Reed Smith Client Alerts

Authors: Emily E. Garrison John D. Shugrue Kevin B. Dreher

In response to a certified question from the U.S. Court of Appeals for the Fifth Circuit, the Supreme Court of Texas ruled that proceedings conducted by the Environmental Protection Agency under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) constitute a “suit” within the meaning of the standard-form CGL policies at issue, thus triggering the insurers’ duty to defend. McGinnes Industrial Maintenance Corp. v. Phoenix Insurance Co., No. 14-0465 (Tex. June 26, 2015). With this decision, Texas joins the majority of jurisdictions that have addressed this question and similarly held that EPA proceedings under CERCLA, including the issuance of potentially responsible party (PRP) letters or administrative orders, constitute a “suit” under standard-form CGL policies.

McGinnes involved the EPA’s remediation of a Superfund site where McGinnes Industrial Waste Corporation had dumped pulp and paper mill waste sludge in the 1960s. During the time McGinnes was dumping waste at the site, it was covered by standard-form CGL insurance policies issued by Phoenix Insurance Company and Travelers Indemnity Company. In 2007 and 2008, McGinnes and its parent company were served with “PRP letters” from the EPA, stating that McGinnes was a PRP under CERCLA in connection with the remediation of the Superfund site. The first letter offered “the opportunity to enter into negotiations concerning cleaning up the Site and reimbursing EPA for costs incurred,” and the second letter included 58 requests for detailed information and threatened penalties for a failure to respond. In 2009, McGinnes was informed that it was responsible for cleaning up the site. After McGinnes failed to provide a required good-faith settlement offer, the EPA issued a unilateral administrative order directing McGinnes to conduct a “remedial investigation and feasibility study.”

After the first letter from the EPA in 2007, McGinnes requested a defense from its insurers in the EPA proceedings. Both insurers refused on the ground that the EPA proceedings did not constitute a “suit” under the policies, which provided that the insurers “shall have the right and duty to defend any suit against insured seeking damages on account of . . . property damage.” McGinnes’ declaratory judgment action followed, and on appeal of that action, the Fifth Circuit certified the following question to the Texas Supreme Court: “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.” In answering the Fifth Circuit’s question in the affirmative, the Texas Supreme Court identified three reasons why “suit” as used in the CGL policies at issue includes CERCLA enforcement proceedings by the EPA:

First, the court explained that when the policies were issued in the 1960s, the main avenue of redress for pollution was by suing in court on common law or statutory grounds. As applied to the facts of McGinnes, prior to the enactment of CERCLA, the EPA would have been required to sue to force McGinnes to clean up the site, and the CGL policies would have required McGinnes’ insurers to defend that lawsuit. The enactment of CERCLA in 1980, however, “changed the landscape dramatically” by authorizing the EPA to conduct what otherwise would have amounted to pretrial proceedings, but without having to initiate a court action until the end of the process. In holding that CERCLA effectively redefined a “suit” on cleanup claims to mean “proceedings conducted by one of the parties, the EPA, followed by an enforcement action in court, if necessary,” the court drew several analogies between EPA CERCLA proceedings and court proceedings, including: PRP notice letters serve as “pleadings”; EPA requests for information are “indistinguishable from interrogatories”; and unilateral administrative orders resemble summary judgment. The court concluded that EPA CERCLA proceedings are “the suit itself, only conducted outside a courtroom,” and an insured should be entitled to a defense of that “suit,” as it would have been prior to the enactment of CERCLA. Ultimately, an insured’s “rights under its policies should not be emasculated by the enactment of a statute intended not to affect insurance, but to streamline the EPA’s ability to clean up pollution.”

Second, to hold that the EPA’s PRP letters or administrative orders do not constitute a “suit” would create a situation where the insurer would not have a duty to defend, but would have a duty to indemnify because cleanup costs under CERCLA constitute covered “damages” under the subject policies. The court reasoned that such a situation would create “perverse incentives and consequences for insurers and insureds alike.” For example, if an insured was left to defend itself in a suit where it knew any ultimate damages would be the insurer’s responsibility, that insured may be incentivized to “mount no defense.”

Finally, the court noted that the insurers’ interpretation of “suit” as not including EPA proceedings under CERCLA has been rejected by 13 out of 16 state high courts to have considered the issue, and “insureds in Texas should not be deprived the coverage insureds have in thirteen other states.” Those 13 states are Alabama, Colorado, Connecticut, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Vermont, and Wisconsin. As the court explained, “[o]nly high courts in California, Illinois, and Maine have sided with the Insurers’ position, and California, the most recent of the three, did so in 1998.” The results in lower courts are also “lopsided in favor of the insureds.”

The Texas Supreme Court’s decision could directly impact policyholders with legacy environmental liabilities in Texas, and their ability to recover defense costs incurred in connection with those liabilities. If you believe your business may be affected by this decision, Reed Smith LLP can help you evaluate your coverage and report your claims as soon as possible. Please contact the authors of this Alert; the Reed Smith Insurance Recovery Group’s Global Practice Group Leader, Douglas E. Cameron; or any Reed Smith coverage attorney with whom you routinely work, for assistance or with questions.


Client Alert 2015-186