BURIED TREASURE
By Sheila Mulrennan

Sheila Mulrennan is founder and president of the Insurance Archaeology Group in New York.

Insurance archaeology can save taxpayers millions in response costs. Imagine your 20-year-old insurance policy covering, at least in part, a Superfund environmental cleanup. Municipalities have been left literally holding the bag for the last 18 years when it comes to Superfund liability for environmental cleanup, but there are ways to limit the entity's out-of-pocket expenditure. If you can document your insurance coverage history, you may be able to get a past policy-or multiple past policies-to cover a significant amount of the cost.

Cleanup Mandates
Under the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, a.k.a. Superfund), cities, towns and counties whose "pollution contribution" consisted simply of trucking ordinary garbage to local landfills have found themselves "jointly and severally liable" for decades' worth of toxins released by local businesses-as well as by private citizens disposing of products later identified as pollutants. Under "joint and several liability," each entity that bears any liability at all can be held responsible for cleaning up the entire site. Such entities can include water and sewer authorities, transportation authorities, school districts-virtually any element of local government.

Like the corporations and small businesses that did the bulk of the polluting, municipalities and other local government entities have been caught in a web of litigation that has accounted for-by conservative estimate-one-third of Superfund cleanup costs to date. According to the National Association of Counties, cities, towns, school districts and counties have been the targets of more than 750 lawsuits filed by private Superfund defendants seeking to minimize their own cleanup liability. Moreover, counties, cities and towns have been named by the Environmental Protection Agency as owners or operators at approximately 100 co-disposal landfills on the National Priorities List.

Unlike private businesses, whose main concern is to dispose of liability at minimal cost, municipal governments and other public sector entities have a double mandate: to dispose of taxpayers' dollars wisely and to provide clean earth, air and water to their citizens, to whom they're directly accountable. Expediting effective cleanup, and paying no more than taxpayers' fair share of cleanup costs is a tall executive order. Earlier this year the EPA took a bold step toward cutting the Gordian knot of entangled liabilities on behalf of municipalities. An EPA policy released in February offers owners and operators of co-disposal landfills, and generators and transporters of municipal solid waste-i.e., municipalities-a formula for fair settlement of their Superfund responsibilities, setting a "baseline presumption" of municipal responsibility for 20 percent of total response costs. EPA regional offices aren't bound by this baseline, but the proportion of costs allocated to municipalities is generally not to exceed 35 percent.

Thus, the time may be ripe for municipalities to fulfill their double mandate to 1) decontaminate "the old town dump" and 2) cap their own liabilities.

Uncovering Old Gold
Action on these fronts requires due diligence in another direction from municipal officials. They must aggressively pursue insurance coverage for environmental cleanup costs. Due diligence in this regard can serve taxpayers as surely as increasing the tax base or reducing government expenditures, because the possibility of recovering millions or tens of millions of dollars in cleanup costs is very real.

A key component of standard commercial general liability policies is they never expire. Under most CGL policies, if a claim is filed against a policyholder 20 or 30-even 40 or 50-years after property damage or bodily injury occurs-as often happens in cases of environmental pollution-a policy that was in effect when the damage occurred is still effective. This "long-tail" coverage is a crucial but often-overlooked resource for municipalities facing environmental cleanup costs. According to most state courts that have ruled on the issue, policyholders liable for environmental damage are entitled to insurance coverage not only under the policy that was in effect at the point when damage was first discovered, but also under every policy in effect during the often decades-long period when damage was silently occurring. Thus, if environmental damage occurred over a long time, a municipality may be entitled to insurance coverage for both defense and indemnity under multiple, even scores, of insurance policies. When the damage extends over many years, some courts require the costs to be allocated over all of the relevant insurance polices-raising the possibility that a municipality with missing insurance policies might still be required to pay for a considerable portion of the damage. Therefore, it's essential to reconstruct as completely as possible a municipality's entire insurance history over the past half century and more. For many cities and towns, particularly for those that owned and operated landfills, an insurance "map" may ultimately prove to be worth tens of millions of dollars.

Retroactive liability, another Superfund aspect that has inspired bitter complaint, also enhances the value of old insurance. In many cases, the brunt of the pollution accumulated occurred during the time that the municipality was covered by extremely broad CGL policies of the type offered in the 1940s, '50s and '60s. These policies aren't available on the market today and probably never will be again, no matter what price a policyholder would be willing to pay. Historic policies tend to:

• provide broad coverage terms with no restrictions or exclusions that relate to pollution or contamination
• contain no aggregate limits, allowing coverage for an unlimited number of occurrences
• be prepaid and rarely involve claims-handling service charges or additional premiums under old retrospective rating plans
• provide unlimited coverage for defense costs in addition to policy limits

Even policies written and purchased during the last 25 years-since the first generation of pollution exclusions became standard issue in 1973-are often interpreted by the courts in favor of policyholders seeking coverage for pollution liabilities. That's because the so-called "sudden and accidental" pollution exclusion, drafted in the early '70s, has been interpreted by many state courts to exclude only expected or intended pollution. Municipalities are among the policyholders that have fought successfully for insurance coverage in environmental cases:

• Jackson Township, N.J., was awarded $5.4 million from an insurer that disputed coverage for gradual leaking of chemicals from a landfill that contaminated the water supply.
• When New Castle County, Del., first became aware of its liability for ground water contamination from waste disposal sites, its insurance broker said there wasn't insurance coverage for these claims because pollution was excluded under the county's old standard form CGL insurance policies. After initially accepting this statement, the county later pursued coverage and obtained judgment against its insurer.
• In 1996, the Colorado Court of Appeals ruled in favor of two Colorado cities, Englewood and Littleton, which sought indemnification and defense costs for EPA-mandated pollution clean up of sludge leakage from a waste treatment facility (the state supreme court heard appeal arguments this September and will render a decision by the end of the year).

Although coverage for environmental cleanup under post-1973 policies is often vigorously contested in the courts, insurance companies have recognized that they must contend with policyholders' demands, often settling voluntarily or by court order. A rule of thumb is, the older the liability policy, the likelier it is to cover environmental response costs for damage that occurred while the policy was in effect. Old policies have time and again proved themselves a buried treasure to policyholders beset with environmental liabilities. As your city, town or county moves to settle its environmental liabilities and remove the public health hazards buried in its soil or contaminating its water, unearthing old insurance policies should be an integral part of the plan.

Why Insurance Archaeology?
Of course, the older a policy is, the harder it may be to find documentation, or even living memory of its having ever existed. And that's where insurance archaeology comes in. To activate an old insurance policy, you must either have the policy document in hand or be able to prove that it once existed. Municipal recordkeeping being what it is, insurance policies aren't that easy to pull from files or call up on the computer screen-especially policies that are 20, 30 or 40 years old. The first purpose of democracy, after all, isn't administrative efficiency. Frequent changes of administration, movement of officials to the private sector, privatization of government functions-all contribute to long-term institutional memory loss. Moreover, unlike many financial instruments, insurance policies aren't registered anywhere-not even in the county clerk's office or the town records department. To lay claim to these ancient insurance assets, you need the combined skills of a detective, a historian, a claims specialist and an excavator. That's where the insurance archaeologist comes in. Consider the fruits of just a couple of recent searches:

• For a large public sector agency, actual policies were located in internal records for all but six of the 23 years where policies had been missing. Substantial secondary evidence was unearthed for the few remaining missing policies.
• For a municipal utility company, broadly worded policies totaling more than $350 million in coverage were located during an intensive lost policy search. Codes in policy numbers entered in old ledgers were used to track down the London broker, who ultimately produced the documentation for most of the missing policies.

The cumulative value of these finds, and many others, are potentially much greater than the face value of the policy limits, since many of these policies aren't subject to aggregate limits.

Raiders of the Lost Archive
Practitioners of insurance archaeology understand that although a municipality's old records may be "arranged" according to conventional retention procedures-they're in a heap somewhere-they may still be retrievable. Perhaps the policies are slowly disintegrating in a damp storeroom. Perhaps they're in the town's "Executive Library"-a.k.a. the former mayor's garage. They may even have been boxed and dumped in the very landfill the town has now been called upon to clean up! However melodramatic or banal the scenario, there's a good chance that an insurance archaeologist can either retrieve the policies or reconstruct them with secondary evidence.

The discipline of insurance archaeology is governed by a prime directive: when someone says the records don't exist, dig deeper. Culling through brokers' slips, chasing down retirees and descendants of former municipal officials and clerks, searching through government archives and venturing into radon- or asbestos-contaminated vaults make up investigations that would challenge even the most intrepid archaeologist. In the end, the insurance archaeologist does much the same thing as a traditional archaeologist: gathers testimony-much of it easily passed over by the untrained eye-and painstakingly assembles it to reconstruct a past reality.

Digging up Internal Records
Insurance archaeology teaches that the best place to look for documentation is in your own records. Easier said than done! Records containing original policies and a variety of secondary evidence have been found in old town halls, attics, locker rooms, abandoned warehouses and even a salt mine.

One company forgot to look in an underground storage vault. When its existence was identified in an interview with a former employee, a search uncovered all the accounting records dating back to the 19th century. Ledgers contained details of liability coverage dating back to the 1930s.

Before embarking on such dramatic searches, you should take a series of steps to locate the treasure closer to home:

• Identify all possible types of coverage that could potentially respond to claims: general liability, workers' compensation, first party property.
• Determine which departments may have handled the insurance function over time.
• Know your internal systems for document storage. Find out how older insurance records are kept, where they're kept and who's in charge of them.
• Confirm that records that were scheduled to be destroyed actually were destroyed. No records destruction program is infallible; you may find millions of dollars in coverage in documents marked for destruction.
• Interview former risk managers, as well as people who had a hand in maintaining records.
• Keep a log of whatever you find and where you found it.

Examining External Sources
State and federal government records, outside auditors and counsel, and third parties that entered into contracts requiring proof of insurance can provide invaluable leads. On a recent trip to a federal archive on behalf of a private company, insurance archaeologists located policies for records of this coverage for several years, the policies were tucked away in a carton waiting to be destroyed. Because Lloyd's of London has traditionally written so many insurance contracts in the North American market, London is perhaps the most productive outside source of policy documentation. The London brokers who keep records on behalf of Lloyd's underwriters are repositories of a wealth of evidence.

These brokers often retain "slips," to record the respective percentages underwritten by the Lloyd's syndicates and the British companies. Because of the wealth of information they contain-not only the coverage terms and policy periods of the Lloyd's contracts, but also key information about the primary coverage-the London broker's slips can be valuable evidence documenting a policyholder's coverage history. In a typical search for secondary evidence of missing policies, several documents that identify the primary insurance company may be found, but information concerning policy limits may still be missing. When those documents are combined with the underlying information from the London broker's records, a complete picture of the primary coverage is often revealed.

Reconstructing Coverage Terms
Even if supporting documentation is available to establish the existence of a policy, the actual coverage terms may still be missing. Fortunately, the insurance industry's long-standing practice of selling standard-form policies has made insurance companies unwitting allies in the search for old coverage. The result is that coverage terms for missing policies can be reconstructed by locating policies issued to other policyholders during the same period. Several courts have upheld coverage in cases when the original policy document was missing but comprehensive secondary evidence documented the policy's existence and its terms.

It's important to keep an accurate log of where and by whom documents are found. If an insurance company should contest the authenticity of your documentation, you may need to prove specifically when, where and by whom a document was located.

Completing the Puzzle
Analysis of a historic insurance reconstruction project begins at the point that all the documentation located for each policy has been organized in chronological order by policy type. Once the key policy provisions (e.g., exclusionary language and aggregate limits) have been outlined, the details can be charted, as illustrated. Such a chart allows even the most complex coverage to be understood at a glance by insurance adjuster, judge or jury.