Travelers 2003 Annual Report Download - page 55

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ENVIRONMENTAL CLAIMS AND LITIGATION
Travelers continues to receive claims from policyholders who allege that they are liable for injury or damage arising
out of their alleged disposition of toxic substances. Mostly, these claims are due to various legislative as well as
regulatory efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response,
Compensation and Liability Act, or CERCLA, enacted in 1980 and later modified, enables private parties as well as
federal and state governments to take action with respect to releases and threatened releases of hazardous substances.
This federal statute permits the recovery of response costs from some liable parties and may require liable parties to
undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties.
Travelers has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to
environmental claims. Travelers believes that some court decisions have interpreted the insurance coverage to be
broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies
that were issued by Travelers prior to the mid-1970s. These decisions continue to be inconsistent and vary from
jurisdiction to jurisdiction. Environmental claims when submitted rarely indicate the monetary amount being sought
by the claimant from the policyholder, and Travelers does not keep track of the monetary amount being sought in those
few claims which indicate a monetary amount.
Travelers reserves for environmental claims are not established on a claim-by-claim basis. Travelers carries an
aggregate bulk reserve for all of Travelers environmental claims that are in dispute until the dispute is resolved. This
bulk reserve is established and adjusted based upon the aggregate volume of in-process environmental claims and
Travelers experience in resolving those claims. At December 31, 2003, approximately 82% of the net environmental
reserve (approximately $236.5 million) is carried in a bulk reserve and includes unresolved and incurred but not
reported environmental claims for which Travelers has not received any specific claims as well as for the anticipated
cost of coverage litigation disputes relating to these claims. The balance, approximately 18% of the net environmental
reserve (approximately $53.6 million), consists of case reserves for resolved claims.
Travelers reserving methodology is preferable to one based on “identified claims” because the resolution of
environmental exposures by Travelers generally occurs by settlement on a policyholder-by-policyholder basis as
opposed to a claim-by-claim basis. Generally, the settlement between Travelers and the policyholder extinguishes any
obligation Travelers may have under any policy issued to the policyholder for past, present and future environmental
liabilities and extinguishes any pending coverage litigation dispute with the policyholder. This form of settlement is
commonly referred to as a “buy-back” of policies for future environmental liability. In addition, many of the
agreements have also extinguished any insurance obligation which Travelers may have for other claims, including but
not limited to asbestos and other cumulative injury claims. Travelers and its policyholders may also agree to
settlements which extinguish any future liability arising from known specified sites or claims. Provisions of these
agreements also include appropriate indemnities and hold harmless provisions to protect Travelers. Travelers general
purpose in executing these agreements is to reduce Travelers potential environmental exposure and eliminate the risks
presented by coverage litigation with the policyholder and related costs.
In establishing environmental reserves, Travelers evaluates the exposure presented by each policyholder and the
anticipated cost of resolution, if any. In the course of this analysis, Travelers considers the probable liability, available
coverage, relevant judicial interpretations and historical value of similar exposures. In addition, Travelers considers
the many variables presented, such as the nature of the alleged activities of the policyholder at each site; the allegations
of environmental harm at each site; the number of sites; the total number of potentially responsible parties at each site;
the nature of environmental harm and the corresponding remedy at each site; the nature of government enforcement
activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship
between Travelers and the policyholder, including the role of any umbrella or excess insurance Travelers has issued to
the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of
years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims, in any
resolution process; and the applicable law in each jurisdiction. Conventional actuarial techniques are not used to
estimate these reserves.
The duration of Travelers investigation and review of these claims and the extent of time necessary to determine an
appropriate estimate, if any, of the value of the claim to Travelers, vary significantly and are dependent upon a number
of factors. These factors include, but are not limited to, the cooperation of the policyholder in providing claim
information, the pace of underlying litigation or claim processes, the pace of coverage litigation between the
policyholder and Travelers and the willingness of the policyholder and Travelers to negotiate, if appropriate, a