Titles Titles & descriptions

When confronted with a contamination loss, a predictable tension inevitably develops between an insured, who is seeking to realize as much financing as possible from every available source to repair or replace damaged property and to clean up the environmental hazard, and an insurer, who is attempting to limit coverage only to risks it intended to insure under the property insurance policy. It should not be surprising that, from time to time, insureds and insurers adopt conflicting interpretations of the coverage available. To respond effectively, an insurer must understand the bases for the view of coverage adopted by an insured. Policyholders, too, must reasonably comprehend the terms and conditions of their policy and the applicable law governing their claims.

Under standard forms of property insurance,[6] there are two primary avenues an insured will likely pursue in attempting to recover for environmental losses. Under one approach, an insured may seek to recover by alleging that the pollution comprises a peril insured under the policy. Peril in this context means the cause of the loss, and encompasses the risk, hazard, or contingency insured against by the contract of insurance.[7] Typical perils that can be insured against are fire, hail, smoke damage, explosion, and windstorm, as well as vandalism and malicious mischief.[8] Policy restrictions such as limitations on the original grant of coverage or exclusions from coverage, however, should be taken into account by an insured and may appropriately be considered by an insurer when responding to a claim.

A second approach to gain coverage is to contend that the affected property and the residue of the contamination constitute "debris" for debris-removal coverage. Most property insurance policies, however, contain provisions requiring that the debris must be made up of covered property, that the loss must be from a peril insured against, and that the total loss to property plus the cost of debris removal must not exceed the amount of insurance.[9] Further, post-1986 policy forms have limited significantly the scope of debris-removal coverage for pollution-related losses. Possible claims under these two approaches for obtaining property insurance coverage are outlined below.

The first approach to a recovery for a contamination loss involves alleging a direct physical loss to covered property proximately caused by an insured peril during the policy term. A key aspect of any property policy[10] is the statement of perils insured against, namely, either "risks of direct physical loss" or specific "named perils."

1. All Risk Coverage

Coverage under an all risk policy[11] extends to physical loss of, or damage to, property arising from any fortuitous cause, unless specifically excluded.[12] An insured has the burden of proving that the covered property was physically lost or damaged due to a fortuitous event.[13] In evaluating a claim for potential coverage, an insurance company should determine whether one or more specific exclusions apply.[14] Under the following approaches, an insured may argue that a contamination loss is covered under an all risk policy.

a. Third-Party Negligence

One theory on which an insured may rely for coverage is concurrent causation analysis. Application of that doctrine has been developed primarily by the California courts, but also has been applied in various forms in other jurisdictions. As part of the concurrent causation analysis, there will likely be a contention that third-party negligence constitutes an independent peril of loss that is covered. Even though one or more exclusions in an all risk policy may bar coverage for environmental losses, policyholders may adopt the view that there is coverage because the immediate cause of the loss was the negligence of a third person.

A recent decision by the new California Supreme Court,[15] however, has essentially abandoned the concurrent causation doctrine in California in the context of first-party property insurance claims. In Garvey v. State Farm Fire & Casualty Co.,[16] the court reinstated a more traditional form of proximate cause analysis in place of concurrent causation analysis. Following the established doctrine of California, the trial court in Garvey ruled that a homeowner's insurer that issued an all risk policy would be liable to its insured for damage resulting from concurrent causes if either of the causes was a covered peril.[17]

The trial court in Garvey directed a verdict against the insurance company because there was evidence that negligent construction, considered a covered peril in California, was at least a partial cause in damaging the insured's home. The jury then returned a verdict that included one million dollars in punitive damages.[18] The California Supreme Court affirmed the decision of the Court of Appeal to reverse the trial court. The action was remanded for a new trial to allow the jury to resolve the causation issue as a question of fact.[19]

The Garvey decision reflected the first time the California Supreme Court. had considered the concurrent causation doctrine in an insurance context since 1973. In Garvey, the court articulated a standard of causation for first-party property cases for the first time since 1963 as it rejected application of the concurrent causation doctrine in first-party claims. The court revived a test originally articulated by an earlier California Supreme Court in Sabella v. Wisler.[20] After Garvey, the California standard of causation in first-party property insurance claims requires a finding that an insured risk is the "efficient proximate cause" of the insured's loss.[21]

The court distinguished the principles for determining coverage for damage to property under a first-party policy, insured versus insurer, from the applicable rules for tort liability coverage under a third-party liability insurance policy, third-party claimant versus insured, defended by insurer.[22] Chief Justice Lucas, writing for the majority, criticized the application of the concurrent causation doctrine articulated for tort liability coverage in first-party property insurance claims.[23] In Garvey, the court clarified that the concurrent causation doctrine established by the California Supreme Court for tort liability coverage in State Farm Mutual Automobile Insurance Co. v. Partridge[24] does not apply in the context of first-party claims. The court cautioned that the application of a Partridge concurrent causation approach to coverage in first-party claims would essentially nullify the specific exclusions contained in all risk policies, and would abrogate the terms limiting the grant of coverage provided under all risk property insurance.[25] Such a result would ignore the terms and conditions of the all risk policy and, therefore, would be unacceptable. The California Supreme Court restricted the application of concurrent causation analysis only to coverage questions under policies protecting the insured against liability claims by third parties.[26]

Additionally, the Garvey court continued to recognize that, in California, negligence constitutes an independent peril covered under first-party property insurance.[27] The majority, however, acknowledged that distinctions between types of negligence may be valid for determining coverage. Without addressing the question, the court left open the possibility that coverage may not exist for negligent acts undertaken "for the sole purpose"[28] of protecting against an excluded risk. The court also declined to comment on whether it would enforce new policy language specifically excluding third-party negligence as a covered peril.[29]

It remains to be seen whether other states that have adopted some form of concurrent causation analysis will follow California's lead in repudiating the doctrine in first-party property claims. Ray-bestos-Manhattan, Inc. v. Industrial Risk Insurers[30] is a case in which the court was persuaded that the negligent act of a third party was covered under an all risk policy, even though the loss resulted from contamination, an excluded peril. A tank truck driver unintentionally poured an entire load of fuel oil into the insured's underground heptane tank at the insured's industrial storage facility. The fuel mixed with the heptane. The mixture was fed into an auxiliary tank used for production purposes and damaged the insured's work in progress.[31]

The policy at issue provided coverage "'against all risks of direct physical loss or damage from any external cause to the insured property, except as hereinafter excluded.'"[32] The policy then excluded losses "'caused by or resulting from . . . contamination . . . unless such loss is caused directly by physical damage to the property covered, or to premises containing such property, by a peril not excluded in this policy.'"[33] The trial court concluded that coverage existed for the loss under these policy terms and entered judgment in the insured's favor.[34] The insurer appealed.

On appeal the court found that, under "any reasonable definition," the damage to the insured's work in progress was "caused by contamination."[35] This finding reflected that the heptane-fuel mixture came into contact with the insured's work in progress and rendered it worthless. The court, however, did not enforce the contamination exclusion to bar coverage.[36] Rather, the court was persuaded that the proximate cause of the insured's loss was the unintentional pouring of fuel oil into a tank intended for heptane, in other words third-party negligence.[37] The court reasoned that coverage for loss or damage caused by, or resulting from, the negligent acts of a third person was not excluded by the policy.[38] Relying on the express policy language, the court ruled that coverage existed because the contamination loss was caused by a nonexcluded external peril.[39] The appellate court affirmed the trial court's judgment in favor of the insured.[40]

b. Contamination Characterized as a Nonexcluded Peril

To overcome a defense based on the contamination exclusion, insureds may characterize the cause of loss as some peril other than contamination. In Insurance Co. of St. Louis v. McConnell Construction Co.,[41] a loss was found to have been caused by corrosion, a covered peril, rather than by contamination, an excluded peril. The insured building contractor sued to recover under a builders risk policy insuring against "all risks of physical loss to . . . described dwelling(s), building(s), or structure(s)."[42]

The McConnell trial court granted recovery for damage resulting from the application of muriatic acid to brick flooring in a newly constructed house.[43] The builder applied the muriatic acid in an effort to clean the floor, shortly before conveying the house to a new owner. The acid reacted with mortar in the brick to produce a wet gas highly corrosive to metal. Severe discoloration and the appearance of "pit marks" on the interior metal surfaces occurred.[44] A chemist testified that the fumes from the muriatic acid corroded the metal objects inside the house.[45] The insurer defended by arguing that the loss was excluded because it was caused by contamination.[46] The Houston Court of Civil Appeals examined the evidence and concluded that, as a matter of law, the loss was due to contamination.[47] The appellate court ruled that coverage was precluded by a policy provision excluding "loss by contamination including loss by radioactive or fissionable materials."[48]

The Texas Supreme Court, distinguishing between contamination and corrosion, reversed the intermediate appellate court[49] According to the court, the loss resulted from corrosion, which was not excluded as contamination. The court based its ruling on the expert's testimony and on dictionary distinctions between contamination and corrosion.[80] Although the court acknowledged that certain instances of corrosion might be classified as contamination,51 the facts before it established no blending of substances which resulted in an impure mixture.[52]

2. Named Peril Coverage

Under named peril coverage, insurance applies only to certain risks specified in a policy. An insured has the burden of proving that its loss arose from one of the named perils.[53] In evaluating a claim, an insurance company must determine whether one of the specified perils caused a direct loss to covered property.[54] Under the following circumstances, insureds may argue that contamination losses constitute a covered peril within a specified risk policy.

a. Fire

A fire may cause the release of contaminants affecting covered property.[55] An insured may assert that coverage exists for such contamination losses under the peril of fire.[56] In Marshall Produce Co. v. St. Paul Fire & Marine Insurance Co.,[57] a contamination loss was covered as damage by fire. The relevant policies covered the insured's egg and milk processing plant against "all loss or damage by fire originating from any cause."[58] As the result of a nearby house fire, the insured's manufacturing plant was saturated with a dense blue-gray smoke.[59]

Under a contract with the federal government, the insured was required to supply powdered milk and eggs, which were processed under stringent sanitation requirements.[60] Although there was no proven damage to the insured's egg powder, the cans and wrappers in which the products were packaged were damaged by the smoke. When the federal government subsequently rejected the insured's products because of smoke damage to the cans and wrappers,[61] a covered loss was found to have taken place.[62]

The court held that it was not necessary for coverage that any part of the insured's property must actually have ignited.[63] Nor was it necessary that the fire must have occurred within the insured's building for coverage to exist.[64] Under Minnesota law, the fire policy covered losses proximately resulting from fire, even though the fire itself did no injury to the objects insured.[65]

The Marshall Produce case, however, should offer only limited support for claiming coverage of contamination losses under the peril of fire. Under the "Minnesota form" of standard insurance policy, there was no requirement that the fire had to be a direct cause of the loss or damage, as was the case with the "New York form."[66] The insured, therefore, was entitled to recover for a loss in value to insured goods, for which a showing of physical damage to the property was not necessary.[67]

b. Smoke

Insureds may contend that a contamination loss is covered under the smoke peril.[68] Coverage for damage due to smoke is usually limited in standard policy forms to "sudden and accidental damage from smoke, other than smoke from agricultural smudging or industrial operations."[69] Under such coverage the word "sudden" should exclude damage occurring over a long period of time.[70] In Henri's Food Products Co. v. Home Insurance Co.,[71] however, a chemical vapor that contaminated the insured's edible goods constituted smoke within the coverage of a standard fire policy? The vapor escaped from agricultural chemicals stored in a warehouse and left a residue on the insured's packaged products.[73] The policy covered the insured's goods stored at a warehouse against direct loss by smoke.[74]

The court consulted both dictionary and judicial definitions of "vapor" and "smoke" and applied its own understanding of the terms.[75] Ruling in favor of the insured, it concluded that the chemical vapor constituted smoke within the coverage for that peril.[76] The court held that a loss occurred when the Food and Drug Administration seized the insured's packaged products. Because the loss fell within the coverage for smoke damage, the court did not find it necessary to address coverage under the all risk coverage endorsement.[77]

c. Vandalism and Malicious Mischief

An insured may also contend that contamination losses should be covered as vandalism or malicious mischief,[78] a risk that is usually included under named peril policies. To recover under this peril, an insured ordinarily must prove wanton or malicious acts intended by the perpetrator to damage or destroy property.[79] Although a minority of jurisdictions require proof of personal animosity toward the insured or subjective intent to damage the described property to establish malice,[80] the growing trend, and present majority position, is that malice may be inferred from an unlawful act.[81] The term "vandalism" also has been extended by its popular meaning to comprise unusual destruction of property resulting from the completion of a wrongful act.[82]

In Louisville and Jefferson County Metropolitan Sewer District v. Travelers Insurance Co.,[83] the court found coverage for a contamination loss by characterizing it as having been caused through vandalism and malicious mischief.[84] The insured, a metropolitan sewer district, carried property insurance on its wastewater treatment plant. The policy provided coverage for "direct loss by: vandalism and malicious mischief, meaning only direct loss by willful and malicious damage to or destruction of property."[85] A third party dumped large quantities of toxic waste material into the municipal sewer system.[86] The dumping was in violation of state and federal law and resulted in severe damage to the insured's primary wastewater treatment facility.[87]

The Sixth Circuit Court of Appeals upheld the insurer's liability under the policy, and affirmed the district court's ruling to that effect.[88] Before the district court, the parties had stipulated that the act of dumping the toxic substances into the sewer system was unlawful and that it had caused damage to the insured's property.[89] Evidence further established that the third party had removed a 128-pound manhole cover in order to dump the toxic waste material.[90] He then filled the manhole with sand and dirt to hide the dumping.[91] The court of appeals found that the third party willfully performed the unlawful act under conditions that obviously would lead to property damage.[92]

Applying Kentucky law, the court held that the unlawful act itself provided the requisite malice for coverage under the pertinent vandalism and malicious mischief provision.[93] There was no requirement that the act had to be performed out of personal animosity toward the property owner for coverage to arise.[94] The court held the property insurer liable for the insured's unrecouped damages.[95] It also charged the insurer a pro rata portion of the insured's litigation expenses in prosecuting a claim for damages against certain third-party tortfeasors.[96]

d. Explosion

Finally, contamination losses may allegedly arise from an explosion, if explosion is a peril covered under the policy. Although there is no reported decision awarding coverage for a contamination loss under the peril of explosion, a case related to this issue is American Alliance Insurance Co. v. Keleket X-Ray Corp.[97] Under a policy providing coverage for expenses incurred to reduce the insured's business interruption loss, the Sixth Circuit Court of Appeals disallowed an award of expenses to decontaminate a building.[98]

The insured manufactured a pocket-sized device for measuring exposure to radiation. As part of the manufacturing process, a calibration procedure was used to determine the accuracy of the instrument.[99] One of the insured's physicists, while conducting routine calibration operations, heard a "pop" sound.[100] He also observed the emission of a finely powdered radium salt from the calibration stand in which the known radium source was stored.[101] The radioactive powder and radon gas[102] permeated the insured's manufacturing plant, contaminating it with radiation.[103] Large quantities of stock and other material became contaminated, all of which was unsalvageable.[104] The insured's manufacturing operation was interrupted for a five-month period.

The trial court addressed whether the accident constituted an explosion for coverage purposes. None of the policies before the court covered the building against damage due to explosion.[106] Insurance companies had issued stock policies and business interruption policies, however, insuring against direct loss to stock, materials, and supplies by explosion and loss of gross earnings resulting directly from the necessary interruption of business caused by explosions.[107] The jury returned a verdict finding that there had been an explosion of the radium source located in the insured's plant, and, therefore, found the insurers liable.

The Sixth Circuit Court of Appeals affirmed the verdict.[109] Even though the explosion was of a small magnitude, the court was persuaded that there was substantial evidence from which the jury reasonably could have inferred that an explosion had taken place.[110] This evidence included a buildup of gas pressure within the capsule, the occurrence of a "popping noise," and the emission of a cloud of powder.[111] The court recognized that it was impossible to establish a hard and fast definition of the word "explosion" that would satisfy all factual contingencies.[112] Although the finding of an explosion was upheld, as well as the reimbursements for losses to stock and lost earnings, the Sixth Circuit ruled that the district court had erred in awarding the insured's decontamination expenses.[113]

1. Debris-Removal Coverage

Another primary basis on which insureds may allege coverage for contamination losses is to claim a compensable expense for debris removal.[114] Ordinarily, the cost of cleaning up debris produced by an insured peril is a legitimate item of loss that is covered under a property insurance policy.[115] Under a typical debris-removal clause in a commercial property form, an insurer agrees to pay an insured's expenses incurred in removing debris of covered property arising from a covered loss.[116] Therefore, in order to recover for debris removal, the insured should be required to establish that: (1) the substance to be removed is "debris"; (2) the "debris" is made up of "covered property"; and (3) a covered loss or insured peril caused damage requiring that the substance be removed.

The nationwide emphasis on cleaning up contaminants will undoubtedly increase claims under the debris-removal coverage for on-premises cleanup of pollutants.[117] Insureds may argue that they are entitled to recover the expense of removing from the insured premises covered property that has become a contaminant. The term "debris" is usually not defined. An insured will employ the broadest possible definition consistent with common usage. The only express restriction under the clause is that coverage is usually limited to debris made up of insured property that has been damaged by an insured peril.[118]

In the absence of an express policy definition, courts often will refer to dictionary definitions and will apply the term "debris" in a manner consistent with its regular usage.[119] A common dictionary definition provides that debris is "the remains of something broken down or destroyed."[120] Using this approach, some courts have broadly interpreted the meaning of debris.[121] Debris has been defined judicially as including the removal of "waste material resulting from the destruction of some article."[122] Following a windstorm, trees and bushes not originally a part of the insured property have been treated as debris,[123] as have ruins from the fire-damaged portion of an inn.[124] These courts' expansive construction of the word "debris" does not bode well for a restrictive application of such coverage in claims for the cleanup of pollutants.

A case often relied upon by insureds to seek recovery for cleanup of contaminants under debris removal insurance is Lexington Insurance Co. v. Ryder System, Inc.[125] The all risk policy at issue covered all personal property owned, leased, or used by the insured.[126] A policy endorsement provided coverage for oil and pipelines. Fuel leaked from the underground storage tanks at the insured's place of business.[127] The insurer reimbursed the insured for the loss of oil. The insurer, however, refused the insured's claim to recover for the cost of removing from the ground the fuel that had escaped from the tanks.[128] The insured's claim for removal costs was submitted under the following provision: "Debris Removal. In the event of claim for physical loss or damage insured hereunder, this company shall also be liable for the cost of demolition and removal of debris formerly an insured part of the property and no longer suitable for the purpose for which it was intended."[129]

The trial court granted summary judgment in favor of the insured, and held the insurance company liable for the cost of removal.[130] On appeal, the insurance company argued that the oil did not constitute debris because it was not subject to demolition.[131] The Georgia Court of Appeals rejected this reasoning.[132] It concluded that "debris may mean merely waste material resulting from the destruction of some article."[133] Relying on a dictionary definition of "demolition," the court held that "escaped oil which has contaminated the surrounding earth is debris, and its removal is compensable because as oil in storage it was insured."[134] Although the insurance company argued that the debris-removal clause was inapplicable because there was no remaining property to demolish or tear down, the court construed the debris-removal provision in favor of the insured. In so doing, the court refused to define "demolish" narrowly to require proof by the insured that the remaining damaged portion of the insured structure had to be torn down in order to qualify for debris-removal coverage.

Based on Lexington,, insureds may seek coverage for on-premises cleanup of pollutants under the debris-removal clause where the contaminant is residue of covered property.[136] Where such coverage is found, the insurer's liability under pre-1986 forms of debris-removal clauses can extend up to the limit of coverage for property damage.[137]

Claims may also be asserted under debris-removal coverage for damage to uncontaminated covered property that is necessarily damaged in removing a contaminant from on-premises soil, water, personal property, or buildings.[138] Manduca Datsun v. Universal Underwriters Insurance Co.[139] will be the likely basis for such claims. The policyholder in Manduca Datsun suffered substantial fire damage to an insured building where an automobile dealership formerly had been operated.[140] Under the general property coverage, the trial court denied recovery for asphalt damage expected to occur during the removal of debris because the asphalt was not damaged in the fire.[141] The trial court also declined to allow recovery under the debris-removal coverage because damage to asphalt was not specifically included in the provision.[142]

The Idaho Court of Appeals reversed and found coverage under a debris-removal clause providing, in relevant part:

DEBRIS REMOVAL-Coverage under this Coverage Part includes expense incurred in the removal of debris of property covered occasioned by LOSS insured against in this Coverage Part, but this Company shall not be liable . . . for more than the amount for which this Company would be liable, exclusive of debris removal expenses, if all the property covered at the LOCATION where the LOSS occurred were destroyed.[143]

The record established that the most efficient way to remove the debris of the fire-damaged building was to use heavy equipment.[44] Evidence also showed the use of such equipment would necessarily produce asphalt damage.[145] The court held that any asphalt damage "actually and necessarily caused" by the debris-removal process fell within the insurance coverage for debris removal following a covered loss.[146]

The court concluded that the economic purpose behind debris-removal coverage would be defeated if such coverage "did not provide payment for damage necessarily caused by the debris removal process itself."[147] The appellate court remanded the case for a determination of the amount of asphalt damage actually and necessarily incurred by debris removal.[148]

2. Possible Expanded Applications of Debris-Removal Insurance

As one commentator has concluded, the rationale for coverage expressed in Manduca Datsun may provide a basis for a significant expansion of debris-removal coverage under pre-1986 policies as interpreted by some courts at the urging of insureds.[149] An insured may contend that debris-removal coverage must apply to damage to any property, not just insured property, necessarily resulting from the process of removing covered property turned into contaminant.[150] Relying on Lexington, insureds may also seek coverage for cleaning up pollution from adjacent noncovered land and water caused by a leak of insured property turned contaminant.[151] Such claim scenarios are plausible under the standard debris-removal coverage offered before 1986 because insurers usually have paid the cost of removing from off-premises locations the debris of covered property.152

Expenses associated with cleaning up radioactive, toxic, or otherwise hazardous debris can be staggering. 153 Special procedures for cleaning up, handling, and disposing of the hazardous debris may be required.[154] Extra transportation costs likely will be incurred to remove and transport the material to specially designated dump sites according to hazardous waste statutes and regulations.

The devastating potential of a dramatic rise in debris removal claims for cleaning up environmental pollution did not go unheeded by the insurance industry. The prospect of a significant jump upward in such claims was a major factor in the 1986 promulgation of a revised standard policy form for debris-removal coverage.[155]

3. Revisions to Debris-Removal Coverage Forms and Additional Coverage for Cleanup and Removal of Pollutants

Two new pollution endorsements[156] for commercial policies have been adopted to clarify the intent behind coverage for debris removal.[157] These endorsements limit the scope of potential coverage for contamination claims in terms of time, location, and extent of liability. In 1986, the Insurance Services Office Commercial Property Committee (ISO Committee) promulgated these new endorsements for commercial policy lines titled "Changes--Pollutants" (basic endorsement)[158] and "Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance" (extra endorsement).[159]

a. Reporting Restrictions

Under the basic endorsement, coverage for debris removal is limited to expenses reported to the insurance company within 180 days of whichever is earlier: (1) the date of the direct physical loss or damage, or (2) the end of the policy term.[160] The date triggering subsection (1) is apparently intended to be the date on which the covered property became debris.[161] The provision reflects an effort to eliminate excessively tardy reporting of debris-removal claims. This should preclude the receipt of stale claims for debris removal. The endorsement also circumvents the need for insurers to maintain extensive claim records for "late manifestations."[162]

The basic endorsement contains no reference to the date debris-removal expenses are actually incurred, but focuses on the date the loss is reported to the insurer.[163] Oral notification of the claim will apparently suffice, as no requirement of written notice is stated.[164] There is no requirement that the debris-removal expenses must have been incurred by the insured at the time they are reported to the insurer.[165] The basic endorsement does not expressly restrict the coverage for removal of debris to designated premises and does not define "debris."[166]

b. Dollar Limit of Liability

To avoid triggering the policy limits for debris removal where a property loss is minor, a new dollar limitation has been added.[167] The ISO Committee determined that open-ended debris-removal coverage was not intended to be in effect for cleaning up covered property turned contaminant.[168] A limitation of coverage for debris removal of up to twenty-five percent of the amount of the insured loss, or loss payment plus deductible, is contained in the basic endorsement.[169] An extra debris-removal limit of up to $5,000 applies over and above the percentage limit, and constitutes additional debris-removal coverage beyond the Limits of Insurance stated in the policy declarations.[170]

c. Exclusion for Pollutant Removal

The cost of extracting pollutants from land or water is not covered as debris-removal Additional Coverage, and neither is the cost of restoring or replacing polluted land or water, either on or off the insured premises.[171] There is also no coverage for the expense of cleaning up contaminated soil.[172] Debris-removal Additional Coverage may apply, however, to the cost of removing pollutants from buildings and personal property, on or off the insured premises, for which there is no express exclusion.[173] The term "pollutants" here is expressly defined.[174]

d. Additional Coverage for Pollutant Cleanup and Removal

Claims for the expense of extracting pollutants from land and water on insured premises have been provided for by additional coverage with a comparatively low aggregate liability limit, stated separately from the debris-removal coverage in the basic endorsement.[175] The newly created pollutant clean-up and removal coverage provides up to $10,000 of additional coverage for the cost of extracting pollutants from water or land on the designated premises.[176] There is no coverage for neutralizing the toxic effects of pollutants, only their removal or extraction is covered.[177] The basic endorsement provides no coverage to defray the cost of removing or extracting pollutants from land or water on premises away from the described premises.[178]

Coverage is limited to pollutant clean-up and removal expenses arising out of "Covered Causes of Loss."[179] The $10,000 limitation of additional coverage is calculated on losses "occurring during each separate 12-month period of this policy."[180] The ISO Committee reportedly intended the latter phrase to mean an annual aggregate and to comprise the time interval between anniversary dates of the policy, assuming an annual renewal term.[181] The aggregate limit is intended to unambiguously limit the insurer's exposure to no more than $10,000 during any one policy year, even when multiple occurrence claims are presented.[182] There is a 180-day reporting requirement under this Additional Coverage, similar to that set forth in the basic endorsement.[183]

e. Increased Aggregate Limit of Coverage for Pollutant Cleanup and Removal

An insured can purchase an additional aggregate limit of insurance to cover the cleanup and removal of pollutants from land and water at specified locations.[184] Such coverage is available under the extra endorsement[185] for an additional premium.[186] The extra endorsement does not modify the basic endorsement,[187] but it provides an additional annual aggregate limit as excess insurance.[188] No coverage is intended or expressed under the extra endorsement for removal or extraction of pollutants from off-premises land or water.[189]

We have examined potential bases contained within property insurance policies on which an insured may rely to urge that there is coverage for a pollution-related claim. Whether the basis of the claim for coverage is an allegation that pollution comprises an insured peril or that the contamination loss should be covered as debris removal, however, there usually should be valid defenses to the claim based on the express language of the policy. An insured's claim may fail to satisfy some essential prerequisite for coverage or the claim may be expressly excluded by a provision barring coverage for certain risks.

Not all property damage losses are insurable.[190] Even under standard all risk policy forms, not every risk is covered.[191] Restrictions on the scope of coverage under property insurance policies are properly taken into account by insurers in evaluating whether coverage exists for contamination-related claims. An insured bears the burden of proving its loss falls within the scope of coverage provided under the insuring agreement.[192] To meet this burden, an insured must establish a direct physical loss to covered property proximately caused by a peril insured against during the policy term.[193] In addition, standard commercial and homeowners property forms provide a number of limitations and exceptions that should negate coverage for contamination losses.[194] In evaluating whether coverage exists, an insurer should consider the following elements that an insured is required to prove by a preponderance of the evidence.

A. Direct Loss

Under certain circumstances, when the policy so requires,[195] an insurer may defend by contending that a loss does not comprise a direct loss. This defense may be considered under circumstances when factors of time, distance, or excluded perils render the actual cause of the claimed loss too remote.[196] The requirement of direct loss may exclude losses that flow from, but do not comprise, physical loss to property.[197]

In Blaine Richards & Co. v. Marine Indemnity Insurance Co. of America,[198] the Second Circuit Court of Appeals required the insured to prove that its losses were directly caused by physical damage to imported beans by the fumigant Phostoxin,[199] a covered peril, rather than by the governmental detention of undamaged beans only suspected of being contaminated, an excluded peril.[200] In the latter event, the insured's losses would be due only remotely to the exposure of the beans to Phostoxin and there would be no coverage.[201] The insured, a shipper of goods, sued to recover on two marine insurance policies for losses sustained when a shipment of beans from Europe was temporarily detained, by order of the Food and Drug Administration, upon arrival in the United States. During the period of detention, which lasted more than six weeks, the insured applied for permission to segregate, clean, and rebag the beans that were found to contain residue of the pesticide.[202] The FDA approved the insured's proposal and immediately released the "clean bags" of beans that were unaffected by Phostoxin, and agreed to the reconditioning and release of the bags of beans containing Phostoxin residue.[203]

The beans ultimately had to be resold at a loss when the original sales contracts, both for the undamaged beans and for beans that were contaminated with Phostoxin residue, were cancelled.[204] The applicable policies provided no coverage for financial losses caused solely by governmental seizure and detention of the beans.[205] The court of appeals therefore ruled that, in order for the insured to recover under the policies, it had to prove that the original purchasers rejected the beans because of their physical condition, rather than because of the delay caused by governmental detention.[206]

The insured argued that, even if a detention of the beans fell within the policy exclusions, the proximate cause of the financial losses was the improper fumigation of some of the beans with Phostoxin.[207] The insured asserted that coverage should exist for losses on both the "clean" and "dirty" bags of beans. That should be the result, the insured contended, because "but for" the improper fumigation the detention by the FDA would not have occurred.[208]

The Second Circuit Court of Appeals rejected the insured's contention that all of its losses were covered as being proximately caused by improper fumigation.[209] In discounting the insured's position, the court sought to determine the immediate cause of the losses and declined to trace the losses back to their remote causes.[210] The court concluded that fumigation with Phostoxin was a remote cause of the losses arising from resale of the undamaged beans, which directly resulted from the detention.[211] The predominant and determining, also known as the "real efficient," cause of such loss was the detention, coverage for which was barred by both policies. The insured could only recover upon proof that direct physical loss or damage had occurred to the beans and resulted in the losses.[212]

The defense that direct loss refers only to a loss resulting from the force of the designated peril on the insured property, however, probably will not be dispositive.[213] Many courts have equated direct loss with proximate cause,[214] and have applied it to first-party claims in a fashion similar to its meaning in negligence cases.[215] The mere presence of intervening time or distance between the happening of the event and resulting loss by contamination does not mean the peril was a remote cause of the loss.[216] Rather, the court will seek to determine the predominant and determining, or the real efficient, cause of the loss.[217] For example, in Henri's Food Products Co. v. Home Insurance Co.,[218] the policy insured the product against direct loss caused by smoke. The court found coverage even though only the packaging of the insureds' product contained residue of the toxic chemical vapor.[219]

The use of the word "direct" to modify the word "loss" generally has not been interpreted as altering the application of the usual principles of proximate causation by the courts that have considered the issue.[220] Nevertheless, when policy language and circumstances of a claim support such a defense, an insurer correctly may evaluate whether the loss at issue satisfies the requirement of a "direct loss" for coverage.

B. Physical Loss

Standard all risk homeowners and commercial property policies limit recovery to physical damage.[221] Some courts have shown a reluctance to extend coverage under policies requiring physical loss if an insured has failed to prove a loss resulting from physical damage to covered property.[222]

Court definitions of the term "property damage" in standard Comprehensive General Liability (CGL) policies illustrate the impact of the physical damage requirement on coverage analysis.[223] Many courts have given a broad interpretation to the phrase "property damage" in liability policies where the phrase was not limited to mean physical injury.[224] Without the requirement of physical injury, these courts have interpreted property damage to be comprised of consequential or intangible property losses, in addition to direct physical damage.[225] Absent the criterion of physical injury, the incorporation of a defective component into tangible property has been found to constitute property damage, if it resulted in a decrease in market value of the property.[226] In Hauenstein v. St. Paul-Mercury Indemnity Co.,[227] defective plaster that shrank and cracked forced the contractor to remove it and to replaster damaged walls and ceilings. The Minnesota Supreme Court held that, although the injury to the walls and ceilings could be rectified by removal of the defective plaster, the presence of the defective plaster on the walls and ceilings reduced the value of the building and constituted property damage.[228]

In construing liability policies that define "property damage" to mean "physical injury to or destruction of tangible property," however, some courts have strictly enforced the requirement of physical injury.[229] In light of the present CGL policy language, the holding in Hauenstein has been rejected.[230] In Wyoming Sawmills, Inc. v. Transportation Insurance Co.,[231] the Oregon Supreme Court held that the requirement of physical injury for property damage negated liability coverage for consequential or intangible losses.[232]

The Wyoming Sawmills court found that the incorporation of a defective product into a building did not constitute property damage. The insured manufactured defective two-inch-by-four-inch studs that warped and twisted after being installed in the building. Although the studs had to be replaced, they did not physically damage the rest of the building. The insured tore out and replaced the defective studs and brought an action against its CGL insurer to recover the labor costs associated with this remedial action. Relying on the requirement of "physical injury to tangible property" contained in the 1973 revision to the CGL form, the court declined to follow Hauenstein.[233]

The court in Wyoming Sawmills ruled that no coverage existed for the insured's labor expense in taking out the defective studs and replacing them with nondefective ones.[234] At the same time, the court held that the costs associated with tearing out other parts of the building in order to replace the studs would be covered by the policy.[235]

Decisions awarding coverage in the absence of physical alteration or damage to insured property, however, may not be ignored by the insurer in analyzing contamination claims.[236] One court took the position that a physical loss occurred when tangible property was contaminated and rendered uninhabitable, although there was no palpable physical injury to the insured property. In Western Fire Insurance Co. v. First Presbyterian Church,[237] the all risk policy limited the insured's recovery to physical losses. The Colorado Supreme Court held that a direct physical loss occurred when the fire department ordered the insured's church building closed as a health hazard due to contamination by gasoline vapors.[238]

Gasoline saturated the soil underneath and surrounding the church building. Vapors contaminated the foundation, halls, and rooms of the church. Ultimately, the vapors rendered the building uninhabitable and the use of the building dangerous. The policy apparently contained no exclusion for losses caused by contamination. The insurance company argued that, although the church suffered a loss of use, no direct physical loss had taken place.[239] The court, however, rejected that theory and affirmed the jury award in an amount necessary to remedy the infiltration and contamination problems.[240]

By disregarding the policy restriction that physical damage to property must have occurred, courts adopting that view run the risk of expanding coverage beyond what the insured contracted for and purchased. Whether mere loss of use or diminution in value of property, without some identifiable damage, constitutes physical damage for coverage is a question an insurer is entitled to consider when investigating a claim. A valid argument exists that unambiguous policy language requiring physical property damage should be enforced where no visible or palpable damage to property can be established.[241] This question has not been finally resolved, and the defense of no "physical loss or damage" should not be overlooked when evaluating whether there is coverage for contamination losses.[242]

C. Fortuitous Loss

The defense that a loss is not fortuitous[243] is generally applied as a limit to the all risk coverage and is also relevant to named perils policies.[244] If an insured knew of the presence of the contaminant and was aware of the harmful effect it would have on insured property at the time the policy was purchased, the loss may be nonfortuitous and coverage may be barred.[245] An insured bears the burden of proving that a fortuitous loss has occurred.[246] Nevertheless, the fortuity doctrine has been transformed in recent years from an emphasis on an objective standard, determining whether the loss was physically inevitable, to a subjective standard, determining whether the insured knew the loss was certain to occur when the policy was issued.[247]

Courts employing the original fortuity doctrine have emphasized the physical inevitability that a loss would occur. An often-cited case applying an objective standard to assess the inevitability of the loss under the traditional fortuity doctrine is Greene v. Cheetham.[248] The Second Circuit Court of Appeals reversed the trial court judgment rendered in favor of the insureds, who were importers of frozen catfish fillets. The court of appeals remanded for a determination of whether the loss was inevitable, and whether frozen fish that was shipped had become unfit for consumption before the relevant insurance coverage became effective.

The insureds purchased three shipments of frozen fish and had them transported from England to the United States. FDA officials examined the fish upon arrival and condemned the shipment as unfit for human consumption.[249] The insureds notified their insurer of the condition of the fish and of the FDA action.[250] The insurance underwriters denied liability under the two floating cover policies issued to the insured shipper.[251]

The parties stipulated that the condition of the fish remained unchanged from stowage in the vessel until condemnation.[252] The applicable insurance provided coverage for frozen fish shipments "against All and Every Risk whatsoever, howsoever arising. . . . Including risks of condemnation by the Authorities under Pure Food Laws irrespective of percentage."[253] The trial court held that coverage was afforded for the condemned fish because the open cover policy form specifically mentioned the risk of condemnation.[254]

The Second Circuit Court of Appeals reversed, however, because no finding of fact had been made about when the fish became unfit for human consumption.[255] The court found that conflicting inferences could be drawn about when the fish spoiled from the evidence stated in the record.[256] It concluded that even under an all risk policy the insurance "would not include an undisclosed event that existed prior to coverage."[257]

Among the notable American cases enforcing the traditional view of fortuity is Aetna Insurance Co. v. Sachs.[258] A housebound French poodle was not properly supervised by the insured for an extended period, and the dog committed irreparable damage to carpeting and drapes in about seventy-five to eighty different spots.[259] The court ruled that the insurer was not obligated to pay the claim for damage to the carpet because the insureds were guilty of gross negligence and indiscretion in failing to detect the dog's activity earlier.[260] The court reasoned that the loss was not fortuitous.[261]

Courts applying the modern rule of fortuity no longer emphasize the objective inevitability of the loss, but focus instead on whether the loss was unplanned and unintentional from the subjective viewpoint of the insured.[262] This latter approach does not consider whether from an objective standpoint there was a physical certainty that a loss would occur.[263] This trend fails to take into account the risk-taking element generally contemplated in insurance policies.[264] The present tendency of most courts is to construe the phrase "fortuitous event" in the same manner as the term "accident" in a liability insurance policy.[265] Under the modern approach, a loss due to the negligence of the insured is considered to be fortuitous.[266]

A court's inquiry under the modern approach is usually limited to whether a named insured was aware that a loss would occur.[267] The majority of cases addressing fortuity have now adopted the definition of "fortuitous event" found in the Restatement of Contracts.[268] After restating that an aleatory promise is one conditioned on a fortuitous event, the Restatement defines an aleatory promise indirectly by defining a fortuitous event as "an event which so far as the parties to the contract are aware, is dependent on chance. . . . [I]t may even be a past event, as the loss of vessel, provided that the fact is unknown to the parties."[269]

In Compagnie des Bauxites v. Insurance Co. of North America,[270] the Third Circuit Court of Appeals found that the trial court erred in holding that an objectively inevitable loss arising from an unknown design defect was a nonfortuitous event and was not covered. The court of appeals adopted the Restatement definition of "fortuitous event" as the proper standard of review.[271] Because the insured contended it had no prior knowledge of the design defect,[272] the court concluded that the trial court incorrectly granted summary judgment for the insurer.[273]

In the context of a present-day claim for property losses due to contamination, an insurer may appropriately consider whether the loss is fortuitous. The loss may not be fortuitous, for example, if an insured knew that a process at its manufacturing plant was producing a toxic waste product likely to result in clean-up costs or property damage.[274] Even considering the limitations placed on the doctrine of fortuity by some recent court decisions,[275] the requirement that a loss must be fortuitous remains a valid criterion for coverage.[276]

D. Increase of Hazard

The "increase of hazard" defense is conceptually related to the doctrine of fortuity. A policy may be temporarily suspended if an insured volitionally makes a change in conditions on the insured property that creates an enhanced risk of a loss due to contamination. The defense applies to a change in conditions[277] that increases the risk of loss resulting from an insured peril[278] with the knowledge and control of the insured.[279] Coverage is suspended until the increased risk is discontinued.[280] If a loss occurs while the coverage is suspended due to an increase in hazard, an insured cannot recover for the loss.[281]

The increase of hazard provision forms part of the "New York 165-lines" standard fire policy,[282] and is also included as a provision in the statutory fire policies adopted in some states.[283] Although the clause primarily is a factor in fire claims, it can expressly affect coverage for other insured risks.[284]

Whether there has been an increase in hazard must be determined by a comparison with the conditions existing at the time the policy was written.[285] Unlike the fortuity doctrine, the increase of hazard provision applies only to future changes and not to conditions existing when the policy was issued.[286] The provision is not an exclusion, but is a condition subsequent suspending coverage.[287] The burden is on the insurer to prove the increase in the risk of loss in order to sustain a denial of coverage.[288]

A split of authority exists on whether the increase of hazard must proximately cause the loss in order for the insurance company to rely on the defense. The majority view holds that the increase in hazard need not result in a loss to void coverage.[289] A minority of states holds that the increase in risk of loss must cause or contribute to the loss to relieve the insurer of liability.[290] In Good v. Continental Insurance Co.,[291] the court followed the majority rule and held that if an increase in risk is permanent and continuous it voids coverage under the policy, even though it does not produce a loss.[292] The contrary view was expressed in Hawkeye Chemical Co. v. St. Paul Fire & Marine Insurance Co.[293] Under either approach, if the increased risk proximately causes the loss, even an occasional or temporary increase of risk should be sufficient to void the policy.[294]

If an insured seeks to recover for a contamination loss under a policy containing an increase of hazard clause, an insurer is entitled to consider whether coverage has been suspended by operation of that provision where circumstances warrant it.[295] There may be no coverage where an insured is an industrial concern that knowingly alters its manufacturing processes in a manner that heightens the risk of a release of toxic wastes. Likewise, there may be no coverage if an