On Wednesday, llth March 1987,Robert S. Faron of Barnett & Alagia, Washington D.C.,

addressed a very well attended lunchtime meeting on"USA - LIABILITY & ENVIRONMENTAL CLAIMS"

Thank you for the privilege of addressing the Members of the BritishInsurance Law Association. As I prepared for my remarks I was reminded ofthe following story:

The Chief Executive Officer reports to the Chairman of a large multinationalchemical company with some good news and some bad news:

I've some good news, I think I've found the source of our leakingunderground storage tank problem in our Puerto Rican operation, but thebad news is we have to sell the company to pay off the clean-up bill.

As an attorney who is familiar with the environmental liability process in theUnited States but who also has long standing ties with the London insurancemarket, I would like to discuss with you today my perceptions of U.S.liability as it relates to environmental claims. Many of you in the audiencework with, represent or are underwriters of insurance whose reinsurance andprimary insurance coverage of U.S. based companies has embroiled you ingreat controversy over insurance coverage of environmental claims in theUnited States. Many of you may also represent British companies or entitieswho are either owners or operators of U.S. facilities or who have somefinancial investment in companies operating within the United States. It isimportant for you to understand developments that will affect your businesstaking place in the U.S. Courts and, as importantly, the rapid changes thatU.S. statutes are giving to expanding liability exposure in the tort liabilitysystem.

I would like to put to you a proposal about the synergism of the statute andcommon law bases of environmental liability. U.S. Courts are takingdirection from emerging liability standards that are increasingly reflected instatutes, and federal statutory standards are driving U.S. Courts to expandliability concepts and decrease defences available for those whose activitiesproduce pollutants.

I would then like to discuss some common law examples that make my pointthat public perceptions of harm are driving both courts and legislatives toestablish higher standards of public protection. I will then trace through thedisastrous changes to tort liability concepts that have come about throughfederal models of environmental liability systems, and discuss the impact on

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insurance coverage that is evident from the few cases reaching appellantlevels of review. I will conclude with a brief discussion attempting to drawsome conclusions on the interrelationships of these issues to the insurancemarket and the tort reform movement.

In New Jersey, in a court case several years ago the Supreme Court helddefendants, owners and operators of a site contaminated with hazardoussubstances, liable for cleanup and removal costs under a strict liability theoryfor actions which under a negligence theory would not result indeterminations of liability. That same court also expected the defendants tounderstanding its U.S. statutory environmental responsibility and the need toincorporate these laws and the detailed regulations implementing these lawsinto its operations in order to avoid a negligence per se rule. In that case StateDept. of Env. Protection v. Ventron Corp., 94 N.J. 473 (1983), the courtstated that "it is time to recognize expressly that the law of liability hasevolved so that a landowner is strictly liable to others for harm caused bytoxic wastes that are stored on his property and flow onto the property ofothers." 94 N.J. at 488 (1983).

Thus N.J. adopted the Rylands v. Fletcher, LR. 1 Ex. 265 (1866) commonlaw principle of strict liability for non-natural use of land.

This theory has also been applied to the generators of toxic waste who can beheld strictly liable for damages resulting from the off-site disposal of thatwaste. Kenny v. Scientific, Inc., 294 N.J. Super 228 (Law Div. 1985)

But recently last year a trial judge in New Jersey held this doctrine does notapply as between a buyer and a seller unless the seller knew or had reason toknow that the conditions being complained about were abnormallydangerous. T & E Industries, Inc. v. Safety Light Corp., (May 14, 1986)(N.J. No. L. 41346-89). In doing so the court looked to a state of the artknowledge of the defendant's conduct in placing a halt to the seeminglyendless march towards the imposition of strict liability in hazardous wastecases.

We may be able to project future scenarios for U.S. environmental liabilityfrom these legal developments in New Jersey, even though strict liabilityconcepts are not always applied in environmental property damage claimsand N.J. is often, but not always, a harbinger of the future.

Contrast this development to another matter in which an English companyTurner Newall whose foreign subsidiary was an asbestos processor is beingsought to be responsible for its subsidiary operations under a veil piercing

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theory. The company is confronting the argument that due to the existence ofa U.S. federal environmental statute, it cannot otherwise assert defenseswhich it had previously successfully asserted in a state court action and whichwere based on contract between itself and its subsidiary. U.S. v. Nicolet, Inc.(D.C. E.D.Pa. No. 85-3060). See also Idaho v. Bunker Hill, 635 F. Supp.665, (D.C. Idaho 1986) holding the parent corporation Gulf Oil liable for itssubsidiaries waste disposal activities.

In a recent Tennessee decision, a U.S. District Court held a companyresponsible for the impairment of the immune system of six class actionsplaintiffs due to its determination that a history of abuse of environmentalstatutes and regulations had lead to the contamination of groundwaterutilized by the plaintiffs. Sterling v. Velsicol Chemical Corp., 647 F. Supp.303 (W.D. Tenn. 1986).

Personal injury claimants in a recent Massachusetts action also attributed itstheories of liability to the failure of the corporate defendant to comply withenvironmental statutes which resulted in groundwater contamination eventhough those statutes did not impose a responsibility on the company at thetime the activity took place. Anderson v. W.R. Grace & Co., 628 F. Supp.1219 (D. Mass. 1986).

The proposition I put to you is that these cases are the harbingers of a formof liability which in the next decade will be a standard that will apply to allenvironmental enforcement claims and personal injury and property damageclaims flowing from environmental impairments.

We are all aware that the United States has in the past two decadesaccelerated the development of its common law tort system, particularly inareas relating to personal injury compensation. Decisions in the productsliability and workers compensation area have accelerated the standards ofcare, have expanded upon the basis of liability, have imposed procedural andsubstantive devises to access liability for a new set of defendants. However,the pace of change has been even more accelerated in the area ofenvironmental claims due to the under-pinnings of such claims in statutorylaw both at the federal level and for individual states. I have personallyparticipated in both the defense of companies subject to environmentalclaims from various government officials and have also been involved in thelegislative development of liability provisions in various environmental laws.I can relate to you that there is great network among environmentalists,enforcement officials, plaintiffs counsel's and the environmentally concernedlegislators. Through their extremely able staffs, they have been able toprovide statutory causes of actions where the common law has not, have been

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able to provide statutory procedural devices for over coming common lawprocedural hurdles, and have used statutes to eliminate soundly reasonedcommon law defenses, particularly in those areas where a federal or statestatute gave companies grounds for a defense when companies havesuccessfully asserted defenses under the varying terms of legislation enactedby the federal government or a state, one can almost surely count on the nextAppropriations Bill or Authorizations Request containing language toeliminate those same defenses.

This process was exacerbated in the recently completed SuperfundAmendment and Reauthorization Act. In the last stages of legislationprocess, industry lobbyists were shut out of the debate, with quite disastrousresults for corporate defenses and controls to liability costs. The tide ofenvironmental protectionism has lead to stringent standards and broadclaims of damage, regardless of the technical, statistical or legal basis forsuch claims. Environmental injury, as you know, has been characterized asproperty damage in the context of insurance policies. We shall explore thistopic later. There is also a trend or at least a yearning among these interests toenact federal causes of action to become the basis of personal injury claims.The enforcement related property and cleanup claims now provide and will inthe future, with increasing frequency, provide procedural and substantiveraw data to become the basis for claiming compensation for personal injury.

While courts are reluctant to completely eliminate common law protectionsas between private parties, they will allow private parties and those who areprotecting the public well, greater power. Almost as the exception whichproves the rule, the court in Marden Corp. v. CGL Music, Ltd., 804 F. 2d1454 (9th Cir. 1986), a suit between a purchaser and seller of a facility whichlater became a CERCLA site, allowed private defenses, based on equity andcontractual releases to mitigate the harsh limits of CERCLA's defense.

Contrast this case with the case of Idaho v. Bunker Hill, 635 F. Supp. 665(D.Id. 1986) where Gulf Oil, the parent corporation, was held responsibleunder the alter ego doctrine of corporate veil piercing for the clean-upliability of its subsidiary. There the court swept aside private defenses in itseffort to find a solvent responsible party to clean-up. This same theory isbeing used by the U.S. government in seeking to hold the U.K. domiciledBritish parent company, Turner & Newall, responsible for asbestos wastedisposal under CERCLA, notwithstanding any private contractual defensesand even a prior Texas court hold for the lack of responsibility of the parent.The Justice Department's argument is that CERCLA defenses are distinctlylimited to those set forth in the statute. This theory, if upheld, should give

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considerable pause to foreign corporations holding control directly init intpriprtino Qnmp Vniffpr rnrnnratinn or tWO tO

consiaeraoie pause 10 loreign corporations noiamg controlU.S. companies, without interjecting some buffer corporation,protect them.

II. CERCLA'S IMPACT

The Super fund law has played a major impact in developing these conceptsexpanding common law courses of action and limiting common law defenses.This law, the Comprehensive Environmental Response Compensation andLiability Act (CERCLA) sets up a strict, joint and several liability regime forfour categories of parties: current owners and operators, past owners/operators, generators, and transporters were to be liable for the costs ofcleaning up the identified waste site or could be ordered to conduct the clean-up themselves. Only limited defenses to liability were allowed, andtremendous pressure to force clean-up was placed upon solvent companies,even though they were remotely, sometimes by the slimmest of contractuallinks, responsible for any environmental damage. Four years of litigation hasleft little defenses available and has all but swept away common law barriersof causation and even proximate causation in the assessment of liability forthe enormous costs of cleaning up sites. See U.S. v. Wade, 577 F. Supp. 1326(E.D. Pa. 1983), U.S. v. South Carolina Recycling and Disposal, Inc.,No. 84-1276-6 (D.S.C. Feb. 23, 1984), 14 Env't L. Rep. (Env't. L. Inst.)20272.

Over seven years ago I instructed underwriters on the concepts included in theComprehensive Environmental Response Compensation and Liability Act of1980 or CERCLA. (42 U.S.C. § 9601 et seq.). Their reaction at the time, wasthat such a statute could not be underwritten. Our discussion arose in thecontext of a provision of the law to allow a direct action against the insurer ofthe liability scheme. The background that these underwriters had come fromwas that they had been able, with great difficulty, to develop a scheme forinsuring the Clean Water Act spill clean up responsibility in the early 70's.While they were used to the mechanisms that the CWA scheme had imposed,they were concerned that a lack of Federal preemptions of state laws wouldmake their underwriting extremely difficult. When the Federal OuterContinental Shelf Lands Act Amendments of 1978 were past and theregulations implementing the financial responsibility provisions of that lawpromulgated, a considerable amount of time and effort was spent trying toeducate U.S. officals as to the required needs of underwriters, who based theinsurance contract on tort liability concepts rather than a statutory liabilityscheme. In the case of OCSLA underwriters appeared willing to insure thescheme, but could not agree to providing the guarantees which would subjectthem to direct action without the benefit of this contractual protection. Even

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though OSCLA raised many difficult issues concerning coverage of economicloss on a joint and several, strict liability basis, little did underwriters realizethat the currents of terrific controversy were bubbling beneath the surfaceregarding the efforts to enact a federally preemptive water pollution scheme.These efforts resulted in passage of CERCLA.

The provisions of CERCLA, also known as the Superfund Bill, which relatedto hazardous substance clean up were far more onerous than the statutoryscheme which covered Clean Water Act spills of oil or hazardous substances.The statutory enactment of CERCLA in 1980 as I explained, was a newformulation of liability; strict joint and several, which as a mechanismapportioned liability not based on causation but in reality was purposelyfounded upon a deep pocket theory. The categories of responsible partiesdesignated under that statute were designed to provide a means of assessingcosts against solvent parties when the particular party who might under acommon tort liability system be otherwise insolvent. The concerns of notbeing able to attribute liability and recover from midnight dumpersinadvertently lead to the creation of a deep pocket mentality that has spreadits influence through out the U.S. economic scene.

Indeed some say that this expansion of liability will not only undermine theeconomic basis for many of its industries, as competitors in worldwidecompetition, but also due to the stacking and imposition of enormoustransactions costs on insurance policies, threaten the very basis of the U.S.and indeed the world's insurance and reinsurance capacity.

This statutory scheme has recently gone through a long hard fought andarduous reauthorization process. The Superfund Amendments andReauthorization Act of 1986, SARA plants the seeds of total economicparalysis if carried to the extreme. In the process an even more onerousliability mechanism to overrule common law defenses has been layered on analready complex environmental liability system.

In a recent statement, Henry Habbich II, Association Attorney General forLands and Natural Resources Section of the U.S. Department of Justice,who is the Chief Enforcement Official for the CERCLA program had thefollowing comments when he was discussing Superfund Enforcement afterthe SARA Reauthorization Amendments.

"The difficulty of reauthorizing this law, a law that all major interestgroups have come to support since its creation in 1980, illustrates well theemotionally and politically charged nature of the debate over hazardouswaste cleanup. Despite all the conflicts and controversy however, the

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programmatic portions of the bill finally approved by the conferencecommittee appeared to address many of the perceived weaknesses in theSuperfund program, without imposing limitations that could havejeopardized the ability of the Environmental Protection Agency (EPA)to implement the program. The process will be changed but primarily inthe sense that it will be a more regularized administrative process withearlier participation by interested parties in ways which we all hope willreduce litigation."

The general effect of SARA's passage will be to:

1. Increase the costs and complexity of clean-up

2. To accelerate the clean-up schedule

3. To change the character of CERCLA to an adminstrative law basislike the Resource Conservation & Recovery Act, the Clean WaterAct, or Safe Drinking Water Act, and

4. To decrease the ability to challenge legally the EPA's rational foradministering the law.

One example of the changing administrative nature is the clean-up standardsunder the statute. (§ 121 of CERCLA.) They are more stringent and giveEPA less discretion to adjust the scope of remedy to meet the circumstancesof any particular site. Permanent treatment remedies rather thancontainment solutions will force technology and drive up costs. To reach thisgoal any applicable or relevant and appropriate federal statutes, or morestringent state environmental statute or standard may be applied. Clean-upof disposal sites could become the equivalent of drinking water purificationunder this standard.

And from such regulatory standards the enforcement provisions have beenenhanced to give greater power to environmental enforcement agencies.

Among the changes that Mr. Habbich states will be important to Justice willbe the increased access and, more importantly, the authority to demandinformation and documents relating to (a) materials that have been managed,or added to a CERCLA site, (b) the nature and extent of a release orthreatened release, and the ability of any particular party to pay for orperform cleanup. This latter power may provide authority to seekinformation from insurance companies or agencies. With the ability toenforce information requests and access requests in the District Court, the

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Federal Government has enormously powerful tools to undertakeenforcement of this law. Secondly, SARA increases criminal and civilpenalties for noncompliance with EPA information requests and accessorders. Increased flexibility has been created by the establishment ofcivil penalties in areas where enforcement was previously limited tocriminal intent.

SARA has codified the general proposition that there is no pre-enforcementreview under Super fund. The Courts have held that a potentially responsibleparty cannot challenge either an administrative order to do a response actionor a fund financed response action until the EPA and the Justice Departmentbring an action to Court to enforcement the order or recovery the costs of theGovernment response action. SARA however, modified slightly the pre-enforcement review provision in light of its new citizen suit provision. Thisprovision allows citizen to bring suits which allege that the response actionthat has been undertaken was in violation of any requirement of the act. TheSARA amendment provides many opportunities for citizens and potentiallyresponsible parties to become involved in remedy selection at an early stagein the administrative process, but precludes judicial review until later so thatpiecemeal review and excessive delay of clean up are precluded. Asimportantly, the inability to go to court may have a strong incentive topromptly settle cases rather than litigate over the extent of the remedy.

Moreover, the scope and standard of review gives great difference to theGovernment's actions. A challenge to the adequacy of any response actionwill be limited to judicial review of the administrative record. TheGovernment selection of the response, no matter how costly, will have apresumption of validity unless the objecting party can demonstrate on anadministrative record that the decision was arbitrary and capricious or, nototherwise in accordance with law, an exceedingly hard burden to meet. Thegovernment selection of a response action will be upheld in almost allcircumstances. The aim is to focus all resources on clean up and not ondisagreements over the scope or need for clean up. Of course, one must trustthe wisdom of the agency's judgment. On the other hand the process invitesparticipation of citizen groups and interested environmentally concernedparties, and provides grants for paying their expenses. Another significantchange is the enhanced powers of the state in which the site is located tobecome involved in creating and administrating clean-up. The premise of thisstatute is that the fundamental task of the Superfund program is to clean uphazardous waste sites, a task so immense that to address even a substantialportion of risks to public health and the environment within a reasonableframe, potentially responsible parties will have to bear the considerableshare of the cleanup burden.

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As to the standards of cleanups, SARA directs the President to selectremedial actions which would lead to permanent solutions, and apply allFederal and State environmental standards and requirements that are eitherlegally applicable to the substance concerned or relevant and appropriateunder the circumstances of the release. These federal statutes and the statesstandards and statutes identified as relevant and appropriate will drivecleanup to new levels of expense and detail.

Among the more interesting aspects of Superfund reauthorization was apassage of several provisions concerning research and development intohealth related aspects of exposure to environmental waste. Under anexpanded authority the Agency for Toxic Substances and Disease Registry(ATSDR) is given broad authority to do toxicological profiles to testhazardous substances and to do health assessments at Superfund sites.These must be done on all national priority list sites and other sites at therequest of the EPA or a state. In connection with the public participationcitizen suit provisions of SARA, these provisions will provide the basis forinformation to fuel private party toxic tort suits, which will inevitably followclean-up claims.

There are other provisions which indicate SARA'S passage reflects a policyjudgment that the situation concerning environmental contamination is sograve that all energies must be focused on cleaning up this threat or risk tosociety. It is too early to tell the full impact, since many regulations havingsignificant effects on the detailed implementation of the new act have yet tobe promulgated. But it is clear that the public perception of the seriousness ofthe problem has been enacted into a far reaching legislative policy which willimpact many areas of our society.

III. EFFECTS ON INSURANCE

Since the Superfund does not channel, but rather disperses liability, thescheme brings parties into the process who may not have any nexus to theactions which under the common law would qualify as an abuse of a standardof tort liability. Its mechanisms encourage contribution actions andsubrogation among potentially responsible parties to develop deep pockets topay for the costs of cleanup. The deepest of these pockets that has beendiscovered is that of the insurance companies who have providedcomprehensive general liability cover to companies who are engaged in thisexercise in environmental purification.

At present a great legal debate is raging over the extent that theComprehensive General Liability policy provides coverage to those insureds

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who have sent waste to superfund sites or who own and operate superfundsites. There are many issues concerning this debate and it is difficult topredict trends.

Two recent courts of appeal opinions show the dichotomy of views. In Mrazv. Canadian Universal, 804 F. 2d 1325 (4th Cir. 1986), the 4th Circuit heldthat where waste had been dumped in 1969 but EPA had not taken actionunitl 1981 or 1982, there was no occurrence because the government plaintiffhad not alleged in its complaint that property damage occurred until thediscover of the contamination. That is, the court adopted a manifestationtheory for triggering coverage in cases where a serious question existed aboutwhen an on-going potential damage situation began. The majority of thatcourt also held the United States was not claiming property damage resultedbut simply sought it's response costs under CERCLA's § 107 (a) & (b).

In Continental Ins. Co. v. Neppacco, No. 85-1940 (8th Cir. 1987), the 8thCircuit reversed the District Court's holding that no occurrence could takeplace under policies whose period covered the time prior to passage ofCERCLA. The appellate held that states and the Federal Government suffer'property damage' at the time hazardous wastes are improperly 'released'and that clean-up costs are a recoverable measure of damage not economicinjury. It remanded the case for further ruling on whether there was an'occurrence' based on whether there was expected or intended harm by-thedischarge of the waste. The court's opinion raised issues regarding whetherthe government's interest in clean-up was sufficient to be considered propertydamage and determined it was, under the parens patriae doctrine, eventhough the government was not the owner of the site. The court alsoconcluded clean-up costs were an appropriate measure of damages and thuswere damages due to property damage. On the timing issue, the court lookedto the exposure theory based on its view that in waste dumping cases thewrongful disposal and the resulting damage may be 'practicallycontemporaneous.'

Thus, these two cases set up a conflict among the courts which might needresolution by the U.S. Supreme Court.

The 4th Circuit will again have a chance to rule on the issue of whetherCERCLA's response costs are legal damages or equitable relief not coveredby the CGL. The lower District Court in Maryland Casualty Co. v. Armco,Inc., No. Y-85-1369 (D. Md. 1986), held there was no duty to defend becausethe CERCLA costs were not damages and allegations under CERCLA didnot cross the line of legal damages. It based its position on cases denying jurytrials to CERCLA defendants claiming the monetary relief was mere

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equitable restitution of costs expended by the fund. This decision has beenappealed and briefed to the 4th Circuit, who will have to resolve the issue.

Another issue of controversy is the applicability of the sudden and accidentalexception to the pollution exclusion clause found in policies issued after 1973.The courts are split on the applicability of the exclusion clause to activities ofinsureds who have disposed of waste in the regular course of business.Compare the case of Great Lakes Container Corporation v. National Union,727 F. 2d 30 (1st Cir. 1984) with other circuits holding the exclusion does notapply where the wastes were negligently disposed of by a generator ordisposed of in full compliance with rules regulations. See Payne v. U.S. Fid.& Guar. Co., 625 F. Supp. 1189 (S.D. Fla. 1985) and Technicon ElectronicsCorp. v. Am. Home Assur. Co., IND. No. 08811-85 (N.Y. Sup. Ct. Feb. 18,1986) are examples.

Some other issues such as whether CERCLA administrative notices are 'suits'which will also have to be resolved. The Technicon case mentioned above isbeing appealed to determine if there is a duty to defend a company who is notsued but is given a demand under CERCLA to clean up a site.

In closing I will conclude that the interrelationship of these issues to theinsurance crisis and tort reform movements will have to be explored in moredepth. A question must be asked whether changes in tort law rules for jointand several liability, caps on punitive damages, limitations of attorneycontingent fees, even if enacted at the state level can stand up to theenormous pressure on legislators to provide fair and just protection fromenvironmental harm and compensation for environmental injury, onecannot predict the outcome of the U.S. tort reform movement in light of theconsiderable opposition, but one must also question the reality of basing toomuch hope on it, in the face of the onslaught of environmental liability lawsthat have been enacted in the last decade and which are yet to be passed inthe future.

COMMERCIAL UNION REPORT ON"NATURAL CATASTROPHES"

Whilst the catastrophe potential of natural phenomena is generallyacknowledged, the response of Insurers in practical terms of exposure controland premium adequacy is, at best, perfunctory. It is true that in recognisedearthquake and hurricane prone areas some control is exercised, but evenhere the lessons learned from a major catastrophe are quickly forgottenunder the day-to-day pressures of competition. In the more temperate areas

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