District Court Decision Highlights Importance of Prompt Notice of Claim

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It Pays to Be Covered

The United States District Court for the Middle District of Florida recently granted summary judgment for an insurer on a pollution liability policy for lack of timely notice. The court agreed with the insurer that the insured gas station operator had knowledge of “pollution conditions” in 2017 and 2018, yet failed to provide notice to its insurer until 2019 (L. Squared Indus., Inc. v. Nautilus Ins. Co., — F. Supp. 3d. —, 2023 WL 4227568 (granting summary judgment for insurer), 2023 WL 6194226 (M.D. Fla. Aug. 29, 2023) (denying insured’s motion for reconsideration)).

Nautilus Insurance Company issued the claims made policy for the July 18, 2018, to July 18, 2019, policy period covering “storage tank systems cleanup costs, third-party bodily injury, property damage liability, and defense.” The issue before the court was whether Nautilus owed a duty to cover clean-up and defenses costs associated with the accidental release of petroleum from an underground storage tank (UST). The insured L. Squared Industries, Inc. is a Florida corporation that operates gas stations.

On May 2, 2017, the Florida Department of Environmental Protection (FDEP) inspected L. Squared’s gas station in St. Augustine. This FDEP inspection identified two violations involving cracked boot gaskets and directed L. Squared to take corrective action, including hydrotesting to determine whether any discharge could have occurred. L. Squared hired a contractor to repair the cracked boot gaskets and to conduct the hydrotesting, which failed, necessitating sampling of the surrounding soil.  Following the sampling, L. Squared submitted a Discharge Report Form (DRF) to the FDEP on March 18, 2018, stating a release was discovered in July 2017. The DRF also stated discharged or released gasoline and diesel were affecting the soil and groundwater.

 In 2018, L. Squared replaced a dispenser sump. In connection with that replacement activity, L. Squared hired an environmental consultant who identified some groundwater contamination in a 2018 report. This same consultant conducted further sampling on April 5, 2019, and found what appeared to a be a petroleum release. L. Squared provided a notice of occurrence/claim to Nautilus on April 19, 2019. Nautilus denied coverage and litigation ensued.  Both parties moved for summary judgment.

In deciding whether the insured’s notice was timely, the court focused on the Reporting of a Pollution, Condition, Claim or Suit provision of the policy, which requires the insured to provide notice to the insurer within seven days after the insured “first became aware of, or should have become aware of, a pollution condition.” Nautilus argued L. Squared was aware of a pollution condition in May 2017, when the FDEP notified L. Squared of violations and directed L. Squared to take corrective actions, or at the latest in July 2017, the date L. Squared identified in its DRF report that a release had been discovered. 

L. Squared argued, however, that the 2017 notice and DRF report were related to a pre-existing 1985 release or discharge, and that it was not until 2019 that L. Squared had any knowledge of a new release, and that this new release was “first discovered” through April 2019 correspondence from the FDEP and promptly reported to Nautilus. In rejecting this position, the court noted that within the April 2019 correspondence, the FDEP specifically referenced the 2018 consulting report associated with the dispenser sump replacement, the contents of which L. Squared was aware of in 2018. 

In granting summary judgment for the insurer, the court found the plain language of the policy required L. Squared to notify Nautilus within seven days of the 2018 consultant report, which L. Squared failed to do. The court subsequently denied L. Squared’s motion for reconsideration, which L. Squared has appealed to the United States Court of Appeals for the Eleventh Circuit.

Regardless of the outcome of the appeal, the case highlights the significance of prompt reporting of claims, or even circumstances that may lead to a claim, to insurers – and particularly the repercussions of failing to do so. To avoid waiver of any available insurance coverage, it is critical that companies have a claims management system in place to ensure insurance carriers are timely notified when appropriate. Policyholder attorneys can review notice requirements of existing policies and assist in creating claims management systems to minimize the possibility of late notice of potentially covered claims.

*Andy Tao is a co-author of this post. Andy Tao is not yet a licensed attorney.