On June 2, 2014, the Washington Court of Appeals handed insurance companies a victory by ruling that many insurance policies do not cover the costs of investigating environmental conditions in response to a letter from the Department of Ecology ("Ecology") that confirms a site is contaminated but does not require that the policyholder take immediate action.
Most comprehensive general liability policies issued before the mid-1980s require an insurance company to defend "suits" or "any suit" made against the insured. In Gull Industries, Inc. v. State Farm Fire and Casualty, et al., Case No. 69569-0-I, the Washington Court of Appeals addressed whether a letter from Ecology was the equivalent of a "suit" in such policies. If so, insurance companies would be obligated to pay for testing and sampling environmental conditions (referred to as "defense costs"). If the letter was not a "suit," insurance companies would have no duty to pay for such defense costs.
The letter in question did not indicate that the insured had been deemed a "liable party" for the contamination, and noted that the site would be designated "Awaiting Cleanup" status. The letter confirmed that the contamination exceeded cleanup standards (MTCA Method A), but did not require an immediate response from the insured. Rather, the letter noted that the insured would pursue a voluntary cleanup through Ecology's cleanup program. Based on these facts, the Court found that the letter "did not communicate an explicit or implicit threat of immediate and severe consequences" if the contamination was not addressed and, therefore, Ecology's communication was not "adversarial or coercive in nature." Consequently, the insurance companies were not obligated to "defend" the insured.
The decision left in place existing law regarding an insurer's indemnity obligations under the same kinds of policies. Indemnity costs generally include the cost to remediate (rather than investigate) contamination. In Weyerhaeuser Co. v. Aetna Casualty and Surety Co., 123 Wn.2d 891 (1994), the Washington Supreme Court found coverage for indemnity costs does not require an overt threat of formal legal action.
The Gull Industries case will not impact insurance claims in Oregon, where the legislature has defined the term "suit" to include voluntary actions taken under administrative oversight. ORS 465.480(2)(a).
In a state that has a reputation for decisions that are policyholder friendly, the Gull Industries case is a significant win for insurers. Insureds may face the prospect of paying more of their own money to complete cleanups, and may have to wait longer for coverage determinations for particular sites. And Ecology will likely revisit how its notices are worded. Whether Ecology wants to impose "immediate and severe consequences" for not responding to contamination is a delicate policy question that will implicate how Ecology allocates its limited resources.