Washington Court of Appeals Weighs in On the Meaning of the Word “Suit” in CGL Policies
In Gull Industries, Inc. v. State Farm Fire and Casualty Co., et al., 326 P.3d 782 (June 2, 2014), Division One of the Court of Appeals addressed what constitutes a “suit” for purposes of triggering a commercial general liability (CGL) insurer’s duty to defend its insured against environmental liability claims arising under Washington’s Model Toxic Control Act. The court held that the term “suit” is not limited to civil actions filed in court.. Rather, any action by a government agency that communicates “an express or implied threat of immediate and severe consequences” will trigger the insurer’s duty to defend. 326 P.3d at 784.
Gull’s MTCA Liability and CGL Policies
Gull Industries, Inc. owned a gas station in Sedro-Woolley, which it leased to Hayes and Mary Johnson from 1972 until 1982. During part of that period, Gull purchased liability insurance from Transamerica Insurance Group (TIG), and the Johnsons purchased liability insurance from State Farm Fire and Casualty Company. Like most CGL policies from that era, both TIG’s and State Farm’s policies provided that the insurer “shall have the right and duty to defend any suit” against the insured seeking damages on account of bodily injury or property damage. In 2005, Gull voluntarily investigated the Sedro-Woolley station and found evidence of petroleum hydrocarbon contamination resulting from releases that occurred as far back as the Johnson’s lease period. Gull notified the Department of Ecology of a release and its intent to pursue an independent cleanup. Ecology responded with a letter acknowledging receipt of Gull’s notice, notifying Gull that Gull’s investigative report showed soil and groundwater contamination above MTCA Method A levels, and informing Gull that Ecology had placed the property on its leaking underground storage tank list with an “Awaiting Cleanup” status. Ecology’s letter also advised Gull to “be aware that there are requirements in state law which must be adhered to” but did not advise Gull of any consequences should it fail to adhere to those requirements and expressly indicated that Ecology had not determined Gull was a potentially liable party. Gull installed a remediation system on the property in 2006. Subsequently Gull tendered a claim arising from the Sedro-Woolley remediation to TIG and State Farm for defense and indemnification. Both TIG and State Farm denied the claim. Gull sued, and the insurers moved for partial summary judgment, arguing, in part, that they had no duty to defend because there was no “suit” against Gull.
What is a “Suit” When an Insured Has Strict Liability Under MTCA?
Across the United States, whether a civil action in court is required to trigger the duty to defend under CGL policies has been hotly contested. Courts that have considered the issue have reached varying results. As the Court of Appeals explained, although insureds are strictly liable for environmental contamination and face potentially devastating financial consequences if they do not cooperate with an administrative agency’s non-litigation enforcement efforts, some courts have narrowly construed the word “suit” and held that a complaint must be filed in court before the duty to defend is triggered. E.g., Lap ham-Hickey Steel Corp. v. Prot. Mut. Ins. Co., 166 Ill.2d 520, 532-33 (1995). Other courts, citing the strict liability and administrative enforcement regimes created by state and federal environmental remediation statutes, have held the word “suit” to be ambiguous and to include at least some administrative actions. E.g., SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 315 (Minn. 1995) (“suit” includes a request for information), overruled on other grounds by Bahr v. Boise Cascade Corp., 766 N.W.2d 910 (Minn. 2009); Coakley v. Me. Bonding & Cas. Co., 136 N.H. 402, 417–18 (1992) (PRP notice and state agency administrative order are a “suit”); C.D. Spangler Constr. Co. v. Indus. Crankshaft & Eng’g Co., 326 N.C. 133, 154 (1990) (compliance orders were an attempt by the State to gain an end by legal process and hence were “suits”).
In Washington, the Agency Must Make an “Explicit or Implicit Threat of Immediate and Severe Consequences.”
In Gull Industries, the Court of Appeals adopted the second approach. It concluded “that the undefined term ‘suit’ is ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of suit.” 326 P.2d at 790. Not every act by an environmental regulator will suffice. To be the functional equivalent of a ‘suit, the agency action must be “adversarial or coercive in nature” and “communicate an explicit or implicit threat of immediate and severe consequences.” Id. Applying this rule to Gull Industries, the court concluded TIG and State Farm did not have a duty to defend. The Ecology letter received by Gull was not the functional equivalent of a suit because it “did not communicate an explicit or implicit threat of immediate and severe consequences.” Id. at 791.
What Now?
With the “adversarial or coercive” and “explicit or implicit threat of immediate and severe consequences” standard, the court has adopted a fact-specific approach rather than a bright-line rule to determine when an insurer has a duty to defend its insured related to MTCA liability. What specific agency actions imply the threat of immediate and severe consequences remains to be seen, but a “potentially liable party” notice letter should qualify. These letters notify parties that Ecology has evidence of the party’s liability and plans in the near future to make a final liability determination, and they usually give a party only 30 days to respond. A finding of liability is a severe consequence, and 30 days is certainly immediate.