McGinnes Indus. Maint. Co. v. Phx. Ins. Co.
No. 14-0465
Case Summary written by Abigail Drake, Staff Member.
CHIEF JUSTICE HECHT delivered the opinion of the Court, in which JUSTICE GREEN, JUSTICE WILLETT, JUSTICE DEVINE, and JUSTICE BROWN joined.
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) changed the landscape of nuisance suits based on pollution, and gave the EPA the authority to mandate both the government and private parties to clean up hazardous waste sites. Under CERCLA, the EPA has two avenues to seek site cleanup: it may cleanup the site itself and recover the costs from the potentially responsible parties afterwards in a lawsuit or it may compel the potentially responsible parties “to perform the cleanup either voluntarily or involuntarily through administrative or judicial proceedings”.
In the 1960s, petitioner McGinnes Industrial Waste Corporation disposed of pulp and paper mill waste sludge in ditches near the San Jacinto River in Pasadena, Texas. In 2005, the EPA began investigating the possible environmental contamination at the site. In November 2008, McGinnes’ parent company was notified of its potential liability and invited to enter into negotiations with the EPA regarding cleanup and the associated costs for repairing the site, while McGinnes was similarly notified in December 2008.
In July 2009, the EPA notified McGinnes that it had determined McGinnes was responsible for cleaning up the site and demanded that McGinnes pay over $378,000 in costs. The letter required McGinnes to make a good faith offer within 60 days, but McGinnes did not make an offer, which prompted the EPA to issue a unilateral administrative order requiring McGinnes to conduct a “remedial investigation and feasibility study.”
While McGinnes was disposing of its waste at the site, it was covered by standard-form commercial general liability (CGL) insurance policies through Phoenix Insurance Company and Travelers Indemnity Company (the Insurers). Standard-form CGL insurance policies give the insurer “the right and duty to defend any suit against the insured seeking damages.” Each of McGinnes’ policies contained similar language, giving McGinnes these rights in conjunction with property damages caused by an occurrence.
In May 2008, in the time period between the EPA’s two notice letters, McGinnes requested a defense in the EPA proceedings from the Insurers. The Insurers refused on the ground that the proceedings were not a “suit” under the policy.
McGinnes sued the Insurers in federal district court for a declaration that the policies covered the EPA proceedings, but the federal district court granted partial summary judgment on that issue. McGinnes certified its order for interlocutory appeal, and the United States Court of Appeals for the Fifth Circuit certified this issue to the Texas Supreme Court.
Issue: Does “suit” include superfund cleanup proceedings conducted by the EPA under CERCLA?
When the policies at issue were first written, the only recourse for pollution was suing in court on common law or statutory claims. One effect of CERCLA was that the EPA was able to conduct what amounted to its own pretrial proceedings without having to initiate actual court proceedings. The notice letters to potentially responsible parties serve as pleadings. The EPA obtains discovery through requests for information. Its invitations for negotiations serve as attempts at mediation. The fines and penalties for non-cooperation are similar to court-ordered sanctions. Finally, the potentially responsible party’s opportunity for review is limited to the end of the process and judicial review is based on an abuse of discretion standard. Given this procedure, the EPA proceedings are a suit in and of themselves, only conducted outside a courtroom. CERCLA effectively redefined “suit” to include these proceedings, given that before the act, the same process would have been conducted through a court.
While the Insurers argued that this would amount to every demand letter having to be treated as a suit, this fear was unnecessary. Ordinary, run-of-the-mill demand letters are nothing like the notice letters and unilateral administrative orders issued by the EPA under CERCLA, which command compliance.
Additionally, the Insurers claimed that the damages at issue for the cleanup costs were not the result of an “occurrence” under the policies, which they take to mean an accident. However, the Fifth Circuit already determined that cleanup costs are damages that are covered under the CGL policies at issue here. This further supported the Insurers’ duty to defend, for if the Insurer were required to indemnify but not to defend, it could have created a situation where the insured made no defense and the Insurer would have been liable for a large amount of damages.
Finally, thirteen other state high courts have found that “suit” in these standard-form CGL policies covers these proceedings, while only three have sided with the Insurers’ interpretation of the word. Of those three states, the most recent decision was in 1998, and seven other state high courts have sided with the insureds since that time.
JUSTICE BOYD, joined by JUSTICE JOHNSON, JUSTICE GUZMAN, and JUSTICE LEHRMANN, dissenting.
The ordinary meaning of “suit” is one of court proceedings. In allowing the EPA proceedings to be termed a “suit,” the Court moved outside what the parties actually contemplated and imposed a meaning that was unsupported by the context. When the policy was written, the meaning of “suit” was defined to mean a court proceeding or tribunal. Furthermore, the fact that the policies distinguished between a “claim” and a “suit” gave further emphasis to the assertion that “suit” should be limited to court proceedings. The fact that the EPA proceedings are a “functional equivalent” of a suit is irrelevant to contract interpretation. The Court has stated that this ruling will not mean that insurance companies have to defend against every administrative proceeding or demand letter, but it did not specify which ones insurers have to defend against and which ones insurers can ignore.
Additionally, not all courts have agreed that CERCLA cleanup costs are “damages” under a CGL policy. Because of the split, the argument that Insurers must defend because it must cover the damages falls flat.