Insurance Coverage for Agricultural Environmental Claims

A recent agricultural case highlighted the importance of agricultural counsel having a working knowledge of insurance coverage law. After apparently receiving a complaint from a neighbor, a dairy farm was served with a temporary restraining order prohibiting its operation from applying manure. The potential impact on the dairy’s day-to-day operations was disastrous. Even worse, a long, drawn-out legal battle while the case was pending would be financially crippling, regardless of the ultimate outcome. The dairy farm turned to his insurance carrier to defend its interests. Instead, the dairy’s insurance agent responded that there was no coverage because the claim arose out of "pollution." The dairy’s insurance policy, like many others, contained a "pollution exclusion." If the dairy had accepted its agent’s interpretation, this is where the story would have ended.

Fortunately, the dairy was willing to challenge its insurer’s determination. Through a series of exchanges between its attorneys and the insurance carrier, the dairy farm’s law firm was able to persuade the insurer that the "pollution exclusion" did not apply. The result: the insurance carrier reversed its initial denial of coverage and agreed to pay for the dairy’s defense. The dairy now can afford to challenge the temporary restraining order.

This story teaches a very important lesson: if you are not willing to stand your ground with insurers, many of your client’s claims will go unpaid. This article provides insurance coverage advice to attorneys who consider pursuing insurance coverage.

When an agricultural client, whether a farmer, rancher, livestock producer, or different agri-business, comes to you with an environmental problem, a first step should be to take inventory of his insurance policies. Insurance professionals generally speak of policies as responding to two types of losses: first party and third party. A first party loss results when the policyholder suffers property damage, for instance, when a fire destroys a policyholder’s barn. In contrast, a third party loss results when people other than the policyholder make a claim that the policyholder is liable. For example, if the policyholder’s barn burns while it is storing a neighbor’s hay crop, that hay crop would be a third party loss. Insurance companies often sell insurance packages that cover both first and third party losses.

Most traditional liability policies are "occurrence" based. They cover liability for property damage or bodily injury that occurs within the policy period, even if the third party makes the claim years later. Although this concept seems simple enough, the results of pursuing such coverage can be quite spectacular. Imagine a fertilizer spill that, ten years after it occurs, is discovered to have migrated into a local water supply. Users of this water supply then bring a claim against the person that caused the spill, who in turn, tenders a claim to his insurance company. The insured can look not only to his current policy, but each policy dating back to the date of the spill, because property damage "occurred" during each of these ten years. The end result is that he has not one year of coverage to respond to the loss, but ten. His policy limits have, in effect, multiplied tenfold. Even more spectacular, many insurance policies promise to pay for "all sums" for which the policyholder becomes liable as a result of an "occurrence." A number of state courts have interpreted this "all sums" language to mean that the policyholder can choose which year of all those triggered should respond to the occurrence. See e.g., Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1057-58 (Ind. 2001). For instance, in the ten-year example set out above, the policyholder could select the policy in effect during year three to respond to the spill. This is extremely valuable when insurers become insolvent, potentially leaving a policyholder with a reduced or no remedy.

Depending on the size of your agricultural client, you may find that he or she comes to you with a number of different policies. One typical policy is homeowner’s insurance, providing first and third party coverage. Although a homeowner’s policy usually will seek to exclude coverage for the business pursuits of the policyholder, a farmer’s homeowner’s policy may be different, or contain endorsements that extend coverage into farming-related activities. On the other hand, a larger corporate farmer will likely have business policies, including those that go above and beyond first and third party primary policies. Insurance that covers risks "above" the primary policies are described as "excess" coverage. These policies take effect after the primary policy limits are exhausted. Policies that go "beyond" primary first and third party coverage come in a variety of forms. One common form is "umbrella" coverage, which, as the name indicates, provides greater coverage for more perils. Other policies include worker’s compensation, inland marine, which may be useful if the loss involves property in transit, livestock protection, income protection, or crop, to name a few. In the case in this example, the dairy farm had purchased a specialized "pollution liability" policy to protect himself from liability in the event his operation caused some form of "pollution."

Regardless of the type of policy and the extent of coverage, one of the most important insurance coverage rules is to advise your client to locate and save all of his insurance policies. Understandably, policies are the best evidence of the policy terms. Contrary to common thought, insurers do not save a copy of your client’s policies. If you do not have them, countless hours can be spent arguing, proving, and in the worst case, litigating, what you believe the policies covered. If policies are lost or gone, locate and save secondary evidence, such as declaration pages, premium notices, cancelled checks, invoices, renewal notices, etc.

By the time he or she comes to you, your client may have already notified their insurance agent or broker of a potential claim. Never accept the agent’s or broker’s determination that there is no coverage for your client’s loss. The agent or broker is typically not an attorney, not familiar with how courts interpret policy terms, and may not be anxious to dispute matters with an insurer. After all, an agent or broker derives its income from selling policies, not securing coverage once the loss occurs.

The first step to procuring insurance coverage is to provide prompt "notice" to the insurer. Specific notice provisions may vary from policy to policy, so check your policy to determine what "notice" is required. At a minimum, notice should contain the policyholder’s name, a statement that you represent the policyholder, a general description of the loss, and a request for defense and indemnity. Besides informing the insurer of the claim, notice enables the insurer to make an investigation into the claim. If the loss spans multiple policy periods or types of policies, all insurers potentially on the claim should be notified. Err on the side of over-inclusiveness. There is no penalty for incorrectly notifying an insurer of a claim provided you have a reasonable belief that there may be coverage, but there is a potential defense to coverage if you do not.

When providing notice to the insurer, promptness is important. A policy will usually provide that notice of claim be tendered within a certain time. Such provisions may be specific, for example sixty days, but more likely will require that notice be given "immediately," "as soon as practicable," "promptly," "within a reasonable time," or other subjective time frame.

If the policyholder delays in providing notice, an insurer may assert "late notice" as a defense to coverage. When asserting late notice, an insurer will claim that it would have handled and settled the matter differently, but it lost this chance when the policyholder failed to timely notify it of the claim. States’ courts vary in the weight they give to the late notice defense. Policyholderfriendly states are reluctant to relieve an insurer of its policy obligations simply because the policyholder did not provide prompt notice. For example, the Alaska Supreme Court recently held that "absent prejudice, regardless of the reasons for the delayed notice, there is no justification for excusing the insurer from its obligations under the policy." Tush v. Pharr, 68 P.3d 1239, 1250 (Alaska 2003). The court held that when asserting late notice, the insurer must prove that it was actually prejudiced. Other states allow a lack of prejudice to overcome late notice, but require the policyholder to prove it. See, e.g., PSI Energy v. Home Ins. Co., 801 N.E.2d 705, 716 (Ind. Ct. App. 2004). At the other end, some state courts have found the presence or absence of prejudice to be immaterial. Late notice alone may be a bar to coverage. See Marez v. Dairyland Ins. Co., 638 P.2d 286 (Colo. 1981). But in all states, prompt notice is important. It allows you to avoid this issue altogether.

After receiving notice of the claim, the insurer will issue a response. Most likely this response will come in the form of a "reservation of rights" letter. A reservation of rights letter sets out all of the coverage defenses the insurer may potentially assert and states that it is investigating the claim. Pay close attention to this letter; defenses to coverage that are not asserted may be waived if the insurer tries to assert them later. After investigation, the insurer will either deny the claim, pay the claim, or continue to defend under a reservation of rights. This last course is common for a good reason. The duty to defend is broader than the duty to indemnify. See, e.g., Seymour Mfg. Co., Inc. v. Commercial Union Ins. Co., 655 N.E.2d 891, 892 (Ind. 1996). Thus, there may not be enough facts known at the time of the claim to determine indemnity obligations, but there probably are enough to determine whether defense obligations have been triggered.

It is important to work with the insurer during its investigation of the claim. Most policies have a "duty to cooperate." Furnish information in a timely manner, but keep a record of what you do. This may be important later. Failure to cooperate can lead to a denial of coverage.

Insurance coverage is a specialized field of law. The manner in which courts interpret policies varies greatly from state to state—some are very policyholder-friendly, others are insurance industry-friendly. Insurance coverage law itself is dynamic. Insurers draft the policies. Policyholders argue the policy language should be read broadly. When enough policyholders convince courts that the broad interpretation is correct, the insurance industry sometimes redrafts certain policy language, and the cycle begins again. This cycle will never end, because a policy can never anticipate every conceivable type of loss. If it could, there would be no need for insurance. Insurance coverage law is a constantly evolving landscape. It pays to have competent insurance coverage counsel. Nevertheless, even if it is not your area of expertise, there are certain universal coverage rules to remember when representing your agricultural client’s interest to the insurer.

Begin by construing policy terms with their plain and ordinary meaning. Read the policies. Do not assume that the insurer, agent, or broker’s interpretation of policy language is correct. Courts often begin their interpretation of insurance policies with a recitation of "general rules of contract construction." Valmont Steel, Inc. v. Commercial Union Ins. Co., 2004 WL 238344 (5th Cir. 2004). Thus, a court will attempt to effectuate the intent of the parties. It will consider the policy as a whole, and will try to give each provision effect and meaning. Finally, it will give those unambiguous policy terms their plain, ordinary, and popular meaning.

However, this law school contract interpretation approach is limited in its usefulness. Insurance policies are often not the product of an arms-length transaction. Policies are form documents that are modified with various endorsements and exclusions, but the overriding language is the same for policyholder A, B, or C. As one court explained, "the insurer drafts the policy and foists its terms upon the customer. The insurance companies write the policies; we buy their forms or we do not buy insurance." American Econ. Ins. Co. v. Liggett, 426 N.E.2d 136, 142 (Ind. Ct. App. 1981).

When the plain meaning is not clear, ambiguities exist in the policy terms. "Ambiguity" is a term of art used in insurance policy construction. Generally, if a term in a policy is subject to more than one reasonable interpretation, it is "ambiguous" as a matter of law. See, e.g., Bosecker v. Westfield Ins. Co., 724 N.E.2d 241, 244 (Ind. 2000). Courts in different states, however, use different methods for resolving these ambiguities. Some states allow parties to submit extrinsic evidence as proof of the parties’ intent. See, e.g., Beale v. American Nat. Laywers Ins. Reciprocal, 2004 WL 306092 (Md. 2004). Such extrinsic evidence may be custom or usage as understood by the insurance industry.

Other states take a more policyholderfriendly approach. In these states, if there are two reasonable interpretations, the interpretation that favors coverage prevails. See, e.g., American States Ins. Co. v. Kiger, 622 N.E.2d 945, 947 (Ind. 1996). Stated simply, ambiguous terms in policies should be construed in favor of coverage. This rule builds upon the common law contract doctrine of contra proferentem, which means "against the offeror." It follows the theory that contracts should be construed against the party that drafted them because it had the upper hand when negotiating. In no situation is this more true than in insurance policies. This contra proferentem treatment is applied with particular force to policy exclusions. In these states, if the insurer wants to exclude coverage, it must do so explicitly. See, e.g,. Kiger, 622 N.E.2d at 949 (holding that "gasoline" was not an excluded "pollutant" under a filling station policy).

This issue arose in a dairy farm case. The client was sued by the state environmental agency for alleged manure run-off into state waters. The claim was tendered to his insurer under his first and third party liability policy. His insurer initially denied coverage pursuant to a policy provision that excluded coverage for losses "arising out of the actual, alleged or threatened discharge, seepage, migration, dispersal, release or escape of ‘pollutants’" (a so-called "pollution exclusion"). "Pollutants" was a policydefined term: "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned, or reclaimed." In short, the claim was denied because "manure" was considered a "pollutant," and the policy excluded coverage for pollution causing losses. Lawyers for the dairy farm argued that whether "pollutants" included "manure" was ambiguous. It was not obvious from the plain and ordinary meaning, as "manure" was not a listed pollutant. Although one could argue that manure is a "gaseous irritant," or "waste," or that its constituents are "chemicals," one could equally argue that manure is not waste, but a natural beneficial substance, a fertilizer. Indeed, many agricultural crop producers likely view manure in this positive way. The policy also contained a separate exclusion for the losses arising from the application "liquid fertilizer," if done for hire. This exclusion would be surplusage if the general "pollution exclusion" already applied to manure. Thus, whether "pollutants" included "manure" was subject to more than one reasonable interpretation. In Indiana, under which this policy’s terms were construed, the construction that favors coverage governs. Moreover, because the definition of "pollutants" is so broad, encompassing nearly any substance, it is overbroad and unenforceable, since applied literally it would provide no coverage at all Kiger, 622 N.E.2d at 948.

If there is no state court opinion interpreting the policy provisions at issue, use other jurisdictions for guidance. Insurance is generally a state law matter, but your state court will likely not have interpreted every policy term you encounter. Insurance policies are similar across state boundaries because of standardization. Many policies follow the Insurance Service Office’s (ISO) standard form policies. Thus, a commercial general liability policy from Alpha Insurance Company of Arkansas may be identical to one from Kappa Insurance Company of Kansas. If there is a split in authority in other jurisdictions, that can be evidence that that term is ambiguous. After all, courts are generally thought of as reasonable persons. See Hartford Accident & Indemnity Co., et al. v. Dana Corporation, 690 N.E.2d 285, 295 (Ind. App. 1997).

Hold insurers to their duty of good faith. Most states have recognized, whether judicially or by statute, that insurers owe their policyholders a duty of good faith. See Erie Ins. Co. v. Hickman, 622 N.E.2d 525, 519 (Ind. 1993). In these states, a breach of this duty gives rise to an independent cause of action, referred to as "bad faith." Such a breach may occur if the insurer makes an unfounded refusal to pay policy proceeds, causes an unfounded delay in making payment, deceives the policyholder, or exercises an unfair advantage to pressure the insured into a settlement. In short, your client’s interests are entitled to consideration.

Do not forget public policy arguments. Judges are human, in many cases elected, and they purchase insurance too. Check to see how much your client spent on premiums. The fact that your client paid $10,000 in annual policy premiums and has never had a claim in ten years makes a compelling argument. Was it reasonable for your client to expect that his loss would be covered? In the case of the dairy farmer, surprisingly his "Pollution Liability" policy did not cover alleged claims arising from manure. If not manure, what other "pollution" would a dairy farmer be concerned with? In the Kiger case illustrated above, the insurer argued that environmental claims arising from the accidental leakage of gasoline were not covered under a gas station’s "garage policy." The Indiana Supreme stated: "That an insurance company would sell a ‘garage policy’ to a gas station when that policy specifically excluded the major source of potential liability is, to say the least, strange.... We are particularly troubled by the interpretation advanced by [the insurer], as it makes it appear that the [policyholder] was sold a policy that provided no coverage for a large segment of the gas station’s business operations." Kiger, 622 N.E.2d at 948-49. This type of "illusory coverage" can be a persuasive argument in favor of coverage.

Finally, be prepared to litigate. Your efforts to persuade your client’s insurer may ultimately be unsuccessful. Learn the law, and if it is on your side, be ready to file a declaratory judgment action. Issues of coverage are typically matters of policy construction, and thus purely legal issues. They can be settled on summary judgment without an exhaustive and expensive discovery period.

Finding insurance coverage for a client can make or break the farm. This is especially true for agricultural businesses, where high cost inputs are used to generate profits on very tight margins. At a settlement meeting between the dairy farmer and state officials, one of the state’s attorneys commented to counsel for the dairy farmer after the meeting: "We know your client needs to resolve this matter because we understand that the tight margins involved in farming make it hard for your farmer to continue to litigate." He was right. A typical farmer probably can not afford to fairly litigate against a state agency. But he was also wrong. He was forgetting, or perhaps overlooking, that one protection the client purchased to protect his interests—insurance. Your job is to help you client utilize his coverage to its utmost.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.