In ever increasing numbers, particularly those who used perchloroethylene are being targeted by environmental Regulators as potential sources of environmental contamination. Dry cleaners are being required to conduct investigations of their establishments to determine whether solvents used in dry cleaning operations have been released into the soil and groundwater beneath their establishments. These investigations can be extremely costly.

Moreover, if remediation is required, the costs can run into the hundreds of thousands, if not millions, of dollars. In addition, claims are also being brought against manufacturers and distributors of dry cleaning equipment in an attempt to force them to contribute to the costs to investigate and remediate environmental contamination. What should a dry cleaner, manufacturer or distributor do in the face of this crisis?

1. Don't Panic

The first thing is not to panic. While these problems can be extremely expensive and time consuming to, deal with, there are strategies that can be employed to attempt to manage, and hopefully overcome, the threat. Careful planning can greatly reduce your long-term liability as well as your level of stress.

2. Locate Your Insurance Policies

Locate copies of your insurance policies; particularly, those providing liability coverage and particularly those dating as far back as you can go. You may be entitled to a defense or indemnification from your insurance carrier. However, your ability to obtain coverage will be hampered if you cannot locate the policy or other information about the policy.

In that regard, we note that for many years many dry cleaners obtained liability insurance sponsored by, the California Fabricare Institute. In many instances, dry cleaners have records of those policies in the form of canceled checks, receipts, statements from brokers and other forms, but cannot locate the policies themselves. Unfortunately, many carriers deny coverage unless the insured is able to produce a policy.

In order to assist dry cleaners, we are establishing a clearinghouse for policies sponsored by the California Fabricare Institute. We are collecting these policies so that we have forms for each policy year. We would very much appreciate it if anyone who has any policies sponsored by the California Fabricare Institute, especially for years before about 1990, would send us a copy of the policies. We will then make these policies available to other dry cleaners who cannot locate copies of their own policies. We think all dry cleaners will benefit by working together on this important issue.

3. Review the Policies Carefully To Determine Whether There Is A Potential For Coverage And, If So, Consider Placing Your Carriers On Notice Of The Claim

Commercial general liability policies generally provide coverage for, among other things, claims for "property damage." Courts have generally construed this to include claims for environmental investigation and remediation. Prior to the early 1970's, most policies did not have any exclusion for environmental claims.

Therefore, if you have a policy from before the early 1970’s, and an accidental release occurred or allegedly occurred during this period, you should have a good chance of obtaining a defense of the claims brought against you. In addition, you may also be entitled to indemnification for the claims.

Between the mid-1970's and the mid-1980's most policies had what is commonly called a "sudden and accidental pollution exclusion." Policies with this exclusion provide coverage for "sudden and accidental" releases, but not for releases which were not "sudden and accidental." There is considerable dispute between insurers and insureds about what the term "sudden and accidental" means. However, if you have a policy from this period, you may well be entitled to a defense and may also be entitled to indemnification.

Since 1985, most policies have so called "absolute" pollution exclusions which generally bar coverage for most environmental claims. However, there are policies from this period, which do hot include "absolute" pollution exclusions. In one recent case we are handling for an owner of property where a dry cleaner is located, we located a 1996 policy with a "sudden and accidental" pollution exclusion. As a result, the carrier agreed to defend its insured., In addition, there are instances where the so called "absolute" pollution exclusion does not bar coverage. See, e.g. Charles E. Thomas Co. v. Transamerica Ins. Group, 62 Cal.App4th 379,72 Cal.R'ptr.2d 577 (1998).

Two recent cases have dramatically affected the positions of insureds with respect to their carriers. First, in Aerojet General Corporation, et al. v Transport Indemnity Company, et al., 17 Cal.4^th 38 (1997) ("Aerojet"), the California Supreme Court held that costs incurred to investigate a site in response to a demand from a regulatory agency may constitute defense costs which must be paid pursuant to an insurer’s duty to defend.

Therefore, if your carrier is required to defend, it may be required to pay the costs of the site investigation demanded by the regulatory agency. In many instances, the cost of the site assessment can be greater than the cost to actually remediate the site. This holding is very favorable to insureds and emphasizes the need to obtain carrier involvement at the earliest stage of a site investigation in order to insure that the carriers help pay for site investigation activities.

The second decision, however, is detrimental to the interests of insureds. Most policies require insurers to defend "suits" brought against the insured. However, many actions brought against insureds are in the form of demands or orders from regulatory agencies such as EPA and Regional Water Quality Control Boards rather than lawsuits filed in court. Insurers claimed that regulatory agencies are not "suits" and, therefore, denied any duty to defend such actions. Insureds disagreed.

In Foster-Gardner, Inc. v. National Union Fire Insurance Company of Pittsburgh, et al.; 18 Cal.4th 857,77 Cal.Rptr.2d 107 (1998), the California Supreme Court, in a narrow 4-3 decision, held that demands of orders by regulatory agencies which are not initiated by a suit brought in a court of law do not constitute "suits" triggering an insurer’s duty to defend. This decision is likely to have a negative impact on insureds and certainly requires insureds to be extremely careful I how they handle actions brought against them by regulatory agencies.

At a minimum, insureds must now, carefully review their insurance policies since some policies require carriers to defend "claims," the insured must carefully consider its options. For example, in order to obtain a defense, it may be to the insureds advantage to wait and be sued rather than complying with a regulatory demand. However, insureds must be very careful in considering such a course of action because the penalties for not complying with an order by a regulatory agency can be significant.

The overall point is that you may, be entitled to insurance coverage for a claim brought against you regarding environmental contamination. You need to keep your insurance records, carefully review the policies you are able to locate and consider placing your, carriers on notice of the claim. Furthermore, you must carefully plan your response to a regulatory demand in order to maximize your ability to obtain coverage.

4. Carefully Plan Your Dealings With Your Insurance Carrier And The Regulatory Agency

Insureds must be careful in dealing with their carriers and with the regulatory agencies. For example while carriers, may, be. Required

To defend claims brought by regulatory agencies, they often deny. Any obligation to defend where the work is being undertaken voluntarily by the insured. On the other hand, taking a cooperative approach with the regulatory agency can be very helpful in creating a good relationship with the agency and reducing the overall cost of the investigation and remediation. As a result, it is very important to be aware of these types of issues when dealing with regulatory agencies and carriers so that you can maximize your ability to obtain insurance coverage for, the work being required by the regulatory agency.

5. Summary

Receiving notification that you have an environmental problem can be very unnerving. However, you may be able to obtain insurance coverage for some or all of the claim, which can significantly reduce the economic burden of dealing with the problem. In addition, by carefully managing your dealings with the regulatory agencies, you may be able to greatly reduce the costs of the investigation and remediation as well as the level of stress in dealing with the regulatory agencies.