Could voluntarily performing environmental cleanup threaten insurance coverage?

Stoel Rives - Renewable + Law
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[co-author: Nina Neff - summer associate]

Because of the increasing frequency of significant, often multimillion-dollar, environmental claims against businesses and individuals under environmental statutes such as the Comprehensive Environmental Response, Compensation and Liability Act, it is important for any potentially liable entity to fully explore how the costs may be shifted in whole or in part to others. Washington insurance law has traditionally been highly favorable to policyholders, broadly interpreting the insurer’s duty to defend so that remedial investigation costs are covered under the insurer’s duty to defend. Washington’s law has had important benefits for individuals and public and private entities, who without insurance coverage may be bankrupted by cleanup liability, and has also benefited taxpayers and the general public by promoting prompt cleanups.

A 2018 federal district court decision threatens Washington’s longstanding rule requiring insurance companies to defend policyholders designated as potentially liable by the Washington Department of Ecology (DOE). Washington corporate general liability policyholders were recently shocked by Travelers Indemnity Co. v. City of Richland, in which the District Court for the Eastern District of Washington held that the City of Richland’s costs to voluntarily perform site investigation under a voluntary cleanup order with the DOE did not qualify as covered defense costs, despite Washington’s long history interpreting the duty to defend broadly.

The dispute began when the City of Richland was designated as potentially liable and agreed to undertake a remedial investigation/feasibility study as part of an agreed order with the DOE. The court held that, even though the agreed order was not a settlement, it ended the insurer’s duty to defend. The agreed order is prohibited by statute from including an agreement as to future liability, but the court held that because the order settled the question of whether the City of Richland would perform a remedial investigation/feasibility study, the costs of performing the remedial investigation/feasibility study were not based on “potential for liability” and therefore could not be charged as defense costs. Instead, the court treated those costs as damages, which fall not under the insurer’s broad duty to defend, but under the insurer’s much narrower duty to indemnify.

The Travelers decision presents serious questions for policyholders, businesses, public entities, taxpayers, and the public. Washington policyholders may avoid voluntary cooperation with the DOE if agreed orders cannot be charged to insurers as defense costs. Policyholders may have to pay site investigation costs out of pocket, which could cause businesses to fold or costs to fall on taxpayers. Hazards that are not covered by insurance and that cannot be funded by the potentially liable entity may simply go unaddressed, posing a threat to public health and the environment. Though Washington insurance law has historically protected against these outcomes, policyholders must now carefully consider how to undertake voluntary site investigations without undermining their right to insurance coverage.

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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