Academic journal article Defense Counsel Journal

Cleaning Up under AIU insurance/FMC: The Wrong Way to Go

Academic journal article Defense Counsel Journal

Cleaning Up under AIU insurance/FMC: The Wrong Way to Go

Article excerpt

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

A. 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.

B. 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. …

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