Stephen Henshaw is the founder and President/CEO of EnviroForensics (headquartered in Indianapolis, Indiana), the only environmental consulting firm in the country (to our knowledge) that combines environment investigation/engineering/design expertise with insurance coverage and settlement resolution expertise. It is this latter specialty that interested us the most, as over the years the company has carved a niche for itself in the field of insurance archaeology, especially for small to mid-sized businesses. David O’Neill is the company’s chief insurance archaeologist. O’Neill, an attorney, with an insurance background, and Henshaw, in the following interview, gave us a primer on insurance archaeology.
Interview with Stephen Henshaw & David O’Neill
USILR: What is insurance archaeology?
O’Neill: Insurance Archaeology is the practice of locating, retrieving, assembling, and evaluating historical insurance documents. Typically this is done on behalf of the policyholder who has lost or mislaid his insurance policies and wishes to assemble his historical insurance program. The term “archaeology” refers to the assembly of the various parts of an insurance contract. Since insurance policies are “contracts of adhesion” they are comprised of various parts, which often must be located and reassembled. Just as an archaeologist reassembles the skeleton of a prehistoric animal, the insurance archaeologist reassembles the parts of a historical insurance policy and portfolio.
USILR: How old is the field of insurance archaeology, and what circumstances created the need for insurance archaeology? Am I correct in assuming that it stemmed from asbestos and pollution litigation?
O’Neill: The field of insurance archaeology had its beginnings in England during the 1970’s and 80’s. Individuals working for the underwriters found that there was a market for the retrieval of policy information from the major London brokers primarily for American manufacturers responding to asbestos personal injury and pollution property damage claims.
The need for reconstructing and finding a company’s or an individual’s insurance coverage came about when companies were being required to address third party liabilities. Because environmental claims and personal injury claims are considered retroactive to the party causing or contributing to the damages, and because the costs of the damages were so large, companies looked for alternative funding approaches.
Henshaw: That’s really where it started. It’s a relatively new field, and the late ’80s is when it really started coming on. It did result from these large environmental liabilities that were coming about, and the associated retroactive liability. People got rid of their properties and assets, but the long-tail liability followed them around. There are about three major periods when insurance was written and crafted in very different ways as the industry changed and as claims were brought. These were roughly 1972/73, when there was a change in the coverage and how it was written then roughly, 1985/86. The early insurance was written up to 1972/73, and did not, typically, have pollution exclusion language in it. That meant that environmental damages were covered by insurance.
So, before 1972/73, the courts have generally interpreted it to mean that those environmental conditions are covered under insurance policies, typically CGL policies. After 1972/73, most carriers still covered environmental damages, but only to the extent that those were sudden and accidental. From 1972 to roughly 1985, only sudden and accidental events, unexpected, unintended releases were covered – overfills of tanks, ruptures of lines, inadvertent spills and releases, valves that stayed open – things of that nature.
After about 1985/86, the insurance industry really tightened up their policy language so that it did not cover any environmental conditions; if you wanted those covered, you had to buy a separate policy. Your CGL policy would no longer cover even sudden and accidental events. As these claims started coming with Superfund and environmental enforcement of RCRA, and various state regulations, suddenly, the liabilities blossomed, and the need to find alternate funding for major industrial companies was heightened. These costs were in the tens of millions of dollars, in many cases, and the legal fees were exorbitant in the real heyday of Superfund. Many lawyers would sit around tables and discuss allocation, so the need to find some solution to this problem focused on how historical insurance might cover some of these costs, particularly defense costs.
USILR: You mentioned the salad days of CERCLA. It is perceived by environmental lawyers, and certainly by insurance coverage lawyers who deal with pollution, that things have slowed down considerably. Many insurance coverage attorneys no longer specialize in pollution coverage disputes because, in many states, there is now a discrete body of case law, so that there is not that much to argue about. Also, many of the Fortune 500 companies have already had their pollution liabilities resolved in one way or the other. Have you noticed a slowdown in this particular area?
Henshaw: That is a two-part question. The heyday of Superfund is behind us. That is a good thing for everybody, because while Superfund was designed to address big sites, such as the “Valley of the Drums” sites, and large environmental problems, it also crept into every business’s life. That was not necessarily its intention. But what happened [was] that anyone who contributed to a site (whether it was giving them an empty drum, or sometimes even being a supplier or a transporter) was brought into this. Many of these Superfund situations have been resolved, and the large run of claims by larger companies has been settled.
In addition, I would say that most Fortune 500 companies have addressed their historical insurance. That is not a blanket statement, but our experience is that most Fortune 500 companies with environmental concerns have done global runoffs of their historical insurance. What that means is they negotiated a settlement with their various historical carriers and had a cash buyout of these policies. They received money and the carriers obtained a release from any future liabilities. So then, if a particular company is identified as a responsible party for some future site, there will be no coverage to defend them. In general, that is what has happened.
However, I would say that that is not the case with most mid-size companies, certainly from a dollar standpoint. From an impact to our nation’s economy, and to our businesses in general, it is these smaller companies that now have the most to lose in environmental damages. The cost of a $100,000 to a $1 million cleanup – let alone something higher than that – can ruin a company, not just for their annual bottom line, but for good. Fortunately, most of the mid-size companies haven’t exhausted their policies. I would say that most of them haven’t even looked for them, so from that standpoint, there is still much work to be done. Although, many claims will be filed, they will not be of the magnitude that we saw in the past.
USILR: Non-insurance archaeologists, including most lawyers, perceive that insurance brokers are the ones who should be performing insurance archaeology. In fact, should that not be part of the insurance broker’s service to his/her client?
O’Neill: Broker mergers, consolidations, etc. in general have a limiting effect on insurance archaeology. When a larger brokerage absorbs a smaller one, some records survive the move and some do not. Most state laws only require insurance brokers to keep records for five or seven years. Most brokers do not have a profit motive in keeping old records and they are often discarded. Also, as insured corporations acquire other insured corporations, often the need for retention of “expired” insurance policies is not understood, or if it is understood, it is not advantageous to the insurance carriers.
Even where the acquired corporation has retained its historic insurance records, the acquiring corporation may not include assembly of the acquisition’s historic insurance records in its pro forma. The new corporation’s record retention plan may not include historic insurance policies of newly acquired companies. So, the potential sources of insurance records are constantly dwindling. Finally, many insurance agents adopt the insurance company’s line, “the insurance was never intended to deal with retroactive liability.”
To Be Continued Next Week…