Parties facing responsibility for long-tail events such as environmental contamination or asbestos exposure can face staggering joint-and-several liabilities. Often, old occurrence-based liability policies offer the only potential source of insurance for these “long-tail” liabilities. Historically, insurers have sought a buy-back or full release of occurrence-based policies, many of which do not contain aggregate policy limits, as a condition of settling long-tail claims. This tactic can leave settling policyholders with no source of insurance should another similar liability arise and effectively eliminate any recovery for claimants.
The Washington Court of Appeals recently held, in Pope Resources LP v. Certain Underwriters at Lloyd’s, London, et al., No. 80032-9-I (Wn. App. Sept. 7, 2021), that such policy releases are invalid under Washington's anti-annulment statute, RCW 48.18.320. The decision has the effect of reviving insurance coverage, and potential funding for long-tail damages, that otherwise had been lost through policy buy-backs in settlements. But what is most remarkable about this case is not the fact that it enforced this long-standing statute, but the choice-of-law gymnastics that allowed the Court to bring the statute to bear despite the settling parties having gone to what looks like substantial lengths to avoid having Washington law apply.
Pope & Talbot, Inc. owned and operated a mill in Port Gamble, Washington, and procured commercial general liability, excess, and umbrella coverage under various policies between 1959 and 1986.
In 1985, Pope & Talbot formed Pope Resources LP and, shortly thereafter, transferred ownership of the Port Gamble mill site to the newly formed entity. Pope Resources then leased the mill site back to Pope & Talbot for continued operations; however, the mill was subsequently shut down in 1995 and designated as a hazardous waste site.
In an attempt to apportion their respective environmental clean-up obligations, Pope & Talbot and Pope Resources eventually entered into a remediation agreement under which Pope & Talbot assumed responsibility for the remediation of the Port Gamble site. Seeking coverage of its clean-up obligations, Pope & Talbot filed suit against its insurers and later entered into separate settlement and remediation agreements with each of the ten insurers.
After Pope & Talbot filed for Chapter 11 Bankruptcy in 2007, Pope Resources filed suit under its own policies to obtain coverage for its share of the cleanup responsibilities. Pope Resources also sought contribution from Pope & Talbot and the settling insurers. In response, Pope & Talbot’s insurers sought to enforce their respective settlement and remediation agreements, but the trial court ruled that all ten agreements were unenforceable under RCW 48.18.320. The insurers appealed.
As a threshold issue, the Court was tasked with determining whether choice of law provisions in six of the ten settlement agreements effectively avoided the application of Washington’s anti-annulment statute. To make this determination, the Court applied the common law “most significant relationship” test, under which a Court will apply “[t]he local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.”
Applying this test to the agreements, the Court explained that, because the application of another state’s law could prevent injured parties from filing insurance claims for environmental damage in Washington State, the choice-of-law provisions in the settlement agreements violated Washington’s fundamental public policy. Since Washington’s interest in the enforceability of the agreements materially outweighed any other state’s interest, the Court applied Washington law to all ten agreements. In doing so, the Court sent a clear message to insurers and policyholders that they cannot contract around the prohibitions in RCW 48.18.320 even by bargaining for choice of law designations in other states, and even when agreements are negotiated by non-Washington parties outside of Washington.
Application of Anti-Annulment Statute (RCW 48.18.320)
In determining whether the agreements violated RCW 48.18.320, the Court first looked to the statute’s "broad and inclusive" plain language, which provides that “[n]o insurance contract insuring against loss or damage through legal liability * * * for damage to the property of any person, shall be retroactively annulled by any agreement between the insurer and insured after the occurrence of any such * * * damage for which the insured may be liable, and any such annulment attempted shall be void.”
The Court interpreted the term “annulment” to mean any attempt to “abrogate, abolish, buy back, cancel, nullify, rescind, or void an insurance contract.” The Court further interpreted an “insurance contract” to mean a legally enforceable promise or set of promises that is “both a risk-shifting and risk-distributing device.” Under this definition, the Court clarified that while an insurance policy qualifies as one form of an “insurance contract,” it does not mean that only an insurance policy can qualify as an “insurance contract.”
Altogether, the Court construed the statute’s language as extending to and voiding “any attempt to cancel, rescind, void, buy back, or otherwise annul a contractual obligation that in substance is a risk-shifting and risk-distributing device manifesting a mutual intent to insure against liability resulting from triggering events occurring before a settlement agreement and release was entered into.” Put more simply, the statute precludes an insured and its insurer from “coming together and canceling or rescinding insurance contracts after a potentially covered injury, death, or damage has occurred.”
Applying this construction to the agreements between Pope & Talbot and its insurers, the Court noted that the Port Gamble mill site released toxic materials over many decades, triggering environmental insurance claims and the long-tail environmental coverage that the insurers issued to Pope & Talbot. Given that each of the ten agreements contained broad release provisions and express language attempting to cancel, rescind, void, buy back, or otherwise annul liability coverage for injury or damage that occurred prior to the agreement’s execution, Washington’s anti-annulment statute operated to void those agreements. Thus, the Court affirmed the trial court’s ruling that the agreements were unenforceable.
The Impact of Pope Resources
In the wake of the Pope Resources decision, parties facing liability for Washington claims falling within the coverage grant of insurance policies that have ostensibly been annulled by an insured’s prior policy release or buy-back agreement should consult legal counsel as to whether RCW 48.18.320 renders that agreement unenforceable. If so, those parties can potentially access the subject policies and lines of coverage, unaffected by the void buy-back provision. This could result in significant insurance proceeds becoming available, as older occurrence-based liability policies often do not contain aggregate policy limits, and therefore may not be exhausted if there is a separate occurrence.
Of similar importance to policyholders is the Court’s dismissal of the argument that, whether under severability provisions in the settlement agreement or under common law, the clauses offending RCW 48.18.320 could be severed from the agreement’s remaining terms. To the Court, neither a severability provision nor common law is applicable where, as in Pope Resources, the agreement’s essential terms are prohibited by statute and were prohibited when the contracts were formed. In effect, the entire agreement between an insurer and its insured can be unwound if it is found to violate RCW 48.18.320.
Policyholders should therefore have legal counsel review any agreement with an insurer after a covered loss in Washington, and review older agreements giving up insurance rights if a new claim is asserted. In light of Pope Resources, it may be possible to revive insurance rights that were considered gone.