If a lawsuit was filed against your business today for activities that happened years ago, would you be able to prove that you had insurance? Would you be able to notify your past insurers of the claims?

In The Travelers Ins. Cos. v. Maplehurst Farms, Inc., Case No. 49A04-1006-PL-394 (Ind. Ct. App. Aug. 24, 2011), the Indiana Court of Appeals held that an insured could not recover costs incurred in defense and settlement of claims where the costs were incurred before the insured notified its insurers of the claims.

The facts were that Maplehurst operated in a dairy in Indianapolis from the 1930s until 1997. In 1997, Maplehurst sold the property to Deans Foods Company, and Dean later sold the property to another party. In 2000, the new owner discovered that an underground storage tank used to store heating oil had leaked. (Maplehurst had last used the tank in the 1970s.)

Later in 2000, Dean demanded that Maplehurst investigate the leak. Two years later, in 2002, the Indiana Department of Environmental Management (IDEM) demanded that Dean investigate and remediate the release. Dean incurred $320,000 in response costs and demanded that Maplehurst reimburse these costs.

Maplehurst searched for its insurance policies after it learned of Dean’s and IDEM’s claims, but the search was hampered. When Maplehurst stopped operating in 1997, it transferred the company’s files to an offsite storage facility. And, many of its employees (including its past president who was primarily responsible for buying the insurance policies) were deceased, or their whereabouts were unknown. Under mounting pressure from IDEM, in December 2002, Maplehurst eventually agreed to pay Dean $170,000 to settle its claim and agreed to a corrective action plan with IDEM to address the contamination.

Maplehurst’s attorneys were eventually able to put Maplehurst’s insurers on notice of the claims between March and May, 2003. However, in June 2004, Travelers learned of the Dean settlement and denied Maplehurst coverage claiming that it violated the voluntary payment provision of its policies. Maplehurst responded that its late notice should be legally excused because it could not find its policies, its insurers, or its insurance agents. The Court of Appeals sided with the insurers and held that "where an insured enters into a settlement agreement without the insurer’s consent in violation of a voluntary payment provision, that obligation cannot be recovered from the insurer, and prejudice is irrelevant."

The lesson for business owners, especially ones that are at risk for environmental claims for activities that occurred on property owned years ago, is that you need to locate your insurance policies before your employees who bought the policies retire or move away. You need to determine who your insurance agents were and try to recreate the policies in case you have a claim.

The irony of the court’s ruling is that responsible parties like Maplehurst may be disinclined to investigate and perform remedial activities until after they locate their insurance policies and after they place their insurers on notice of the claims. In instances where immediate action is required, and the responsible parties elect not to respond because of insurance coverage uncertainty, IDEM with its limited funds will be forced to bear the costs of prompt investigation and response rather than the responsible parties, even if the insurers are not prejudiced by the settlement.