Washington Court of Appeals Holds No Duty to Defend: An Invitation to Initiate Cleanup Is Not A Suit

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On June 2, 2014, the Washington State Court of Appeals issued a published opinion regarding what constitutes a “suit” in the context of environmental liability claims under the Model Toxics Control Act (MTCA). The court held there must be “an explicit or implicit threat” from a government agency of “immediate and severe consequences by reason of the contamination” in order to trigger the duty to defend, and that no such threat was present. Gull Industries, Inc. v. State Farm Fire & Cas. Co., et al., No. 69569-0-I. The opinion is significant in light of existing Washington law that states an insurer may be required to indemnify an owner or operator of contaminated property even if no agency has taken or overtly threatened formal legal action. See, e.g., Weyerhaeuser Co. v. Aetna Cas. & Sur. Co., 123 Wn.2d 891, 896-97, 874 P.2d 142 (1994).

The Gull appellate decision stems from litigation initiated by Gull Industries, Inc. (Gull) against multiple commercial liability insurers, in which Gull seeks declarations of coverage as to over 200 gas stations it owned, operated or leased. Two of the insurer defendants, Transamerica Insurance Group (TIG) and State Farm Fire and Casualty Company (State Farm), moved for summary judgment on the issue of whether their duty to defend was triggered at a station located in Sedro-Woolley, Wash.1

The TIG and State Farm policies contained similar language regarding the duty to defend; namely, that the insurer “shall have the right and duty to defend any suit against the insured seeking damages” for covered damages, “even if any of the allegations of the suit are groundless, false or fraudulent.” The policies did not define suit. The trial court granted the insurers’ motions and certified the ruling for immediate appeal.

On appeal, the court recognized that the “MTCA compels a potentially liable person (PLP) to address environmental contamination through strict joint and several liability provisions regardless of fault or intent” and that, under Weyerhaeuser v. Aetna, supra, an insurer might have to indemnify its insured for cleanup costs even if the insured has not been threatened with formal legal action. The court also noted, however, that in Weyerhaeuser, “the Supreme Court concluded that nothing in the language of the insurance policy required a ‘claim’ or an overt threat of action before the insured became legally obligated to comply with the mandatory provisions of the environmental statute.” In contrast to the language governing State Farm and TIG’s duty to defend, the policies at issue in Weyerhaeuser provided indemnification for all sums that the insured was obligated to pay by reason of the liability imposed by law for damages to property — they did not require a suit in order for coverage to attach.

With that backdrop in mind, the court examined how other jurisdictions have addressed whether administrative actions that fall short of an actual lawsuit constitute a suit that trigger the insurer’s duty to defend. Nationally, there are three views. Some courts require the filing of a formal complaint, others hold that the issuance of a potentially responsible party (PRP)2 letter is the functional equivalent of a suit, and the final group holds that whether a suit exists depends on the coerciveness of the specific regulatory action taken by the government. Although not directly addressed in the opinion, at oral argument Gull conceded there is no authority that holds the duty to defend is triggered simply by the fact of potential or actual contamination.

The court first concluded that the undefined term "suit" is ambiguous in the environmental liability context, due to strict liability under environmental statutes and because “[i]t makes no difference whether an insured voluntarily cleans up contamination or waits until after government intervention — it is liable either way.” The court nevertheless required “more than an invitation to initiate cleanup.” It adopted the analysis set forth in Ryan v. Royal Ins. Co. of Am., 916 F.2d 731 (1st Cir. 1990), which stated, in part: “Even though environmental liability may be strict, it is only when the government actually purposes to enforce the law against a property owner that the latter will bear the consequences of strict liability.” The Gull court thus held that an agency action that is adversarial or coercive in nature is the functional equivalent of a suit.

The court then considered whether Gull faced a sufficiently adversarial agency action at the Sedro Woolley station, and concluded it did not. Specifically, all Gull had received was a letter from the Department of Ecology (Ecology) acknowledging receipt of Gull's notice that the property was contaminated and that it intended to pursue an independent voluntary cleanup. The court highlighted the content of the letter as follows:

  • Gave notice to Gull that Gull's report reveals the soil and groundwater are above the MTCA “Method A Cleanup levels”;
  • Placed the property on the leaking underground storage tank list with an “Awaiting Cleanup” status;
  • Advised Gull to be aware of state law requirements that must be followed;
  • Did not advise of any consequences that might attach to the failure to follow those requirements;
  • Expressly stated that Ecology has not determined that Gull is a PLP;
  • Explained that Gull may request assistance from Ecology under the Voluntary Cleanup Program; and
  • Did not present an express or implied threat of immediate and severe consequences by reason of the contamination.

The court declined Gull’s invitation to disregard the terms of the policies and instead adhered to the policy language requiring the functional equivalent of a suit. It rejected Gull's argument that its ruling will “destroy any incentive for property owners to voluntarily remediate,” noting that such public policy rulings have limited significance in a duty to defend analysis where there is no threat of adverse action.

Whether or not an agency action amounts to an “express or implied threat of immediate and severe consequences by reason of the contamination” could, of course, be somewhat of a subjective determination. But the Gull opinion makes clear that, as long as the policy requires a suit to trigger the duty to defend, even if suit is not defined, there must be more than an invitation to initiate cleanup.3 Simply communicating with an environmental agency is not enough.

TIG issued commercial general liability (CGL) coverage to Gull from 1981 to 1986. State Farm issued CGL coverage to Gull’s lessees at the station from at least 1977 to 1978.

2 Washington’s MTCA was enacted in an effort to avoid the confusion and delays associated with the federal Superfund program under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). CERCLA uses the phrase “potentially responsible parties,” or PRPs, whereas MTCA uses the phase, “potentially liable parties,” or PLPs.

Arguably, a policy that does define the term suit could require even more.

 

 

Topics:  Contamination, Department of Toxic Substances Control, Duty to Defend, Toxic Exposure

Published In: General Business Updates, Environmental Updates, Insurance Updates, Commercial Real Estate Updates, Toxic Torts Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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