Commercial general liability policies provide coverage for the insured’s liability for “damages” on account of bodily injury and property damage and require the insurer to provide a defense to “suits” seeking such damages. Since the beginning of the environmental liability coverage wars some twenty-five years ago, insurers have disputed whether their insureds’ environmental liabilities seek to impose “damages”, are on account of “property damage,” and are adjudicated in the context of “suit[s].” Recent cases have continued to address these recurring issues.
In Cinergy Corp. v. Associated Electric & Gas Insurance Services, Ltd. (Ind. May 1, 2007), the Indiana Supreme Court considered whether the insured’s liability in that case was in the nature of “damages.” The Indiana court granted the insured a somewhat pyrrhic victory in finding that the insurers in theory had obligations to defend, but holding that the liability for which the insured ostensibly was liable was not of the nature of a monetary obligations to which liability insurance applies. The court gave the insured some sympathy in dealing with the policy language: “Synthesizing the policies’ insuring agreements with their respective definitions of capitalized words and phrases is a daunting task, replete with often confusing, redundant, and sometimes circular concepts.” Slip op. at 7.
But the court held that the liability in the civil action in which the insured was involved was not of the nature and kind covered by liability policies. “There is essential agreement among the parties . . . that the primary thrust of the federal lawsuit is to require the [insured] to incur the costs of installing government-mandated equipment intended to reduce future emissions of pollutants and prevent future environmental harm.” Slip op. at 11. In assessing whether there was coverage, the court adopted the now-familiar distinction between (covered) “remedial” and (uncovered) “prophylactic” measures. The court ruled that the government’s action against the insured was “directed at preventing future public harm, not at obtaining control, mitigation, or compensation for past or existing environmentally hazardous emissions.” Slip op. at 14. Consequently, the court found that the liability of the insured was not as a result of “the happening of an accident, event, or exposure to conditions but rather [was directed at] the prevention of such an occurrence.” Slip op. at 15.
In effect, the court found that the liability involved was not as a result of any past or existing property damage, but rather was based only on complying with legal requirements to conduct its operations safely. (Alternatively, the court could be said to have found that there was no property damage yet for which the insured was being held liable.) Accordingly, “the costs of installing government mandated equipment intended to reduce future emissions of pollutants and to prevent resulting future environmental harm” does not constitute covered sums for which the insured is liable because of property damage. Slip op. at 16.
The “remedial” versus “prophylactic” distinction in the environmental context is often elusive (and for that reason alone courts should be chary of denying coverage for bona fide liability). While it is true that insurance policies are not funding mechanisms for the costs of operating in compliance with the law, where property damage has occurred and an element of the damages on account thereof include measures to prevent the recurrence of damage, then the costs of those future-oriented remedies should be (and generally are) covered. When one is dealing with water contamination or air contamination, for example, it may be that the remedy includes measures to reduce the concentrations of the deleterious substance released by the insured; by limiting additional releases of that substance, the water system, for example, is able to dilute the contaminants through ordinary recharges of the system and reduce the concentration below the level of “damage.” In this way, stopping the on-going contribution of the deleterious substance can be thought of as a remedy for past damage (because this type of preventive remedy allows the damage to be mitigated). Were one to freeze-frame the issue, however, and look only at the remedy (and not the reason for the remedy), it might be argued that the measure is “prophylactic,’ that is, is meant to prevent the future release of contaminants.
For purposes of analyzing the availability of insurance-coverage, however, the question is why is the insured responsible for containing future releases. Where there has already been damage for existing releases of contaminants, “stop[ping] that ongoing release is not mere prophylaxis.” Watts Industries, Inc. v. Zurich American Ins. Co., 121 Cal. App. 4th 1029 (2004)
In legal proceedings where the insured faces liability for “damages,” primary CGL insurers will have a duty to defend. Where there is no possibility, however, that the action against the insured can eventuate in a judgment covered by the insurer’s duty to indemnify, then the insurer will not have an obligation to defend. Because in Cinergy the Indiana Supreme Court held that the costs at issue were purely prophylactic and not “damages because of property damage,” the court ruled that the insurers had no duty to defend (though rejecting the rationale of the court below that there was a duty to pay defense costs only as an incident to the obligation to indemnify and thus only after the underlying action was concluded). Cinergy, slip op. at 16.
Even if the insured faces bona fide damages, the duty to defend applies to “suits,” and naturally insurers and insureds have joined issue on whether various types of proceedings constitute “suits” to which the duty to defend extends. Most courts have recognized that enforcement proceedings that can eventuate in a “damages” award are in the nature of a “suit” against the insured, but some courts have equated the term “suit” with “lawsuit” and held that only actions in a court of law – as opposed to an administrative proceeding – can constitute a “suit.” That said, even these jurisdictions may allow a claim for the cost of defense of a non-traditional or non-court proceeding where “suit” is defined more broadly to encompass other forms of liability-seeking actions or where the insurer’s obligation to pay includes obligations to reimburse “expenses” incurred in the defense, without those expenses being tethered only to court-proceedings. The recent decision of the California Court of Appeal in Ameron Int’l v. Insurance Co. of State of PA (Cal. App. May 15, 2007) analyzes a number of different formulations of insuring obligations, cast against the backdrop of decisions holding that the undefined term “suit” is limited only to actions in a court of law. Ameron is a useful reminder to policyholder and insurer lawyers that we need to parse the language of the contract carefully in determining the obligations to provide coverage vel non.