While Washington courts have long held that an insurer must indemnify an insured for cleanup costs under the Model Toxics Control Act (MTCA), even where the Washington State Department of Ecology (DOE) has made no threat of formal legal action, the Washington courts had not addressed the issue of what triggers an insurer’s duty to defend.

On June 2, the Washington Court of Appeals addressed the latter issue in Gull Industries, Inc. v. State Farm Fire and Cas. Co. and Transamerica Ins. Group, et al., 2014 Wash. App. LEXIS 1338, and 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 Gull Industries, Gull undertook voluntary remediation of his gas station after finding contamination from an underground storage tank.  Gull notified the DOE, which acknowledged receipt of Gull’s notice of contamination.  The DOE letter also 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 comply with such requirements; and noted that Gull may request assistance from the DOE.

Gull subsequently tendered its defense and indemnity to Transamerica Insurance Group (TIG) and State Farm, which both provided liability coverage for the gas station.  The policies provided a duty to defend “any suit against the insured,” but “suit” was undefined.  After TIG and State Farm denied the tender and Gull filed suit, the trial court granted summary judgment to TIG and State Farm on the duty to defend.

On appeal, the Court of Appeals adopted the analysis in Ryan v. Royal Ins. Co. of America, 916 F.2d 731 (1st Cir. 1990) to determine what triggers the duty to defend “any suit” when the owner of contaminated property faces strict liability under MTCA.  The Court of Appeals held that the term “suit” is ambiguous in this context and may include administrative enforcement acts that are the functional equivalent of a suit to trigger the duty to defend if the governmental agency communication involves an explicit or implicit threat of immediate and severe consequences by reason of the contamination.

In this case, the Court of Appeals held that the DOE letter to Gull 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.

In light of this case, it will be important for insurers to carefully examine agency communications to determine whether such communications would qualify as a functional equivalent of a suit to implicate the duty to defend.