Source:  Property Casualty 360, November 20, 2012
By: John E. Heintz, Jared Zola
Superstorm Sandy’s recent strike hit the most densely populated area of the country, causing loss of life, destruction and dislocation on a massive scale. Recovery efforts are still in their infancy, and the storm’s economic impact will be felt by businesses and individuals across the country for some time. Many businesses have suffered direct damage to property and lost income due to the resulting interruption of their operations, while others may face environmental-contamination claims stemming from Sandy. For those businesses facing potential liability from environmental-contamination claims, liability insurance may be an important asset to help offset defense costs and remediation payments.
The government is seriously assessing potential environmental threats in Sandy’s aftermath. The U.S. Coast Guard, Environmental Protection Agency, National Oceanic and Atmospheric Administration, oil-spill removal organizations, New York Department of Environmental Conservation and New Jersey Department of Environmental Protection have joined efforts to create a Hurricane Sandy Pollution Response Unified Command. The unified command has created branches, divisions and task forces, totaling 137 personnel, to assess and respond to impacted areas. The unified command is currently identifying environmentally sensitive areas for pollution and hazardous materials.
Early reports have identified several environmental incidents, including: 277,000 gallons of diesel fuel spilled from storage tanks damaged by Sandy at the Sewaren Terminal along the Arthur Kill River in New Jersey; another 7,700 gallons of fuel spilled from a refinery in Linden, N.J.; and approximately 238 barrels (some 10,000 gallons) of biodiesel spilled from a Carteret, N.J. terminal after Sandy devastated the East Coast. We expect additional environmental scrutiny surrounding the New York area concerning parking garages in which hundreds of vehicles were trapped for days and even weeks; marinas along the East Coast where many vessels sank; and, potentially, the maze of pipelines supplying fuel to the Northeast.
Companies facing potential responsibility for alleged environmental damages may seek to invoke an “act of God” defense with respect to liabilities asserted against them. Congress defines an act of God as “an unanticipated grave natural disaster or other natural phenomenon of an exceptional, inevitable and irresistible character, the effects of which could not have been prevented or avoided by the exercise of due care or foresight.” Courts have strictly interpreted this defense to create an uphill battle for companies seeking to invoke its protection. In United States v. Alcan Aluminum Corp., the defendant sought to invoke the act of God defense after it discharged approximately 100,000 gallons of waste into the Susquehanna River during Hurricane Gloria. The court found that “heavy rainfall is ‘not the kind of “exceptional” natural phenomenon to which the act of God exception applies.’”
Given the unique characteristics of the recent storms that converged in the Northeast, companies may be able to successfully advance the act of God or other defenses to their alleged liabilities. Notwithstanding, companies may incur significant defense costs disputing liability and may ultimately pay some amount of money toward remediation to resolve their potential liabilities. Some businesses may have purchased a stand-alone Environmental Impairment or Pollution Liability policy to respond to these potential liabilities, while others may turn to their Comprehensive General Liability (CGL) policies for coverage. CGL policies sold to businesses involved in the energy industry may contain avenues for seeking coverage.
For example, an Energy Pollution Liability Extension Endorsement states that the pollution exclusion does not apply to “bodily injury,” “property damage” or “remediation costs” caused by a “pollution incident,” meaning a discharge of “pollutants” into the “environment,” provided that:

1. the discharge is both unexpected or unintended from the standpoint of the “insured”; and
2. the discharge commenced abruptly and instantaneously and can be clearly identified as having commenced entirely at a specific time on a specific date during the policy period; and
3. the discharge commenced at or from a site, location or premises:

a.  owned by or occupied by, or rented or loaned to, any “insured” at the time the discharge commenced; or
b.  at which any “insured,” or any contractor(s) or subcontractor(s) working directly or indirectly on any “insured’s” behalf, was performing operations at the time the discharge commenced; and

4.  the discharge was known by any “insured” within 30 days of the commencement of the discharge of “pollutants”; and

5.  the discharge was reported to us within 60 days of the commencement of the discharge of “pollutants.”

This endorsement incorporates insurance coverage concepts that insureds and insurers have litigated for decades, including the fight over what is unexpected or unintended and abrupt or instantaneous. Insureds, however, should immediately report any circumstances or occurrences for which they may be liable. In light of the short reporting period, insureds should report now even if they do not presently know if they will face potential liability.
Another policy provision frequently found in CGL policies sold to businesses in the energy industry is an Underground Resources and Equipment Coverage Endorsement. This endorsement modifies exclusions that apply to Coverage A for “property damage” and “bodily injury.” The endorsement modifies the policy by stating that the “Damage to Property” exclusion does not apply to any: “property damage” included within the “underground resources and equipment hazard” other than “property damage” to that particular part of any real property on which operations are being performed by you or on your behalf if the “property damage” arises out of those operations.
The endorsement defines “underground resources and equipment hazard,” in pertinent part, as follows: “Underground Resources and Equipment Hazard” includes “property damage” to any of the following: oil, gas, water or other mineral substances which have not been reduced to physical possession above the surface of the earth or above the surface of any body of water.
This endorsement may provide coverage for losses incurred from property damage to “water or other mineral substances.”
Insureds should be aware that their policies may contain these and other endorsements that may provide coverage for potential liability from environmental-contamination claims stemming from the recent series of storms. It is important to recognize that language can vary significantly from policy to policy and that the requirements imposed by specific policy language may require businesses to act quickly. Accordingly, insureds should immediately perform the following action items:

• consider and locate all possible insurance policies that may be implicated by your loss, including all forms and endorsements; if you cannot find them, then request a copy from your insurance agent or broker.
• Check your policy to locate the address to which any written notice is to be sent and provide written notice of your loss to your insurance company.
• If your policy contains a time-element reporting requirement (see, for example, the Energy Pollution Liability Extension Endorsement), immediately report any circumstances or occurrences for which you may be liable whether or not you presently face any contamination claims; otherwise you may lose the ability to pursue coverage in the future.
• Review your policy to determine if there are any additional procedural requirements or deadlines. To the extent possible, comply with all requirements and deadlines.
• Follow up with your insurance company regarding your claim.
• •Seek legal advice as appropriate.