Cleaning up under AIU insurance/FMC: the wrong way to go.

• Author: Schmidt, Bradford P.

THE Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and similar state legislation are designed to ensure the clean up of hazardous waste contamination that threatens public health. The costs of hazardous waste clean up is staggering, and many private firms that have been ordered to clean up waste sites or are liable for reimbursing the Environmental Protection Agency have looked to their comprehensive general liability insurance carriers for indemnity. Subject to other coverage provisions, CGL policies generally cover sums the insureds become legally obligated to pay "as damages." One major question is whether the costs of reimbursing the EPA and the costs of complying with clean-up orders are "damages" within the meaning of the policies.

State courts and federal courts interpreting state law are divided on this issue. In 1990 the California Supreme Court held the costs of both reimbursing the EPA and complying with injunctions are, in most instances, "damages" within the meaning of the insurance policies. Unfortunately, the California court's reasoning was incorrect as a matter of law and was designed to cover a policy-based decision by the court. Moreover, the court's decision also was incorrect as a matter of public policy.

BACKGROUND

1. CERCLA and Environmental Clean Up

   Congress designed CERCLA, 42 U.S.C. [sections] 9601 et seq., to meet the problem of cleaning up abandoned hazardous waste sites that threaten public health.(1) The EPA may take two courses of action with respect to a hazardous waste site. First, under Section 9606(a), it may seek an injunction requiring the responsible parties to perform the clean up.(2) Second, under Section 9611, it may use Superfund, which is established by the act to ensure that money is immediately available to cover the government's costs, to investigate, monitor and clean up and thereafter seek reimbursement of the costs from the responsible parties. The EPA usually steps in to clean up a site only when the responsible parties fail to do so.(3)

   CERCLA directly imposes two basic types of liability. First, under Section 9607(a)(4)(A), responsible parties are liable for "all costs of removal or remedial action incurred" by the federal or a state government. Second, under Section 9607(a)(4)(C), responsible parties are liable for "damages or injury to, destruction of, or loss of natural resources." Indirectly, CERCLA imposes liability on responsible parties for the costs of complying with injunctions directing them to clean up waste sites. All these CERCLA-imposed liabilities are retroactive, so parties are liable for conduct occurring before CERCLA's enactment in 1980.(4)

   The question is whether any or all of these liabilities are covered by comprehensive general liability policies.

2. CGL Policies

   Insurance is a contract between two or more parties whereby risk is transferred to the insurer in exchange for a consideration paid by the insured. Third-party policies, or liability insurance, are contracts under which the insurer promises to indemnify the insured for liability to third parties injured as a result of the insured's actions or omissions. Comprehensive general liability policies, a type of third-party policy which first became popular in the 1940s, are the most common policies involved in environmental coverage cases because they provide relatively broad coverage.(5) In the typical CGL policy, the insurer agrees to "pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies."

   Thus, the typical CGL policy is designed to cover liabilities for property damages or bodily injury that are not excluded by the words of limitation in the coverage provisions or conditions or excluded by other provisions of the policy.(6) The precise question addressed here is whether environmental response costs are excluded by the "as damages" words of limitation in the coverage provision.

3. What Are "Damages"?

   A split in authority exists among federal and state jurisdictions as to whether CERCLA responses costs and the costs of complying with clean-up injunctions are "damages" within the meaning of that term as used in CGL policies.(7) With more than 800 sites on the national priority list for Superfund cleanup, another 20,000 being investigated and an estimated cost of $100 billion to clean up known hazardous sites, this question is a serious one. Insureds faced with paying clean-up costs look to their CGL insurers for indemnity. Insurers argue that because the costs are not "damages" within the meaning of the policies, they have no duty to indemnify.

   1. Not Favoring Coverage

      Courts that have determined that these costs are not "damages" have relied on five general reasons.

      First, since CERCLA distinguishes between recovery of cleanup costs and recovery of damages for destruction of natural resources, clean-up costs should not be considered "damages." In Continental Insurance Cos. v. Northeastern Pharmaceutical (NEPACCO),(8) which applied Missouri law, the Eighth Circuit pointed out that CERCLA treats clean-up costs and compensatory damages for injury to the environment differently because they are different. Because the cost of cleaning up a waste site often exceeds the site's original value, the court explained, the cost of cleanup often would exceed the damages--that is, the diminution of value of the property. On the other hand, the loss caused by destruction of exceptionally valuable natural resources could greatly exceed the cost of clean up, and thus the damages would be far greater than the cleanup costs.

      Second, the government cannot claim "damages" for injury to property in which it does not have an ownership interest. Therefore, "damages" means recovery only for injury to the plaintiff's own property. In Mraz v. Canadian Universal Insurance Co.,(9) for example, the United States and Maryland sought reimbursement for their costs of investigating, removing, monitoring and cleaning up the insured's property. The Fourth Circuit, applying Maryland law, held that the costs were not "damages" because the United States and Maryland lacked ownership interest in the subject property and therefore did not suffer injury to or destruction of their property.

      Third, the ordinary, lay meaning of "damages" must exclude costs associated with equitable remedies, because otherwise the "as damages" clause is mere surplusage. The policies therefore cover only those sums that the insured legally becomes obligated to pay to third persons who have legal claims based on injury to property. In Patrons Oxford Mutual Insurance Co. v. Marois(10) the insurer sought a declaration that it was not obligated under its CGL policy to pay for remedial actions ordered by the State of Maine. The Maine Supreme Judicial Court distinguished expenses an insured might pay to reimburse the state for remediation or to comply with an injunction compelling remediation, on the one hand, from the compensation an insured might pay to third parties for damages to their property. Because of the "as damages" language, the insurance contract covered only the latter. The only way to find coverage for the former would be to alter the contract by eliminating the "as damages" language.

      Fourth, response costs, whether incurred by the insured or paid to the government, are not damages because they do not compensate for past wrongs. In City of Edgerton v. General Casualty Co.,(11) the Wisconsin Supreme Court explained that response costs are a form of equitable relief designed to prevent future contamination and to provide for remediation of the affected site. The court held that response costs are not "damages" because that term, as used in CGL policies, unambiguously refers to "legal compensation for past wrongs and injuries."

      Fifth, sophisticated insureds do not need the protection of the rule that ambiguities are to be construed against the insurer. Thus, the court may exclude equitable relief from coverage by applying the technical, legal definition of...