The Washington Court of Appeals, Division One, issued an opinion on June 2, 2014, addressing what triggers a duty to defend “any suit” in a commercial general liability (CGL) policy when the owner of a contaminated property faces potential strict liability.  In Gull Industries Inc. v. State Farm Fire and Cas. Co., — Wn.App. —, 2014 WL 2457236 (2014), the Court of Appeals considered the issue in the context of the Washington Model Toxics Control Act (MTCA) which imposes strict liability on the owner of a contaminated property and may trigger the duty to indemnify under a CGL even though no agency has taken or threatened formal legal action.  The Court of Appeals concluded that the term “suit” as used in the CGL is ambiguous in such a context and does not require that a formal summons and complaint be filed or served or that administrative action be commenced.  Under the functional equivalent standard, the court found that the duty to defend is triggered “if a government agency communicates an explicit or implicit threat of immediate and severe consequences by reason of contamination.”  The Court of Appeals ultimately affirmed the trial court’s grant of summary judgment in favor of the insurance companies, however, because the Department of Ecology (DOE) did not satisfy that standard.

The case concerned an insured that owned a gas station that was covered under a CGL policy in the 1970s and 1980s.  The applicable CGL policies provided that the insurance company had a duty to defend the insured “any suit” against the insured seeking damages that were covered under the policy.  None of the policies expressly defined the term “suit.”  In 1984, the insured investigated the underground storage tanks at a number of its stations and found that there was a continuous release of hydrocarbons into the soil adjacent the tanks.  As a result, the insured voluntarily began the process of remediating the contamination, including investigating and cleaning soil and groundwater.  In 2005, the insured informed the DOE that there was continuous release of hydrocarbons at one of the stations.  The DOE acknowledged receipt of the notice of the suspected contamination.  In 2009 and 2010, the insured tendered its claims under the CGL policies that were in effect at the time the contamination occurred.  The insurance companies denied the insured’s tender.

After the tenders were declined, the insured instituted a series of lawsuits relating to a number of contamination claims—all of which were consolidated in 2012.  In the suits, the insured asserted claims for declaratory relief, breach of contract, breach of fiduciary duty, and bad faith.  A subset of the insurance companies moved for summary judgment on the ground that the duty to defend was not triggered by the acknowledgement letter from the DOE.  The insured argued in opposition that the duty to defend was triggered because it faced strict liability for the environmental cleanup costs under the MTCA.  The trial court agreed with the insurance companies, finding they did not have a duty to defend.  The insured appealed the decision.

In the appeal, the insured relied on the Weyerhaeuser Co. v.Aetna Cas. and Surety Co., 123 Wn.2d 891, 874 P.2d 142 (1994) to argue that because the MTCA imposes strict liability, the duty to defend should arise whether or not an agency has sent any communications about the statute or environmental cleanup costs.  The Court of Appeals rejected the insured’s proposed standard and analysis of the Weyerhaeuser case.  The court did, however, determine that the term “suit” as used in the applicable CGL policies was ambiguous as used based on its analysis of case law from other jurisdictions.  Ultimately, the court adopted the analysis in Ryan v. Royal Ins. Co. of America, 916 F.2d 731 (1st Cir.1990), and held that an “agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a ‘suit.’”  The court found that the correspondence received by the insured from the DOE in response to the notice of contamination did not satisfy the standard and, therefore, did not trigger the insurance companies’ duty to defend.

Maloney Lauersdorf Reiner regularly handles duty to defend claims on behalf of its clients.  Please feel free to contact us with any questions or concerns regarding this case or any other matter you see on the MLR Insurance Coverage Blog.