More than 30 years after the insurance industry began adding a so-called “Absolute Pollution Exclusion” to Comprehensive General Liability insurance policies, some courts are still answering the basic questions that arise in coverage disputes about environmental liabilities, such as whether a letter from an environmental agency is a coverage-triggering “suit,” as that word is used in the policy. Reading the most recent decision by the Washington Court of Appeals on that issue is like being in a time warp.
Congress passed the Resource Conservation and Recovery Act in 1976 to impose regulations and liability for the municipal and industrial disposal of solid and hazardous waste. RCRA amended the Solid Waste Disposal Act of 1965. We tend to forget how long ago these environmental laws were passed. Then, in 1980, Congress passed the Comprehensive Environmental Response, Compensation and Liability Act. The result of all this legislation was, among other things, an explosion of litigation across the country in the late 1970s — and throughout the 1980s and early ’90s — among corporate and municipal policyholders and their insurance companies about coverage under standard CGL policies for the costs of cleaning up waste sites . Billions of dollars were at stake.
And there were lots and lots of issues that needed sorting out. CGL policies provide that the insurance company will pay all sums an insured becomes legally obligated to pay as damages on account of bodily injury or property damage, and that the carrier will also have the duty to defend “any suit” seeking such bodily injury or property damage. CERCLA and the various analogous state environmental laws impose strict liability upon anyone who is in any way responsible for the generation, transportation or disposal of applicable wastes.
As an initial matter, the federal government — and most state environmental agencies — impose this liability by sending a letter to the potentially responsible party, asserting that the party may be liable for the cleanup of the subject site and that, if it fails to conduct the investigation and cleanup, the government will perform the clean up and charge the costs to the PRP. These law also usually impose stiff daily penalties or fines for failing to respond. During the late 1970s and early 1980s, when governmental agencies sent out many thousands of PRP letters, policyholders and their insurers sued each other in every state in the country over coverage for these environmental liabilities.
As these cases made their way through the state and federal court systems, decisions emerged from them about the various coverage issues they raised. Can the discharge of wastes into the environment be considered an “occurrence,” as the CGL policy defines that word? When is coverage for an environmental mishap triggered? If the property damage or bodily injury span many years and many different policy periods, how should the courts allocate any covered damage among the various triggered policies? Do the costs of investigating an agency’s claim of environmental harm qualify as “defense costs” under the policy?
And does a PRP letter that alleges liability for environmental damage constitute a “suit” that triggers the carrier’s duty to defend?
Remarkably, no Washington state appeals court had ever decided whether mere notification of potential responsibility for pollution damage triggers a carrier’s duty to defend until the Gulldecision on June 2, 2014.
That last question came up as a threshold issue in essentially every case in which a policyholder sought coverage after receiving a PRP letter. As such, courts across the country during the nearly two decades of very intense environmental coverage litigation resolved it with, in many instances, the state’s highest court finally weighing in for a definitive resolution. Washington state was one of the battleground jurisdictions in the 1980s and ’90s and was the site of several important coverage actions that reached the Washington Supreme Court.
Each of these cases resolved numerous coverage questions under Washington law. One of them posed the question: “Can there be insurance coverage under a Comprehensive General Liability (CGL) policy for property damage when the policyholder has incurred environmental cleanup costs pursuant to statute, but where the involved government environmental agency has not made an overt threat of formal legal action?” That case was Weyerhaeuser Co. v. Aetna Cas. & Surety Co., 123 Wash. 2d 891, 874 P.2d 142 (1994).
At first blush, this would seem to require a determination of whether a PRP letter from an environmental agency constitutes a “suit.” In fact, the carriers in Weyerhaeuser cited a 1st Circuit Court of Appeals (the federal court sitting in Boston, MA) case called Ryan v. Royal Ins. Co.,916 F.2d 731 (1st Cir. 1990) for the proposition that simply receiving a letter from the government was not enough to trigger the duty to defend. Instead, the letter must be sufficiently threatening that it becomes the functional equivalent of a “suit.” But theWeyerhaeuser court expressly declined to follow Ryan because the issue before it did not involve the duty to defend. It involved the duty to indemnify, a different obligation under a CGL policy governed by its own set of rules. Incidentally, the Weyerhaeuser court concluded that CGL policies “can reasonably be read to provide coverage for actions taken to clean up pollution damages required under environmental statutes which impose strict liability for such cleanup.”
Remarkably, in light of the sheer volume of environmental coverage litigation in Washington, no appeals-court level decision in that state had ever resolved the threshold question whether a mere notification of potential liability from the government was enough to trigger a carrier’s obligation to defend a “suit” seeking property damage. That finally changed on June 2, 2014 in the case Gull Indus., Inc. v. State Farm Fire & Cas. Co., et al., No. 69569-0-1 (Wash. June 2, 2014) (get a copy here).
In Gull, the owner of a contaminated gas station took immediate steps to address the contamination as soon as it discovered the problem, as required by Washington law. It also notified the state Department of Ecology, also as required by law, that it had discovered an environmental problem and that it was taking steps to investigate and remediate the damage. The DOE responded with a letter that merely “acknowledged” receipt of Gull’s correspondence but did not name Gull as potentially liable for the cleanup nor did it threaten further state action.
The Washington Court of Appeals found the undefined term “suit,” as used in the CGL policy, to be ambiguous and, therefore, not limited to a traditional lawsuit in a court of law. Instead, it expressly adopted the reasoning of the 1st Circuit’s Ryan decision, the case that the Weyerhaeuser court had expressly declined to follow. It held that the term “suit” is ambiguous in the environmental context and “may include administrative enforcement acts that are the functional equivalent of a suit.” Like the Ryan court, however, it rejected the policyholder’s argument that the strict liability imposed by statute for cleanup of environmental contamination was, in and of itself, sufficient to trigger the CGL carrier’s duty to defend. Instead, there must at least be some “adversarial and coercive” act by the agency to trigger a duty to defend.
Gull is noteworthy for two reasons. First, it has taken until 2014 for a Washington appeals court even to address the “suit” issue in an environmental coverage case. This is at least thirty years after policyholders and insurers began to go after each other in earnest in this kind of coverage litigation. It is also some thirty years after the insurance industry introduced the so-called “Absolute Pollution Exclusion” into the CGL policy. I call it the “so-called Absolute Pollution Exclusion” because it is not really as “absolute” as carriers now argue that it is — or as some courts have been convinced to conclude that it is.
The mission of these witnesses is to get the regulators to approve the exclusion without requiring a drastic reduction in premiums (or, in some cases, without any reduction at all).
In a pattern that repeats itself seemingly every time the insurance industry introduces a new exclusion for an important category of risks, insurance industry executives and representatives of the Insurance Services Office, the trade group that drafts policy language for the industry, trot out witnesses to testify before state insurance regulators about the new exclusion. The mission of these witnesses is to get the regulators to approve the exclusion without requiring a drastic reduction in premiums (or, in some cases, without any reduction at all).
In the case of the Absolute Pollution Exclusion, industry representatives made representations to a number of state regulators to the effect that, even after the introduction of the Absolute Exclusion, there would still be substantial pollution coverage for certain kinds of risks — such as, for example, pollution caused by product failures – and that, therefore, “these are not total, absolute pollution exclusions.” Fortunately, there exists a record of at least some of these industry representations. For example, a copy of the transcript of the December 18, 1985 testimony of insurance industry representatives before the New Jersey Department of Insurance (now known as the Department of Banking and Insurance) is still available. (Get a copy here.)
In that testimony, industry representatives told the New Jersey regulators — contrary to what carriers would later tell policyholders and the courts — that the new exclusion was not an exclusion for all pollution liabilities. Instead, significant coverage remains for products-completed operations risks, such as for the manufacturer of underground storage tanks. If, for example, a tank should fail on a customer’s property and result in contamination, there would be coverage despite the Absolute Pollution Exclusion (see page 31 of the December 18, 1985 transcript). On the basis of this testimony, at least in part, New Jersey courts have held that the so-called Absolute Pollution Exclusion only applies to “traditional environmental catastrophes resulting from intentional industrial pollution.” In a very recent, unpublished, trial court opinion, a New Jersey judge held that an “Absolute Pollution Exclusion” did not apply under New Jersey law to the failure of a filter attached to a home heating oil tank that had failed, resulting in substantial soil and groundwater contamination. (Get a copy here.) (Full disclosure: I represented the policyholder in that case.)
Similar representations that insurance industry representatives made to the Louisiana Department of Insurance, and subsequent denials of coverage on the basis of the Absolute Pollution Exclusion, inspired the Louisiana Commissioner of Insurance to issue a letter admonishing insurance companies to stop using the exclusion to deny claims in a manner that was inconsistent with the intent expressed at the time the exclusion was approved. (Get a copy of that letter here.)
In short, even though the insurance industry introduced the Absolute Pollution Exclusion in the early 1980s — and those of us who have been practicing for many years in this particular insurance litigation space therefore thought that the days of environmental coverage litigation were numbered a long time ago — courts are still making decisions about environmental coverage issues that one would have thought must have been resolved decades ago.
The second noteworthy aspect of the Gull decision is that, even though the court found the term “suit” to be ambiguous — a finding that almost universally requires construing the ambiguity in favor of the policyholder — the court nevertheless affirmed the denial of coverage under the circumstances of that case. An ambiguity arises in policy language when a term or phrase can have more than one reasonable interpretation. As the Gullopinion acknowledges, a number of courts have found that the mere imposition of strict liability under state and federal statutes is sufficient to trigger a carrier’s duty to defend. These decisions necessarily reflect one of the reasonable interpretations of the term “suit.” To conclude otherwise would be tantamount to saying that the decisions of those courts were unreasonable and that the judges who made those decisions reached their conclusions on an irrational basis.
To put the proposition positively: if a number of courts looking at the same policy language conclude that it can be interpreted to have a particular meaning, that meaning must necessarily be at least one of the reasonable interpretations of the language. Accordingly, the Gull court, having found ambiguity, should have actually applied the rule it claimed it was applying: that ambiguities in policy language are always construed in favor of coverage. Since one reasonable interpretation of the term “suit” is that strict liability imposed by statute triggers the duty to defend (as evidenced by the findings of other courts that this interpretation is, in fact, reasonable), the Gull court should have found in favor of the policyholder and against the carrier that drafted the ambiguous policy language.