United States: EPA Suit For CERCLA Cleanup Triggered CGL Insurer's Duty To Defend

Case:    McGinnes Indus. Maint. Corp. v. Phx. Ins. Co.
             Supreme Court of Texas
             58 Tex. Sup. Ct. J. 1439 (2015)

The Texas Supreme Court considered, on a certified question from the United States Court of Appeals for the Fifth Circuit, whether "suit" as defined by a commercial general liability policy includes superfund cleanup proceedings conducted by the Environmental Protection Agency (the "EPA") under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA").

In answering the question in the affirmative, the court first recounted that CERCLA changed the main redress for pollution, i.e., suing in court on common law or statutory claims, by creating a process that begins in the EPA and ends, only if necessary, in the courts. The court noted the EPA has two options for obtaining a cleanup under CERCLA. "It may conduct the cleanup itself and later seek to recover its costs from potentially responsible parties ('PRPs') in a subsequent cost recovery action —a lawsuit—"or it can compel the PRPs to perform the cleanup (either voluntarily or involuntarily) through administrative or judicial proceedings."

The process starts with a notice letter informing the recipient that it is a PRP. The letter may invite the PRP to negotiate with the EPA over its liability, but because defenses to liability are limited, the invitation is effectively a demand. The EPA can also request information and sanction a PRP's failure to respond with significant fines. It can issue a "unilateral administrative order" directing a PRP to conduct a "remedial investigation and feasibility study," or be subject to civil penalties and punitive damages. According to the court, a PRP cannot seek judicial review until the process is complete, such that as a practical matter, PRPs have no choice but to comply with the EPA's directives, since there will seldom be a court proceeding.

The court then looked to the specific facts of this case. In November 2007, the EPA served a general notice letter on the insured's parent company, stating that it was a PRP and offering it the opportunity to enter into negotiations concerning cleaning up the Site and reimbursing EPA for costs incurred. In December 2008, the EPA served a similar letter on the insured. That letter included 58 requests for detailed information covering every aspect of the insured's involvement with the Site. The letter noted that a failure to respond could result in penalties of up to $32,500 a day. In July 2009, the EPA sent the insured a special notice letter stating it had determined the insured was responsible for cleaning up the Site and demanding the insured pay $378,863.61 in costs. The letter required the insured to make a good-faith offer to settle with the EPA within 60 days. When the insured did not make an offer, the EPA issued a unilateral administrative order directing the insured to conduct a remedial investigation and feasibility study in accordance with the EPA's specifications. The letter warned the insured that its willful failure to comply without cause would subject it to $37,500 per day in civil penalties and punitive damages up to three times the resulting costs to the EPA.

In May 2008, in the interim between the EPA's first two notice letters, the insured requested a defense in the EPA proceedings from its insurers. The Insurers refused on the ground that the proceedings were not a "suit" under the CGL policies, which provided "[t]he company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against insured seeking damages on account of such . . . property damage, . . . and may make such investigation and settlement of any claim or suit it deems expedient . . . ."

In finding the term "suit" in the CGL policies included CERCLA enforcement proceedings by the EPA, the court reasoned as follows. First, when the policies at issue were written, the main avenue of recovery for pollution was by suing in court. Moreover, the intent of CERCLA was not to impact insurance but to provide a streamlined approach for cleanup of contaminated sites, and any actions by the EPA "are the suit itself, only conducted outside a courtroom." In addition, the court noted the majority view of other jurisdictions which had considered the issue is that cleanup costs under CERCLA are "damages" covered by the form CGL policies at issue here.

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