The Resurrection of Environmental Insurance Coverages

As insurers are confronted with increased pressures from claims involving asbestos, mold, and directors and officers’ policies, little attention is paid to the decreasing number of traditional environmental claims.

In fact, many states have clearly delineated the parameters of available coverage for environmental claims. The State of Wisconsin was one such state where the law was considered firmly established. Since the 1994 Wisconsin Supreme Court decision in City of Edgerton v. General Casualty Company of Wisconsin, 184 Wis.2d 750, 517 N.W.2d 463 (1994), cert. denied, 514 U.S. 1017 (1995), Comprehensive General Liability (CGL) policies did not provide coverage for environmental cleanup and remediation costs in Wisconsin.

Under the reasoning of the Wisconsin Supreme Court, environmental cleanup and remediation costs did not constitute “damages” under CGL policies in Wisconsin. However, on July 11, 2003, the Wisconsin Supreme Court in Johnson Controls v. Employers Insurance of Wausau et al., Case No. 01-1193, held that environmental response costs are considered “damages” under CGL policies. No longer is coverage for environmental response costs nonexistent. Rather, environmental coverage in Wisconsin has been revived, and Wisconsin may very well become a hotbed of environmental coverage litigation.

Environmental Response Costs Not Considered “Damages”
In 1980, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in order to encourage the cleanup of hazardous waste. CERCLA empowered the federal government, through the Environmental Protection Agency (EPA), to identify hazardous waste sites and pursue remedial activities. CERCLA authorized the government to cleanup properties and seek compensation from responsible parties or to require polluters and other responsible parties to perform the cleanup themselves.

Almost a decade ago in the Edgerton case, the Wisconsin Supreme Court held that cleanup and remediation costs under CERCLA did not constitute “damages” within the indemnification provisions of CGL policies. The Court reasoned that environmental response costs under CERCLA constitute equitable relief, not legal damages, and thus the insurer had no duty to indemnify its insured.

In addition, the court held in Edgerton that the issuance of a letter by the EPA or the Wisconsin Department of Natural Resources, which either requested or directed an insured to participate in the environmental cleanup of contaminated property, did not constitute a “suit” sufficient to trigger the insurer’s duty to defend.

For nine years, CERCLA response costs were not covered under Wisconsin law, as they were not considered “damages” under CGL policies. However, as a result of the Johnson Controls decision, environmental coverage in Wisconsin has taken a drastic turn.

The Johnson Controls Decision
The Johnson Controls case involved a CGL policy coverage dispute between Johnson Controls and more than thirty of its generally liability insurance carriers.

In overruling the Edgerton decision, the Wisconsin Supreme Court in Johnson Controls stated that “the problems created by the Edgerton decision have become so obvious and so acute that they cannot be ignored…[t]he process of restoring consistency and coherence to the law must begin by overruling the Edgerton decision.” Johnson Controls decision at pg. 5.

The Wisconsin Supreme Court set forth four mistakes made by the court in the Edgerton decision.

The Court concluded that the Edgerton opinion: “was too quick to embrace the strict dichotomy between legal damages and equitable actions” that had been established in prior case law; did not recognize that an injunction under CERCLA is distinguishable from traditional injunctions; failed to recognize that certain sources materials relied upon in the Edgerton case had been revised; and was predicated on a line of cases that, since Edgerton, has more clearly delineated the damages that are recoverable under Wisconsin law. It should be noted that certain parties have filed motions for reconsideration with the Wisconsin Supreme Court.

Despite nine years of precedent, the Wisconsin Supreme Court overruled the Edgerton decision in Johnson Controls by holding that an insured’s costs of restoring and remediating damaged property, whether the costs are based on remediation efforts by a third party (including the government) or are incurred directly by the insured, are covered damages under applicable CGL policies, provided that other policy exclusions do not apply. Following the Court’s determination in Johnson Controls that CERCLA response costs for restoring and remediating contaminated property are “damages’ under CGL policies, the Court went on to reverse Edgerton’s conclusion that the receipt of a potentially responsible party (PRP) letter from the EPA, or a similar notification letter from a state agency, did not constitute a “suit” for which an insurer has a duty to defend. The Wisconsin Supreme Court in Johnson Controls held that a PRP letter is so adversarial that it constitutes the functional equivalent of a suit and triggers the CGL insurer’s duty to defend.

Post-Johnson Controls: Where Do We Go From Here?
In its Johnson Controls decision, the Wisconsin Supreme Court did not believe that overruling Edgerton would result in a dramatic increase in insurance coverage litigation and the unnecessary expenditure of litigation and judicial resources to address coverage issues that were avoided under Edgerton.

Despite the Wisconsin Supreme Court’s statements to the contrary, insurance coverage may now be available for many contaminated sites for which there was previously no coverage due to Edgerton. In fact, there is some question as to whether certain policyholders with Wisconsin contaminated sites may now seek to void prior settlement agreements and re-open cases where unfavorable declaratory judgments were entered when Edgerton was the law.

Given the dangers associated with breaching a duty to defend and the likelihood that there will be renewed interest in insurance coverage, insurers would be wise to closely monitor any open environmental claims files with Wisconsin sites.

The Tip of the Month is a monthly feature on claimsguides.com. Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, bad faith, asbestos, life and health, professional liability and environmental cases. Jamie C. Kandalepas is an associate at Tressler Soderstrom Maloney & Priess. Her practice is focused on litigation and arbitration of complex insurance coverage matters. Questions and responses to this article are welcome at aboris@mail.tsmp.com