By Bret A. Stone and John R. Till
DO NOT throw away old insurance policies. Now days, many accountants are advising their clients to destroy records after a certain number of years. But this advice could cost your clients millions in lost insurance coverage. Instead, accountants should qualify any advice with respect to destruction of records so that their clients understand to retain all evidence of historical insurance coverage. While there may be good reasons to destroy old documents, an exception to this rule for historical insurance policies is crucial – especially when it comes to responding to environmental claims.
Today, issues of soil and groundwater contamination and other long tail liabilities are becoming commonplace. Businesses are suing and being sued by regulators and private parties alike. Whether or not your clients are currently dealing with environmental issues, there are economical steps that they can and should take now to protect themselves and their businesses and save millions of dollars on attorneys and environmental consultants.
II. INSURANCE BASICS
Generally, liability insurance policies obligate insurance companies to two important duties. If your clients are sued for a potentially covered claim, their general liability insurance company has a duty to defend that suit – i.e., it must pay for the defense of the case. In addition, their insurance company has a duty to indemnify the business for liability up to specified limits for covered claims. Although insurance policies written today typically exclude coverage caused by pollution, that was not always the case. In the 1960s, liability insurance policies did not contain pollution exclusions. In the 1970s, however, the insurance industry started writing policies that contained an exclusion for pollution coverage, but the exclusion contained a glaring exception – the so called “sudden and accidental” exception. Under these policies, the insurance companies contractually agreed to provide coverage if the pollution was the result of a sudden and accidental event. After years of paying out claims, the insurance industry changed again in the mid-1980s and put in place what is commonly referenced as an “absolute pollution exclusion.” (Some courts have found that even this exclusion did not apply).
The change in liability insurance policies is particularly important because the old policies are typically “occurrence-based” policies, which never expire. They continue to provide coverage today for events that took place decades ago! Thus, an accident causing a spill of hazardous materials that occurred in 1970 continues to provide coverage today if allegations are made against your clients. Moreover, a “sudden and accidental” spill may trigger the insurance for every subsequent year of coverage where the property damage exists. Accordingly, the general liability insurance policies your client had in 1971, 1972, and so on may each have an independent obligation to defend and indemnify the client against long tail exposures.
But this information is literally disappearing! Every time someone moves their office, files get discarded in the process. If these files contain your clients’ old insurance policies, they may be throwing away millions of dollars in insurance coverage. Accordingly, an exception to any document retention policy should be carved out in order to preserve valuable historical insurance assets. Accountants should advise their clients to retain — indefinitely — all of their insurance policies and proof of insurance where they are named insureds (e.g., landlords are named insureds under tenants’ policies; contractors and manufacturers are named insureds under subcontractors’ insurance policies). Any other advise could cost your client millions in lost insurance coverage.
III. STEPS FOR PROACTIVE BUSINESSES AND PROPERTY OWNERS
In order to ensure that these valuable insurance assets are not lost and are available should the need ever arise, clients should take proactive steps to identify and understand their historical insurance programs. All too often, clients wait until they actually have a problem before consulting with an environmental attorney. Due to the long tail nature of these liabilities and the rapidly disappearing information related to historical insurance assets, this may be too little too late. For as little as a few thousand dollars, your clients could hire an attorney knowledgeable on issues of insurance coverage issues in environmental cases to analyze and report on their existing coverages, how they might be used to address past, current and future environmental problems, understand where they are missing insurance information, and be able to respond quickly and effectively in the event of a future claim.
The time to act is now, before those files are discarded. The people with the information about your clients’ insurance program are getting up in age. Even if your clients are not able to readily put their fingers on their old insurance policies, the people who handled insurance matters 20, 30, or 40 years ago may be a great help in identifying and securing information regarding these valuable assets. But don’t stop there. Once the client has found their old insurance, make sure that they understand their coverages and exclusions, have them scanned and backed up onto a disc for safekeeping, and begin the process of filling in any gaps in their historical insurance coverage programs.