In Siltronic Corp. v. Employers Insurance Co. of Wausau, No. 3:11-CV-1493-ST, 2015 WL 181785 (D. Or. Jan. 14, 2015), an Oregon federal district court, applying Oregon law, considered a policyholder’s motion for partial summary judgment concerning coverage for an environmental loss.  The court held that the policyholder was generally entitled to a defense, but could not recover costs incurred before it tendered its defense to the insurer.  The court also noted that the insurer would not be liable for certain post-tender defense costs to the extent that a third-party property owner had agreed to pay those sums.

The dispute arose when the policyholder received notices from federal and state environmental agencies requiring it to remediate contaminants leaching from its property.  Siltronic, 2015 WL 181785, at *1-2.  The policyholder had purchased the property from a third party who retained a nearby parcel that was also contaminated.  Because pollutants from both sites had mixed as they spread from the parties’ properties, the policyholder and third party entered into an interim agreement to allocate remediation costs.  Id. at *7.  The policyholder later sought a judicial declaration that it was entitled to recover defense costs, including remediation costs, from its insurer.  Id. at *9.

The court first noted that the insurer did not dispute that the agency notices constituted “suits” within the meaning of the policy and Oregon law.  Id.  at *4-5.  The court also found that the policyholder had tendered its defense to the insurer via a 2003 letter, and that the existence of the third-party cost sharing agreement—which was provisional in nature—did not relieve the insurer of its duty to defend.  Id. at *5-8.  But the court concluded that, on the record before it, the policyholder was not entitled to recover any pre-2003 defense costs.  Based upon policy language and the law of Oregon and other states, the court found that policyholders cannot recover defense costs incurred before tendering the defense to their insurers.  Id. at *9-10.  This was so regardless of whether the insurer had suffered prejudice as a result of the late tender.  With respect to post-2003 costs, the court concluded that, while additional briefing was necessary, the policyholder would likely not be able to recover to such costs because, to date, those costs had actually been paid by the third party pursuant to the interim agreement with the insured.  Id. at *10-12.

The Siltronic decision is important for at least two reasons.  First, it reconfirms the long-standing rule that defense costs incurred before a policyholder tenders its defense will not be covered, even if the insurer suffered no prejudice from late notice.  And second, the case suggests that—at least in the environmental loss context—a policyholder cannot seek defense costs where a third party has separately agreed to pay those costs, and in fact has made payment.