Texas Says EPA Administrative Actions under CERCLA Trigger Duty to Defend
As any company facing EPA administrative action under CERCLA knows, the financial risk and defense costs associated with those proceedings can be the same as the risk and costs of an EPA lawsuit under CERCLA. But insurers have argued that administrative actions are very different from suits under standard CGL policies. Those policies, insurers argue, provide defense coverage to costs related to “suits,” not administrative actions. Joining a clear majority of state courts, the Texas Supreme Court recently rejected this narrow interpretation of the duty to defend in McGinnes Indus. Maint. Corp. v. The Phoenix Ins. Co., holding that a CGL insurer must provide a defense in CERCLA administrative actions.
The policyholder, McGinnes Industrial Waste Corporation, allegedly dumped pulp and other paper mill waste into disposal pits, resulting in environmental contamination at the site. EPA investigated the site and issued letters to the policyholder putting it on notice that EPA considered it potentially responsible parties (“PRPs”) for the contamination and requesting that they negotiate with EPA for the cleanup of the site and payment of EPA’s costs. EPA’s letters also demanded considerable information about McGinnes’s activities at the site.
McGinnes contacted its CGL insurers and demanded a defense. The insurance companies refused, on the ground that the policies provided for “the right and duty to defend any suit against the insured” seeking certain covered damages, but the EPA proceedings were not a “suit.” EPA ultimately issued a unilateral administrative order requiring McGinnes to conduct a remedial investigation and feasibility study, or face punitive damages and penalties. McGinnes sued its insurers for declaratory relief in federal court, but lost on the issue of whether the insurers had a duty to defend.
On appeal, the Fifth Circuit Court of Appeals certified the question to the Texas Supreme Court, asking “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.” The Texas Supreme Court held they did, for three reasons:
First, “CERCLA effectively redefined a ‘suit’ for cleanup to mean proceedings conducted by one of the parties, namely EPA, followed by an enforcement action in court, if necessary.” Under CERCLA, judicial functions are ceded to EPA and review by courts is limited to abuses of EPA’s discretion. These administrative proceedings are “suits,” just not suits that take place inside a courtroom.
Second, the cleanup costs EPA seeks through its administrative processes are undeniably “damages” under standard CGL policies. Not even the insurance companies argued otherwise. The Texas Supreme Court expressed concern about the perverse incentives that would result if insurance companies had a duty to pay damages for cleanup costs, but had no duty (or right) to defend those actions.
Third, the Texas high court recognized the importance of consistent insurance policy interpretations across jurisdictions. By the court’s count, thirteen state high courts had held that insurance companies have a duty to defend in environmental administrative actions, and only three state high courts had held otherwise (all in decisions decided over fifteen years ago, as the court noted).
The Texas Supreme Court’s decision continues the momentum of the majority of state courts that have recognized there is a duty to defend administrative actions under CERCLA or similar state laws. Even in the handful of jurisdictions holding otherwise, the trend appears to be against formalistic interpretations of the word “suit,” where administrative proceedings resemble traditional in-court lawsuits. This is good news for policyholders facing EPA action.