"Suits" under a 1973 CGL Insurance Policy
February 2008
One of the coverage issues that arises under
the Insurance Services Office, Inc. (ISO), 1973 edition comprehensive general
liability (CGL) policy is whether the insurer must defend the insured if the
U.S. Environmental Protection Agency (EPA) or a companion state environmental
enforcement agency initiates a site investigation involving long-tail contamination.
by
Rich Scislowski
IRMI
For example, under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA), Pub. L. No. 96-510 (codified at 42 U.S.C. § 9601-57),
the EPA may notify a "potentially responsible party" (PRP) of potential CERCLA
liability by sending what has been come to be known as a "PRP letter." When
the insured receives such a letter, is the CGL insurer obligated to hire a lawyer
to defend the agency proceedings, even though, technically, there is no lawsuit
yet?
The answer to that question depends on the court's interpretation of the
defense provision of the 1973 insuring agreement, which reads:
[T]the company shall have the … duty to defend
any suit against the insured seeking
damages on account of such bodily injury or property damage, even if any of
the allegations of the suit are groundless,
false or fraudulent, and may make such investigation and settlement of any claim
or suit as it deems expedient[.]
(Emphasis added.) The 1973 CGL did not define the word "suit."
Different Approaches
Jurisdictions that have ruled on this issue can be grouped into three distinct
camps: Those favoring the policyholder, those favoring the insurer, and those
that take an intermediate approach. Each will be discussed in more detail below.
States Favoring the Policyholder
These jurisdictions hold that the undefined word "suit" in the 1973 CGL insurance
policy includes "any attempt to gain an end by legal process." Under this view,
a letter issued by the EPA notifying the insured of potential liability under
CERCLA would qualify as a "suit," and the insurer must hire counsel and defend
the policyholder during the remediation process.
Most states that have considered the issue of who defends an administrative
proceeding initiated by a PRP letter rule in favor of policyholders and require
insurers to assume the defense under a 1973 edition CGL policy. The primary
reason given by these courts for favoring the policyholder is that the legal
consequences of the receipt of a PRP letter under CERCLA are "substantially
equivalent to the commencement of a lawsuit." Hazen
Paper Co. v. U.S. Fid. & Guar. Co., 407 Mass. 689, 696, 555 N.E.2d 576
(1990).
Courts in the pro-policyholder camp additionally reason that if coverage
is not extended at the PRP letter stage, policyholders may refuse to cooperate
with EPA and/or state officials until a summons and complaint are served, which
would frustrate the public policy of encouraging voluntary cleanup efforts.
On the other hand, securing the policyholder's cooperation with the EPA or a
state environmental agency prior to suit may lessen the overall amount of response
costs. Therefore, pro-policyholder courts say that coverage should be afforded
under the 1973 CGL to allow PRPs an opportunity to immediately participate in
the administrative process and protect their interests in the creation of the
administrative record, which may govern the determination of their ultimate
liability. See, e.g.,
Employers Ins. of Wausau v. Petroleum Specialties, Inc.,
69 F.3d 98 (6th Cir. 1995).
States Favoring the Insurer
These jurisdictions hold that the undefined word "suit" in the 1973 edition
CGL insurance policy is limited to mean only
a formal complaint filed in a court of law. Under this view, a mere letter will
not suffice, and the insurer will have no duty to defend unless and until the
policyholder is named as a defendant in an actual court filing.
A minority of states (most notably California) hold that the word "suit"
is unambiguous and means an actual court proceeding.
See, e.g., Foster-Gardner,
Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857, 77 Cal. Rptr.
2d 107, 959 P.2d 265 (1998). No matter how tempting it would be to foster a
cleaner environment by forcing insurance companies to help pay cleanup costs,
these courts refuse to rewrite what they consider to be clear policy language.
These courts reject the argument that a finding of no coverage will force
policyholders to wait for the EPA to file a complaint before taking action to
clean up pollution for which they will bear ultimate liability. It is in the
best interest for the policyholder to cooperate with the EPA whether the insurance
company defends them or not. See
Harleysville Mut. Ins. Co. v. Sussex Cty., Del.,
831 F. Supp. 1111 (D. Del. 1993), aff'd
46 F.3d 1116 (3d Cir. 1994).
States Taking an Intermediate Approach
Some states (most notably New York) take an intermediate approach that
does not strictly favor either the policyholder or the insurer. Courts in
these states hold that PRP letters, administrative actions, and/or consent
orders could be "suits" under the 1973 CGL policy if they are "sufficiently
adversarial" to approximate a formal legal proceeding.
To illustrate, courts in the intermediate camp have held that PRP letters
which merely request information or request that the policyholder undertake
a study to find out if there is pollution on its site are not "adversarial"
enough to qualify as "suits" under the 1973 CGL policy.
See Ryan v. Royal
Ins. Co. of Am., 916 F.2d 731 (1st Cir. 1990) (applying New York law).
However, a PRP letter that goes beyond a mere request for voluntary participation
and indicates the policyholder is required
to take action, or that the agency is taking steps to clean up the site in question
and will hold the policyholder liable for the costs, may be "sufficiently adversarial"
so as to qualify as a "suit" in the eyes of some courts.
Avondale Ind., Inc. v. Travelers Indem. Co.,
887 F.2d 1200 (2d Cir. 1989) (applying New York law);
Burt Rigid Box, Inc. v. Travelers Prop. Cas. Corp.,
126 F. Supp. 2d 596 (W.D.N.Y. 2001).
ISO Policy Fixes
Interpreting the word "suit" in the 1973 edition CGL insurance policy as
including a PRP or other sufficiently adversarial communique from a federal
or state environmental enforcement agency expanded the CGL insurer's obligation
to defend. To curtail insurers' defense obligations in agency proceedings, ISO
implemented several policy fixes in the mid-1980s.
ISO revised the pollution exclusion 1984, when ISO drafted an endorsement
(CG 21 33) for use with the 1973 edition CGL policy. Among other things, the
1984 pollution endorsement contained a new paragraph to eliminate coverage for:
Any loss, cost or expense arising out of any governmental direction or request
that the named insured test for, monitor, clean up, remove, contain, treat,
detoxify or neutralize pollutants.
In 1986 ISO incorporated this exclusion in the CGL coverage form itself.
This exclusion has been held to apply to the cost of cleaning up environmental
pollution at the behest of an environemntal enforcement agency before the institution
of formal legal proceedings. See
Titan Corp. v. Aetna Cas. & Sur. Co., 22 Cal.
App. 4th 457, 27 Cal. Rptr. 2d 476 (Ct. App. 4th Dist. 1994).
In Harvard Indus., Inc. v. Aetna Cas. & Sur. Co.,
273 N.J. Super. 467, 642 A.2d 438 (Super. Ct. App. Div. 1993), a state agency
ordered a municipality to shut down and clean up a landfill. Since the insured
had made deposits at the landfill, the insured was liable for a portion of the
cleanup cost. The court held that the 1984/1986 edition of the ISO commercial
general liability insurance policy "loss, cost or expense" exclusion did not
apply where the environmental enforcement agency gave the cleanup order to some
other party who was not an insured, and that the claim was covered.
In 1988 ISO closed this loophole by amending the "loss, cost or expense"
exclusion so that it applies whenever a state environmental enforcement agency
gave the cleanup order to "any insured," including an an additional insured
or "others," including a governmental authority that owns and operates a public
landfill.
ISO also added a new definition of the word "suit" in the 1986 edition of
the CGL coverage form. Under the new definition, a "suit" means:
A civil proceeding in which damages because of "bodily injury," "property
damage," "personal injury," or "advertising injury" to which this insurance
applies are alleged.
Although the term "civil proceeding" was not further defined, this phrase
suggests that the term "suit" would not apply to a PRP letter that merely requested
information or directed the insured to take action to clean up pollution outside
of formal legal proceedings in a court of law.
For Further Information
Subscribers to Pollution Coverage Issues
in IRMI Online or SilverPlume Sage can access additional information on this
subject, including the following:
-
A full analysis of each of the reasoning of courts in each group (IRMI
Online;
Sage);
-
A complete description of all of the ISO policy fixes discussed here
(IRMI
Online;
Sage);
-
A table showing which states have joined which camp (IRMI
Online;
Sage);
-
A hyperlinked map allowing the subscriber to click on a state and be
taken to a table listing and describing pertinent cases from that state
(IRMI
Online;
Sage); and
-
A series of charts citing and summarizing the holdings of approximately
75 cases on this subject. (IRMI
Online;
Sage).
If you do not currently subscribe, learn more about
Pollution Coverage
Issues.
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