When Is A Letter is a Suit?

When Is A Letter is a Suit?

 Ninth Circuit: A State Can Insert a Definition Into a Policy After It Expired

The Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq. (“CERCLA”), establishes a retroactive strict liability regime that imposes joint and several liability upon past and current landowners or operators of properties or facilities from which hazardous substances have been released or disposed into the environment.

Insurance is a contract where the insurer promises to indemnify another against a contingent or unknown event. The terms, conditions and limitations of the contract are set at the time the terms of the contract of insurance are agreed to by the contract wording. Courts, faced with statutes that did not exist at the time the contract is executed. In Anderson Brothers, Inc. v. St. Paul Fire and Marine Insurance Co., 12-35346, 12-35454 (9th Cir. 08/30/2013) the Ninth Circuit was asked to determine if there was coverage under a Comprehensive General Liability (CGL) insurance policy for defense after the Environmental Protection Agency sent two letters to the insured. One letter was issued pursuant to Section 104(e) of CERCLA requiring the insured to respond to questions that necessarily established its liability under CERCLA. The second was a General Notice Letter identifying the insured as a potentially responsible party (PRP). The insured claimed the letters were “suits” requiring the insurer to defend.

Anderson’s general liability insurer, St. Paul Fire and Marine Insurance Co. (“St. Paul”), declined to provide Anderson with a legal defense. Under the CGL policies in question, St. Paul has a duty to defend Anderson against “suits” for activities covered by the comprehensive general liability policies. St. Paul did not consider the letters sent to Anderson to be “suits” because the common understanding of “suits” at the time the CGL was written and issued, required that a “suit” be filed in a court of law. In light of CERCLA’s unique liability regime, which is designed to promote settlement with the EPA instead of litigation, the district court held that both letters were “suits.”

Anderson is an Oregon corporation that owned and leased property, falling within the boundaries of the Portland Harbor Federal Superfund Site (“the Site”). St. Paul issued two CGL policies (“the Policies”) to Anderson, providing coverage for damages arising from “occurrences” that happened between January 1979–80 and January 1980–81, respectively. St. Paul’s relevant obligations under the Policies, which include a duty to defend Anderson, are as follows:

The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of: . . . property damage to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient . . . .

The EPA listed the Site as a “Superfund” site in December 2000. See 65 Fed. Reg. 75179, 75182 (Dec. 1, 2000).

Anderson sued St. Paul in district court, alleging that St. Paul breached its duty to defend under the Policies by refusing to provide Anderson with a legal defense in response to each of the two letters. After the parties filed cross-motions for summary judgment, the State of Oregon intervened on Anderson’s behalf in order to defend the constitutionality of the Oregon Environmental Cleanup Assistance Act, which provides a legislatively- imposed definition of “suit” in comprehensive general liability policies, as discussed below.

The district judge granted Anderson’s motion for partial summary judgment from the bench, concluding that both letters triggered St. Paul’s duty to defend. The parties stipulated to the resulting damages in order to obtain a final judgment. St. Paul appealed.

THE ISSUE

The Ninth Circuit limited its analysis to a determination whether either letter was a “suit, ” and, if so, St. Paul had a duty to defend Anderson.

The Policies here are standard-form CGL policies replicating the 1973 standard form comprehensive general liability policy that was in use when the Policies were issued. The nature of the federal CERCLA regime is relevant to the contractual interpretation issues. CERCLA imposes strict liability on all entities that have owned or operated “facilities” at which hazardous substances were “disposed.” Once an entity is identified as a PRP, the EPA has broad authority to compel it to clean up a contaminated area or reimburse the Government for its past and future response costs. A PRP’s failure to cooperate with any reasonable order from the EPA at a contaminated site can result in significant civil liability. These broad powers give the EPA strong leverage to compel PRPs to settle. Indeed, encouraging early settlement between PRPs and environmental regulators is one of CERCLA’s central purposes. A PRP finds it important to participate in settlement talks at the earliest possible opportunity because non-settling PRPs may be held jointly and severally liable for the entire amount of response costs minus the amount of the settlement. Furthermore, non-settling PRPs may not file a contribution action against settling PRPs regarding matters addressed in the settlement.

The majority of U.S. courts hold that a policyholder’s receipt of a PRP notice from the U.S. EPA is the functional equivalent of a suit.

In 1999, the Oregon legislature enacted the Oregon Environmental Cleanup Assistance Act (“OECAA”). OECAA provides a definition for the term “suit,” and instructs courts to apply that definition when interpreting comprehensive general liability policies in cases involving administrative actions by the EPA. OECAA defines “suit” as follows:

Any action or agreement by the . . . [EPA] against or with an insured in which . . . the [EPA] in writing directs, requests or agrees that an insured take action with respect to contamination within the State of Oregon is equivalent to a suit or lawsuit as those terms are used in any general liability insurance policy.

Under Oregon law, at least in environmental cases, the word “suit” is ordinarily found to be ambiguous. Therefore, such a policy necessarily does not demonstrate any intent of the parties that would be contrary to OECAA’s statutory definition of the term. Since the Ninth Circuit could see no reason to believe that the Oregon Supreme Court would hold otherwise it decided to apply OECAA’s definition of “suit”.

St. Paul, in its last attempt to avoid the duty to defend of a suit that was not a suit and not filed in any court argued that applying OECAA’s definition of “suit” would violate the Contracts Clauses of the United States and Oregon Constitutions because the statutory definition would alter its contractual commitments under the Policies. The Ninth Circuit, intent on imposing an obligation on St. Paul that was never intended at the time the policies were issued, found that under Oregon common law, if a contractual term is found to be ambiguous, it is generally interpreted against the insurer.

Interpreting the ambiguity in the letters in Anderson’s favor both letters triggered the duty to defend. Each letter put Anderson on notice of the EPA’s belief that Anderson was responsible for the release or disposal of hazardous substances at the Site and of its intent to pursue compensation for Anderson’s alleged role in such releases or disposals. Both the 104(e) Letter and the General Notice Letter were “suits” within the meaning of the Policies. In addition, the letters alleged facts sufficient to alert Anderson to its potential liability for environmental contamination under CERCLA. St. Paul, therefore, breached its duty to defend Anderson.

ZALMA OPINION

The Ninth Circuit failed to recognize the general and ordinary meaning of the word “suit” and adopted the definition placed decades after the policy was issued to make the clear and unambiguous meaning of the term “suit” in the 1980’s when the policy was issued to be made ambiguous by an Oregon statute. Allowing the broad powers CERCLA gives to the EPA to compel PRPs to settle they need insurers to fund the settlement. Indeed, encouraging early settlement between PRPs and environmental regulators is one of CERCLA’s central purposes.

This is not an action requiring an insurer to defend since there is no real suit to defend. It is a court compelling a CGL insurer, under the guise of a duty to defend, to help its insured settle with the EPA. Clearly the duty to defend is broader than the duty to indemnify and since no “suit” was filed and there will probably never be a judgment requiring indemnity, decisions making a letter from the EPA a “suit” is merely an attempt to pass the EPA’s extortion to an insurer.