The Bermuda Form, Environmental Pollution, and Property-Damage Claims

Summer 2011Articles Environmental Litigation
This article discusses the key features of the Bermuda Form insurance policy. These are considered both generally and in the context of claims for property damage. The form may be important in certain environmental cases where insurance coverage is in play. In short, the Bermuda Form is an excess-liability cover that arose in response to the collapse of the U.S. excess-liability market in the 1980s. Typically, it is an umbrella policy, written in broad terms.

There is no single standard version of the Bermuda Form, although certain clauses or concepts are adopted widely. As with most insurance policies, the policy requirements, coverage, and exclusions must be carefully examined to determine whether the identified risk of the insured is appropriately covered. For example, the notification requirements are unusually complex and warrant careful attention. For property-damage claims, the application of the exclusion clauses is central to understanding how the policy applies.

Key Concepts
  • occurrence reported
  • aggregation and integrated occurrence
  • notice of occurrence and integrated occurrence
  • “expected or intended” liabilities excluded
  • “discovery period” cover is available
  • modified New York law with London or Bermuda arbitration

Occurrence and Occurrence Reported
An important feature of the Bermuda Form is that it is an “occurrence reported” policy. There must be an occurrence and a report of the occurrence during the period of the policy. An occurrence, for personal injury and property damage, means either that (a) damage or injury is caused by the insured’s product within the policy period, or (b) where the insured’s product is not the cause of the damage or injury, that there is either an event or a continuous exposure to conditions, which commences in the policy period. Both definitions of occurrence can be important in the context of an environmental problem because the liability of the insured could arise either from its products or from its manufacturing site.

Unusually, the Bermuda Form’s coverage does not always cease at the end of each policy year, although there are new premiums and limits of liability for each annual period. If there were an occurrence in year one that is reported to the insurer in year two, then (all things being equal) this would be covered by the policy. As will be seen below, if covered, it would be policy limits for year two, which would be engaged.

If two or more injuries or incidents of property damage occur within 30 days of one another as a result of a common event or cause, then these are aggregated and treated as a single occurrence. Injuries or property damage commencing more than 30 days apart are not “batched” under the automatic aggregation provision. However, if injuries or damage can be batched in more than one way, then it appears that it is for the policyholder to choose the batching most favorable to him or her. This treatment is automatic under the Bermuda Form. Only one year’s policy will ever respond to an occurrence that is aggregated in this way.

Integrated Occurrence
Where personal injuries or property damage to two or more persons or properties have a
common cause or there is a common defect, but they commence more than 30 days apart, then their treatment as a single occurrence depends upon whether the insured elects to give notice of an integrated occurrence.

This is a key concept within the Bermuda Form. It allows for (but does not require) the aggregation of occurrences that occur over time, including in different policy years, to be aggregated and applied against a single-policy deductible. Because the Bermuda Form is an excess-liability policy, this provision is often essential to the insured because it allows the batching of smaller claims to erode the excess and to engage coverage. From an insurer’s perspective, if the insured elects to give notice of an integrated occurrence, then it prevents multiple policies being exposed to the same cause of injury or property damage. The same “risk” is only insured under one policy year.

Notice of Occurrence and Integrated Occurrence
There are prescribed requirements for giving notice, which must be adhered to. As would be expected, notice of an occurrence must be given as soon as is practicable after an officer of the insured becomes aware that an occurrence is likely to “involve” the policy. The time notice is given fixes the policy period in which the policy will respond. There are additional criteria for giving notice in the case of some liabilities caused by pollution that will be discussed below when we consider how the Bermuda Form responds specifically to claims for environmental damage.

If the insured wishes to designate two or more injuries from a common cause occurring more than 30 days apart as an “integrated occurrence,” then specific notice to this effect must be given, in the specified form. Where notice of integrated occurrence is given, this fixes the policy year in which the policy will respond to all past, present, and future liabilities arising from the common cause or defect that will be “integrated” into that policy year. That remains true, even if the policy limits are subsequently reduced or the policy canceled in a year after notice of integrated occurrence being given.

Expected or Intended
The Bermuda Form is designed to cover catastrophic losses. It does not cover “expected or intended” liabilities. This is sometimes known as the “maintenance deductible,” a phrase not used in the Bermuda Form itself, but used by some practitioners.

In the case of integrated occurrences, the Bermuda Form typically excludes from cover both the “expected or intended” level or rate of personal injury and property damage, and the level or rate “historically experienced.” This shows exactly what the Bermuda Form is designed to do: cover catastrophic losses where the damage is different or at a level or rate vastly greater in magnitude than anticipated or intended. This has obvious relevance where a company knows that its manufacturing processes will inevitably cause a certain level of environmental contamination.

Discovery Period Cover
The policyholder is often given the opportunity to purchase cover for occurrences within the policy period but which are not yet reported. This allows notification after the termination of coverage for injuries or damage that occurred while cover was in force. This cover can significantly enhance the utility of the insurance and should be considered by insureds when ending their ongoing cover with a Bermuda Form insurer, or renewing on different terms.

London Arbitration, Modified New York Law
Disputes arising under the Bermuda Form are generally resolved by arbitration in London by arbitrators selected by the parties.

London arbitration has the benefit of being confidential, and the process is strongly supported by the English Arbitration Act 1996. Appeals to the courts are rare. They may only be made on limited grounds, error of law in New York not generally being among them. The deposition procedure is not used, and witness statements are prepared and generally stand as evidence-in-chief. Thus, a witness’s first encounter with the tribunal will be when facing cross-examination by counsel for the opposing party.

The Bermuda Form prescribes a form of modified New York law, modified so as to treat the parties in an even-handed way. This is sometimes referred to as “New York law minus.” In particular, it does not allow for the payment of punitive damages and precludes the interpretation of the form in a way that is adverse to the insurer (as author). It also prohibits parol evidence (including the evidence of negotiations regarding the policy) as evidence of what the policy means. It may be possible to adduce extrinsic evidence if it goes to the commercial context, or “factual matrix,” but disputes about
admissibility can arise.

Environmental Damage: Specific Considerations
Cover for liabilities under the Bermuda Form arising out of environmental problems is restricted by exclusions in the policy wording. There are at least four exclusions of which any corporation considering the Bermuda Form to guard against environmental risks should be aware:

  • owned-property exclusion
  • pollution exclusion
  • toxic-substances exclusion
  • nuclear exclusion

The Owned-Property Exclusion
The Bermuda Form severely restricts cover for damage to a corporation’s own property.
Specifically, there is an exclusion for property damage to any property owned, occupied, rented, loaned, or in the care, custody, or control of any insured. There is a further exclusion for damage to real property arising out of the operations of any insured or its contractors or subcontractors.

A Bermuda Form policy provides third-party liability cover, so the broadly worded exclusion for first-party property damage should be expected. Corporations routinely purchase property insurance at a high level to protect against fire, extreme weather, or flooding destroying their manufacturing plants or research centers. Insureds should, therefore, check that any damage that they cause to their own plants through environmental spills (for example) are covered under their first-party property policies rather than looking to any cover they have purchased governed by the Bermuda Form.

There remains some important cover provided by the Bermuda Form in situations where there is damage to first-party property. New York courts interpreting the standard-form commercial general-liability (CGL) insurance policies (which often contain broadly similar, though not identical, exclusions) have held that the policy may respond to the extent that costs incurred in relation to first-party property were necessary to prevent or mitigate future damage or injury to another or another’s property.

In some cases, the New York courts have held that the owned-property exclusion does not prevent recovery of cleanup costs, where such cleanup is necessary to prevent future damage to third parties. See Savoy Medical Supply Co. v. F&H Manufacturing Corp. 776 F.Supp 703 (E.D.N.Y. 1991). The courts have reasoned that to deny coverage in such circumstances would not be in the public interest, as it would encourage parties to forego cleanup and then make a later claim following more extensive damage. Hence, in one case, it was held that the costs of cleaning up oil leaking from the insured’s property to prevent pollution of a nearby river was covered despite an owned-property exclusion because it prevented damage to another’s property. See Banker’s Trust Co. v. Hartford Accident & Indemnity Co. 518 F. Supp 371 (S.D.N.Y.).

Policyholders should be aware that the Bermuda Form takes a broad definition of “owned-property” so that it includes all property under the insured’s “care, custody and control.” U.S. case law on “care custody and control” often focuses on the question of whether the insured exerted sufficient “care, custody and control.” There is also a line of authority suggesting that one must determine whether the insured exercised supervision over the property before deciding whether the exclusion bites. This is a difficult area for insureds, especially those contracted to provide services for another where there is a real risk of damage to that property (either directly or through contamination of the site).

The Pollution Exclusion
The pollution “exclusion” is something of a misnomer, because the Bermuda Form actually provides considerable cover for liabilities arising as a result of pollution.

The Bermuda Form deals with liabilities arising from a discharge of pollutants by saying that there is no cover for the liability unless:

  • The liability is a product-pollution liability; or
  • There is personal injury or property damage caused by a discharge of pollutants designed to mitigate or avoid personal injury or property damage that would otherwise be covered under the Bermuda Form, and notice is given to the insurer within 40 days; or
  • There is a discharge of pollutants and the insured becomes aware of the discharge within 7 days of commencement, and notice is given to the insurer within 40 days.

“Discharge” and “pollutant” are defined terms. In essence, there is no “discharge” if the pollutant remains confined within the building or human-made structure in which the pollutant was initially located. A “pollutant” is widely defined to include solids, liquids, and gases that adversely affect the environment.

“Product pollution liability” means that there is a liability for personal injury or property damage arising out of the end use of the insured’s products provided such use (1) occurs after possession of the goods has been relinquished to others by the insured and (2) occurs away from premises controlled by the insured. So, for example, if an insured manufacturers a defective product containing a pollutant that escapes and then causes damage, provided that the escape of that product took place away from premises controlled by the insured and after control had passed to another, then such a liability would usually be covered. This is particularly relevant to insureds producing products such as petroleum, or agricultural fertilizers where widespread use of the manufactured product leads to increased potential for environmental contamination.

Item (b) above provides cover where damage caused by a discharge of pollutants is the result of mitigating greater harm. This is pertinent when considering environmental risks and supports the common-sense position that it is better to cause less harm than greater. For example, it might be better to allow a tanker to leak damaging neighboring property than to allow it to explode, damaging more neighboring property (such damage would, prima facie, be covered under the Bermuda Form). Insureds should note the 40-day reporting requirement.

Item (c) above retains cover for environmental damage provided it comes to the attention of the insured and is reported to the insurer within the required periods. This reporting requirement is in addition to that generally required by the Bermuda Form and noted under the heading “Notice of Occurrence and Integrated Occurrence” above. This feature of the Bermuda Form can be said to reiterate the policy’s primary purpose: to provide catastrophe cover. The policy is not designed to assist an insured that has been allowing, say, oil to leak for years from its site into the groundwater. The policy should respond if the insured’s chemical-storage tank suddenly fails, spilling into the groundwater or onto neighboring properties.

Because New York law commonly governs the Bermuda Form, the pollution exclusion may be construed in accordance the New York courts’ rulings on pollution exclusions under CGL policies. The general message from the appellate courts across the United States seems to be that pollution exclusions are designed to deal only with broadly dispersed environmental pollution and should not be construed in such a way as to cut down the policy’s response to traditional tort claims. See, e.g. Belt Painting Corp. v. TIG Insurance Co. 763 NYS 2d 790 (N.Y. 2003).

The Toxic-Substances Exclusion
The Bermuda Form excludes cover for liabilities arising out of any manufacture, use, or exposure to various substances. Importantly, from an environmental perspective, this list of substances includes asbestos. The Bermuda Form retains cover where there is property damage arising out of asbestos not contained in the insured’s products as a result of explosion, hostile fire, or lightning. So if there were an explosion of a manufacturing plant that contained asbestos such that the asbestos were widely disbursed resulting in high cleanup costs and property damage to third parties, this should not be excluded under the policy.

Nuclear Exclusion
For liabilities arising within the United States, there is a carefully crafted exclusion excluding most claims that could be made for property damage, personal injury, or advertising liability resulting from exposure to nuclear material. Liability of any nature directly or indirectly caused or contributed to by radiation or radioactive contamination from nuclear fuel or nuclear waste outside the United States is excluded. U.S. corporate policyholders seeking Bermuda Form cover for liabilities that could arise from nuclear contamination, such as that recently seen at Fukushima, should be aware of this provision. Policyholders using nuclear material should seek specialist advice.

Is There Cover?
Many of the features of the Bermuda Form are unique. The brokers placing this cover should have specialist knowledge of its terms and be able to provide guidance to risk managers and corporate counsel grappling with its provisions. A body of lawyers in London and the United States has formed with knowledge of the Bermuda Form, which it is important to access should a dispute arise. This is especially significant given that arbitration awards are confidential and reported decisions that might otherwise provide guidance on the Bermuda Form are rare.

Summary

  • Understanding the “occurrence reported” provision is essential to understanding Bermuda Form cover.
  • “Expected or intended” losses are not covered.
  • Generally, damage caused to the insured’s own property is excluded.
  • There is cover on defined terms for discharge of pollutants.
  • Disputes are resolved by an arbitration in London or Bermuda, usually applying modified New York law.

This article is not intended to provide specific advice, and regard will be needed for the terms of each policy and the circumstances giving rise to a claim.

The Bermuda Form, Environmental Pollution, and Property-Damage Claims, Environmental Litigation, Summer 2011, Volume 22, No. 4

@ 2011 by the American Bar Association. Reproduced with Permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form by any means or downloaded or stored in an electronic database or retrieval system without express written consent from the American Bar Association.