Courts in several states have reached divergent views as to whether a liability insurer that has agreed to defend any "suit" against its insured must defend the insured in the face of a "potentially responsible party" (PRP) letter or government clean-up order. A minority of states have taken a narrow view and have limited "suit" to a complaint filed against the insured in court or certain types of administrative proceedings. In contrast, most states that have considered the issue have taken a broader view and found that a PRP letter or government clean-up order is the functional equivalent of a suit and therefore triggers the insurer's duty to defend.
Addressing an issue of first impression, a Washington Court of Appeals ruled that "suit" does not require that a complaint be filed in court or that an administrative action be commenced against the insured. Rather, under a functional equivalent standard, "the duty to defend is triggered if a government agency communicates an explicit or implicit threat of immediate and severe consequences by reason of the contamination." Gull Industries, Inc. v. State Farm Fire and Cas. Co., No. 69569 (Wash. Ct. App., June 2, 2014).
Gull Industries leased one of its gas stations to an operator. Gull insured itself against liability arising from the operation of that station under its own general liability policy and also was an additional insured under a Service Station liability policy obtained by the operator. Each of the policies provided that the insurer shall defend "any suit" against Gull seeking damages covered by the policy. Neither policy defined "suit."
While investigating an underground storage tank in 1984, Gull discovered a continuous release of hydrocarbons into the soil adjacent to the tank. Gull voluntarily investigated and cleaned up the soil and groundwater. Twenty years later, in 2005, Gull notified the state Department of Ecology (DOE) of the release, and DOE sent Gull a letter acknowledging Gull's notice. A few years later, Gull requested defense and indemnity from its liability insurer and from its lessee/operator's liability insurer as an additional insured. When the two insurers refused, Gull filed suit.
Gull contended that because it was strictly liable under the state Model Toxics Control Act (MTCA) as the owner of contaminated property, imposing a duty to defend on Gull's insurers would be consistent with Weyerhaeuser Co. v. Aetna Cas. & Sur. Co., 123 Wn.2d 891, 896-97 (1994). In that case, the Washington Supreme Court held that such strict liability may trigger the duty to indemnify under a liability policy even if no agency has taken or overtly threatened formal legal action. The Gull court rejected an absolute extension of this indemnity standard to the duty to defend, finding that the duty to defend is analyzed independently of the duty to indemnify.
The court then considered the different approaches that courts in other states have taken in deciding what constitutes a "suit" so as to trigger an insurer's duty to defend: The narrow view that "suit" requires a complaint filed against the insured in court; the broader view that a PRP letter is the functional equivalent of a "suit"; and the focus of some courts on the coerciveness of the regulatory action in deciding whether a "suit" is involved. The court concluded that "suit" is "ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of a suit."
The court found, however, that mere liability under the MTCA (which the court found was the state equivalent to CERCLA), without any enforcement action by DOE, may not be the functional equivalent of a suit. Rather, "an agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a 'suit'." Turning to the facts in Gull, the court found that DOE's letter – which merely acknowledged Gull's intent to voluntarily clean up the contamination – did not sufficiently threaten immediate or severe consequences due to the contamination. The letter did not advise of any consequences for failing to comply with state law, and stated that DOE has not determined that Gull is a PRP. Accordingly, Gull had not shown that it faced the functional equivalent of a "suit," and the insurers were not bound to defend Gull under those circumstances.
While in Gull the duty to defend was addressed under atypical facts – a voluntary clean up without any PRP notice – this decision joins a growing majority view that the undefined term "suit" in a liability insurer's duty to defend any "suit" is ambiguous when it comes to environmental liabilities, and that PRP letters and government clean-up orders can be the functional equivalent of a suit and therefore trigger a liability insurer's duty to defend
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