Tuesday, December 30, 2014

On January 15, 2015, the Texas Supreme Court will hear oral arguments concerning whether a “potentially responsible party” (PRP) letter from the Environmental Protection Agency (EPA) for liability for hazardous waste contamination triggers the duty to defend under commercial general liability (CGL) policies.

In McGinnes Industrial Maintenance Corp. v. The Phoenix Insurance Company, No. 13-20360 (5th Cir. June 11, 2014), McGinnes received multiple notice letters from the EPA between 2007 and 2009, advising that Waste Management, indirect parent of McGinnes, was potentially responsible for dumping hazardous waste in three ponds adjacent to the San Jacinto River in 1965 and 1966. McGinnes sued Travelers for over $2 million dollars in attorneys’ fees incurred to fight the EPA. The district court held that EPA enforcement actions do not constitute litigation that would trigger the duty to defend under a CGL policy.

Noting the lack of controlling Texas precedent, 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 the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), constitute a “suit” within the meaning of the CGL policies, triggering the duty to defend?

The Superfund Settlements Project, a nonprofit association of corporations and industrial policyholders, argued in its amicus brief that policyholders reasonably expect a PRP letter to constitute a “suit” that triggers the duty to defend under a CGL policy because it is the EPA’s attempt to gain leverage “through force of legal process.” The insurance industry position is opposite, arguing PRP letters are more like claims than suits. According to the amicus brief filed by the Complex Insurance Claims Litigation Association, distorting the term “suit” to include administrative actions will complicate the ability of the insurer and the insured to accurately assess risks, and create unnecessary coverage litigation.

While this case is a simple contract interpretation exercise for the Texas Supreme Court to address the definition of “suit” in a factual situation that has not been previously addressed by Texas appellate courts, the Court’s decision will certainly result in significant financial consequences to both insureds and insurers alike.