided with the insurers in a summary judgment.
But, in an opinion written by Justice Timothy K. Lewis, the 3rd Circuit panel sided with policyholders for several reasons.
The underlying basis of the companies' liability, New Jersey's environmental liability statute, was not enacted until 1983. Referring to the California Supreme Court's 1995 decision in Montrose Chemical Corp. of California vs. Admiral Insurance Co., Justice Lewis wrote: "We think the better rule, and the one likely to be adopted by the New Jersey Supreme Court, is that the known loss doctrine will bar coverage only when the legal liability of the insured is a certainty" at the time policyholders purchase coverage.
Referring to the 2nd Circuit's 1995 ruling in Stonewall Insurance Co. vs. Asbestos Claims Management Corp., Justice Lewis explained: "This rule does not undermine the basic concept of fortuity because, in the third-party liability context, the insurable risk is the uncertainty of liability."
Quoting another 2nd Circuit opinion from 1989, Judge Lewis said that applying the "known loss" doctrine more broadly might render moot two other defenses insurers have to deny coverage: policyholder misrepresentation when purchasing coverage, and policyholders' expectations of or intentions to cause a loss.
The 3rd Circuit's decision "basically neuters the doctrine," said Mr. Glazer, the Lloyd's attorney.
But, policyholder attorneys say that the known loss issues at the heart of the 3rd Circuit case are very similar to those underlying the retroactive liability insurance that MGM Grand Hotels Inc. purchased after a deadly fire at MGM's Las Vegas hotel in 1980. After the fire but before liability for the disaster had been determined, MGM purchased liability insurance that retroactively covered the company for its potential liability in the tragedy.
"That's a completely disparate situation," Mr. Glazer asserted. "The MGM insurers knew there already was a loss. Here, my clients sold insurance for unknown losses."
"That's not the point of the comparison," said Mr. Breene, the policyholder attorney not involved in the case.
"Insurers have argued you can't get insurance for a known loss," he explained. That is true if the dollar value of the loss has been established. "If not, it's still something to gamble on, and that's what insurance is all about."
Ultramar America Ltd. et al. vs. Allianz Insurance Co. et al., 3rd U.S. Circuit Court of Appeals; Nos. 96-5166 and 96-5167.