Daily Development for Wednesday, November 28, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

HAZARDOUS SUBSTANCES; CERCLA: Voluntary environmental cleanup does not preclude insurance claim in , but does in California.

Certain Underwriters at Lloyd's, London v. Superior Court, 103 Cal.Rptr.2d 672 (Cal. 2001)

Western National Mutual Insurance Co. v. Westling Manufacturing Inc., No. C8-01-360, (Minn. App. 9/18/01)

With the proliferation of state voluntary cleanup programs ("VCPs"), many parties are performing cleanups either pursuant to a VCP agreement or without government oversight if the state allows licensed engineers to certify that the cleanup complies with state environmental requirements. However, this can present an insured with a conundrum. Using a VCP mechanism can streamline the cleanup process and result in a less expensive cleanup. However, because these cleanups are not performed in response to a "suit", the insured may not be able to recover its cleanup costs under its insurance policy.

Where the policy stated that the insurer had a duty to indemnify the insured for "all sums that the insured becomes legally obligated to pay as damages" for harm provided within coverage, the California Supreme Court held that insurance companies are only liable for cleanup costs arising from court orders. Therefore, the insurer was not required to reimburse an insured for cleanup costs incurred pursuant to a state administrative order

In a victory for insureds, the court in ruled that a property owner who was "invited" by the state environmental agency to remediate the site under the state VCP was entitled to coverage even though it did not notify its insurer prior to entering into the VCP program. The court said that the state's invitation to participate in the voluntary cleanup program constituted a "suit" triggering the insurer's duty to defend. The court reasoned that the insurer was not prejudiced or adversely affected by the policyholder's agreement to participate in the VCP because the insurer could bring a lawsuit against a responsible party if it later determined that its policyholder was not responsible for the contamination.

Reporter's Comment 1: When the property is located in a state that follows the rule adopted by the California Supreme Court, policyholders sometime try to follow the approach followed in CERCLA settlements where the parties reach an agreement with the EPA and then have the agency file a "friendly" lawsuit in federal court so that a judge may approve the settlement. Policyholders should also ask for a provision in the agreement that states it is an administrative settlement under Section 113 of CERCLA.

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