Source: http://www.lexology.com, June 23, 2014
By: Amy B. Briggs, Manatt Phelps & Phillips LLP
Why it matters
Policyholders facing strict liability for environmental cleanup often face denials of coverage for defense costs because regulatory enforcement typically is not in the form of a traditional lawsuit. A Washington appellate court recently joined numerous other courts nationwide in holding that strict interpretation of “suit” in a standard defense provision is not appropriate in the context of environmental cleanup claims. Rather, “suit” includes “administrative enforcement acts that are the functional equivalent of a suit.” The court noted that an explicit or implicit threat of “immediate and severe consequences” as a result of pollution may pass the functional equivalency test. However, “potential liability alone, without any adversarial or coercive action by an administrative agency,” would not.
Gull Industries owned gas stations throughout the state of Washington, including one located in Sedro-Woolley. The lessees of the station obtained insurance coverage from State Farm. In 1984 Gull investigated the station’s underground storage tank and discovered a continuous release of hydrocarbons. The company then began a voluntary remediation.
In 2005 Gull notified the Washington State Department of Ecology (“DOE”) that a release of petroleum product had occurred at the Sedro-Woolley station. The DOE responded with a letter acknowledging the notification. Gull then tendered claims for defense and indemnification for the cleanup costs to State Farm, which denied the tender.
Gull eventually filed suit against State Farm and five other insurers based on similar situations at other stations. The insurers moved for partial summary judgment, arguing that they had no duty to defend even though Gull was facing strict liability for cleanup costs under the state’s Model Toxics Control Act.
The State Farm policy provided coverage for “any suit against the Insured seeking damages payable under the terms of this policy.” The policy did not define “suit.” State Farm argued that this term should be construed strictly to include only traditional lawsuits. Gull, on the other hand, argued that, consistent with Washington precedent in the duty-to-indemnify context, the duty to defend should be triggered by its strict liability for cleanup regardless of whether any lawsuit or formal regulatory action had been initiated against it.
The court acknowledged that other courts across the country have reached three different results when considering whether environmental administrative actions that fall short of actual lawsuits constitute a “suit” that triggers the insurer’s duty to defend. One group of courts – in California, Illinois, Maine, New York, and the Eighth U.S. Circuit Court of Appeals (interpreting Missouri law) – has applied a narrow construction of “suit” and required that a formal complaint be filed against the insured in a court of law to trigger the duty to defend.
Taking a broader view of “suit,” a second group of courts in California, Minnesota, New Hampshire, North Carolina, Vermont, and the Second U.S. Circuit Court of Appeals holds that the issuance of a potentially responsible party letter triggers the duty to defend because such letters are the functional equivalent of a suit.
The third group of courts have adopted an “it depends” perspective, holding that the coerciveness of the specific regulatory action taken by the government dictates whether or not coverage is triggered. This group includes courts in California, Indiana, Massachusetts, Ohio, and the First U.S. Circuit Court of Appeals.
Joining the third group, the Washington appellate court opined that “more than an invitation” to initiate cleanup is required to trigger an insurer’s duty to defend in the environmental liability context. “We conclude that the term ‘suit’ is ambiguous in this context and does not require that a summons and complaint be filed or served or that an administrative action be commenced,” the court wrote. “Rather, under a functional equivalent standard, the duty to defend is triggered if a government agency communicates an explicit or implicit threat of immediate and severe consequences by reason of the contamination.”
However, the court drew the line at creating a standard of an absolute duty to defend environmental cleanup claims. According to the court, “an agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a ‘suit.’”
Unfortunately for Gull, the court found that the single letter from the DOE acknowledging notice that the Sedro-Woolley station was contaminated was insufficient to trigger coverage under this standard. Although the letter advised Gull to “be aware that there are requirements in state law which must be adhered to,” it “did not advise of any consequences that might attach to the failure to adhere to those requirements,” the court opined. “The letter did not present an express or implied threat of immediate and severe consequences by reason of the contamination. Therefore . . . Gull has not met its burden on summary judgment to establish there is the functional equivalent of a ‘suit’ here, triggering the duty to defend.”
To read the decision in Gull Industries, Inc. v. State Farm Fire and Casualty Co., click here.