Department of Energy Notice Does Not Trigger Duty to Defend

June 9, 2014

The Court of Appeals of Washington, Division 1, held that a letter from the Department of Energy (DOE) acknowledging receipt of insured's notice that its property was contaminated and that it intended to pursue an independent voluntary cleanup was not a “suit.” This case is Gull Industries, Inc. v. State Farm Fire and Casualty Company, 2014 WL 2457236.

Under the Model Toxics Control Act (MTCA), DOE identifies hazardous waste sites and either requires a potentially liable person (PLP) to clean up the waste or undertakes the cleanup itself and seeks reimbursement from the PLP.

Gull Industries, Inc. (“Gull”) owned a gas station in Sedro-Woolley, WA. Gull had liability coverage with Transamerica Insurance Group (“TIG”) for bodily injury and property damage from 1981 until 1986. Gull leased the station to Hayes and Mary Johnson from 1972 to 1982. The Johnsons obtained coverage of the operations of the station from State Farm Fire and Casualty Company (“State Farm”) from 1977 through 1978. Then the Johnsons obtained another policy through State Farm from 1978 through 1981. The policies at issue included the duty to defend against a “suit,” but none of the policies defined the term.

In 1984, Gull investigated underground storage tanks at its service stations. At the Sedro-Woolley station, hydrocarbons were continuously released into the adjacent soil. Gull undertook voluntary remediation, including investigation and cleanup of the soil and groundwater. In 2005, Gull notified DOE that there was a release of petroleum product at the Sedro-Woolley station.

The DOE sent Gull a letter acknowledging receipt of Gull's notice and expressly indicating DOE had not determined that Gull was a potentially responsible party (PRP). The letter gave notice to Gull that its report revealed the soil and groundwater were above the MTCA “Method A Cleanup levels” and that the property had been placed on the leaking underground storage tank list with a status of “Awaiting Cleanup”.

In 2009, Gull tendered its claims for defense and indemnification for the cost of the cleanup to TIG, which was not accepted. In 2010, Gull then gave its claims as an additional insured under the Johnsons' policy to State Farm. Like TIG, State Farm did not accept Gull's tender. Gull sued TIG, State Farm, and other insurers in Skagit County, asserting claims for declaratory judgment, breach of contract, breach of fiduciary duty, and bad faith relating to the Sedro-Woolley site. In May 2012, the lawsuit was consolidated with other claims for declaratory relief and damages against insurance companies in connection with over 200 sites.

State Farm moved for partial summary judgment arguing that it had no duty to defend. TIG joined State Farm's motion on that issue. Gull argued that the duty to defend was triggered because it faced liability for cleanup costs under the MTCA, which imposes strict liability upon the owner or operator of contaminated property. The trial court granted State Farm's and TIG's motion and concluded that State Farm and TIG had no duty to defend Gull. This appeal followed.

At issue on appeal was what triggers an insurer's duty to defend a “suit” when the owner of contaminated property faces strict liability under the MTCA.

The undefined term “suit” is ambiguous in the environmental liability context. It may include administrative enforcement acts that are the functional equivalent of a suit. Under the functional equivalent standard, the duty to defend is triggered if a government agency communicates an explicit or implicit threat of immediate and severe consequences by reason of the contamination.

Gull argued that the duty to defend should arise regardless of whether an agency has sent communications about the statute or cleanup operations because the MTCA imposed strict liability. The court disagreed, finding that an agency action must be adversarial or coercive in nature to qualify as the functional equivalent of a “suit.” Here, Gull failed to meet its burden to establish there was the functional equivalent of a “suit” because the acknowledgement letter from the DOE to Gull did not present an express or implied threat of immediate and severe consequences by reason of the contamination.

The court found that the public policy of promoting voluntary cleanups alone did not compel an automatic duty to defend. Public policy concerns have limited significance in a duty to defend analysis. The court deemed public policy concerns to be “a secondary reason” in this context.

Editor's Note: Courts examine insurance policies as contracts and must enforce the terms of an insurance policy if the language is clear and unambiguous. A term is ambiguous if it can be reasonably interpreted in more than one way. When terms in the policy are not defined, courts accord those words their plain, ordinary, and common meaning. Moreover, ambiguous terms must be construed in the insured's favor. Because the agency's action was not adversarial or coercive in nature, the court reasoned that the DOE letter to Gull was not a “suit” to trigger commercial liability insurer's duty to defend.