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By Rene Siemens, Partner, Pillsbury Winthrop Shaw Pittman LLP
For decades, insurers have denied coverage for the costs of investigating and cleaning up radioactive contamination. Insurers insist that such costs are excluded from coverage. Their position took a body-blow recently when a Massachusetts federal judge ruled that the standard "pollution exclusion" in a insured's nuclear liability insurance policy was unenforceable as a matter of law.
Nuclear Liability Policies
Comprehensive general liability ("CGL") policies have contained "nuclear exclusions" for over sixty years. Since the late-1950s, a pool called American Nuclear Insurers ("ANI") has filled this gap by issuing policies to cover the "nuclear energy hazard." Many nuclear facility operators are required by federal law to purchase ANI's policies. Other companies that handle radioactive material voluntarily purchase ANI's policies.
The "Pollution Exclusion"
In the 1980s, courts around the country started holding that CGL policies covered the costs of complying with environmental cleanup demands made by federal and state regulatory agencies as such demands were the equivalent of covered "suits" for "damages." CGL insurers responded by adopting the "absolute pollution exclusion" in 1986.
ANI decided to take a different approach. In 1990, instead of adopting the absolute pollution exclusion, ANI drafted a standard endorsement for nuclear liability policies that affirmatively promised to pay for "covered damages" and "covered environmental cleanup costs because of environmental damage." ANI then circulated a memorandum to insurance brokers and state insurance regulators explaining that its endorsement was a "restatement of the present coverage for property damage liability claims in a new format" and provided "new coverage for certain environmental cleanup costs."
But buried in the middle of this 10-page, single-spaced standard-form endorsement were a series of "definitions" that ANI would later argue excluded coverage for environmental response costs that an insured might incur to investigate or remediate radioactive contamination related to any insured facility.
The Nuclear Metals Claim
In 2005, Whittaker Corporation demanded that ANI pay its costs of responding to a U.S. EPA order that required it to investigate and remediate radioactive contamination related to the Nuclear Metals Superfund site in Concord, Massachusetts. The Nuclear Metals facility had started in the 1950s as an offshoot of the Manhattan Project and the Massachusetts Institute of Technology before it became involved in the manufacture of depleted uranium munitions.
ANI invoked its 1990 endorsement to deny coverage. Whittaker then filed suit, seeking a declaration that ANI had a duty to defend and indemnify it against EPA's cleanup demand.
The Nuclear "Pollution Exclusion" Held Unenforceable
In December of last year, Judge Richard G. Stearns sided with Whittaker, ruling that ANI's "pollution exclusion" endorsement was unenforceable as a matter of law because it "was not properly issued." Whittaker Corp. v. American Nuclear Insurers, 671 F. Supp. 2d 242, 252 (D. Mass. 2009). In issuing the endorsement, the judge explained, ANI had failed to "give clear notice to [the] insured of a loss or reduction of coverage." Id. On February 3, 2010, the judge denied a motion for reconsideration filed by ANI, and reiterated that it was "clear from the record" that in issuing its endorsement purportedly excluding environmental cleanup costs, ANI had failed to provide any clear "explanation" of the intended reduction of coverage.
The court's conclusion was based on Mass. Gen. Laws Ch. 175, § 111A, which provides that when an insurer reduces or eliminates coverage, it must send the insured a printed notice clearly explaining how its coverage is being affected; otherwise, the policy's original coverage "shall remain in full force and effect without such reductions and eliminations." Most states similarly protect policyholders from surreptitious reductions in coverage by requiring insurers to accompany exclusionary endorsements with clear, easy-to-understand notices that explain the endorsements' intended effects. Therefore, the ruling in the Nuclear Metals case potentially renders the "pollution exclusion" in every nuclear liability insurance policy that has been issued in the United States void, and unenforceable as a matter of law.
The "Owned Property" Exclusion Inapplicable
Of course, the fact that the "pollution exclusion" in nuclear liability policies may be unenforceable does not mean that all costs of remediating radioactive contamination are automatically covered. In connection with the Nuclear Metals claim, for example, ANI also denied coverage on the ground that its policy excludes coverage for on-site contamination (as opposed to contamination that has migrated off-site). As Judge Stearns noted, however, the case law under similar "owned property" exclusions in CGL policies clearly establishes that if there is an imminent threat that on-site contamination will migrate into groundwater or adjacent property, then such exclusions will not preclude coverage for the costs of investigating and remediating the on-site contamination in order to prevent its spread. Id. at 254-55.
The judge concluded that ANI should at a minimum be required to pay Whittaker's costs of defending itself against EPA's cleanup demand because there was a risk that radioactive contamination would migrate to adjacent property, and EPA already had found that groundwater contamination had taken place. Id. at 255. He further held that ANI can escape its duty to indemnify Whittaker for the ultimate cost of the cleanup only if it turns out that no such threat actually exists. Id. at 255 n. 27.
In light of the Nuclear Metals decision, operators of nuclear facilities and other insureds under nuclear liability insurance policies should consider pursuing coverage for environmental investigation and cleanup costs, even if their coverage claims have previously been denied. The "pollution exclusion" in nuclear liability insurance policies should be unenforceable as a matter of law not just in Massachusetts, but in any state that requires insurers to explain clearly to their policyholders what they are up to when they add an endorsement that they intend to use later on to deny coverage. In addition, most environmental contamination involves at least the threat of migration off-site or into groundwater. For that reason, the cost of cleaning up radioactive contamination should not be excluded by a nuclear liability insurance policy's versions of the "pollution" and "owned property" exclusions.