Public Nuisance: A New Battleground for Policyholders and Insurers
Ever since the tobacco industry agreed to pay some $240 billion in settlements in the 1990s, the tort of "public nuisance" has emerged as a favored weapon of states and municipalities looking to spread the economic cost of large-scale societal ills.
To date, it has been used in attempts to impose liability on asbestos manufacturers for asbestos-related illnesses, poultry farmers for water pollution, lead pigment manufacturers for childhood lead poisoning, auto manufacturers for global warming, and firearm manufacturers for, well, crime.
Major investment banks blamed for the current subprime mortgage crisis have become the newest "public nuisance" target. In January 2008, the City of Cleveland filed a public nuisance suit against 21 major investment banks, including such venerable institutions as Goldman Sachs and Merrill Lynch, alleging the banks irresponsibly bought and sold high interest loans, leading to a foreclosure crisis in Cleveland that has physically devastated neighborhoods.
Interestingly, the public nuisance theory has almost always failed in the courts. But that has not stopped states and entrepreneurial plaintiffs' lawyers from trying to use it. And for now, the effort appears to have gained traction in at least one significant case.
In a case brought by the Rhode Island attorney general, a jury recently found that the "cumulative presence of lead pigments" in the state constituted a public nuisance, and therefore held three alleged former lead pigment manufacturers liable for the costs of abating lead paint from private residential buildings throughout the state.
Unless the verdict is overturned by the Rhode Island Supreme Court, the estimated cost to the manufacturers for this one case could be as high as $2.4 billion, according to the state.
Even if one views the Rhode Island verdict as anomalous, and these public nuisance cases as meritless, it is widely expected that more public nuisance cases will be brought in the future. And defense costs alone can be considerable, reaching into the millions.
A company's insurance portfolio can be an important asset both for covering defense costs and for indemnifying the company for any judgments or settlements arising out of public nuisance suits. However, for insurers, no less than their policyholders, the scope of potential liabilities for public nuisance suits may create "bet the company" risks.In some cases, insurance companies have already drawn a line in the sand, contending that their policies do not cover public nuisance claims.
If other insurers follow suit, coverage litigation over public nuisance suits may join the ranks of asbestos and environmental cases as the new high-stakes battleground in insurance coverage litigation.
AN EVOLVING THEORY
Just what is public nuisance? Traditionally stated it is "an unreasonable interference with a right common to the general public." Under public nuisance theory, a government entity may seek to enjoin the activity that is causing the nuisance or to compel the party responsible to abate the nuisance. Historically, the typical public nuisance suit addressed problems such as smells emanating from factories or unsightly junk yards.
In the '90s, public nuisance was retooled and gained prominence in the tobacco litigation as a new theory of products liability. It was then asserted in litigation against gun manufacturers. Although the courts overseeing the tobacco litigation never ruled on the public nuisance claims, the gun litigation yielded several decisions that, for the most part, dismissed the claims on a variety of grounds.
Despite those setbacks, states and plaintiffs' lawyers continued to bring suits on public nuisance theories, and such suits persist today. The current wave of public nuisance-based tort litigation is focused on two areas, lead paint and global warming.
The reason for the theory's resilience is simple: It allows plaintiffs to circumvent a number of well-established limits on products liability claims, such as statute of limitations, product identification and defect, proximate cause, and contributory and comparative negligence.
In areas where traditional products liability law presents insurmountable hurdles, public nuisance is seen as the best solution. And even if the likelihood of success on the theory is limited, the lawsuit can provide a vehicle for settlement with defendants unwilling to receive risk adverse judgments, unable to sustain multiyear, multistate defense efforts, or who see settlement as preferable to the possibility of more stringent state regulation.
COVERAGE UNDER CGL
Comprehensive and commercial general liability insurance policies are a substantial asset and may be the first line of defense for companies facing existing or potential public nuisance claims.
These policies contain a broad grant of coverage, generally obligating the insurer to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence. ..."Courts construe this language broadly in favor of coverage, and it is the insurer's burden to establish the applicability of any exclusions to or limitations on coverage.
Typically, CGL policies also require the insurer to defend the policyholder whenever the allegations in the underlying complaint permit proof of claims which, if proven, would fall within the scope of coverage. The insurer must defend the suit even if the allegations are groundless, false or fraudulent. In public nuisance cases, where the risk of an adverse judgment may be limited but the costs of defending the suit may be enormous, coverage for defense costs can be more important than coverage for any ultimate liabilities.
Given the broad coverage grant in CGL policies and favorable principles of interpretation, CGL policies should provide coverage--defense and indemnity--for public nuisance suits. However, if past is prologue, policyholders will be forced to litigate before their insurers will honor those coverage obligations.
Just a few of the myriad defenses insurers have raised in the past, and likely will raise in the future, to avoid their obligations to cover public nuisance claims are discussed below.
Covered "Damages" -- Standard CGL policies require insurers to pay "all sums which the insured shall become legally obligated to pay as damages ..." Most public nuisance complaints allege past and present harm caused by the nuisance, and seek abatement to mitigate that alleged harm. In past cases, insurers have argued that the term "damages" is limited to "legal" monetary damages awarded to compensate for past harm, while abatement is an equitable remedy intended to prevent future harm, and therefore no coverage exists.
Although this defense will no doubt be raised by insurers, attempts to deny coverage based on a distinction between legal and equitable relief will likely fail, just as similar arguments failed in Superfund related coverage cases.With either type of relief, the policyholder is required to pay sums of money because his acts or omissions are found to have caused harm to third parties. An abatement claim may be characterized as "equitable relief," but the costs of abatement are essentially compensatory damages for the injury caused by the policyholder. The insurers' distinction, when it comes to the reasonable expectations of the policyholder, is a false one.
The weight of authority supports the policyholder position on this issue. In the environmental context, courts generally have rejected attempts to draw a distinction between legal and equitable relief, recognizing instead that costs of abatement, although equitable, constitute "damages" under CGL policies.
As one court explained, policyholders should be able to rely on "the common sense expectation" that the term "damages" will cover all claims that require them to pay money, regardless of whether the claim is styled as equitable or legal. And this same reasoning has already been adopted in at least one coverage case arising out of the public nuisance gun litigation.
Although there is some limited contrary authority, the "damages" defense has a low chance of success.
Trigger of Coverage -- Another defense that may be asserted by insurers is "trigger of coverage."The term "trigger" generally refers to what must happen during the policy to implicate coverage under a policy, which in the case of most CGL policies is the injury or damage allegedly caused by the policyholder. When dealing with liabilities that potentially span many years, trigger determines which policy periods, and therefore which policies, are required to provide coverage for the claim.
To date, complaints asserting public nuisance claims have alleged "continuous injury" arising from the nuisance, and thus, all applicable policy periods from the time the nuisance began until the present are triggered.
Insurers, however, are sure to argue that, to the extent coverage is triggered at all, the trigger or injury is not "continuous." For example, in the lead paint context, insurers may argue that the alleged property damage occurred at the point of application of the lead paint to the building, rather than from the time of application until abatement, as the states alleged.
A number of cases addressing similar defenses by insurers in prior asbestos coverage cases should support policyholders on this issue. In those cases, courts held that alleged property damage resulting from the presence of asbestos in buildings constituted a "continuous injury" triggering all policies in effect from the time the asbestos was installed until it was abated.
Applied to the public nuisance context, those cases would support a finding that all policies from the time the public nuisance began until the time of abatement would be triggered, thereby maximizing coverage.
Expected or Intended -- Another defense insurers no doubt will assert in public nuisance cases is based on the "expected or intended" limitation found in most CGL policies. That language generally provides that damage that is "expected or intended from the standpoint of the insured" is not covered.
Insurers probably will argue that coverage is barred if the policyholders intended the acts giving rise to the public nuisance, for example, intending to sell lead paint or to emit greenhouse gases. Or if they intentionally acted in disregard of a known danger, for example, disregarding that the lead paint could harm children, that the greenhouse gases could contribute to global warming, or that irresponsible lending practices could result in massive home foreclosures.
Here again, there is substantial authority to contradict the insurers' position. Courts generally have held that coverage is available unless the insurer can establish not only that the policyholder intended to perform the act giving rise to the damage, but that the damage itself was intended or expected to a high degree of certainty.
Companies have not seen the last of the public nuisance theory of mass products liability. There are many cases still pending in the lead paint context, and it is widely expected that new suits will continue to be filed as states and municipalities seek to defray the costs of lead paint, global warming, and other large scale problems.
Corporate policyholders assessing their risks and potential exposure for public nuisance claims should review their entire insurance portfolio, both past and present, to evaluate the coverage available for indemnity and defense costs.It may take a fight, but at the end of the day, it is likely that insurers will be forced to step up to the plate and honor their coverage obligations.
DONNA L. WILSON
is a partner in the Washington D.C. office of Kelley Drye & Warren LLP, and MARLA H. KANEMITSU is a senior associate in the Chicago office. They work in the insurance recovery practice group.
April 1, 2008
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