The emerging PFAS & PFOA insurance coverage battleground
Lawsuits and regulations concern ‘forever chemicals’ and policyholders are certain to turn to insurers for recourse.
Litigation over per-and polyfluoroalkyl substances (PFAS) in the United States has been headline inducing. As companies that manufacture PFAS or use PFAS in the manufacturing of other end products are strapped with extraordinarily large verdicts and settlements, many will need to turn to their insurance companies to access the insurance coverage they have purchased to protect their businesses. In addition to the currently occurring PFAS litigation, increased federal and state PFAS regulation will induce further disputes and recovery. What results is an emerging insurance coverage battleground over funding for PFAS liabilities and regulatory requirements.
What are PFAS & why are they important?
PFAS are a group of man-made chemicals that include perfluorooctanoic acid (PFOA) and perfluorooctane sulfonic acid (PFOS). These types of chemicals are sometimes referred to as “forever chemicals” because their unique chemical structure makes it almost impossible for them to be eliminated from the environment. The chemicals are immune from natural degradation as well as heat, acids, chemical stimuli and oxidation. Because of this, PFAS persist in water sources, leading to bioaccumulation of the substances in humans and animals. Studies have detailed the health impacts of PFAS exposure, including cancer, thyroid disease, pregnancy complications and high cholesterol.
The U.S. Environmental Protection Agency (EPA) maintains a list of PFAS chemicals, which currently includes over 12,000 chemical substances. PFAS are used widely in various industries including automotive, aerospace, electronics, chemical and industrial processes, medical and retail housewares. PFAS appear in everything from firefighting foams and semiconductors to nonstick cookware and COVID-19 testing equipment. The most recognizable PFAS products are 3M’s Scotchgard and DuPont’s Teflon. Both companies have been subjects of PFAS litigation, with combined settlements totaling billions of dollars.
Recent PFAS litigation & regulatory trends
Though PFAS litigation has occurred for many years, litigation has expanded even further recently. Lawsuits come in many forms including medical monitoring and personal injury claims based on PFAS exposure in drinking water, claims for diminished property values, public and private suits for remediation costs for water and soil containing PFAS, and citizen suits under the Resource Conservation and Recovery Act (RCRA) to enjoin disposal of PFAS-containing waste.
More creative suits have also been brought including shareholder actions for failure to disclose material information about PFAS liability and consumer protection suits alleging false or misleading advertising about PFAS. This litigation has historically been brought against PFAS manufacturers, but recent trends show that companies down the supply chain that manufacture products containing PFAS are also being targeted. These lawsuits have resulted in settlements ranging from millions of dollars to $4 billion.
Litigation is likely to increase with the Biden Administration’s regulatory focus on PFAS. The EPA has created a Council on PFAS and established a PFAS Strategic Roadmap for research and regulation. Important pending rules and regulations include the designation of PFAS as a hazardous substance under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the promulgation of a national drinking water standard incorporating PFOA and PFOS limits under the Safe Drinking Water Act, and a rule requiring disclosure of PFAS manufacturing, use, import and disposal since 2011. In addition to this federal response, many states are enforcing stricter regulations on PFAS levels, particularly in drinking water.
Insurance coverage issues involving PFAS litigation & liabilities
With increased regulation and litigation surrounding PFAS resulting in massive settlements and payouts, policyholders are sure to turn to their insurers for recourse. Generally, arguments exist that PFAS litigation may be covered by general liability and other insurance policies. However, contentions will arise over whether certain policy exclusions apply. To date, three cases have litigated insurance coverage issues concerning underlying PFAS claims.
In Colony Insurance v. Buckeye Fire Equipment, the court addressed whether the insurance company had a duty to defend the manufacturer of firefighting equipment, which included foams containing PFOA and PFAS, under a commercial general liability policy. The manufacturer was a defendant in ongoing aqueous film-forming foam (AFFF) multi-district litigation. At issue was the applicability of the hazardous materials exclusion in the policy. The court held that the hazardous materials exclusion applied only to traditional environmental pollution, which did not include bodily injury from direct contact with a pollutant. Therefore, the exclusion did not apply to the underlying claims in the AFFF litigation, and the court ruled that the insurance company owed a duty to defend its policyholder in the AFFF multi-district litigation.
In Wolverine World Wide v. American Insurance, the plaintiff owned and operated a tannery that used Scotchgard (a PFAS) in its operations. The insurance companies argued that the discharge of pollutants was excluded from coverage by the pollution exclusions in their policies. The policyholder contended, however, that any release of PFAS was “sudden and accidental,” so that the sudden and accidental exception to the pollution exclusion applied. The court found that coverage for the underlying actions was possible despite the possibility of the narrow application of the exclusion, and the insurers had a duty to defend.
Finally, in Tonoga v. New Hampshire Insurance, a manufacturer sued its insurers for breach of the duty to defend private lawsuits and administrative hearings involving PFOA and PFOS contamination of a water supply. The court held that PFOA and PFOS fell within the definition of “pollutant” regardless of whether they were known pollutants at the time of contamination. Therefore, the insurers had no duty to defend.
These decisions evidence the efforts of insurers to avoid coverage for PFAS claims. Namely, insurers assert that “total” or “absolute” pollution exclusions should be read broadly in order to preclude coverage. Additionally, the applicability of the “sudden and accidental” exception to the pollution exclusion is ripe for controversy, as many underlying claims regarding PFAS are for pollution spanning a period of years or even decades. Products liability exceptions to pollution exclusions may also come into play, as PFAS-containing products throughout a manufacturing supply chain become targets of underlying litigation. Other exclusions that could be implicated by insurers for PFAS claims include the “expected or intended” exclusion and the “hazardous materials” exclusion. Insurance companies are also responding by creating new exclusions focused explicitly on PFAS and PFOA, which are worded to exclude broad swaths of coverage.
Strategy for dealing With PFAS-related coverage issues
In addressing insurance coverage issues related to PFAS, it is critical to note courts addressing insurance coverage issues have only ruled upon the broader duty to defend and not the duty to indemnify. Policyholders should beware of the new PFAS and PFOA exclusions proffered by insurance companies and the impacts these could have on coverage for potential PFAS claims. Older policies may also have more potential to provide coverage than newer policies.
The timing and location of underlying PFAS claims can also have an impact on coverage issues. PFAS claims typically involve actions occurring over a long period of time and many locations, implicating multiple policy periods and insurers. Policyholders should therefore be prepared to provide notice of claims broadly to all possible policies for all policy periods. Furthermore, state law varies dramatically on how pollution-related issues and other exclusions are interpreted. Therefore, the forum of the coverage dispute can often be determinative of outcome.
As PFAS litigation continues to spur throughout product supply chains, and as new regulations go into effect to mitigate environmental and health impacts of PFAS, policyholders will increasingly turn to insurance carriers to cover losses. While general liability and other policies are strong candidates to provide coverage for these claims, controversies will arise regarding pollution and other exclusions and new PFAS-specific exclusions. Policyholders and coverage counsel should begin preparing for this developing insurance battleground.
John Ellison and Jessica Krauss are attorneys at Reed Smith, an international law firm with one of the leading policyholder-only insurance coverage practices in the world. Michael Merlo is the chief claims officer-United States and Bermuda for Aon PLC, one of the largest global brokerage firms. The views in this article are those of the authors alone, and are not representative of the views of their organizations or their clients. Contact them at jellison@reedsmith.com, jkraus@reedsmith.com, mike.merlo@aon.com.
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