Most standard form commercial general liability insurance policies provide that the insurer has the duty to defend any "suit" against the insured that seeks damages covered under the policy. In CGL policies issued before 1986, the term "suit" was not defined. And while all courts could agree that a "suit" encompasses a civil complaint filed in a court of law, they disagreed on whether proceedings that take place outside the courtroom, such as the administrative process initiated by a government "PRP" notice, are "suits" that give rise to the insurer's duty to defend.
The Texas Supreme Court is the latest court to weigh in on this issue, and its decision is good news for policyholders. On June 26, 2015, in a 5-4 decision, the court held that the term "suit" encompasses administrative enforcement actions by the Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).
In a case that we have been monitoring closely, McGinnes Industrial Maintenance Corp. v. The Phoenix Ins. Co., the insured, McGinnes, received a letter from the EPA stating that it was a "potentially responsible party" (a so-called "PRP letter") with respect to environmental contamination at a site in Pasadena, Texas. The PRP letter demanded that McGinnes pay more than $300,000 in cleanup costs. When McGinnes failed to respond, the EPA issued a unilateral administrative order directing McGinnes to conduct a "remedial investigation and feasibility study." The letter warned McGinnes that it was subject to penalties and punitive damages if it willfully refused to comply with the order.
McGinnes requested a defense to the EPA proceedings from its CGL insurers, Phoenix and Travelers. The insurers refused to defend on grounds that neither the PRP notice nor the order was a "suit" under the policy. McGinnes then filed suit against its insurers in federal district court, seeking a declaration that Phoenix had a duty to defend. The court granted the insurers' motion for partial summary judgment, agreeing that the insurers had no duty to defend, denied McGinnes's motion, and certified its order for interlocutory appeal. The U.S. Court of Appeals for the Fifth Circuit certified to the Texas Supreme Court the question whether a PRP letter or unilateral administrative order from the EPA was a "suit" within the meaning of CGL policies that triggered an insurer's duty to defend.
The majority of the court answered "yes" to the Fifth Circuit's question. It gave three reasons for its ruling. First, it found that EPA proceedings under CERCLA were more than "the functional equivalent of a suit," concluding that the proceedings "are the suit itself, only conducted outside a courtroom." The majority recognized that a PRP letter or a unilateral administrative order issued by the EPA is more than an ordinary demand letter, a claim or other administrative proceedings. "The EPA's demands and directives, backed by threats of fines and penalties, are more like interlocutory rulings than claims."
Second, the majority relied on "well-settled" law that cleanup costs under CERCLA are "damages" covered by standard form CGL policies. "To interpret the policies as covering the damages incurred as a result of pollution cleanup proceedings without giving the Insurers the right and duty to defend those proceedings creates perverse incentives and consequences for insurers and insureds alike."
Finally, the court noted that the majority of courts that have interpreted the term "suit" have sided with policyholders on this issue. According to the court, 13 of 16 state high courts that have reached the issue have rejected the insurers' position, leaving only high courts in California, Illinois and Maine to side with the insurers. The overwhelming majority of lower state courts and federal courts have also rejected the insurers' position. Thus, in order to "strive for uniformity," the court decided it was "prudent" to join with the majority and hold that EPA enforcement actions are "suits" that obligate the insurer to provide a defense to the policyholder.
The Texas Supreme Court's ruling in McGinnes is favorable for the many policyholders who face liability under CERCLA and have coverage under historic CGL policies. The holding is, however, unlikely to open the doors to coverage for other types of administrative or quasi-judicial adjudicative proceedings under more modern CGL policies. Standard form CGL policies issued after 1986 now define the term "suit" in a way that limits the insurer's defense duty to civil proceedings or arbitrations seeking covered damages. Nevertheless, the McGinnes ruling shows that courts will not enforce a narrow interpretation of policy terms to deprive the policyholder of coverage, when a more liberal interpretation will preserve coverage in a situation where it is reasonable and expected.
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