Insurance Recovery Law -- Apr 18, 2013

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In This Issue:

Ninth Circuit Narrows Insurers' Options in Pursuing Subrogation Claims Under CERCLA

Why it matters: The Ninth Circuit confirmed that Chubb could have maintained a subrogation action against potentially liable parties if its insured had made a written demand for a sum certain to such persons. Insurers may require that such a claim be asserted by their policyholders either pursuant to the cooperation or subrogation clauses found in most policies.

In Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., _ F. 3d _ (9th Cir. March 15, 2013), the Ninth Circuit affirmed that, as a matter of law, an insurer cannot maintain a subrogation claim against entities allegedly responsible for environmental contamination under the circumstances alleged in the insurer's complaint. On the one hand, the Ninth Circuit held that the plain language of § 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") does not permit such a subrogation action against the alleged polluters because the insurer itself does not incur "costs of response" when it reimburses its insured for the cost to remove contaminants or remediate a polluted site. On the other hand, the Ninth Circuit simultaneously made clear that an insurer could maintain a subrogation action under § 112(c) if the insured were a "claimant," i.e., had made a demand in writing for a sum certain to either the Superfund or the allegedly liable party. Because Chubb Custom Insurance Company was unable to allege that its insured, the Taube-Koret Campus for Jewish Life, had ever made such a claim, Chubb's subrogation lawsuit failed as a matter of law.

Taube-Koret purchased an environmental insurance policy from Chubb covering property in Palo Alto, California. Under the policy, Chubb first reimbursed Taube-Koret for $2.4 million spent cleaning up contaminants, and then filed suit against the previous owners of the property, arguing that they were jointly and severally liable for the clean-up costs.

Chubb asserted subrogation rights under two sections of CERCLA.

First, Chubb argued that such an action could be maintained under § 112(c). Section 112(c) provides that "any person" who has paid compensation to a "claimant" for "damages or costs resulting from a release of hazardous substances" is subrogated to all rights "that the claimant has" under CERCLA. A "claimant" is one who makes a written demand for reimbursement of monetary costs under CERCLA. Although § 112(c) does not specify to whom the demand must be made (hence Chubb's contention that Taube-Koret's insurance claim was a written demand for reimbursement of such costs), the Ninth Circuit held that "claimant" means one who demands reimbursement of environmental clean-up costs from (1) the Superfund or (2) a potentially liable party. "Claimant" does not include, in contrast, a policyholder's demand for reimbursement to its insurer. Accordingly, the Ninth Circuit held that Chubb had not – and could not, despite three attempts – sustain its contention that its insured, Taube-Koret, was a "claimant" under § 112(c).

Second, the Ninth Circuit also rejected Chubb's subrogation claims under § 107(a), which provides that potentially responsible parties ("PRPs") are liable for the costs of response "incurred by" any person under certain conditions (with the exception of identified sovereigns). Significantly, and as a matter of apparent first impression, the Court held that § 107(a) applied only to a person who, through his or her own actions, had become statutorily liable for cleanup costs or remediation. Here Chubb could allege only that Taube-Koret was liable because it was the property owner. Chubb could not allege, however, that its own actions had rendered it liable for any response costs. An insurer, the Court explained, "that is only obligated to reimburse the insured for cleanup costs does not itself incur response costs."

The Court also rejected Chubb's other arguments under § 107(a). Another provision of CERCLA (§ 113(f)), the Ninth Circuit noted, permits a PRP to pursue contribution where it has not directly incurred its own costs of response but rather has reimbursed response costs paid by other parties. Thus Congress had expressly created a remedy for those persons who, rather than directly incurring the costs of response, had reimbursed those costs as incurred by others. Allowing such a person to pursue recovery under both § 107(a) and § 113(f) was thus not only contrary to Congressional intent, but could create other problems, such as double recovery.

"CERCLA was not enacted to benefit insurance companies; rather, it was enacted to promote the timely cleanup of contaminated waste sites, impose liability on those responsible for polluting the environment, and to encourage settlement through a complex statutory scheme," the Court concluded.

California Appellate Court Holds that Whether Primary Policies Can Be Stacked to Cover Long-Tail Asbestos Coverage Depends on the Policy Language

Why it matters: This decision appears to reach the opposite result of last year's California Supreme Court ruling in State of California v. Continental Ins. Co. (all-sums-with-stacking coverage). But the two opinions have one thing in common: the results maximize coverage for policyholders facing long-tail liabilities.

In Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania, _ Cal. App. 4th _ (April 8, 2013), the insured (Kaiser) had manufactured a variety of asbestos-containing products and now faces tens of thousands of bodily injury claims for alleged exposure to those products over the course of many decades. Truck Insurance Exchange issued four primary policies to Kaiser in effect from 1964 to 1983. Following earlier rulings made in the case, Kaiser had selected Truck's 1974 policy to respond to each of the asbestos claims alleging bodily injury during that year.

The appellate opinion discussed here arose out of the following salient facts: (1) the 1974 policy had a $5,000 per occurrence deductible and a $500,000 per occurrence limit; (2) the policy contained no annual aggregate limit; (3) Kaiser's other primary carriers had fully exhausted their policies; and (4) by October 2004, Truck's indemnity payments totaled in excess of $50 million.

In addition, earlier proceedings in this case had led to an appellate court ruling that each claim for bodily injury caused by asbestos was a separate occurrence (i.e., the injurious exposure to asbestos products).

In 2008 Kaiser moved for an order that the first-layer excess policy in 1974 – issued by Insurance Company of the State of Pennsylvania – was liable for a claim once Kaiser had satisfied its deductible and Truck had paid its $500,000 per occurrence limit. Because deductibles make strange bedfellows, Kaiser, the policyholder, argued that California law was not clear as to whether it was entitled to stack multiple policy periods for continuous-loss claims. It also urged that the better rule was that stacking was not appropriate. Truck, not surprisingly, joined in many of Kaiser's arguments. The trial court agreed with Kaiser, and the following year Kaiser successfully moved for summary adjudication, reiterating many of the same arguments previously raised, and ICSOP appealed.

ICSOP argued on appeal that under the language of its 1974 excess policy as well as California's principle of horizontal exhaustion, it had no obligation to indemnify Kaiser until all primary policies had been exhausted (a problem for Truck and Kaiser, because Truck's 1974 policy contained no aggregate limit). Rejecting Kaiser's arguments, the appellate court reviewed ICSOP's policy, which clearly applied in excess of "any other underlying insurance collectible by the Insured," and agreed with ICSOP that California's well-established rule of horizontal exhaustion applied.

The court then had to determine, however, what underlying insurance was "collectible." After an extensive review of California's "all sums" and stacking case law, culminating with an analysis of last year's Supreme Court decision in Continental (which had adopted an all-sums-with-stacking approach to continuous injury claims), the Court of Appeal held that Truck's 1974 policy language was different, and therefore the rule in Continental did not apply. The 1974 Truck policy, the court held, clearly limited Truck's liability to the per occurrence limit of $500,000: "We do not know what more Truck could have said when the policy was drafted in 1974 to make clear that its policy's limitation-of-liability terms was an absolute cap on its per occurrence exposure – and, as such, it is fundamentally inconsistent with 'stacking' the liability limits of several Truck policies." Because stacking was not permitted, the remaining Truck policies were not "collectible" and therefore Kaiser was entitled to recover from ICSOP to the extent any one claim exceeded the $500,000 per occurrence limit of the 1974 Truck policy. (In relying heavily on language limiting the company's liability, the court left the door open: Had Kaiser's policies been issued by different carriers, stacking, presumably, would have been permitted.)

Further bolstering this result, the court held that its ruling satisfied the Supreme Court's articulated goal in Continental. "In Continental, stacking policies increased the insured's coverage because it 'effectively stack[ed] the insurance coverage from different policy periods to form one giant "uber-policy" with a coverage limit equal to the sum of all purchased insurance policies.' So, too, here the court noted that application of an anti-stacking rule in the context of deductibles likewise increased coverage because stacking would have rendered the policyholder liable for multiple deductibles.

The court then remanded the case for a determination of whether the policies issued by three other insurers to Kaiser during the relevant time period had been exhausted or whether ICSOP's obligation had attached upon the exhaustion of Truck's policies.

Insurer Entitled to Seek Contribution for Costs of Defense Against Fronting Policy, Minnesota District Court Rules

Why it matters: Under Minnesota law, primary insurers may seek contribution from other primary insurers that had a duty to defend under a fronting policy even where, as here, the insured ultimately would bear those costs pursuant to indemnities and other side agreements that typically form a part of such policies.

A district court in Minnesota recently confronted what appeared to be a routine claim of contribution between liability insurers over the cost of defending four toxic tort claims against the insured, The Valspar Corp. ("Valspar"). Continental Casualty Company v. National Union Fire Ins. Co., _ F. Supp. 2d _ (D. Minn. March 29, 2013).

This case, however, had a twist: The "insurer" defendant (National Union) had actually issued a fronting policy to Valspar, which meant that Valspar, and not National Union, ultimately paid for any defense costs up to a specified limit.

Over National Union's and Valspar's objections, the court held this distinction did not warrant deviations from Minnesota's contribution rule.

First, the district court noted that since 2010 Minnesota has permitted a primary insurer (here, Continental) to bring a claim for equitable contribution seeking defense costs from any other insurer that also had a duty to defend the insured.

Second, the district court carefully distinguished between the duty to defend and the duty to reimburse for defense costs, holding, not surprisingly, that the former entailed additional duties such as the retention of defense counsel and management of the litigation.

Third, the district court then held that the fronting policies issued by National Union to Valspar imposed a duty to defend on National Union. In painstaking detail, the district court examined each and every contractual arrangement that formed Valspar's fronting program and held that nothing therein altered National Union's duty to defend.

Moreover, the fact that Valspar had a contractual obligation to reimburse National Union for defense costs paid pursuant to the duty to defend did not itself alter the duty to defend. Accordingly, Continental had demonstrated a right to contribution from National Union.

However, Minnesota also follows an allocation rule of equal shares between defending insurers. The court found that as among the seven insurers with a duty to defend, including Continental and National Union, Continental was therefore entitled to contribution in the amount of approximately $78,000.

The New Frontier for Insurance: Space Flight

Why it matters: Gov. Martinez emphasized that the legislation still leaves room for injured space flight participants to bring suit, at least in cases where the supplier or manufacturer engaged in willful or wanton conduct or acted with reckless disregard.

Space travelers in the state of New Mexico have fewer options for bringing civil suits after Governor Susana Martinez signed the New Mexico Expanded Space Flight Informed Consent Act into law this month.

Under the new bill, companies that make or supply parts used in commercial space flights are required to purchase at least $1 million of liability insurance. By maintaining the insurance, manufacturers and suppliers can face civil claims only for intentional injuries to a space flight participant or if the company "commits an act or omission that constitutes willful, wanton or reckless disregard for the safety of the participant and that act or omission proximately causes injury, damage or death to the participant."

Passed unanimously by the state legislature, the law is a result of the state's Spaceport America, home to the first commercial passenger space flight company, Virgin Galactic. The law was intended to address the "inherent risks" of space flight and keep the Spaceport at the forefront of the commercial space flight industry, Gov. Martinez explained.

"This legislation will prevent lawsuit abuse and make it easier for businesses related to the space travel industry to thrive and succeed right here in New Mexico," she said in a press release.

The state previously enacted legislation in 2010 that established similar protections for space flight operators like Virgin Galactic. The original law established immunity for certain death or personal injury lawsuits against operators. The new bill expands coverage from operators all the way down their supply chain and extends the life of the law for three additional years, until July 2021.

To read the new law, click here.

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