Why it matters: Answering a certified question from the Fifth Circuit Court of Appeals, the Texas Supreme Court determined that an enforcement proceeding under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is a "suit" for purposes of a commercial general liability (CGL) policy, requiring insurers to provide a defense. McGinnes Industrial Maintenance Corporation (McGinnes) dumped pulp and paper mill waste sludge into disposal pits during the 1960s when it was insured under CGL policies from The Phoenix Insurance Company (Phoenix) and Travelers Indemnity Company (Travelers). In 2005, the Environmental Protection Agency (EPA) began an investigation and served a general notice letter to McGinnes in 2007 that it was a potentially responsible party under CERCLA. Although McGinnes turned to its insurers for help, they refused, arguing that the EPA's enforcement action was not a "suit" covered under the policy. The policyholder filed a declaratory judgment action and a federal court granted summary judgment to the insurers. McGinnes appealed and the Fifth Circuit asked the Texas Supreme Court for guidance. Emphasizing the unique nature of the EPA's enforcement proceedings ("in actuality … the suit itself, only conducted outside a courtroom"), the split court concluded the action was covered by the policies and the insurers had a duty to defend. With the policyholder-friendly decision, Texas joins the majority of courts that have considered the issue to find that CERCLA proceedings constitute a "suit" under a CGL policy.

Detailed discussion: During the 1960s and early 1970s, McGinnes removed waste from a paper mill and released it in three ponds adjacent to the San Jacinto River in Texas. McGinnes had purchased CGL policies from Phoenix and Travelers during this period.

The policies provided that the insurers "shall have the right and duty to defend any suit against [McGinnes] seeking damages on account of … 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." None of the policies defined the term "suit."

In 2005, the EPA began investigating McGinnes' alleged pollution of the river pursuant to CERCLA. In 2007 the EPA sent McGinnes a Potentially Responsible Party (PRP) letter contending that it had contributed to the hazardous waste contamination at the site. The EPA (1) demanded that McGinnes reimburse the agency for remediation costs, (2) ordered McGinnes to conduct a Time-Critical-Removal-Action to prevent further contamination, and (3) demanded that McGinnes fund a Remediation/Investigation/Feasibility Study.

McGinnes turned to the insurers for defense of the EPA's CERCLA action. But both insurers disclaimed a duty to defend, arguing that the policy's term "suit" was limited to traditional lawsuits in a court of law—not an administrative action. The policyholder filed a declaratory judgment action seeking a ruling that a defense was owed and payment for more than $2 million in attorney's fees it had already spent.

A federal district court judge granted summary judgment for the insurers and McGinnes appealed. The Fifth Circuit Court of Appeals certified the question of whether coverage existed to the Texas Supreme Court.

In a 5-4 decision, the majority sided with the policyholder.

"We agree with the Insurers that 'suit' commonly refers to a proceeding in court," the court said. "Although the word is sometimes defined more generally as 'the attempt to gain an end by legal process,' the more specific connotation is an attempt through process in court. But for three reasons we think 'suit' in the CGL policies at issue must also include CERCLA enforcement proceedings by the EPA."

The first reason: CERCLA was intended "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 court explained. The PRP letters serve as pleadings while a unilateral administrative order resembles summary judgment, with "part of the judicial function [] ceded to the EPA by limiting a PRP's opportunity for review until the end of the process, and then limiting that review to an abuse of discretion by the EPA, based on its own record."

The EPA proceedings "are the suit itself, only conducted outside a courtroom," the court said. "CERCLA effectively redefined a 'suit' on cleanup claims to mean proceedings conducted by one of the parties, the EPA, followed by an enforcement action in court, if necessary. McGinnes's 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."

This conclusion does not extend an obligation for insurers to provide a defense for every demand letter, the court clarified, as a simple demand letter threatening or prefacing a lawsuit "is nothing like a PRP letter or unilateral administrative order," which command compliance. Nor would the ruling affect administrative proceedings, the court added, again distinguishing EPA enforcement proceedings as "unusual: not only are they like judicial proceedings, they were judicial proceedings before CERCLA was enacted."

As a second reason for its holding, the majority also noted the well-settled law that cleanup costs under CERCLA are "damages" covered by the form CGL policies at issue. "To interpret the policies as covering the damages incurred as a result of pollution cleanup proceedings without giving the Insurers the right and duty to defend those proceedings creates perverse incentives and consequences for insurers and insureds alike," the court wrote.

Third, and finally, the court cited the weight of authority from other jurisdictions. The highest courts of Alabama, Colorado, Connecticut, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Vermont, and Wisconsin have all reached a similar conclusion. Only 3 of the 16 high courts to consider the issue—California, Illinois, and Maine—have adopted the insurers' position and the most recent of those decisions was in 1998.

To the Fifth Circuit's question: "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 majority answered "yes."

To read the opinion in McGinnes Industrial Maintenance Corporation v. The Phoenix Insurance Company, click here.

To read the dissent, click here.