In McGinnes Industrial Maintenance Corporation v. The Phoenix Insurance Company, No. 14-0465, —S.W.3d— (Tex. June 26, 2015), a 5-4 majority of the Texas Supreme Court held that the undefined term “suit” in the standard-form CGL policy includes PRP letters issued by the EPA under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).
Factual & Procedural Background
In the 1960s, McGinnes Industrial Waste Corporation (McGinnes) dumped pulp and paper mill waste sludge into disposal pits near the San Jacinto River in Pasadena, Texas. At the time, McGinnes was covered by standard-form CGL policies providing that the insurers “shall have the right and duty to defend any suit against the insured seeking damages on account of such … property damage.” The policies did not define "suit."
In 2005, the EPA began investigating environmental contamination at the site. After finding hazardous substances, the EPA, acting pursuant to CERCLA, sent McGinnes a series of letters about the site. After the second letter, which identified McGinnes as a potentially responsible party (PRP) and requested certain documents and information, McGinnes sought a defense from its insurers. They refused, explaining that the EPA’s PRP letter was not a suit under the policy.
McGinnes filed suit, but the district court agreed with the insurers, finding that the EPA’s actions were not a suit triggering the duty to defend. McGinnes filed an interlocutory appeal to the Fifth U.S. Circuit Court of Appeals, but because of the lack of Texas appellate precedent on the issue, the Fifth Circuit certified the following question to the Texas Supreme Court:
Whether the EPA’s PRP letters and/or unilateral administrative order, issued pursuant to CERCLA, constitute a “suit” within the meaning of the CGL policies, triggering the duty to defend.
The Texas Supreme Court accepted the certification.
The Majority Holding
The majority began its analysis by acknowledging that "suit" “commonly refers to a proceeding in court” and that “the more specific connotation is an attempt through process in court” but then provided three reasons for why "suit" in the policies “must also include CERCLA enforcement proceedings by the EPA.”
PRP Letters Are Like Judicial Proceedings
The majority explained that, before CERCLA’s enactment in 1980 when the policies were written, the main avenue for redress for pollution was by suing in court on common law or statutory claims. Had the EPA wanted to force McGinnes to clean up the site before 1980, it was required to first file suit, and the insurers would have been obligated to defend McGinnes.
One effect of CERCLA, however, was to “authorize the EPA to conduct on its own what otherwise would have amounted to pretrial proceedings, but without having to initiate a court action until the end of the process.” The majority explained that PRP letters from the EPA are not the “functional equivalent of a suit,” as McGinnes had argued, “but in actuality, they are the suit itself, only conducted outside a courtroom.” CERCLA “effectively redefined” a “suit” on cleanup claims to mean proceedings conducted by the EPA followed by an enforcement action in court, if necessary. As a result, the majority refused to conclude that CERCLA deprives McGinnes of coverage because its “rights under its policies should not be emasculated by the enactment of a statute intended not to affect insurance, but to streamline the EPA’s ability to clean up pollution.”
There Should Not Be a Duty to Indemnify Without a Duty to Defend
It is relatively well settled, the majority recognized, that CERCLA cleanup costs are covered “damages” under the policies. Thus, the majority concluded, to interpret these policies to impose no duty to defend the proceedings from which these damage arise “creates perverse incentives and consequences for insurers and insureds alike.” McGinnes argued that it would give insureds an incentive to “mount no defense itself, assured that whatever damages result will not be its responsibility but the insurer’s,” whereas the insurers argued that such a failure could be a breach of the duty to cooperate and, therefore, grounds for denying coverage. Both, the majority explained, “illustrate the problem with a duty to indemnify without a duty or right to defend.”
The Majority of Other States Agree
The majority explained that of the 16 state high courts to consider the issue, only three (and last in 1998) have concluded that CERCLA proceedings do not qualify as a suit. The results in lower courts, the majority explained, “are similarly lopsided in favor of the insureds.” Citing the “importance of uniformity,” the court held that “insureds in Texas should not be deprived the coverage [that] insureds have in thirteen other states.”
The dissent wrote that the policies’ use of the words "suit" and "claim" confirms that the parties “intended the ordinary meaning of ‘suit’” and that this is where the analysis should end because “EPA letters and orders do not fall within the common, ordinary meaning of the term ‘suit,’ and the policies’ context does not in any way indicate the contrary.” Thus, the dissent continues, under the “well-established rules for construing insurance contracts, that should end the matter,” but “the Court proceeds, unrestrained by those rules.”
More specifically, the dissent argues, the rules of construction “do not recognize any of the Court’s reasons as a legitimate basis for ignoring or rewriting the unambiguous language of an insurance policy.” As a result, the dissent concludes that the majority’s decision is “disturbing” and hopes that it “will soon be seen as a fluke, an oversight, and a rare misstep by a Court that has otherwise been steadfastly committed to enforcing contracts as written, to refraining from rewriting parties’ agreements, and to determining the parties’ intent by relying on the ordinary meanings of the terms the parties choose.”
This decision is significant because it answers an unsettled question of Texas law: whether the term suit in a standard-form CGL policy includes PRP letters issued by the EPA. As discussed above, the answer to that question is: Yes.