A letter sent by the EPA in 2001 pursuant to CERCLA warning Land O’Lakes that it could be a potentially responsible party (“PRP”) for cleanup of an old refinery site triggered Land O’Lakes’ insurers’ duty to defend, the Eighth Circuit Court of Appeals recently held. This is consistent with the majority rule nationally, and typically is the position advocated by policyholders. In the case of Land O’Lakes, however, this unfortunately meant that the statute of limitations applicable to breach of contract had run as a result of Land O’Lakes’ seven-year delay in challenging its insurers’ denials of coverage.

In 2001 the EPA sent a Special Notice Letter (or “PRP Letter”) to notify Land O’Lakes that the agency considered Land O’Lakes to be a PRP under CERCLA for an oil refinery acquired by Land O’Lakes and later declared a Superfund site. The PRP Letter demanded that Land O’Lakes reimburse the EPA for $8.9 million that it had spent cleaning up the site, and encouraged Land O’Lakes to enter into negotiations with the EPA regarding additional cleanup.

Land O’Lakes denied any responsibility, arguing that a prior owner of the refinery site legally was responsible for the costs. But Land O’Lakes notified two of its insurers, Employers Mutual Liability Insurance Company of Wausau and The Travelers Indemnity Company, about the PRP Letter and requested coverage under historical CGL policies they had issued to Land O’Lakes. Both insurers declined to defend Land O’Lakes.

Over the next several years, Land O’Lakes continued to take no part in cleanup activities at the site and declined to negotiate with the EPA as to its liability for cleanup costs. Then, in 2008, the EPA sent Land O’Lakes a second PRP Letter, again encouraging Land O’Lakes to work with the EPA on the cleanup and resolve Land O’Lakes’ alleged liability at the site. In 2009 Land O’Lakes capitulated and agreed to work with the EPA.

Land O’Lakes then filed a breach of contract action against both insurers, seeking indemnification for its cleanup costs and reimbursement of its legal costs for defending against EPA. The district court held that the action was barred by Minnesota’s six-year statute of limitations applicable to breach of contract claims. According to the district court, the statute began to run when the insurers breached their duty to defend upon notice of the 2001 PRP Letter, and Land O’Lakes failed to bring a breach of contract action until 2009.

The Eighth Circuit agreed. In particular, it rejected Land O’Lakes’ contention (contrary to its initial position) that the 2001 PRP Letter was simply an “invitation to participate in an investigation” and did not constitute a demand for potentially covered damages. Indeed, according to the court, “[t]he 2001 PRP Letter marked the beginning of an adversarial administrative process that ultimately sought to impose liability upon Land O’Lakes for remediation costs associated with the refinery site.” Moreover, the 2001 PRP Letter notified Land O’Lakes of its potential liability and cautioned that an administrative order or civil litigation could be forthcoming for a failure to finance the necessary cleanup costs. The 2001 PRP Letter also noted that fines of up to $27,500 per day were possible under CERCLA for Land O’Lakes’ failure to comply. “Taken as a whole, the information relayed in the 2001 PRP Letter alerted Land O’Lakes that a suit for arguably-covered damages had commenced,” the court concluded.

Land O’Lakes argued that the 2008 PRP Letter commenced a new and distinct enforcement action by the EPA, triggering coverage for a second time. The court rejected this argument as well, concluding that “the 2008 PRP Letter was ‘simply a continuation of the claims made by the EPA in the 2001 PRP [L]etter.’ ”

The court further found that the so-called “owned-property exclusion” applied to coverage for cleanup costs at the refinery site. Specifically, the court held, “Land O’Lakes’ costs to remediate the refinery site fall within the owned-property exclusion because Land O’Lakes has not established that (1) third-party property had been contaminated by hazardous materials from the refinery site; (2) that same third-party property remained contaminated at the time the EPA ordered Land O’Lakes to clean up the refinery site; (3) the hazardous materials from the refinery site posed a continuing threat of contamination to that same third-party property; and (4) the EPA-mandated cleanup of the refinery site was designed to protect that same piece of third-party property from further contamination by hazardous materials from the refinery site.”

To read the decision in Land O’Lakes v. Employers Insurance Co. of Wausau, click here.

Why it matters: Land O’Lakes learned a tough lesson in this case. While it fought the EPA for years over responsibility for cleanup of the polluted refinery site, Land O’Lakes failed to pursue its insurers for eight years after they denied coverage for the EPA’s claims. This passivity forced Land O’Lakes to take a position contrary to most policyholders on this issue (and contrary to its own prior position) that a PRP demand letter from the EPA constitutes a “suit” seeking “damages.” Ultimately, this position was rejected. Because denials of coverage often trigger statutes of limitation applicable to breach of contract, policyholders would be well-served to be more proactive when their insurers deny coverage for a claim.