L.A. Schools in a Legal Mess With Insurer

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 sites.”

District officials decided to take out an insurance policy in the wake of the embarrassing and costly debacle of trying to build the Belmont Learning Complex.

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.”