Airport handed a win in decades-old pollution coverage dispute

A unit of American International Group must face renewed claims that it owes potentially unlimited coverage for environmental cleanup costs at a Southern California airport, after a federal appeals court ruled that its policies did not cap liability for property damage.

In County of San Bernardino v. Insurance Company of the State of Pennsylvaniaa three-judge panel of the U.S. Court of Appeals for the Ninth Circuit in San Francisco on Thursday reversed a lower court ruling that had sided with ICSOP, a New York-based unit of AIG.

The dispute stems from contamination at Chino Airport, owned by San Bernardino County. Earlier tenants at the airport produced napalm and bombs for the Vietnam War and melted down World War II planes into ingots, leaving industrial waste. In 1990, California water quality regulators ordered the county to clean up a contaminated local drinking water supply. The county sought coverage under three successive umbrella policies it had purchased from ICSOP between 1966 and 1975, each with a $9 million per-occurrence limit.

ICSOP paid $9 million and declared it had hit an annual aggregate cap. The county disagreed, arguing the policies imposed no such cap on property damage claims. The central question for the court was whether the aggregate limit — which the policy said applied “where applicable” and specified only for products liability and occupational injury claims — extended to property damage as well.

Writing for the panel, Judge Jay Bybee agreed that the policy language was “not just ambiguous, but nearly incoherent.” Crucially, internal ICSOP documents showed that the insurer’s own employees had once agreed with the county’s reading. Under California law, that ambiguity had to be resolved against the drafter. The court concluded that “these policies do not specify an aggregate limit for property damage.”

Judge Bybee noted that many policies at the time contained no aggregate limits. “The CGL policies did not anticipate the advent of environmental and, especially, asbestos-related tort litigation. The resulting ‘cascade of liability’ exposed insurers to unlimited aggregate liability and triggered a crisis in the insurance industry.”

The ruling returns the case to the Central District of California, where the number of occurrences and total payout remains to be determined.

AIG did not immediately respond to a request for comment.