Cooperating with Environmental Regulators Could Cost You Your Coverage on Historical Contamination Sites

King & Spalding LLP
Craig Stanfield

August 15, 2018

Reprinted with permission from Texas Lawyer. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

If you manage environmental issues, receiving an unexpected letter from EPA or a state environmental regulator about historic contamination could be the start of a years-long and expensive project. Whether these costs are borne by your company alone or are covered by insurance policies is a question you should raise early with coverage counsel.

The site at issue could be one that no one has ever heard of and for which your company may have scant to no records. Your company’s involvement could have been brief and perhaps insubstantial. Some predecessor entity, which may not operate any longer, could have simply arranged for a small amount of waste to be deposited in a landfill or may have operated briefly at a site. And that activity could have been done entirely in line with standards of the day. But none of those arguments may be enough to avoid investigating and remediating the site.

The costs of such investigation and remediation could be enormous. Investigation alone may cost millions of dollars, and proposed remedies could dwarf that number.

This scenario is all too familiar for many companies in the energy and manufacturing space. When you receive such a letter, you can cooperate or risk government action and litigation. If your company refuses to cooperate, the potential financial exposure could balloon quickly and the fallout with regulators could become unacceptable. Thus, most companies choose cooperation. Indeed, the relevant statutes were written in such a way as to promote “voluntary” compliance and avoid court.

When faced with these types of claims, companies hunt for their policies from the applicable time period and turn to their insurers for coverage of legal and professional costs. Unfortunately, some insurers will pounce on a company’s cooperativeness to avoid coverage and it is important to realize the impact on valuable insurance assets.

Insurance coverage for responding to historic contamination outside of traditional litigation can vary significantly depending on what state law applies to your policy. When it comes to historic contamination, most companies will turn to their historic general liability policies for coverage.[1] Those policies in turn generally provide coverage for “suits” and “damages.” Coverage for a “suit” provides coverage for defending against the governmental action whereas “damages” provides indemnity for the cleanup costs. Both are quite valuable. The meaning of these terms has been construed in fewer than half of state high courts.

The recent summary judgment order in Arrow Electronics, Inc. v. Aetna Cas. & Surety Co., highlights the distinction and how valuable policy benefits can be lost depending on which state’s law applies. 2018 WL 2278247, Case No. 2:17-cv-05247-JFW-JEM (C.D. Cal. May 15, 2018). Arrow incurred costs associated with investigating and remediating a site in Alabama that was used by Arrow’s corporate predecessor. After receiving notice from the Alabama Department of Environmental Management (“ADEM”), Arrow entered into negotiations with ADEM and the two entered into a consent decree to address the site. Arrow in turn sought coverage from its primary and excess general liability insurers and they denied coverage.

Arrow filed suit against its insurers in California seeking reimbursement for all costs that it had and would incur to investigate and remediate the site. Insurers sought summary judgment, in part, on the basis that California law applied and was well-established in denying coverage where no lawsuit was pending and where a court had not awarded damages. Arrow argued that Alabama law applied and would afford coverage. The court applied California law as the place where the insurance policies “were made” and held in favor of the insurers. This result would have been quite different elsewhere, including in Alabama.

California is in the minority. It is joined only by Illinois and Maine in its interpretation. Still, those states represent a large swath of potential exposure and many states have not yet decided this question.

The majority of states to address the question disagree with California. For example, the Supreme Court of Texas reached a different conclusion on certified question from the Fifth Circuit in McGinnes Industrial Maintenance Corp. v. The Phoenix Insurance Company. 477 S.W.3d 786 (Tex. June 26, 2015). The case turned on activities related to a Superfund site in Texas. As the court noted, while the EPA “invites” a potentially responsible party to negotiate over its liability, “the invitation is effectively a demand.” “As a practical matter, courts afford PRPs no hope of relief, and consequently they have no choice but to comply with the EPA’s directives.” Recognizing this reality, the court wisely agreed there was coverage under McGinnes’s general liability policies not just for the resulting costs of clean up, but also for the costs of responding to EPA’s directives.

The Supreme Court of Texas’s conclusion—in line with many other courts—avoids what it referred to as “perverse incentives and consequences for insurers and insureds alike.”

It is important to consider your coverage when faced with historic contamination. Choice of law concerns can make or break the outcome of a coverage determination. You should therefore consider carefully whether and where to file any coverage action. It is important to consult with a coverage attorney and plan a strategy to obtain coverage at the outset of responding to the EPA or state regulator.

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This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Mr. Stanfield and may not reflect the opinions of Synergy Environmental, Inc., King & Spalding LLP or either of those firms’ clients.

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