AIR, LAND AND WATER LAW NEWSLETTER
No. 98-1 June 1998

INSURANCE CARRIERS MAY HAVE A DUTY TO DEFEND DEMANDS BY ENVIRONMENTAL REGULATORY AGENCIES AND TO PAY FOR SITE INVESTIGATION COSTS

Albert M. Cohen

A party which receives a letter from a regulatory agency such as a Regional Water Quality Control Board demanding that it investigate or remediate contaminated property is often faced with the serious problem of how it is going to come up with the funds necessary to defend itself against the matter and pay for the required work. One option which all parties should seriously consider is seeking coverage from current and former general liability insurance carriers. As set forth below, several recent developments have enhanced the ability of insureds to obtain a defense from their carriers. Moreover, such a defense may well include the obligation to pay for site investigation costs.

1. SUMMARY

During the past year, California courts have rendered two significant decisions which have substantially enhanced the ability of entities with environmentally impaired properties to obtain insurance coverage from their insurance carriers. First, in Foster-Gardner, Inc. v. National Union Fire Insurance Company of Pittsburgh, et al., 56 Cal.App.4th 204, 65 Cal.Rptr.2d 127 (1997), review granted, 68 Cal.Rptr.2d 296 (October 15, 1997) ("Foster-Gardner"), the California Court of Appeal held that proceedings by a regulatory agency such as a Regional Water Quality Control Board requiring investigation and cleanup constitute a suit triggering an insurer's duty to defend. Second, in Aerojet-General Corporation, et al. v. Transport Indemnity Company, et al., 17 Cal.4th 38 (1997) ("Aerojet"), the California Supreme Court held that costs incurred to investigate a site in response to a demand from a regulatory agency may constitute defense costs which must be paid pursuant to an insurer's duty to defend. In light of these cases, any party with contaminated property should carefully review all of its insurance policies to determine whether there is a potential for coverage and, if appropriate, take steps to notify carriers of the claim in order to obtain a defense.

2.  INSURANCE CARRIERS MAY HAVE A DUTY TO DEFEND
     CLAIMS BY REGULATORY AGENCIES

Many insurance policies require that the carrier defend any suit against the insured seeking damages on account of . . . bodily injury or property damage. One problem insureds often face is that a regulatory agency requests, demands or orders that they take action at a site, but does not file suit in court. Insurance carriers often argue that the request, demand or order does not constitute a suit triggering a duty to defend.

3.  INSURANCE CARRIERS MAY HAVE A DUTY TO
     REIMBURSE INSUREDS FOR SITE INVESTIGATION
     COSTS IF THOSE COSTS WERE INCURRED TO
     AVOID OR MINIMIZE LIABILITY

Another problem commonly faced by insureds is that the regulatory agency is demanding that they conduct a site investigation. If they fail to do so, they face escalating risks and costs. Moreover, conducting a site investigation may be necessary to avoid or minimize liability by demonstrating that the contamination was caused by others or that additional investigation or remediation is unnecessary. Nevertheless, carriers often refused to pay such costs, arguing that the costs were incurred only because they were required by the regulatory agency. In Aerojet, the California Supreme Court made it clear that carriers must pay such costs under their duty to defend if such costs are necessary to avoid or minimize the insured's liability.

The case involved a situation where Aerojet had occupied a site for a number of years and engaged in activities which allegedly resulted in discharges of hazardous substances causing pollution in and around its site. The United States and the State of California had brought legal actions to force Aerojet to undertake cleanup, abatement and remedial work and to reimburse the governments for costs they had incurred under a variety of statutes, including the Comprehensive Environmental Response Compensation and Liability Act of 1980 (commonly called "CERCLA" or "Superfund"). The issue before the California Supreme Court was whether costs incurred by Aerojet because of government orders and demands and because of its agreement to perform site investigation, cleanup or remediation could be considered defense costs. The California Supreme Court emphatically held that where "site investigation expenses" are reasonably incurred in an attempt to "avoid or minimize liability," such costs "constitute defense costs an insurer must incur in fulfilling its duty to defend." The Supreme Court added that such costs could constitute defense costs even where a regulatory agency compels the insured to conduct the investigation. The Supreme Court reasoned that even in such circumstances, the costs could be defense costs because "it is well known that by conducting the study itself, the insured may be able to avoid or at least minimize liability-both for the costs of the study and for any costs subsequent thereto" (emphasis added). The test for whether site investigation expenses are recoverable as defense costs is "whether the site investigation would be conducted against liability by a reasonable insured under the same circumstances . . ." (Aerojet at 62). Thus, under Aerojet, costs incurred to investigate a site in response to a Regional Water Quality Control Board demand may constitute reimbursable defense costs.

4.  CONCLUSION