Wednesday, June 4, 2014

No Duty to Defend an Insured’s Remediation of Contaminated Property Where the Insured Did Not Face the Functional Equivalent of a Suit

On June 2, 2013, the Washington Court of Appeals held that there is no duty to defend an insured’s remediation of contaminated property when the insured does not face the “functional equivalent” of a lawsuit.  In Gull Industries, Inc. v. State Farm Fire and Casualty Company, et al, No. 69569-0-1 (Wash. App. 2014), the insured, Gull Industries (“Gull”), notified Washington State Department of Ecology (“DOE”) that there had been a release of petroleum product at its gas station.  DOE sent Gull a letter acknowledging Gull’s notice of the suspected contamination.  Gull tendered defense and indemnity of the cleanup to its insurers, including State Farm and Transamerica Insurance Group (“TIG”), both of whom denied the tender.  Gull sued various insurers, including State Farm and TIG.  The policies in question provided a duty to defend for “any suit.”  Gull contended that the insurers had a duty defend because it faced strict liability under the Model Toxics Control Act (“MTCA”, chapter 70.105D RCW, thus satisfying the “any suit” requirement of the policies.  The Court of Appeals rejected Gull’s argument.  Instead, the court held that the duty to defend may incept where the insured faces the functional equivalent of a suit, following Ryan v. Royal Ins. Co. of Am., 916 F.2d 731, 741 (1st Cir. 1990).  The court concluded that Gull failed to make this showing:
We conclude that the undefined term “suit” is ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of a suit….

We do not agree with Gull’s contention that liability under the MTCA alone, without any direct enforcement action by DOE, is the functional equivalent of a suit for the purposes of the duty to defend.  Instead, we adopt the analysis outlined in Ryan and hold that an agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a “suit.”

Here, the only communication Gull received was a letter from DOE acknowledging receipt of Gull’s notice that the property was contaminated and that it intended to pursue an independent voluntary cleanup.  DOE gave notice to Gull that Gull’s report reveals the soil and groundwater are above the MTCA “Method A Cleanup levels” and that DOE placed the property on the leaking underground storage tank list with an “Awaiting Cleanup” status.  The letter also advised Gull to “be aware that there are requirements in state law which must be adhered to” but did not advise of any consequences that might attach to the failure to adhere to those requirements.  The letter expressly indicated DOE has not determined that Gull is a PLP and does not imply that DOE “has formally reviewed and approved of the remedial action” planned by Gull….  The letter did not present an express or implied threat of immediate and severe consequences by reason of the contamination.  Therefore, consistent with Ryan, Gull has not met its burden on summary judgment to establish there is the functional equivalent of a “suit” here, triggering the duty to defend.

Slip op. at 13-14 (footnotes omitted).

Link to Court of Appeals Decision;

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