By Bret A. Stone and John R. Till
Lawyers and the businesses they represent often get so involved in defending claims that the availability of historic insurance policies to help defray the costs of defense is not given the attention it deserves. Even when a search for historic insurance policies is commenced, it is often called off too early, especially considering the value of such policies. The search for and analysis of historic insurance policies is often called “insurance archaeology.” Like the traditional archaeologist, the insurance archaeologist digs for evidence – much of it easily passed over by the untrained eye – and painstakingly assembles it to reconstruct a picture of the past – in this case, a business’ insurance coverage from decades ago.
Although businesses typically undertake insurance archaeology after claims have been asserted against them, the rapidly disappearing nature of historic insurance information counsels in favor of businesses taking a proactive approach to identifying, preserving and assessing their historic insurance assets before those assets are needed. Indeed, insurance archaeology should be part of the “due diligence” required in mergers and acquisitions and real estate transactions. Any business that has the potential for long tail liabilities (e.g., environmental, asbestos, welding fumes, and products liabilities) should search its records posthaste.
Generally, liability insurance policies impose upon insurance companies two important duties: the duty to defend and the duty to indemnify. If a business is sued and the claims asserted against it are potentially covered by an insurance policy, then its insurance company has a duty to defend the business – i.e., the insurance company must pay for the defense of the case. In addition, if the claims are covered by the policy, then the insurance company has a duty to indemnify the business for liability up to the limits specified in the policy (after any applicable deductible).
Insurance policies written today typically exclude coverage for bodily injury and property damage caused by traditional kinds of pollution and for asbestos. But that was not always the case. Indeed, insurance may be available today under policies that were written, and for property damage and bodily injury that occurred, many years ago. In the 1960s, for example, liability insurance policies did not contain pollution exclusions. It was not until the early 1970s that the insurance industry started writing policies containing pollution exclusions, but the exclusion contained a glaring exception – the so-called “sudden and accidental” or “unexpected and unintended” exception.
These policies provide coverage for property damage caused by pollution resulting from sudden and accidental events. After years of paying out claims, the insurance industry changed again in the mid-1980s and put in place the so-called “absolute pollution exclusion.” The insurance industry has taken the position that this exclusion prevents coverage for all bodily injury and property damage caused by “pollution” regardless of circumstances or facts. (Even so, some courts have found that even these policies may not always exclude such coverage. MacKinnon v. Truck Ins. Exchange (2003) 31 Cal. 4th 635.)
Likewise, insurance companies began writing exclusions for asbestos in the 1980s. But the exclusions vary and coverage may be available on policies written in the 1990s or later.
These changes in liability insurance policies are particularly important because the old occurrence based policies never expire. They can continue to provide coverage today for events that took place decades ago! Suppose, for example, a claim is brought against a business today based on property damage or bodily injury that first occurred way back in 1970. A liability insurance policy written for that business in 1970 could provide coverage for that claim today. And if that initial exposure continued to cause additional property damage (e.g., spreading the contamination deeper into the soil and groundwater) or bodily injury (e.g., illness progressing due to exposure to asbestos or toxic fumes), then later policies could provide coverage as well. In that way, each of the insurance companies that provided insurance after the initial exposure also have an independent obligation to defend and indemnify the business.
In order to obtain coverage, however, the business must be able to prove up the existence and essential terms of the relevant insurance policies and that can be a very difficult task when the policies are many decades old. Every time a business does some “spring cleaning,” every time someone moves their office, files get discarded in the process, and millions of dollars in insurance coverage can be lost if these files contain old insurance policies.
But all is not necessarily lost even if old insurance policies have been discarded. Experienced insurance archaeologists are frequently told by the businesses that hire them that they have already searched their records for old insurance policies and found nothing. A business, however, does not always need the actual insurance policy to obtain coverage. Secondary evidence of the policy may be sufficient. Dart Indus., Inc. v. Commercial Union Ins. Co. (2002) 28 Cal. 4th 1059. Secondary evidence might include policy numbers, partial policies, correspondence with insurers, or testimony from insurance brokers. This secondary evidence often proves indispensable to proving the terms and conditions of “lost” insurance policies.
In order to ensure that these valuable historic insurance assets are not lost and are available should the need ever arise, business owners should take a proactive approach to identifying and understanding their historic insurance assets. More often than not, upon receipt of an environmental claim, products liability claim, or other long tail or historical type of injury (such as welding fume or asbestos injuries), everyone’s focus turns to how to defend the claim, and the identification of insurance that could provide coverage for that claim takes a distant back seat. Acting early to identify insurance, without the pressure of defending a claim, can put a business in a strong defensive position by allowing it to immediately tender to its insurance companies should a claim later arise.
The time to act is now. The people who handled insurance matters 20, 30 or 40 years ago are advancing in age, and may become unable to assist the insurance archaeologist.
Take the time now to secure and understand the terms and conditions in your insurance policies. Consider reviewing the policies with the assistance of an attorney who is experienced with insurance law in general and insurance archaeology in particular. Lastly, protect the insurance documents that have so painstakingly been assembled – have them scanned and backed-up onto two sets of discs (and store each set in separate locations) for safekeeping.