Washington courts have long held that an insured has indemnity coverage for incurred cleanup costs under the Model Toxics Control Act (MTCA), even where the Washington State Department of Ecology (DOE) has made no overt threat of formal legal actions. However, the Washington courts had not addressed the issue of what constitutes a “suit” to implicate the insurer’s duty to defend environmental liability claims against the insured.
On June 2, the Washington Court of Appeals addressed the issue in Gull Industries, Inc. v. State Farm Fire and Cas. Co. and Transamerica Ins. Group, et al., 2014 Wash. App. LEXIS 1338. The Court of Appeals held that an agency action must be adversarial or coercive to qualify as the functional equivalent of a “suit” when that term is undefined in the policy.
In this case, Gull owned a gas station, for which it obtained liability coverage with Transamerica Insurance Group (TIG) from 1981 to 1986. Gull leased the gas station to the Johnsons from 1972 to 1982, and the Johnsons obtained liability coverage from State Farm from 1977 through 1978. The parties agreed that the reconstructed TIG and State Farm policies, which did not define the term “suit,” provided a duty to defend “any suit against the insured.”
In 1984, Gull investigated underground storage tanks at its service stations and found contamination, for which Gull undertook voluntary remediation. Gull notified the DOE in 2005 and in 2009, Gull tendered its defense and indemnity to TIG and State Farm. Both insurers denied the tender. Gull sued TIG and State Farm, among others, and State Farm moved for partial summary judgment, arguing that it had no duty to defend. TIG joined the motion. The trial court granted the motions and Gull appealed.
The Washington Court of Appeals was asked to decide what implicates a duty to defend “any suit” when the owner of contaminated property faces strict liability under MTCA. Gull argued that because MTCA imposes strict liability, the duty to defend arises regardless of whether an agency has sent communications about the statute or cleanup obligations. The Court of Appeals rejected Gull’s argument as the duty to defend analysis is completely independent of the duty to indemnify analysis.
The Court of Appeals also rejected Gull’s argument that interpreting the term “suit” to exclude voluntary remediation would destroy any incentive for property owners to voluntarily remediate, which would be contrary to the policy concerns in Weyerhaeuser Co. v. Aetna Cas. & Sur. Co., 123 Wn.2d 891, 874 P.2d 142 (1994). The Court of Appeals reasoned that such policy concerns have limited significance in a duty to defend analysis and, under the policy language, the duty to defend is implicated by the functional equivalent of a lawsuit, not public policy. Gull’s argument that insurance proceeds are necessary to pay for investigation was rejected by the Court of Appeals as there is no authority for the proposition that construction of an insurance policy turns on the needs of an insured. The Court of Appeals further rejected Gull’s argument that an average purchaser of insurance would not distinguish between paying legal costs as a result of coercive or non-coercive action from government as the duty to defend implies the necessity to “defend” against something, and an average purchaser would not likely believe a duty to defend is implicated if there is no adversarial or coercive interaction.
After considering how other jurisdictions have decided this issue, the Court of Appeals found the First U.S. Circuit Court of Appeals’ decision in Ryan v. Royal Ins. Co. of America, 916 F.2d 731 (1st Cir. 1990) to be persuasive. InRyan, the First Circuit looked to the coerciveness of the specific regulatory action taken by the government agency and held that potential liability alone, without any adversarial or coercive action, did not constitute a “suit” under the policy. The First Circuit continued that while a lawsuit need not be commenced, there must be more than an invitation to initiate cleanup to implicate the insurer’s duty to defend.
The Washington Court of Appeals adopted the analysis in Ryan and concluded that the term “suit” is ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of a suit. The Court of Appeals continued that while service of a summons and complaint, or commencement of an administrative action, is not necessary to implicate the duty to defend, a governmental agency communication that involves an explicit or implicit threat of immediate and severe consequences by reason of the contamination does trigger the duty to defend.
In this case, Gull only received a letter from DOE acknowledging receipt of Gull’s notice that the property was contaminated and that it intended to pursue an independent voluntary cleanup. The DOE letter expressly stated that DOE has not determined that Gull is a potential liable party; advised Gull to be aware of state requirements but did not advise of any consequences in failing to adhere to such requirements; and noted that Gull may request assistance from DOE. In short, the DOE letter did not present an express or implied threat of immediate and severe consequences by reason of the contamination. As a result, Gull was not faced with the functional equivalent of a suit, and TIG and State Farm had no duty to defend.
To read the Gull opinion, click here.