Moreover, stigma damages claims may come not just from the owners of the contaminated property itself but also from surrounding landowners who claim to have suffered a loss of property value simply due to public fear regarding their land's proximity to the MtBE contamination.

In evaluating stigma damage claims, general liability insurers should be aware that they can assert significant coverage and liability defenses to these claims--both of which play a significant role in an insurer's overall exposure to pay for either defense or indemnity of these alleged losses.

Although courts have often failed to take a single, consistent approach to stigma damage claims, they have laid out a number of different avenues--from the perspective of both coverage and liability--by which insurers can respond to these claims.

First, there may be no coverage for these stigma damages because such economic losses do not constitute "property damage" as defined by general liability insurance contracts. Although no court has specifically addressed whether diminution in value due to MtBE contamination constitutes "property damage," other courts have addressed the issue in the context of other forms of contamination and have found no coverage for such claims.

The key coverage issue is whether a claim for diminution in value constitutes a "loss of use" because general liability contracts commonly define "property damage" as "physical injury to tangible property, including all resulting loss of use of that property" or "loss of use of tangible property that is not physically injured."

In 1986, in Hawaiian Ins. & Guar. Co., Ltd. v. Blair, Ltd., for example, the Hawaii Appeals Court ruled: "We hold that as applied to the facts of this case, 'diminution in value' does not constitute 'loss of use' within the meaning of the policy provision."

In Iowa, in Kartridg Pak Co. v. Travelers Indem. Co., the 1988 Appeal Court held that the "requirement of 'physical injury or destruction of tangible property' is clear and unambiguous," concluding that "tangible damages, such as diminution of value, do not constitute physical injury to or destruction of tangible property."

Second, the issue of causation may also be a significant coverage defense to a "stigma damages" claim. Under the terms of a general liability contract, the policy only provides coverage for those losses that are caused by the physical damage to the property, and not the diminution in value caused by other market factors.

A new opinion from Texas in Nautilus Ins. Co. v. ABN-AMRO Mortgage Group Inc. (S.D. Tex. Dec. 8, 2006) recently addressed this question.

In Nautilus, a Texas federal district court denied the insurer's motion for summary judgment and found that the underlying plaintiffs had alleged potentially covered property damage but distinguished between covered and uncovered diminution-in-value claims.

The defendant-insured in this case was sued by 928 individual plaintiffs who purchased manufactured homes from the insured for, among other things, deficient construction and deceptive trade practices. The plaintiffs' property had allegedly suffered damage to their foundations.

The insurer argued, however, that certain alleged economic damages related to the over-valuation of the homes did not constitute "property damage" under the insurance contracts.

The Texas court concluded that economic losses that were caused by the property damage would be potentially covered by the insurance contracts. However, economic losses caused for reasons other than the property damage would not be covered.

As stated by the court, "assuming the facts alleged in the complaint are true, the diminution in the value of the properties...attributable to the physical defects would be covered by the policies. Any additional loss...that was caused by [other factors and] is not related to the property damage" would not be "covered by the policies."

Under the reasoning of Nautilus, causation may be a significant defense to stigma damages claims. If the economic losses--that is, stigma damages--were caused by MtBE contamination, then arguably a claimant has suffered covered property damage.

However, if the economic losses were caused by factors other than the contamination--such as changes in the market or other economic conditions--then those losses would not be covered.

Insurers may be able to raise other coverage defenses as well, including, for example, the number of "occurrences"--an issue that impacts both limits of liability and self-insured retentions.

In Sunoco Inc. v. Illinois National Ins. Co., the U.S. Court of Appeals for the Third Circuit found that 76 of 77 MtBE lawsuits arose from a single "occurrence" in a Jan. 31, 2007 ruling.

Insurers also have other potential liability defenses to stigma damage claims in the underlying suits that significantly impact their potential coverage obligations.

Liability defenses, for example, are an important part of determining an insurer's good faith obligation to pay, if any, a third-party demand for losses and, thus, whether an insurer has any duty to indemnify the policyholder for such losses.

As a general rule, courts have been reluctant to find that a mere diminution in value alone was sufficient to support a claim for nuisance where there is no evidence of actual physical injury.

For example, the Fourth Circuit in Adams v. Star Enterprise in 1995 held that landowners' fears of future harm and ill health effects from the migration of an oil spill to their property were not compensable under Virginia law in a negligence action against oil facility operators, absent a showing of physical impact on the landowner's property or physical injury.

In 1986, in Exxon Corp. v. Yarema, however, the Maryland Court of Special Appeals held that a property owner could bring a claim for nuisance without showing direct physical impact on the land, but only where gasoline contamination of groundwater resulted in the imposition of crippling restrictions on the use of the land.

Other liability defenses could also potentially apply. In a 1998 ruling in Black v. Coastal Oil New England Inc., the Massachusetts Court of Appeals rejected diminution in value as an appropriate measure of damages except for permanent or irremediable injury.

In addition to its own coverage defenses, these liability defenses are an important component of an insurer's evaluation of a "stigma damages" claim.

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