Insurer Cannot Seek Subrogation For Environmental Cleanup Costs If Its Insured Does Not Make A Claim To The Superfund Or A Potentially Liable Party

An insurance company filed a subrogation suit for recovery of insurance payments made to its insured for costs incurred cleaning up pollutants released on the insured’s property.  The United States Court of Appeals for the Ninth Circuit held: (1) that the insurance company did not have standing to bring a lawsuit under section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601 et seq.) (“CERCLA”) because the insurance company did not incur any “costs of response” that were related to the removal or remediation on the insured’s property; and (2) that the insurance company cannot bring a subrogation claim under section 112(c) of CERCLA because it did not allege that its insured was a “claimant” within the meaning of CERCLA. (Chubb Custom Insurance Company v. Space Systems/Loral, Inc. (710 F.3d 946, C.A.9 (Cal.), March 15, 2013).

What This Means To School Districts

An insurer is prohibited from recovering under CERCLA where it did not directly incur costs to remediate a polluted site and did not allege that the insured was a “claimant” as required by the CERCLA statutes.  Although the insurer had a contractual obligation to make payments to the policy holder that undertook the remediation, the insurer could not claim subrogation where it did not comply with the statutory requirements of CERLCA.

Facts

The lawsuit involved approximately 47 acres of land at 3825, 3963, and 3977 Fabian Way and 901 San Antonio Road in Palo Alto, California (collectively, the “Site”).  Chubb Custom Insurance Company (“Chubb”) issued Taube-Koret Campus for Jewish Life (“Taube-Koret”) an Environmental Site Liability Insurance Policy (“Policy”) for two properties located at 901 and 851 San Antonio Road.  The Policy included the following provision for the transfer of rights of recovery: “If the insured has rights to recover all or part of any payment we have made under this insurance, those rights are transferred to us.”  In December 2008, Chubb issued Taube-Koret a check on the Policy for $2.4 million for “the necessary cleanup costs for responding to the release of hazardous substances” on Taube-Koret’s properties.  The check was “payment for all necessary Response Costs claims and incurred” by Taube-Koret, “thereby making [Taube-Koret] whole for its soil remediation costs.”

Chubb filed a subrogation suit against Space Systems/Loral, Inc. (successor to Ford Aerospace and Communications Corp.), Ford Motor Company, Sun Microsystems, Inc., Chevron Corporation, and Harman Stevenson Inc.  Chubb claimed that Ford Aerospace used the Site from 1959 through 1990 to manufacture and sell satellites, equipment, and missile guidance systems–activities which Chubb asserted resulted in the release of volatile organic compounds into the groundwater and soil.  Chubb further alleged Ford Aerospace conducted ineffective remediation.  The California Regional Water Quality Control Board (“Water Board”) issued an order that named Ford Aerospace a discharger of pollutants and required it to clean up hazardous substances released on the Site.  Space Systems purchased the assets of Ford Aerospace and owns and occupies buildings on the Fabian Way properties.

Sun Microsystems acquired the 901 San Antonio Road property in 1988.  The Water Board also named Sun as a discharger of pollutants and informed Sun that it would oversee the cleanup of contaminants at the property and recover oversight costs.  Chubb alleged that Sun had “failed to take adequate measures to remediate or abate further contamination caused by Sun’s demolition of a vehicle maintenance building previously constructed by Ford Aerospace and known to contain hazardous substances.”  Chubb alleged that when Sun sold its 12-acre parcel to Taube-Koret, “Sun knew about the contaminated soil and groundwater on its property but elected not to take remedial action.”  The 12-acre parcel was later subdivided into two parcels. 

Chevron operated a gas station on a property adjacent to the Site from 1960 to 1977.  Chubb alleged that hazardous substances and waste oil and petroleum contaminated the soil at 851 San Antonio Road.  Chubb also alleged that from 1977 to 2007, Harman Stevenson, Inc., owned and operated a Kentucky Fried Chicken restaurant at 851 San Antonio Road and that during the construction and demolition of the restaurant, hazardous substances left by Chevron were released.

Taube-Koret purchased 851 San Antonio Road, which is adjacent to 901 San Antonio Road, in 2006.  Soil and groundwater beneath Taube-Koret’s property were found to be contaminated with hazardous substances and the Water Board issued an order requiring named dischargers to clean up and abate the effects of hazardous substances.  The Water Board later amended its order and named Taube-Koret as a discharger based on its purchase of the property from Sun. Taube-Koret performed “the requisite environmental investigation, assessment, remedial actions, and removal of hazardous substances on its property,” including the removal of the contaminated soil.  The Water Board issued written confirmation in September 2009 that Taube-Koret had fully complied with all cleanup orders.   

Chubb asserted subrogation claims against Space Systems, Ford, Sun Microsystems, Chevron, and Harman Stevenson under CERCLA sections 107(a) and 112(c).  Chubb also asserted state law claims.  The trial court dismissed Chubb’s complaint.

Decision

The Ninth Circuit court of appeals affirmed the decision of the trial court.  Subrogation allows “an insurer to take the place of the insured to pursue recovery from third-party tortfeasors responsible for the insured’s loss.”  Chubb alleged a section 107(a) claim as an equitable and contractual subrogee of Taube-Koret and a claim for statutory subrogation under section 112(c).

Section 112(c)(2) provides: “[a]ny person, including the Fund, who pays compensation pursuant to this chapter to any claimant for damages or costs resulting from a release of a hazardous substance shall be subrogated to all rights, claims, and causes of action for such damages and costs of removal that the claimant has under this chapter or any other law.”  Under the statute, a claimant “is any person who presents a written demand for reimbursement of monetary costs under the statute—i.e., for a CERCLA violation.”

The court concluded Chubb could not state a statutory subrogation claim under section 112(c) because it is not a claimant within the meaning of the statute.  The statute’s “definition of claimant required Chubb to make a written demand for payment for its response costs from potentially liable parties,” which Chubb alleged were Space Systems, Ford, Sun, Chevron, and Stevenson.  Chubb however did not allege that Taube-Koret made such a demand on alleged liable parties, the Superfund, or any other potentially responsible parties.  Chubb merely alleged that Taube-Koret made an insurance claim.  The court noted that its decision “does not mean that insurers cannot bring subrogation claims in environmental matters.”  An insurer’s “subrogation rights remain intact under CERCLA section 112(c)” but the right is not unbridled and “may be circumscribed by Congress through certain requirements, including the assertion of a claim by the subrogor-insured.”  The court held “that an insured must first make a claim to either the Superfund or a potentially liable party before an insurer can bring a subrogation action under section 112(c).”

Section 107(a) of CERCLA imposes strict liability on four categories of potentially responsible parties “for the cleanup of environmental hazards, irrespective of whether they directly contributed to the contamination.”  The court noted that “section 107(a) plainly applies to a person who, through his or her own actions, becomes statutorily liable for, or is subject to, the costs related to the cleanup of hazardous substances or the permanent remediation of a release or threatened release of hazardous substances into the environment.”  The court found that Chubb lacked standing to bring an action under section 107(a) because “both the plain statutory language and overall scheme of CERCLA indicate that an insurer cannot bring a subrogation action under section 107(a) when it has not itself incurred response costs.”  Chubb did not incur any response costs and therefore it cannot assert a subrogation claim under section 107(a).

Chubb was not statutorily liable for Taube-Koret’s response costs but instead was contractually responsible because of the insurance policy issued to Taube-Koret.  Chubb simply reimbursed Taube-Koret after the cleanup was completed.  The court concluded that “an insurer that is only obligated to reimburse the insured for cleanup costs does not itself incur response costs.”  Insurers, however, “may still avail themselves of statutory subrogation pursuant to section 112(c) and under relevant state law, as long as they comply with specified requirements.”

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Meghan Covert Russell or Elizabeth L Leeper | 916.321.4500