Environmental Newsletter

Environmental Insurance and the Known Unknown (or Unknown Known) Pollution Conditions

Aon Environmental Services Group

By Claire Juliana of Aon Risk Solutions

Former United States Secretary of Defense Donald Rumsfeld once famously said: “…as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know….”1 These linguistic gymnastics could also be used to describe the environmental conditions on a site. In the context of environmental insurance, what is known (or unknown) about potential contamination and often by whom and in what context can be critical as to whether an insurance policy will cover such conditions or not. Consider a recent Appeals Court case from the Commonwealth of Massachusetts which analyzed the issue of what are “known” pollution conditions for purposes of an insurance policy’s “Known Conditions” exclusion. Market Forge Industries, Inc. v. Indian Harbor Insurance Company, 2014 Mass. App. Unpub. LEXIS (August 29, 2014).

The facts in Market Forge are fairly typical. In June of 2000, MF Properties (“MFP”) acquired property that since the early 1900s was used for various industrial manufacturing purposes. Prior to acquisition, MFP commissioned an environmental assessment of the property (the “Paragon Report”). The Paragon Report relied upon previous site assessments by other environmental consultants from the mid-1980s and an audit by the Department of Environmental Protection (“DEP”), all of which had identified the presence of certain contaminants throughout the property. The Paragon Report summarized the various assessments including one report that identified reportable concentrations of volatile organic compounds (“VOCs”) in a groundwater monitoring well but deemed them “no significant risk”; a subsequent study suggesting that the VOCs were the results of leaks either from a degreaser or nearby storage tank north and upgrade from the monitoring well; and a later study that ruled out that possibility finding no contamination or release there. The Paragon Report recommended additional subsurface investigation in the former location of an aboveground storage tank. However, no further site investigation was conducted at that time.

In connection with its tenancy at the property, Market Forge Industries (hereinafter Market Forge and MFP will be collectively referenced as “Market Forge”) sought, and Indian Harbor issued, a pollution and remediation insurance policy to protect Market Forge from liability against future pollution-related claims for the period of September 2000 to September 2005 (the "Policy"). As part of Market Forge's application, it sent Indian Harbor the narrative portion of the Paragon Report. In 2005, Market Forge hired Clean Harbors to conduct another environmental assessment of the property focusing on changes since 1999. Clean Harbors found that there was no documented evidence of environmental impacts to the soil or groundwater from previous use that had not been discussed in the previous reports (the "2005 Assessment"). Market Forge submitted the 2005 Assessment in connection with its renewal application in 2005.

In 2009, Market Forge commissioned another environmental assessment of the property. That investigation revealed VOCs exceeding reportable concentrations on the property, which, once reported to the DEP, resulted in an order requiring response actions at the property. Shortly thereafter, Market Forge tendered this claim. In March 2010, Indian Harbor denied coverage for the pollution conditions on the basis of the Policy’s Known Conditions exclusion which provided in pertinent part that:

“This insurance does not apply to LOSS, REMEDIATION EXPENSE, LEGAL DEFENSE EXPENSE …:
1. Known Condition(s)
Arising from POLLUTION CONDITIONS existing prior to the inception of this Policy, and reported to any officer, director, partner, or employee responsible for environmental affairs of the INSURED, which were not disclosed in writing to the Company in the application or related materials prior to the inception of this Policy or prior to the location being endorsed onto this policy. Only conditions described in the documents listed in the Known Condition(s) Document Schedule are disclosed to the Company.” (Emphasis added).

The Policy did not contain a Known Conditions Document Schedule.

On cross motions for summary judgment, the Superior Court allowed Indian Harbor’s motion and denied Market Forge’s motion finding that:

  1. the Known Conditions exclusion was not ambiguous;
  2. the claims were for "known" conditions within the meaning of the Policy because all of the various environmental investigations since 1985 had reported the presence of VOCs at several locations irrespective of whether these "reportable" or "nonreportable" levels of contamination (noting that the Policy did not make any such distinction); and
  3. “most fatal” to Market Forge’s position, these Pollution Conditions were not disclosed “as required by the Policy.” Even though the Paragon Report and the 2005 Assessment were disclosed in the application process, the court noted that “because the Policy explicitly required that in order for Pollution Conditions to be deemed "disclosed" within the meaning of the Policy, they must be included on the "Known Conditions Document Schedule."

On appeal, the Appeals Court vacated the judgment and remanded for further proceedings. Like the lower court, the Appeals Court agreed that the plain language of the Known Conditions Exclusion was clear and unambiguous on the point that “Known Conditions are excluded, unless listed on the schedule”. The Appeals Court did, however, find an issue of fact as to whether the VOC contamination was “known”. Although VOCs had been identified in in a 1997 report, the contamination discovered in 2009 was detected in a different monitoring well in a different area of the property. The court noted that “known contamination in one area is not known contamination in all areas of a site”.

This case offers some important cautionary lessons when it comes to treatment of what may be considered known but non- “actionable” conditions:

  1. Required disclosure – as this case demonstrates, “required disclosure” may be more than merely disclosing the reports to the insurer and may (as here) require the affirmative scheduling (or in some cases documents listing the reports) in order for coverage to be provided for the “known” conditions; and
  2. Describing the conditions - most importantly, careful attention should be paid to the description of the known conditions for which the insured seeks coverage. Some insurance companies offer a “Disclosed Documents” endorsement which “deems” the conditions described in any of the listed documents as having been disclosed to the insurer.

In the negotiation of an environmental insurance policy, policyholders should work closely with their brokers and other advisors to assure that the parties understand the scope of coverage for any conditions identified in an environmental risk assessment. Insurance companies may be willing to underwrite certain conditions that are known but do not require cleanup under existing environmental laws. However, parties should be attentive as to how these are both disclosed and affirmatively endorsed onto the policy to avoid a costly debate in the future about what is known and excluded.

1 February 12, 2002, in a news briefing about a lack of evidence linking the Iraqi government with the supply of weapons of mass destruction to terrorist groups. Available at http://www.defense.gov/transcripts/transcript.aspx?transcriptid=2636

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