One of the coverage issues that arises under the Insurance Services Office, Inc. (ISO), 1973 edition comprehensive general liability (CGL) policy is whether the insurer must defend the insured if the U.S. Environmental Protection Agency (EPA) or a companion state environmental enforcement agency initiates a site investigation involving long-tail contamination.
For example, under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), Pub. L. No. 96-510 (codified at 42 U.S.C. § 9601-57), the EPA may notify a "potentially responsible party" (PRP) of potential CERCLA liability by sending what has been come to be known as a "PRP letter." When the insured receives such a letter, is the CGL insurer obligated to hire a lawyer to defend the agency proceedings, even though, technically, there is no lawsuit yet?
The answer to that question depends on the court's interpretation of the defense provision of the 1973 insuring agreement, which reads as follows.
[T]he company shall have the … duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient[.]
[Emphasis added.]
The 1973 CGL did not define the word "suit."
Different Approaches
Jurisdictions that have ruled on this issue can be grouped into three distinct camps—those favoring the policyholder, those favoring the insurer, and those that take an intermediate approach.
States Favoring the Policyholder
These jurisdictions hold that the undefined word "suit" in the 1973 CGL insurance policy includes "any attempt to gain an end by legal process." Under this view, a letter issued by the EPA notifying the insured of potential liability under CERCLA would qualify as a "suit," and the insurer must hire counsel and defend the policyholder during the remediation process.
Most states that have considered the issue of who defends an administrative proceeding initiated by a PRP letter rule in favor of policyholders and require insurers to assume the defense under a 1973 edition CGL policy. The primary reason given by these courts for favoring the policyholder is that the legal consequences of the receipt of a PRP letter under CERCLA are "substantially equivalent to the commencement of a lawsuit." Hazen Paper Co. v. U.S. Fid. & Guar. Co., 407 Mass. 689, 696, 555 N.E.2d 576 (1990).
Courts in the pro-policyholder camp additionally reason that if coverage is not extended at the PRP letter stage, policyholders may refuse to cooperate with EPA and/or state officials until a summons and complaint are served, which would frustrate the public policy of encouraging voluntary cleanup efforts. On the other hand, securing the policyholder's cooperation with the EPA or a state environmental agency prior to suit may lessen the overall amount of response costs. Therefore, pro-policyholder courts say that coverage should be afforded under the 1973 CGL to allow PRPs an opportunity to immediately participate in the administrative process and protect their interests in the creation of the administrative record, which may govern the determination of their ultimate liability. See, e.g., Employers Ins. of Wausau v. Petroleum Specialties, Inc., 69 F.3d 98 (6th Cir. 1995).
States Favoring the Insurer
These jurisdictions hold that the undefined word "suit" in the 1973 edition CGL insurance policy is limited to mean only a formal complaint filed in a court of law. Under this view, a mere letter will not suffice, and the insurer will have no duty to defend unless and until the policyholder is named as a defendant in an actual court filing.
A minority of states (most notably California) hold that the word "suit" is unambiguous and means an actual court proceeding. See, e.g., Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857, 77 Cal. Rptr. 2d 107, 959 P.2d 265 (1998). No matter how tempting it would be to foster a cleaner environment by forcing insurance companies to help pay cleanup costs, these courts refuse to rewrite what they consider to be clear policy language.
These courts reject the argument that a finding of no coverage will force policyholders to wait for the EPA to file a complaint before taking action to clean up pollution for which they will bear ultimate liability. It is in the best interest for the policyholder to cooperate with the EPA whether the insurance company defends them or not. See Harleysville Mut. Ins. Co. v. Sussex Cty., Del., 831 F. Supp. 1111 (D. Del. 1993), aff'd 46 F.3d 1116 (3d Cir. 1994).
States Taking an Intermediate Approach
Some states (most notably New York) take an intermediate approach that does not strictly favor either the policyholder or the insurer. Courts in these states hold that PRP letters, administrative actions, and/or consent orders could be "suits" under the 1973 CGL policy if they are "sufficiently adversarial" to approximate a formal legal proceeding.
To illustrate, courts in the intermediate camp have held that PRP letters which merely request information or request that the policyholder undertake a study to find out if there is pollution on its site are not "adversarial" enough to qualify as "suits" under the 1973 CGL policy. See Ryan v. Royal Ins. Co. of Am., 916 F.2d 731 (1st Cir. 1990) (applying New York law).
However, a PRP letter that goes beyond a mere request for voluntary participation and indicates the policyholder is required to take action, or that the agency is taking steps to clean up the site in question and will hold the policyholder liable for the costs, may be "sufficiently adversarial" so as to qualify as a "suit" in the eyes of some courts. Avondale Ind., Inc. v. Travelers Indem. Co., 887 F.2d 1200 (2d Cir. 1989) (applying New York law); Burt Rigid Box, Inc. v. Travelers Prop. Cas. Corp., 126 F. Supp. 2d 596 (W.D.N.Y. 2001).
ISO Policy Fixes
Interpreting the word "suit" in the 1973 edition CGL insurance policy as including a PRP or other sufficiently adversarial communique from a federal or state environmental enforcement agency expanded the CGL insurer's obligation to defend. To curtail insurers' defense obligations in agency proceedings, ISO implemented several policy fixes in the mid-1980s.
ISO revised the pollution exclusion 1984, when ISO drafted an endorsement (CG 21 33) for use with the 1973 edition CGL policy. Among other things, the 1984 pollution endorsement contained a new paragraph to eliminate coverage for:
Any loss, cost or expense arising out of any governmental direction or request that the named insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.
In 1986 ISO incorporated this exclusion in the CGL coverage form itself. This exclusion has been held to apply to the cost of cleaning up environmental pollution at the behest of an environemntal enforcement agency before the institution of formal legal proceedings. See Titan Corp. v. Aetna Cas. & Sur. Co., 22 Cal. App. 4th 457, 27 Cal. Rptr. 2d 476 (Ct. App. 4th Dist. 1994).
In Harvard Indus., Inc. v. Aetna Cas. & Sur. Co., 273 N.J. Super. 467, 642 A.2d 438 (Super. Ct. App. Div. 1993), a state agency ordered a municipality to shut down and clean up a landfill. Since the insured had made deposits at the landfill, the insured was liable for a portion of the cleanup cost. The court held that the 1984/1986 edition of the ISO commercial general liability insurance policy "loss, cost or expense" exclusion did not apply where the environmental enforcement agency gave the cleanup order to some other party who was not an insured, and that the claim was covered.
In 1988 ISO closed this loophole by amending the "loss, cost or expense" exclusion so that it applies whenever a state environmental enforcement agency gave the cleanup order to "any insured," including an an additional insured or "others," including a governmental authority that owns and operates a public landfill.
ISO also added a new definition of the word "suit" in the 1986 edition of the CGL coverage form. Under the new definition, a "suit" means:
A civil proceeding in which damages because of "bodily injury," "property damage," "personal injury," or "advertising injury" to which this insurance applies are alleged.
Although the term "civil proceeding" was not further defined, this phrase suggests that the term "suit" would not apply to a PRP letter that merely requested information or directed the insured to take action to clean up pollution outside of formal legal proceedings in a court of law.
For Further Information
Subscribers to Pollution Coverage Issues in IRMI Online or Vertafore ReferenceConnect can access additional information on this subject, including the following.
- A full analysis of each of the reasoning of courts in each group (IRMI Online; Vertafore ReferenceConnect);
- A complete description of all of the ISO policy fixes discussed here (IRMI Online; Vertafore ReferenceConnect);
- A table showing which states have joined which camp (IRMI Online; Vertafore ReferenceConnect);
- A hyperlinked map allowing the subscriber to click on a state and be taken to a table listing and describing pertinent cases from that state (IRMI Online; Vertafore ReferenceConnect); and
- A series of charts citing and summarizing the holdings of approximately 75 cases on this subject. (IRMI Online; Vertafore ReferenceConnect).
If you do not currently subscribe, learn more about Pollution Coverage Issues.
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