The Los Angeles Board of Education is locked in a high-stakes legal battle
over a $100-million insurance policy it bought to cover the rising costs
of cleaning school construction sites contaminated with toxic substances.
The school district, which recently filed a lawsuit in Los Angeles County
Superior Court, accuses industry giant American International Group of
reneging on a 1999 agreement to cover for 20 years much of the school
district's environmental cleanup costs, an expense that district officials
say could reach the limits of the policy.
AIG officials deny the accusations in the lawsuit.
The dispute brings into sharp focus the risks involved in the Los Angeles
Unified School District's aggressive push to build and repair hundreds
of campuses in the city's dense, urban landscape filled with "brownfield"
properties � former industrial sites with potentially contaminated soil.
"When we bought this policy, it was like manna from heaven,"
said school board member David Tokofsky. "Here was a company that
we thought was willing to protect us against the particular risks at less-than-perfect
District officials decided to take out an insurance policy in the wake
of the embarrassing and costly debacle of trying to build the Belmont
The school site, atop an oil field, was hastily purchased in the early
1990s without thorough environmental testing. The discovery of explosive
methane and hydrogen sulfide vapors led to a host of lawsuits and investigations
and will ultimately cost the district millions to remedy.
"The district certainly did not ever want to be in that position again,"
said Steven Miller, a consultant who negotiated the insurance deal for
the school system.
The school board paid about $7.5 million for the policy. In exchange, according
to the lawsuit and district officials, AIG agreed to cover unanticipated
cleanup costs at any of the roughly 900 pieces of property owned by the
district at the time, as well as at up to 100 new sites. The policy permitted
AIG to exclude contaminants that had already been detected on district-owned sites.
Los Angeles Unified, the nation's second-largest school system, is
in the midst of a $19-billion construction and repair project that aims
to build about 150 new schools and renovate hundreds more by 2012.
For several years, there were few problems as AIG reimbursed the school
district for slightly more than $8 million, district officials said. Late
in 2004, however, AIG stopped making payments, according to Michael Strumwasser,
an outside attorney handling the case for the district. Over the next
year, the lawsuit and district officials allege, AIG repeatedly rejected
what district officials considered legitimate claims and tried to change
the terms of the agreement in the face of mounting cleanup costs.
AIG officials dispute the district's allegations. Chris Winans, a spokesman
for the company, said district officials failed to fully disclose what
they knew about polluted sites before buying the policy and were submitting
claims not covered by it.
"We have to stick to the language of the policy," Winans said,
"and not make things up as we go along."
Winans said the company had "serious concerns" about district
claims: "What did they know about contamination at the time? The
purpose was not to provide coverage for contaminants that the district
already knew about."
In total, Miller said, the district had submitted more than $15 million
in claims to AIG. Much of those costs arose from contamination at Park
Avenue Elementary in Cudahy. In November 2000, the district discovered
arsenic in the soil on the campus and spent more than $11 million to haul
away large amounts of earth, according to the lawsuit, which says that
AIG has refused to cover about $5 million of the costs.
In a letter sent last year to the school district's insurance broker,
AIG officials rejected the district's contentions about Park Avenue
Elementary. Instead, they wrote, AIG was not responsible for cleanup at
the school because district officials knew before they bought the policy
that extensive work would be required there. They also contend that the
district hired environmental crews to start cleaning the site without
first consulting AIG � a move the company says is a violation of the policy.
Even more than outstanding debts, however, district officials are worried
about future cleanup costs expected to be incurred.
Of greatest concern is a district-owned 40-acre site in South Gate, for
which board members resurrected old plans to build a high school and middle
school to relieve severe overcrowding at neighborhood campuses. The district
abandoned the site in 2000 because of concerns about extensive contamination
left behind by dozens of old industrial factories and a nearby pipeline.
Officials for the state Department of Toxic Substance Control, which oversees
cleanup at schools, said a stew of harmful metals, pesticides and other
chemicals has polluted the soil and groundwater at the South Gate site.
The district will have to use a complicated pump system, perhaps for 20
years, to filter the groundwater and prevent the toxic chemicals from
spreading, said Angelo Bellomo, director of environmental health and safety
for L.A. Unified. That system, along with extensive soil removal and other
cleanup efforts at the site, he said, was expected to cost the district
between $30 million and $75 million.
"This site makes Belmont look like a sandlot," Bellomo said.
In its lawsuit against AIG, the district says that the South Gate property
is covered under the insurance policy � an assertion that AIG officials
disputed in their 2005 letter.
With just one parcel of land expected to cost so much, school district
officials said they could possibly submit $100 million in claims � the
maximum allowed under the policy � if a judge or a settlement keeps the
policy in place until its originally scheduled termination in 2019.
Lawyers for L.A. Unified and AIG's Winans said the two sides recently
agreed to try to reach a settlement over the next four months before proceeding
with the lawsuit. Winans said he was hopeful that the company and the
district would be able to clarify the terms of the agreement. District
officials declined to say whether they were pursuing a cash settlement
from AIG that would end the policy.
Strumwasser said the lawsuit has placed L.A. Unified in a precarious position
as it continues with its building project.
"You think you have a policy protecting you, but maybe you don't,"
he said. "Do you assume you have coverage and then go bare if it
turns out you don't? Or, do you go out and buy another policy that
may be double coverage?"
David Holmquist, director of the district's office of Risk Management
and Insurance Services, said he was searching for a possible replacement
policy but that the district was still assuming the AIG policy was valid.
Buying a similar policy today, Holmquist estimated, would cost three times as much.
Board President Marlene Canter, however, dismissed the idea of letting
AIG out of the contract. "I want them to step up to the plate,"
she said, "and own up to this responsibility."