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Montrose: Gift That Keeps on Giving

On Jan. 7, 2020, the California Supreme Court heard oral arguments in Montrose v. Superior Court, 14 Cal App. 5th 1306, 2017. The issue in the underlying continuous environmental contamination damage claim is whether the upper excess layer of coverage should participate in funding only after all directly underlying excess coverage during the coverage continuum exhausts. This is known as horizontal exhaustion. 

On April 6, 2020, the California Supreme Court ruled in Montrose’s favor, finding that vertical exhaustion is appropriate. 

On my very first day at Admiral Insurance, ove,r 26 years ago, the first claim I reviewed involved the Stringfellow Acid Pits Superfund Site in California. Admiral’s insured, Montrose Chemical, was a major contributor of toxic wastes to the site and a major target of the EPA. I had the opportunity to attend oral arguments before the California Supreme Court in the subsequent coverage litigation against Admiral which is the subject of this article. 

One can only speculate about how many hundreds of millions of dollars of transaction costs were paid, i.e. attorney fees and other expenses, arising from the many underlying claims against Montrose, including Stringfellow, and the ensuing coverage litigation against Admiral and Montrose’s other insurers. 

In July 1995 (modified Aug. 31, 1995), the California Supreme Court in Montrose Chemical Corporation v. Admiral Insurance Company, 10 Cal. 4th 645, turned the concept of fortuity on its head, eventually compelling the insurance industry to respond with significant policy modifications. 

It’s Fundamental – Known Loss and Fortuity 

The concept of fortuity, or chance, is the cornerstone of insurance and its operation. Individual losses must be unpredictable and, through the magic of the law of large numbers, these individual losses collectively must be predictable. 

Unless a loss is fortuitous, it is not insurable. Otherwise, those who knew a loss would occur or could somehow influence the occurrence would buy insurance and those who knew that a loss would not occur would not buy it. This “adverse selection” plays havoc with sound actuarial predictions. 

It is that simple. Or is it? 

Montrose v Admiral affected the principle of known loss and caused the insurance industry to react with a variety of “Montrose Exclusion” endorsements and the Insurance Services Office to change the insuring agreement in the CGL policy. Its impact was, and still is, felt beyond California’s borders. 

Montrose v. Admiral involved underlying environmental contamination claims and insurance coverage. The court’s rulings cast a wide net that affected construction defect claims, as well. The underlying litigation involved several claims against Montrose, referred to as “the Stringfellow cases” and the “the Levin Metals cases.” This article will focus on Stringfellow. 

Montrose Chemical manufactured DDT, dichloro-diphenyltrichlorethane, a very effective pesticide, at its plant in Torrance, CA, from 1947 until 1982. (I visited the site in the mid-’90s and vividly recall the eerie fenced-in property with skull and crossbones warning.) In August 1982, the company received a PRP (potentially responsible party) letter from the Environmental Protection Agency, followed by a lawsuit, with respect to contamination and response costs at the Stringfellow Acid Pits site. The Admiral policies commenced in October 1982 and expired in March 1986. 

The Stringfellow site opened in 1956 and closed in 1972. James “Jimmy” Stringfellow owned the site and operated Stringfellow Quarry. He was approached twice by the State of California in 1955 to use the property as a hazardous waste disposal site. Stringfellow declined twice. But the third time was a charm. State officials touted the property as “a ‘natural’ for a waste disposal site because it was underlain by impermeable rocks.” They weren’t. State investigations conducted the investigation and designed the dump site. But not very well. In fact, in the subsequent complex litigation, United States v. Stringfellow, the special master, in the State Share Fact Finding Hearing, called the state’s conduct “grossly negligent, if not reckless.”

Chemical wastes generated by Montrose at its plant were deposited at Stringfellow between 1968 and 1972, when Montrose paid a hauling company to transport byproducts of its DDT manufacturing process to the state-approved and licensed disposal facility. As early as 1970, toxic wastes were detected seeping from the site, and in 1975 the Santa Ana Regional Water Quality Control Board declared the site a public nuisance.

According to the allegations in the CERCLA complaint, the property damage began in 1956 and continued throughout the periods when Admiral’s CGL policies issued to Montrose were in effect.

The following chronology is helpful to understand the coverage issues: 

1947 — Montrose began manufacturing DDT

1956 — Stringfellow Acid Pits opened

1968 — Montrose began depositing DDT wastes

1970 — Toxic wastes seeping from site detected

1972 — Stringfellow closed

1982 — Montrose ceased manufacturing DDT

8/31/82 — EPA notified Montrose that it was a PRP

10/13/82 — 3/20/86 Effective dates of Admiral policies 

In applying a continuous trigger, the California Supreme Court ruled that it is when the property damage occurs that determines which policy(s) is triggered. In the case of continuous and progressive property damage or bodily injury, all of the policies in effect at the time the damage or injury occurs are triggered. Of course, determining when property damage, caused by contamination that is continuous and latent, begins and ends is not easy. 

See also: P&C Insurance Is Losing Importance  

Essentially, at issue was the termination date of the triggered period relative to the timing of the Admiral policies. Given the dates of operations, the termination of which occurred before the first Admiral policy, and the manifestation of the contamination occurring before the Admiral policy (certainly no later than Montrose’s receipt of the PRP letter), it seemed reasonable to conclude that any trigger period should not extend beyond the date of the PRP letter. At that point, the loss became known and was not insurable. 

But the court saw it another way: 

According to Admiral, Montrose’s knowledge of the problems at the Stringfellow site defeats coverage. In particular, Admiral points to the fact of Montrose’s receipt of the PRP letter from the EPA on Aug. 31, 1982, prior to the inception of the first of Admiral’s four successive CGL policies issued to Montrose. Admiral misses the point. The PRP notice is just what its name suggests — notice that the EPA considered Montrose a “potentially” responsible party. While it may be true that an action to recover cleanup costs was inevitable as of that date, Montrose’s liability in that action was not a certainty. There was still a contingency, and the fact that Montrose knew it was more probable than not that it would be sued (successfully or otherwise) is not enough to defeat the potential of coverage (and, consequently, the duty to defend).  

Citing the “loss-in-progress rule as codified in sections 22 and 250,” the court asserted that the loss in question in a liability policy is legal liability and that known liability is not insurable. When liability is known occurs when liability is “established” with certainty: 

“We therefore hold that, in the context of continuous or progressively deteriorating property damage or bodily injury insurable under a third party CGL policy, as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured, and no legal obligation to pay third party claims has been established, there is a potentially insurable risk within the meaning of sections 22 and 250 for which coverage may be sought. Stated differently, the loss-in-progress rule will not defeat coverage for a claimed loss where it had yet to be established, at the time the insurer entered into the contract of insurance with the policyholder, that the insured had a legal obligation to pay damages to a third party in connection with a loss.” 

Montrose’s receipt of the PRP letter prior to its purchase of Admiral’s policies did not establish any legal obligation to pay damages or cleanup costs in connection with the contamination at the Stringfellow site, such as would implicate the loss-in-progress rule and preclude Montrose from seeking to obtain the liability coverage sought. The PRP letter did no more than formally place Montrose on notice of the government’s asserted position and initiate proceedings that could result in subsequent findings and orders.

In this author’s opinion, the court pushed the envelope in its interpretation of what constitutes a contingent or unknown event in the context of liability coverage. The court concedes that “an action to recover cleanup costs (may have been) inevitable” at the time Montrose received the PRP letter, yet defines the contingency underlying the fortuity principle only in the context of the establishment of legal liability and not the happening of the event, i.e. the discharge of hazardous wastes at the site, which initiated the PRP letter being sent to Montrose in the first place, followed by the probable inevitability of liability being established and damages awarded. 

The insurance policies at issue provide coverage for damages the policyholder is legally obligated to pay as a result of an occurrence. If the analysis were to stop here, and if one accepts the court’s depiction of the contingency that underlies fortuity and insurability as the establishment of legal liability as opposed to the event that ultimately led to the establishment of legal liability, the ruling seems reasonable. 

However, the analysis cannot stop here. In addition to coverage for the legal liability of the insured to pay damages, the policy also provides another vital type of coverage, and that is defense. The insurer’s obligation to defend does not depend on a finding of legal liability. Rather, it is “triggered” when there is a potential that an insured can be found legally liable, and the defense obligation commences when a suit, or its equivalent, is served upon the insured. So, if a PRP letter is tantamount to a suit the defense obligation would be triggered. 

However, Montrose received a PRP letter prior to the inception of the Admiral policy. With respect to defense coverage, there was no longer a contingency. The obligation to defend existed prior to a finding of liability and was triggered at the time Montrose received the PRP letter unless this occurred prior to the inception of the Admiral policy. It did. 

CA Ins. Code, § 22, defines “insurance” as a “contract whereby one undertakes to indemnify another against loss, damage or liability arising from a contingent or unknown event.” The court rewrote the law by restricting, in a liability policy, the contingent or unknown event to the establishment of legal liability rather than the event that resulted in legal liability and despite the fact that insurance defense coverage is triggered long before a formal finding of liability. The subject of the code, the event, resulted in the receipt by Montrose of the PRP letter. As of the date of the policy, which is after the receipt of the PRP letter by Montrose, the event, otherwise triggering a duty to defend, is no longer contingent and, therefore, no longer insurable. 

The court cast its net broadly and specifically brought construction defect claims within its decision by nullifying the previously applied manifestation trigger in such claims. The industry first reacted with a variety of so-called “Montrose exclusions,” and ISO subsequently amended the insuring agreement in the CGL policy. The manuscripted exclusions varied but the common thrust was that losses in progress (known and, sometimes, unknown) were not covered. ISO modified the insuring agreement to preclude coverage for known losses and was less draconian than the “known and unknown” version of the “Montrose exclusions.” As to the former, the burden is on the insured to demonstrate a potential for coverage. In the case of the exclusion, the insurer has the burden to demonstrate that the loss is excluded. 

The intent of the “Montrose exclusions” was simply to limit coverage in the case of one occurrence to the first policy during which the property damage or bodily injury first began. Neither the manuscripted exclusions nor the ISO modification are a “one size fits all” remedy to the Montrose court’s corruption of the fundamental insurance principles of fortuity and known loss. Application of either requires a (very) fact-intensive analysis within the context of the duty to defend (“potential” criterion) versus the duty to indemnify (“actual” criterion), and the differences between them. 

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Some factors to consider when handling these types of claims: 

  • What are the underlying facts? What is the insured’s role in the cause of the injury or damage? 
  • Bodily injury or property damage? What is the injury or damage process? For example, the injury process of asbestos is different than the damage process of construction defects. 
  • What is the trigger of coverage? Continuous, exposure, injury-in fact and their variations? 
  • Number of occurrences? Is it the cause or the effect that determines the number of occurrences? Are there additional factors that affect a cause application, i.e. timing of the injury or damage, number of products, trades, homes, claimants, etc.? 
  • Are there multiple effects of the same cause, or are the effects the same? Does the “sameness test” affect the number of occurrences even if there is a single cause and the loss occurred in a “cause state”? 
  • While injury or damage may precede the policy inception, did the insured’s product or work contribute to the existing injury after policy inception?

Any views expressed here are mine and do not necessarily represent the views of Admiral Insurance Group or any of its affiliates.

Workplace Wellness Shows No Savings

During the last decade, workplace wellness programs have become commonplace in corporate America. The majority of US employers with 50 or more employees now offer the programs. A 2010 meta-analysis that was favorable to workplace wellness programs, published in Health Affairs, provided support for their uptake. This meta-analysis, plus a well-publicized “success” story from Safeway, coalesced into the so-called Safeway Amendment in the Affordable Care Act (ACA). That provision allows employers to tie a substantial and increasing share of employee insurance premiums to health status/behaviors and subsidizes implementation of such programs by smaller employers. The assumption was that improved employee health would reduce healthcare costs for employers.

Subsequently, however, Safeway’s story has been discredited. And the lead author of the 2010 meta-analysis, Harvard School of Public Health Professor Katherine Baicker, has cautioned on several occasions that more research is needed to draw any definitive conclusions. Now, more than four years into the ACA, we conclude that these programs increase, rather than decrease, employer spending on healthcare, with no net health benefit. The programs also cause overutilization of screening and check-ups in generally healthy working-age adult populations, put undue stress on employees and provide incentives for unhealthy forms of weight-loss.

Through a review of the research literature and primary sources, we have found that wellness programs produce a return-on-investment (ROI) of less than 1-to-1 savings to cost. This blog post will consider the results of two compelling study designs — population-based wellness-sensitive medical event analysis and randomized controlled trials (RCTs). Then it will look at the popular, although weaker, participant vs. non-participant study design. (It is beyond the scope of this posting to question vendors’ non-peer-reviewed claims of savings that do not rely on any recognized study design, though those claims are commonplace.)

Population Based Wellness-Sensitive Medical Event Analysis

A wellness-sensitive medical event analysis tallies the entire range of primary inpatient diagnoses that would likely be affected by a wellness program implemented across an employee population. The idea is that a successful wellness program would reduce the number of wellness-sensitive medical events in a population as compared with previous years. By observing the entire population and not just voluntary, presumably motivated, participants or a “high-risk” cohort (meaning the previous period’s high utilizers), both self-selection bias and regression to the mean are avoided.

The field’s only outcomes validation program requires this specific analysis. One peer-reviewed study using this type of analysis — of the wellness program at BJC HealthCare in St. Louis — examined a population of hospital employees whose overall health status was poor enough that, without a wellness program, they would have averaged more than twice the Healthcare Cost and Utilization Project (HCUP) national inpatient sample (NIS) mean for wellness-sensitive medical events. Yet even this group’s cost savings generated by a dramatic reduction in wellness-sensitive medical events from an abnormally high baseline rate were offset by “similar increases in non-inpatient costs.”

Randomized Controlled Trials and Meta-Analyses

Authors of a 2014 American Journal of Health Promotion (AJHP) meta-analysis stated: “We found a negative ROI in randomized controlled trials.” This was the first AJHP-published study to state that wellness in general loses money when measured validly. This 2014 meta-analysis, by Baxter et al., was also the first meta-analysis attempt to replicate the findings of the aforementioned meta-analysis published in February 2010 in Health Affairs, which had found a $3.27-to-1 savings from wellness programs.

Another wellness expert, Dr. Soeren Mattke, who has co-written multiple RAND reports on wellness that are generally unfavorable, such as a study of PepsiCo’s wellness program published in Health Affairs, dismissed the 2010 paper because of its reliance on outdated studies. Baicker et. al.’s report was also challenged by Lerner and colleagues, whose review of the economic literature on wellness concluded that there is too little credible data to draw any conclusions.

Other Study Designs

More often than not wellness studies simply compare participants to “matched” non-participants or compare a subset of participants (typically high-risk individuals) to themselves over time. These studies usually show savings; however, in the most carefully analyzed case, the savings from wellness activities were exclusively attributable to disease management activities for a small and very ill subset rather than from health promotion for the broader population, which reduced medical spending by only $1 for every $3 spent on the program.

Whether participant vs. non-participant savings are because of the wellness programs themselves or because of fundamentally different and unmatchable attitudes is therefore the key question. For instance, smokers self-selecting into a smoking cessation program may be more predisposed to quit than smokers who decline such a program. Common sense says it is not possible to “match” motivated volunteers with non-motivated non-volunteers, because of the unobservable variable of willingness to engage, even if both groups’ claims history and demographics look the same on paper.

A leading wellness vendor CEO, Henry Albrecht of Limeade, concedes this, saying: “Looking at how participants improve versus non-participants…ignores self-selection bias. Self-improvers are likely to be drawn to self-improvement programs, and self-improvers are more likely to improve.” Further, passive non-participants can be tracked all the way through the study because they cannot “drop out” from not participating, but dropouts from the participant group — whose results would presumably be unfavorable — are not counted and are considered lost to follow-up. So the study design is undermined by two major limitations, both of which would tend to overstate savings.

As an example of overstated savings, consider one study conducted by Health Fitness Corp. (HFC) about the impact of the wellness program it ran for Eastman Chemical’s more than 8,000 eligible employees. In 2011, that program won a C. Everett Koop Award, an annual honor that aims to promote health programs “with demonstrated effectiveness in influencing personal health habits and the cost-effective use of health care services” (and for which both HFC and Eastman Chemical have been listed as sponsors). The study developed for Eastman’s application for the Koop awards tested the participants-vs-non-participants equivalency hypothesis.

From that application, Figure 1 below shows that, despite the fact that no wellness program was offered until 2006, after separation of the population into participants and non-participants in 2004, would-be participants spent 8% less on medical care in 2005 than would-be non-participants, even before the program started in 2006. In subsequent presentations about the program, HFC included the 8% 2005 savings as part of 24% cumulative savings attributed to the program through 2008, even though the program did not yet exist.

Figure 1

Lewis-Figure 1

Source: http://www.thehealthproject.com/documents/2011/EastmanEval.pdf

The other common study design that shows a positive impact for wellness identifies a high-risk cohort, asks for volunteers from that cohort to participate and then tracks their results while ignoring dropouts. The only control is the cohort’s own previous high-risk scores. In studying health promotion program among employees of a Western U.S. school district, Brigham Young University researcher Ray Merrill concluded in 2014: “The worksite wellness program effectively lowered risk measures among those [participants] identified as high-risk at baseline.”

However, using participants as their own control is not a well-accepted study design. Along with the participation bias, it ignores the possibility that some people decline in risk on their own, perhaps because (independent of any workplace program) they at least temporarily lose weight, quit smoking or ameliorate other risk factors absent the intervention. Research by Dr. Dee Edington, previously at the University of Michigan, documents a substantial “natural flow of risk” absent a program.

Key Mathematical and Clinical Factors

Data compiled by the Healthcare Cost and Utilization Project (HCUP) shows that only 8% of hospitalizations are primary-coded for the wellness-sensitive medical event diagnoses used in the BJC study. To determine whether it is possible to save money, an employer would have to tally its spending on wellness-sensitive events just like HCUP and BJC did. That represents the theoretical savings when multiplied by cost per admissions. The analysis would compare that figure to the incentive cost (now averaging $594) and the cost of the wellness program, screenings, doctor visits, follow-ups recommended by the doctor, benefits consultant fees and program management time. For example, if spending per covered person were $6,000 and hospitalizations were half of a company’s cost ($3,000), potential savings per person from eliminating 8% of hospitalizations would be $240, not enough to cover a typical incentive payment even if every relevant hospitalization were eliminated.

There is no clinical evidence to support the conclusion that three pillars of workplace wellness — annual workplace screenings or annual checkups for all employees (and sometimes spouses) and incentives for weight loss — are cost-effective. The U.S. Preventive Services Task Force (USPSTF) recommends that only blood pressure be screened annually on everyone. For other biometric values, the benefits of annual screening (as all wellness programs require) may not exceed the harms of potential false positives or of over-diagnosis and overtreatment, and only a subset of high-risk people should be screened, as with glucose. Likewise, most literature finds that annual checkups confer no net health benefit for the asymptomatic non-diagnosed population. Note that in both cases, harms are compared with benefits, without considering the economics. Even if harms roughly equal benefits, adding screening costs to the equation creates a negative return.

Much of wellness is now about providing incentivizes for weight loss. In addition to the lack of evidence that weight loss saves money (Lewis, A, Khanna V, Montrose S., “It’s time to disband corporate weight loss programs,” Am J Manag Care, In press, February 2015), financial incentives tied to weight loss between two weigh-ins may encourage overeating before the first weigh-in and crash-dieting before the second, both of which are unhealthy. One large health plan offers a weight-loss program that is potentially unhealthier still, encouraging employees to use the specific weight-loss drugs that Dartmouth’s Steven Woloshin and Lisa Schwartz have argued in the Journal of the American Medical Association never should have been approved because of the drugs’ potential harms.

In sum, with tens of millions of employees subjected to these unpopular and expensive programs, it is time to reconfigure workplace wellness. Because today’s conventional programs fail to pay for themselves and confer no proven net health benefit (and may on balance hurt health through over-diagnosis and promotion of unhealthy eating patterns), conventional wellness programs may fail the Americans with Disabilities Act’s “business necessity” standard if the financial forfeiture for non-participants is deemed coercive, as is alleged in employee lawsuits against three companies, including Honeywell.

Especially in light of these lawsuits, a viable course of action — which is also the economically preferable solution for most companies and won’t harm employee health — is simply to pause, demand that vendors and consultants answer open questions about their programs and await more guidance from the administration. A standard that “wellness shall do no harm,” by being in compliance with the USPSTF (as well as the preponderance of the literature where the USPSTF is silent), would be a good starting point.