A federal court in California recently ruled that an insurance company cannot recover payments made to a policyholder for environmental response costs as a matter of federal law, except in certain limited circumstances. Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., No. 5:09-cv-04485 (N.D. Cal., decided April 20, 2011). If followed by courts elsewhere, the decision may substantially diminish the value of a significant remedy to the insurance industry when settling claims for insurance coverage related to the remediation of environmentally contaminated property. The plaintiff has filed a notice of appeal to the Ninth Circuit Court of Appeals.

The court held that an insurance company could not assert an independent claim for cost recovery against potentially responsible third parties under section 107(a) of the federal Comprehensive Environmental Response, Compensation and Recovery Act (CERCLA), 42 U.S.C. § 9607(a), when the costs sought to be recovered are merely payments made pursuant to an environmental insurance policy. The court also held that the company could not assert a claim based on subrogation of its insured’s underlying rights under CERCLA section 112(c)(2), when the insured had not independently pursued a claim against potentially responsible parties or against the federal Superfund. Finally, the court ruled that various supplemental state law claims asserted by the insurer (based, e.g., on equitable subrogation and common law tort theories) were time-barred under the applicable California statute of limitations.

The court based its rulings on motions filed by several defendants, including Ford Motor Co., which was represented in the case by Shook, Hardy & Bacon’s San Francisco office, to dismiss plaintiff’s third amended complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure.

Defendants had argued in a series of 12(b)(6) motions that the plaintiff had consistently failed to allege its CERCLA claims with a degree of plausibility sufficient to meet the minimum federal court pleading standards articulated in Bell Atlantic Corp. v. Twombly, 550 U.S. 554 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). With its most recent rulings, the court not only accepted these arguments, but also decided to (i) grant the pending dismissal motion with prejudice, and (ii) enter a judgment fully disposing of all aspects of the case (both federal and state) in favor of the defendants. The entry of judgment is particularly noteworthy, since none of the moving defendants was ever required to file an answer to the original or any subsequently amended versions of plaintiff’s complaint.