Source: http://www.lexology.com, July 6, 2015
By: Hunton & Williams LLP
The Supreme Court of Texas has ruled that CERCLA enforcement proceedings brought by the EPA are a “suit” as that term is used in commercial general liability insurance policies. In doing so, Texas joins the majority of other jurisdictions to consider the issue. McGinnes Industrial Maintenance Corp. v. The Phoenix Insurance Co., No. 14-0465 (Tex. June 26, 2015).
Background
The facts in McGinnes are unremarkable. In the 1960s, McGinnes allegedly disposed of industrial waste containing, among other things, dioxin. The EPA began investigating the disposal site in 2005, and by 2008 had issued to McGinnes a demand letter that included some 58 requests for information about McGinnes’ activities at the site. Failure to comply would subject McGinnes to up to $32,500 per day in fines and penalties. In 2009, the EPA informed McGinnes that it was responsible for cleaning up the site and demanded that McGinnes pay $378,863.61 in remediation costs. The letter required McGinnes to make a good-faith offer to settle with the EPA within 60 days. When McGinnes did not make an offer, the EPA issued a unilateral administrative order directing McGinnes to conduct a “remedial investigation and feasibility study” in accordance with the EPA’s specifications. The letter warned McGinnes that its willful failure to comply without cause would subject it to $37,500 per day in civil penalties and punitive damages up to three times the resulting costs to the EPA.
McGinnes was insured under commercial general liability insurance policies issued by Phoenix Insurance Company (“Phoenix”) and Travelers Indemnity Company (“Travelers”) for the years that it allegedly disposed of waste at the site. McGinnes tendered the EPA demand to Phoenix and Travelers for a defense. The insurers refused to participate, contending that the EPA proceedings did not amount to a “suit” and therefore did not implicate coverage under the policies, which, according to the insurers, afford a defense only for a “suit” against the insured. The term “suit” was not defined in the policies.
McGinnes sued the insurers seeking a declaration that the insurers were obligated to defend McGinnes against the EPA proceeding. The district court granted summary judgment in favor of the insurers and McGinnes appealed. On appeal, the United States Court of Appeals for the Fifth Circuit certified to the Texas Supreme Court the following question:
Whether the EPA’s PRP letters and/or unilateral administrative order, issued pursuant to CERCLA, constitute a “suit” within the meaning of the CGL policies, triggering the duty to defend.
Holding
A majority of the Texas Supreme Court agreed with McGinnes and held that the undefined term “suit” includes CERCLA enforcement proceedings brought by the EPA.
The court reasoned that with the advent of CERCLA, it is no longer necessary for the EPA to initiate a lawsuit for a policyholder to be held accountable for environmental cleanup. Now, the EPA need only issue a PRP letter to achieve virtually the same result. Thus, the court acknowledged that while litigation by the EPA may have been the practice when the policies were issued in the 1960s, that no longer is the case today, where a PRP letter presents the same impact as a legal complaint. Just as a lawsuit did years ago, a PRP letter allows the EPA to command compliance, conduct discovery, and impose fines and penalties. Consequently, while McGinnes argued that the EPA proceeding was the “functional equivalent” of a suit, the court went even further and found that “in actuality, [a PRP letter is] the suit itself.”
The court also found that the EPA proceeding sought legal damages of the type covered under the policies. For this reason as well, the court found that the insurers must defend the EPA proceeding. As the court explained, to hold otherwise would potentially leave the claim undefended or solely in the hands of the policyholder. Either way, as nonparticipants in the defense, the insurers would be able to later argue that the policyholder somehow breached its duty to cooperate in the defense by acting or failing to act in a way that increased the insurers’ indemnity exposure.
Implications
McGinnes adds to the growing number of jurisdictions to hold that an administrative EPA proceeding is a “suit” in the context of a standard-form CGL policy. The decision also is important in contexts beyond the realm of environmental contamination and CERCLA, to the extent Congress has enacted an administrative adjudicative procedure to address rights or claims that otherwise would be addressed in a court of law.
While this is certainly a positive development for policyholders seeking coverage for environmental enforcement claims in Texas, policyholders should be mindful, however, of the close split among the McGinnes court, and the minority’s strongly worded dissent. There, dissenting justices said the majority “flatly abandons” the rules of contract construction to rewrite the CGL policy in a way in which it was never intended to be applied. This strong split of opinion signifies that the “suit” issue is not finally settled, and serves as a reminder that each claim should still be evaluated on its own facts and merits.
Policyholders also should remain mindful, particularly in Texas, of the interplay between the “suit” issue addressed in McGinnes and other issues that might impact environmental liability claims, such as whether the insurance policy contains a so-called absolute pollution exclusion, which continues to receive broad application in Texas. Prompt consultation with a knowledgeable insurance coverage lawyer regarding  any potential environmental liability will help policyholders navigate these and other potential coverage pitfalls.