Historically, the dry cleaner’s business insurance policy has been a package policy with more than one line of insurance in it. One of these lines is typically general liability insurance: the type of insurance that protects the business against liability from injuries to customers or to the property of others. The standard general liability coverage available to small business owners has for decades been commercial general liability coverage and is usually found in section two of the package policy.
The insuring agreement of many of these commercial general liability (“CGL”) policies contains the insurer’s promise to defend the small business owner (“the policy holder”) against any “suit” against him, seeking damages for bodily injuries or property damage covered under the policy. What is covered under the policy is typically described as an “occurrence.” What constitutes an “occurrence” under the policy is typically spelled out in the definitions or glossary section of the policy. When someone claims that the policy holder’s action or neglect has caused an “occurrence,” as defined in the policy, the insurer’s duty to defend arises. In the environmental context, this duty either arises at the time that a governmental agency orders the dry cleaner to take some action to determine the extent of the alleged pollution, or later, when the dry cleaner is sued in court (usually by his landlord) for the cost of investigation and remediation of the contaminated property on which his dry cleaning plant is or was situated. When the duty arises, the policy holder can then file the claim with his insurer.
But what causes the triggering of the insurer’s duty to defend? And how does it vary depending on the state in which the dry cleaner does business?
Although in some states, courts require that a law suit be filed against the policy holder to trigger a duty to defend, in others, a letter from an environmental agency directing response actions suffices. State courts in California, Illinois, Maine, Ohio, and South Carolina have ruled that a suit is necessary to trigger the insurer’s duty to defend. Federal courts in Delaware, Florida, Louisiana, Missouri, and Pennsylvania agree. Conversely, state courts in Colorado, Connecticut, Indiana, Iowa, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Oregon, Texas, Vermont and Wisconsin consider a letter from an environmental enforcement organization sufficient to cause the insurer to defend. Federal courts in Georgia, Hawaii, Idaho, Vermont, Washington and Wyoming agree. In the balance of states, there is no clear rule, either because lower state courts have yet to decide this matter or lower state courts differ in their interpretation of what constitutes the triggering of the duty.
One landmark case has been the 1998 California Supreme Court decision in Foster-Gardner, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 959 P.2d 265 (Cal. 1998). In Foster-Gardner, where the insured was ordered by California environmental officials to investigate and remediate soil and groundwater contamination at its pesticide facility, the court found that this was inadequate to trigger the insurer’s duty to defend. Only an actual “suit” in a court of law would suffice in California. An opposite result was reached in Indiana, where in Hartford Accident & Indemnity Co. v. Dana Corp., 690 N.E. 2d 285 (Ind. Ct. App. 1997), the court found that USEPA cleanup orders were sufficiently coercive and adversarial to trigger an insurer’s duty to defend.
Taking a different approach, the Ohio Court of Appeals ruled in Professional Rental, Inc. v. Shelby Ins. Co., 599 N.E. 2d 423 (Ohio Ct. App. 1991) that a governmental agency must make attempts to enforce liability through injunction or cost recovery actions in court for the duty to defend to be triggered. Also, a different view was taken by the Eight Circuit Court of Appeals in Aetna Cas. & Sur. Co. v. General Dynamics Corp., 968 F. 2d 707 (8th Cir. 1992), wherein the court opined that since demand letters from environmental regulatory agencies do not seek damages, they were not “suits” as required under the insurance policy to trigger a duty to defend.
Certain courts have found that the term “suit” to be ambiguous. The Michigan Supreme Court ruled in Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 19 N.W. 2d 864 (Mich. 1994) that a PRP letter was the functional equivalent of a lawsuit, given the ambiguity of the term “suit” in the insurance policy. The Colorado Supreme Court found in 1999 that where an insured sought coverage for its contribution to the pollution of a landfill, a CERCLA related PRP letter was enough to trigger a duty to defend because the term “suit” as used in the policy was ambiguous (Compass Ins. Co. v. City of Littleton, 984 P. 2d 606 (Colo 1999).
In the case where the state agency directed the insured to conduct a voluntary clean up at a contaminated site, a New Jersey court still found sufficient coercion to create a duty to defend. In Broadwell Realty Servs., Inc. v. Fidelity & Cas. Co. of N.., 528 A. 2d 76 (N.J. Super. Ct. App. Div. 1987), the court reasoned that since the insured would be exposed to liability if it did not comply and conduct a site cleanup, a duty to defend arose.
If we can determine a trend from American court rulings on the duty to defend issue, it might be that in the twenty-first century, American courts have been trending toward the determination that a letter from an environmental agency is sufficient to trigger the insurer’s duty to defend.
The Wisconsin Supreme Court weighed in on the issue in 2003, determining in Johnson Controls, Inc. v. Employers Ins. Of Wausau, 665 N.W.2d 257, (Wis. 2003), a case where the insured sought coverage for the costs of complying with pre-suit environmental agency directives in a PRP letter, this letter was the start of “adversarial administrative proceedings” and a “reasonable insured” would expect it would trigger the insurer’s duty to defend. In the Hawaiian case, Pacific Employers Ins. Co. v. Servco Pac. Inc., 273 F. Supp. 2d 1149 (D. Haw. 2003), the court ruled that where the state administrative proceeding had required that the insured remediate site contamination, the state proceeding constituted a suit and consequently, an insured’s duty to defend.
In the Kentucky case of Aetna Casualty & Sur. Co. v. Commonwealth of Kentucky, 179 S.W. 3d 830 (Ky. 2005), the Kentucky Supreme Court required the insurer to reimburse the insured for its costs in participating in the CERCLA cleanup of a contaminated landfill. Similarly, the Connecticut Supreme Court ruled in R.T. Vanderbilt Co. v. Continental Cas. Co., 870 A. 2d 1048 (Conn. 2005) that a PRP letter will always constitute a suit under a CGL policy since it is sufficiently detailed for the insurer to determine whether the allegations within the letter fall within the scope of coverage.
It will be interesting to follow the changes in case opinions in those states in which the law regarding the duty to defend is as yet unsettled to determine whether this trend toward finding a duty to defend continues in the second decade of the twenty-first century, or whether state courts as yet to take a position on this issue will look to California or to Ohio to find that no duty exists.
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