Superstorm Sandy's recent strike hit the most densely populatedarea of the country, causing loss of life, destruction anddislocation on a massive scale. Recovery efforts are still in theirinfancy, and the storm's economic impact will be felt by businessesand individuals across the country for some time. Many businesseshave suffered direct damage to property and lost income due to theresulting interruption of their operations, while others may faceenvironmental-contamination claims stemming from Sandy. For thosebusinesses facing potential liability fromenvironmental-contamination claims, liability insurance may be animportant asset to help offset defense costs and remediationpayments.

The government is seriously assessing potential environmentalthreats in Sandy's aftermath. The U.S. Coast Guard, EnvironmentalProtection Agency, National Oceanic and Atmospheric Administration,oil-spill removal organizations, New York Department ofEnvironmental Conservation and New Jersey Department ofEnvironmental Protection have joined efforts to create a HurricaneSandy Pollution Response Unified Command. The unified command has created branches, divisions and taskforces, totaling 137 personnel, to assess and respond to impactedareas. The unified command is currently identifying environmentallysensitive areas for pollution and hazardous materials.

Early reports have identified several environmental incidents,including: 277,000 gallons of diesel fuel spilled from storage tanksdamaged by Sandy at the Sewaren Terminal along the Arthur KillRiver in New Jersey; another 7,700 gallons of fuel spilled from a refinery in Linden, N.J.;and approximately 238 barrels (some 10,000 gallons) of biodiesel spilledfrom a Carteret, N.J. terminal after Sandy devastated the EastCoast. We expect additional environmental scrutiny surroundingthe New York area concerning parking garages in which hundreds ofvehicles were trapped for days and even weeks; marinas along theEast Coast where many vessels sank; and, potentially, the maze ofpipelines supplying fuel to the Northeast.

Companies facing potential responsibility for allegedenvironmental damages may seek to invoke an “act of God” defensewith respect to liabilities asserted against them. Congress definesan act of God as “an unanticipated grave natural disaster or othernatural phenomenon of an exceptional, inevitable and irresistiblecharacter, the effects of which could not have been prevented oravoided by the exercise of due care or foresight.” Courts havestrictly interpreted this defense to create an uphill battle forcompanies seeking to invoke its protection. In United States v.Alcan Aluminum Corp., the defendant sought to invoke the actof God defense after it discharged approximately 100,000 gallons ofwaste into the Susquehanna River during Hurricane Gloria. The courtfound that “heavy rainfall is 'not the kind of “exceptional”natural phenomenon to which the act of God exceptionapplies.'”

Given the unique characteristics of the recent storms thatconverged in the Northeast, companies may be able to successfullyadvance the act of God or other defenses to their allegedliabilities. Notwithstanding, companies may incur significantdefense costs disputing liability and may ultimately pay someamount of money toward remediation to resolve their potentialliabilities. Some businesses may have purchased a stand-aloneEnvironmental Impairment or Pollution Liability policy to respondto these potential liabilities, while others may turn to theirComprehensive General Liability (CGL) policies for coverage. CGLpolicies sold to businesses involved in the energy industry maycontain avenues for seeking coverage.

For example, an Energy Pollution LiabilityExtension Endorsement states that the pollution exclusion does notapply to “bodily injury,” “property damage” or “remediation costs”caused by a “pollution incident,” meaning a discharge of“pollutants” into the “environment,” provided that:

1. the discharge is both unexpected or unintended from thestandpoint of the “insured”; and
2. the discharge commenced abruptly and instantaneously and can beclearly identified as having commenced entirely at a specific timeon a specific date during the policy period; and
   1. owned by or occupied by, or rented or loaned to, any “insured”at the time the discharge commenced; or
   2. at which any “insured,” or any contractor(s) orsubcontractor(s) working directly or indirectly on any “insured's”behalf, was performing operations at the time the dischargecommenced; and
3. the discharge commenced at or from a site, location orpremises:
4. the discharge was known by any “insured” within 30 days of thecommencement of the discharge of “pollutants”; and
5. the discharge was reported to us within 60 days of thecommencement of the discharge of “pollutants.”

This endorsement incorporates insurance coverage concepts thatinsureds and insurers have litigated for decades, including thefight over what is unexpected or unintended and abrupt orinstantaneous. Insureds, however, should immediately report anycircumstances or occurrences for which they may be liable. In lightof the short reporting period, insureds should report now even ifthey do not presently know if they will face potentialliability.

Another policy provision frequently found in CGL policies soldto businesses in the energy industry is an Underground Resourcesand Equipment Coverage Endorsement. This endorsement modifiesexclusions that apply to Coverage A for “property damage” and“bodily injury.” The endorsement modifies the policy by statingthat the “Damage to Property” exclusion does not apply to any:“property damage” included within the “underground resources andequipment hazard” other than “property damage” to that particularpart of any real property on which operations are being performedby you or on your behalf if the “property damage” arises out ofthose operations.

The endorsement defines “underground resources and equipmenthazard,” in pertinent part, as follows: “Underground Resources andEquipment Hazard” includes “property damage” to any of thefollowing: oil, gas, water or other mineral substances which havenot been reduced to physical possession above the surface of theearth or above the surface of any body of water.

This endorsement may provide coverage for losses incurred fromproperty damage to “water or other mineral substances.”

Insureds should be aware that their policies may contain theseand other endorsements that may provide coverage for potentialliability from environmental-contamination claims stemming from therecent series of storms. It is important to recognize that languagecan vary significantly from policy to policy and that therequirements imposed by specific policy language may requirebusinesses to act quickly. Accordingly, insureds should immediatelyperform the following action items:

• Consider and locate all possible insurance policies that may beimplicated by your loss, including all forms and endorsements; ifyou cannot find them, then request a copy from your insurance agentor broker.
• Check your policy to locate the address to which any writtennotice is to be sent and provide written notice of your loss toyour insurance company.
• If your policy contains a time-element reporting requirement(see, for example, the Energy Pollution Liability ExtensionEndorsement), immediately report any circumstances or occurrencesfor which you may be liable whether or not you presently face anycontamination claims; otherwise you may lose the ability to pursuecoverage in the future.
• Review your policy to determine if there are any additionalprocedural requirements or deadlines. To the extent possible,comply with all requirements and deadlines.
• Follow up with your insurance company regarding yourclaim.
• Seek legal advice as appropriate.