Why it matters: The Ninth Circuit confirmed that Chubb could have maintained a subrogation action against potentially liable parties if its insured had made a written demand for a sum certain to such persons. Insurers may require that such a claim be asserted by their policyholders either pursuant to the cooperation or subrogation clauses found in most policies

In Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., _ F. 3d _ (9th Cir. March 15, 2013), the Ninth Circuit affirmed that, as a matter of law, an insurer cannot maintain a subrogation claim against entities allegedly responsible for environmental contamination under the circumstances alleged in the insurer's complaint. On the one hand, the Ninth Circuit held that the plain language of § 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") does not permit such a subrogation action against the alleged polluters because the insurer itself does not incur "costs of response" when it reimburses its insured for the cost to remove contaminants or remediate a polluted site. On the other hand, the Ninth Circuit simultaneously made clear that an insurer could maintain a subrogation action under § 112(c) if the insured were a "claimant," i.e., had made a demand in writing for a sum certain to either the Superfund or the allegedly liable party. Because Chubb Custom Insurance Company was unable to allege that its insured, the Taube-Koret Campus for Jewish Life, had ever made such a claim, Chubb's subrogation lawsuit failed as a matter of law.

Taube-Koret purchased an environmental insurance policy from Chubb covering property in Palo Alto, California. Under the policy, Chubb first reimbursed Taube-Koret for $2.4 million spent cleaning up contaminants, and then filed suit against the previous owners of the property, arguing that they were jointly and severally liable for the clean-up costs.

Chubb asserted subrogation rights under two sections of CERCLA.

First, Chubb argued that such an action could be maintained under § 112(c). Section 112(c) provides that "any person" who has paid compensation to a "claimant" for "damages or costs resulting from a release of hazardous substances" is subrogated to all rights "that the claimant has" under CERCLA. A "claimant" is one who makes a written demand for reimbursement of monetary costs under CERCLA. Although § 112(c) does not specify to whom the demand must be made (hence Chubb's contention that Taube-Koret's insurance claim was a written demand for reimbursement of such costs), the Ninth Circuit held that "claimant" means one who demands reimbursement of environmental clean-up costs from (1) the Superfund or (2) a potentially liable party. "Claimant" does not include, in contrast, a policyholder's demand for reimbursement to its insurer. Accordingly, the Ninth Circuit held that Chubb had not – and could not, despite three attempts – sustain its contention that its insured, Taube-Koret, was a "claimant" under § 112(c).

Second, the Ninth Circuit also rejected Chubb's subrogation claims under § 107(a), which provides that potentially responsible parties ("PRPs") are liable for the costs of response "incurred by" any person under certain conditions (with the exception of identified sovereigns). Significantly, and as a matter of apparent first impression, the Court held that § 107(a) applied only to a person who, through his or her own actions, had become statutorily liable for cleanup costs or remediation. Here Chubb could allege only that Taube-Koret was liable because it was the property owner. Chubb could not allege, however, that its own actions had rendered it liable for any response costs. An insurer, the Court explained, "that is only obligated to reimburse the insured for cleanup costs does not itself incur response costs."

The Court also rejected Chubb's other arguments under § 107(a). Another provision of CERCLA (§ 113(f)), the Ninth Circuit noted, permits a PRP to pursue contribution where it has not directly incurred its own costs of response but rather has reimbursed response costs paid by other parties. Thus Congress had expressly created a remedy for those persons who, rather than directly incurring the costs of response, had reimbursed those costs as incurred by others. Allowing such a person to pursue recovery under both § 107(a) and § 113(f) was thus not only contrary to Congressional intent, but could create other problems, such as double recovery.

"CERCLA was not enacted to benefit insurance companies; rather, it was enacted to promote the timely cleanup of contaminated waste sites, impose liability on those responsible for polluting the environment, and to encourage settlement through a complex statutory scheme," the Court concluded.