Recent events in Japan have focused attention on whether nuclear accidents in the United States would be covered by insurance. For decades, insurers have denied coverage for the costs of investigating and cleaning up radioactive contamination. Insurers insist that such costs are excluded from coverage. Their position took a body blow recently when a Massachusetts federal judge ruled in favor of a Pillsbury client that the “pollution exclusion” that has been contained in nuclear liability insurance policies since at least 1990 is unenforceable as a matter of law.
Nuclear Liability Policies
Comprehensive general liability (CGL) and property insurance policies have contained “nuclear exclusions” for over sixty years. These exclusions are not as comprehensive as sometimes assumed, but since the late- 1950s, pools of insurance companies have been formed to fill the gaps in traditional insurance for radioactive contamination. One pool called American Nuclear Insurers (ANI) has a monopoly on liability insurance policies designed to cover the “nuclear energy hazard.” Many nuclear facility operators and others are required by federal law to purchase ANI’s policies to cover their liability risks. Other companies that handle radioactive material voluntarily purchase ANI’s policies.
Unfortunately, ANI’s position is that environmental contamination caused by releases of radioactivity from insured facilities is not covered by its policies. In light of ANI’s insistent denial of coverage over the last several decades, many companies no doubt assume that insurance is simply not available for their costs of remediating environmental contamination caused by such releases. They are wrong.
The “Pollution Exclusion”
In the 1980s, courts around the country started holding that CGL policies covered the costs of complying with environmental cleanup demands made by federal and state regulatory agencies, as such demands were the equivalent of covered “suits” for “damages.” CGL insurers responded by adopting the “absolute pollution exclusion” in 1986.
ANI decided to take a different approach. In 1990, instead of adopting the absolute pollution exclusion, ANI drafted a standard endorsement for nuclear liability policies that affirmatively promised to pay for “covered damages” and “covered environmental cleanup costs because of environmental damage.” ANI then circulated a memorandum to insurance brokers and state insurance regulators explaining that its endorsement was a “restatement of the present coverage for property damage liability claims in a new format” and describing it as providing enhanced environmental coverage, or (in ANI’s words) “new coverage for certain environmental cleanup costs.”
But buried in the middle of ANI’s new 10-page, single-spaced, standard-form endorsement were a series of “definitions” that ANI would later argue actually excluded coverage for almost all environmental response costs that an insured might incur to investigate or remediate radioactive contamination related to any insured facility.
The Nuclear Metals Claim
In 2005, Whittaker Corporation demanded that ANI pay its costs of responding to a U.S. EPA order that required it to investigate and remediate radioactive contamination related to the Nuclear Metals Superfund site in Concord, Massachusetts. The Nuclear Metals facility had started in the 1950s as an offshoot of the Manhattan Project and the Massachusetts Institute of Technology before it became involved in the manufacture of depleted uranium munitions. Many years later, the state and federal environmental protection agencies ordered Whittaker to characterize and clean up radioactive contamination related to the facility that the agencies had determined resulted from decades of releases of radioactive material.
ANI invoked its 1990 endorsement to deny coverage. Whittaker then filed suit, seeking a declaration that ANI had a duty to defend and indemnify it against EPA’s cleanup demand. The lawsuit raised for the first time whether the current, standard nuclear liability insurance policy form used in the United States covers the costs of responding to environmental contamination from radioactive material.
The Nuclear “Pollution Exclusion” Held Unenforceable
In a series of decisions issued in late-2009 and 2010, Judge Richard G. Stearns sided with Whittaker, ruling that ANI’s “pollution exclusion” endorsement was unenforceable as a matter of law because it “was not properly issued” [Whittaker Corp. v. American Nuclear Insurers, 671 F. Supp. 2d 242, 252 (D. Mass. 2009). ] In issuing the endorsement, the judge explained, ANI had failed to “give clear notice to [the] insured of a loss or reduction of coverage” [Id.]. ANI fought this decision tooth and nail, but the court issued two subsequent decisions denying ANI’s motions for reconsideration and reiterating that it was “clear from the record” that in issuing its endorsement—which, remember, apparently promised to pay for “covered damages” and “covered environmental cleanup costs because of environmental damage”—ANI had failed to clearly “explain” to its insureds that ANI actually intended to eliminate practically all coverage for environmental damage caused by radioactive material.
The court’s conclusion was based on a state statute, Mass. Gen. Laws Ch. 175, § 111A, which provides that when an insurer reduces or eliminates coverage, it must send the insured a printed notice clearly explaining how its coverage is being affected; otherwise, the policy’s original coverage “shall remain in full force and effect without such reductions and eliminations.” Most states similarly protect policyholders from insurers’ attempts to reduce coverage surreptitiously by requiring insurers to accompany exclusionary endorsements with clear, easy-to-understand notices that explain the intended effect of any endorsement or retroactive exclusion. Therefore, the ruling in the Nuclear Metals case potentially renders the “pollution exclusion” in every nuclear liability insurance policy that has been issued in the United States void and unenforceable as a matter of law.
The “Owned Property” Exclusion Inapplicable
Of course, the fact that the “pollution exclusion” in nuclear liability policies may be unenforceable as a matter of law does not mean that all costs of remediating radioactive contamination are automatically covered. In connection with the Nuclear Metals claim, for example, ANI also denied coverage on the grounds that its policy excluded coverage for on-site contamination (as opposed to contamination that has migrated off-site). As Judge Stearns noted, however, the case law under similar “owned property” exclusions in CGL policies establishes that as long as there is an imminent threat that on-site contamination will migrate into groundwater or adjacent property, then such exclusions will not preclude coverage for costs of investigating and remediating the on-site radioactive contamination that are incurred to prevent its spread. Id. at 254-55.
The court concluded that ANI should at a minimum be required to pay Whittaker’s costs of defending itself against EPA’s cleanup demand because there was a threat that radioactive contamination would migrate to adjacent property, and EPA already had found that groundwater contamination had taken place. Id. at 255. He further held that ANI can escape its duty to indemnify Whittaker for the ultimate cost of the cleanup only if it turns out that no such threat actually exists [Id. at 255 n.27.]
In light of the groundbreaking Nuclear Metals decision, operators of nuclear facilities and other insureds under nuclear liability insurance policies should consider pursuing coverage for environmental investigation and cleanup costs—even if their coverage claims have previously been denied. The “pollution exclusion” in nuclear liability insurance policies should be unenforceable as a matter of law, not just in Massachusetts but in any state that requires insurers to explain clearly to their policyholders what the insurer is up to when it adds policy provisions it intends to use later on to deny coverage. In addition, most environmental contamination involves at least the threat of migration offsite or into groundwater. For that reason, the cost of cleaning up radioactive contamination also should usually be covered under nuclear liability insurance policies.