Can a policyholder that knowingly purchases contaminated property be covered for the costs of cleaning up that property under policies of insurance issued before the purchase? Yes, according to a new unpublished decision from the Washington Court of Appeals.

In 1999, the Port of Longview purchased property that had been used from the 1950s through 1982 to treat wood products with creosote and other chemicals. Groundwater contamination had been discovered at the site as early as 1981. The Port knew of the groundwater contamination at the time of purchase, and knew that its acquisition of the site would automatically make the Port liable under the Washington Model Toxics Control Act (“MTCA”) for the contamination there. In 2005, the Washington Department of Ecology (“DOE”) formally notified the Port that it was a potentially liable party (“PRP”) under MTCA for the cleanup of contamination at the site.

Between 1977 and 1985, the Port was insured under a series of primary and excess liability policies issued by certain London market insurers (“LMI”). In 2010, 11 years after it purchased the site and 5 years after it received DOE’s PRP notice, the Port notified LMI of its potential liability to clean up the site. The insurers declined coverage, asserting that the “known loss” defense precluded the Port from obtaining insurance benefits for contamination that it had known of at the time it acquired the contaminated property.

The Washington Court of Appeals rejected LMI’s defense, holding that the Port’s knowledge at the time it purchased the contaminated land was immaterial to coverage. Whether the known-loss defense applies is based solely on the insured’s knowledge at the time the insurance policy is issued. Since LMI’s policies were issued between 1977 and 1985, but the land sale did not occur until many years later, the court held that the known-loss defense could not be applied to the contaminated-property claim.

At first blush, this decision unvarnished has the potential to create a windfall for policyholders. A land buyer with adequate insurance can purchase contaminated land at a bargain, confident that the liability being assumed cannot be avoided as a known loss. Yet, it is important to bear in mind that the known-loss principle is just one of a number of defenses that could be implicated in such circumstances. LMI has also moved for reconsideration of this decision, and the court of appeals has not ruled on the motion.