They Could Have Used a Captive Insurance Company: Harvey and Nina Koloms

The facts for this article are taken from the following case: American States Insurance Co. v. Koloms 177 Ill.2d 473 (Ill. 1997)

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     The Koloms owned a 2-story commercial building.  In September 1990, the building’s furnace broke, emitting carbon dioxide that caused several tenants to become sick.  The tenants sued for damages.  The Koloms were covered by a commercial general liability policy (CGL) that had a total pollution exclusion (TPE).  When they submitted their claim, the carrier determined the “total pollution exclusion” (TPE) applied, preventing the insurer from providing coverage.  Several lower courts disagreed with the insurer’s analysis of the policy and ruled for the Koloms, forcing the insurer, American State Insurance Company, to appeal to the Illinois Supreme Court.

     The case centered around the TPE’s specific language and history.  American State argued the language clearly applied to the case’s facts while the insured responded that the TPE historically only applied to larger scale environmental disasters, not to routine commercial hazards.  The court researched how other states ruled on the issue and noted there was a split among the jurisdictions.  The court ruled for the insureds, arguing that, taken to its logical conclusion, the insurer’s argument would lead to an interpretation so broad that the TPE would apply to literally any discharge.

     How a Captive Would Have Helped

1. There are several historical trends that led Congress to pass 831(b) in 1986, one of which is the large amount of claims insurers paid related to environmental litigation.  In the early 1970s, the TPE was added to the CGL to prevent that policy’s application to environment claims.  Since then, insurers have been very aggressive in their use of the TPE to deny coverage.  Using a captive to underwrite environmental claims – or at least the first layer of environmental risk through a deductible reimbursement policy – is a good idea.
2. The Koloms could have underwritten all the risk related to their buildings HVAC system through the captive, which would have completely eliminated this litigation.
3. This case went from the trial court, to the appellate court and finally to the state supreme court – three layers of very expensive litigation.  It’s standard for a captive to underwrite a legal liability policy, which would have provided the insured with funds to defend this litigation.

      
If you'd like to discuss the benefits of captive insurance and how a captive could help your company, please call us at 832.330.4101