Ninth Circuit Affirms Dismissal of Subrogated Claims Brought Under CERCLA Sections 107(a) and 112(c), as well as State Law Theories

Posted by in CERCLA, Cost Recovery, Emerging Issues, Environmental Litigation, Insurance & Liability on March 28, 2013

By Tiffany Hedgpeth and Michael Einhorn

On March 15, 2013, the Ninth Circuit held in Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., Case No. 11-16272, 2013 U.S. App. LEXIS 5198 (9th Cir., March 15, 2013), that the insurer Chubb Custom Insurance Company (“Chubb”) could not maintain its Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and state law subrogation claims against various potentially responsible parties (“PRPs”) because (1) the insured was not a “claimant” under CERCLA § 112(c) since it had not made a written demand to the Superfund or another PRP; (2) Chubb did not itself incur “response costs” by reimbursing the insured and therefore lacked standing to bring a CERCLA § 107(a) cost recovery action; and (3) the subrogated state law claims were time barred because the period of limitations commenced running when the insured knew or should have known of contamination on its property, not on the date Chubb made its payment to the insured.

Background Facts

Chubb issued Taube-Koret Campus for Jewish Life (“Taube-Koret”) a policy for Environmental Site Liability Insurance (“Policy”) for two parcels of property.  After Taube-Koret acquired the properties, the California Regional Water Quality Control Board (“Water Board”) issued orders requiring Taube-Koret to investigate and remediate volatile organic compounds (“VOCs”) found on the properties.  Taube-Koret complied with the orders and performed the required work.  Pursuant to the Policy, Chubb paid Taube-Koret $2.4 million to make it whole for its remediation costs. The Policy contained a statement that said “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.”  Chubb filed suit against various defendants who formerly owned or operated the properties or adjacent properties at the time alleged releases of hazardous substances occurred.  Chubb’s action asserted claims under CERCLA Sections 107(a) and 112(c) and state law.  The district court dismissed Chubb’s initial complaint and two amended complaints, each with leave to amend.  The district court dismissed Chubb’s third amended complaint with prejudice, holding Chubb failed to allege Taube-Koret was a claimant under CERCLA § 112(c), that Chubb lacked standing under CERCLA § 107(a), and that the state law claims were time barred. Chubb appealed.

Chubb’s CERCLA § 112(c) Claim

The Ninth Circuit reasoned that Section 112(c) permits an insurer to file a subrogation action for reimbursement of costs from PRPs, so long as the insurer complies with the statutory requirements.  One such requirement is that the insured party must be a “claimant” as defined in the statute.  Section 112(c) provides that “[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 hazardous substance shall be subrogated . . .”  42 USC § 9612(c)(2).  Therefore, Section 112(c) limits subrogation claims to compensation paid to any “claimant.”  A “claimant” is defined as any person who presents a claim for compensation, and a “claim” is defined as a demand in writing for a sum certain.  42 USC § 9601(4)-(5).  While CERCLA does not define or explain to whom this “claim” should be made, the Ninth Circuit stated that it has consistently held that the statute refers to a demand for reimbursement from either (i) the Superfund or (ii) a PRP.  See, e.g., Idaho v. Howmet Turbine, 814 F.2d 1376, 1380 (9th Cir. 1987).

Because Chubb did not allege that its insured, Taube-Koret, had made a demand to defendants, the Superfund, or any PRP, it could not maintain its CERCLA § 112(c) cause of action.  The Ninth Circuit rejected the argument that a claim to an insurer qualifies the insured as a claimant, stating “[t]here is no indication that section 112(c)(2) contemplates this meaning of claimant,” as Congress did not use the broader term “person” but instead used the term “claimant.”  Chubb v. Space Systems/Loral, at *22-23.

Chubb’s CERCLA § 107(a) Claim

The Ninth Circuit noted that the issue of whether CERCLA § 107(a) authorizes a subrogated cost recovery action was a matter of first impression, noting a lack of controlling or persuasive authority on the issue.  The Court engaged in a lengthy discussion that included an analysis of the text of Section 107(a), the statute as a whole, legislative history, and public policy.  The Ninth Circuit concludes that “an insurer that is only obligated to reimburse the insured for cleanup costs does not itself incur response costs,” and therefore it cannot bring a Section 107(a) cost recovery action.  In reaching this conclusion, the Court stated that Chubb could not bring a Section 107(a) action because it had no statutory liability: “Chubb lacks standing to sue under section 107(a) because it has not itself become statutorily liable for response costs under CERCLA.”  Chubb v. Space Systems/Loral, at *30.  The Ninth Circuit also held that permitting insurers to bring Section 107(a) actions would render Section 112(c) a nullity, which would violate rules of statutory interpretation, and that public policy favored disallowing subrogation claims to be brought pursuant to CERCLA § 107(a).

State Law Claims

The Ninth Circuit also affirmed the district court’s dismissal of Chubb’s subrogated state law claims (Cal. Health & Safety Code, negligence per se, and strict liability) as time-barred under California Code of Civil Procedure (“CCP”) § 338(b).  Under California law, the three-year period of limitation under CCP § 338 commences to run when a plaintiff knows, or reasonably should have known, of the wrongful conduct at issue.

Chubb challenged the district court’s dismissal by arguing that the statute of limitations did not commence until Chubb’s payment of the claim.  But the Ninth Circuit found that the cases cited by Chubb apply only to third-party subrogation actions, where an insurer asserts an equitable indemnity claim arising from a payment by an insurer to a third party on behalf of the insured.  Chubb’s claims were based on first-party losses by the insured – – Chubb reimbursed Taube-Koret directly for its costs of cleaning up contamination, and did not make a settlement payment to a third party.

Since Chubb asserted the claims of Taube-Koret in subrogation, the Ninth Circuit agreed with the district court and held that the statute of limitations period began to run when Taube-Koret knew, or should have known, of the release of hazardous substances on its properties.

Conclusion

The Ninth Circuit has made clear that CERCLA permits subrogation under Section 112(c) only when insurance payments are made to a “claimant” (i.e., parties who have submitted demands to the Superfund or other PRPs).  The court also made clear that Chubb lacked standing to bring a CERCLA § 107(a) claim because it was not itself a PRP.  Finally, the Court has made clear that in property contamination cases, insurers seeking subrogation under state law will be held to the same statute of limitations commencement trigger as is applicable to the insured.

California Supreme Court Invalidates the Last Vestiges of the Common Law Release Rule – Plaintiffs May Recover the Unsatisfied Portion of All Awarded Damages from Nonsettling Joint Tortfeasors, Even in the Absence of a Good Faith Settlement

Posted by in Environmental Litigation, Insurance & Liability on September 6, 2012

By Clare Bienvenu & John Edgcomb

Until the California Supreme Court’s recent ruling in Leung v. Verdugo Hills Hospital, S192768, the common law release rule was technically still good law in California.  Yet, the rule has long lain dormant due to jurisprudence and legislation that significantly narrowed its scope of applicability. Nevertheless, the particular set of facts that arose in Leung triggered the application of the common law release rule and, in turn, prompted the California Supreme Court to authoritatively end this rule’s application.

In short, the common law release rule provides that a plaintiff’s settlement with one joint tortfeasor automatically releases all other joint tortfeasors from liability as well. The rule arose out of the traditional common law rationale that there can only be one compensation for a single injury and that, in the instance of joint wrongdoers, each wrongdoer is responsible for the entire damage. As a result, compensation of plaintiff by any one of several jointly responsible tortfeasors in return for a release satisfies plaintiff’s entire claim, thereby releasing the other joint tortfeasors as well.

California courts first narrowed the scope of the common law release rule by holding that using the terminology “covenant not to sue,” rather than  “release,” in a settlement with one of several joint tortfeasors would preserve the plaintiff’s right to recover additional compensation from the remaining nonsettling joint tortfeasors. The California Legislature further narrowed the scope of the rule’s application by enacting section 877 of the Code of Civil Procedure, providing that where a court determines that a settlement has been entered into in “good faith,” the settlement does not automatically discharge other joint tortfeasors from liability, but merely reduces the claims against the remaining joint tortfeasors by the settlement amount. Thus, compliance with section 877 protects a plaintiff’s interest in recovering the full amount of damages by making the common law release rule inapplicable and preventing the release of nonsettling joint tortfeasors. Compliance with section 877 also protects the settling tortfeasor from all liability for contribution to the non-settling tortfeasors for payment of the remaining damages awarded at trial.

Despite these constraints on the application of the common law release rule, until Leung, the rule still applied in the narrow circumstance where a settlement was not determined to be in good faith under section 877. This is the circumstance under which Leung made its way to the California Supreme Court. In Leung, the plaintiff, a newborn baby boy, suffered irreversible brain damage six days after his birth, and the plaintiff, through his guardian ad litem, sued both the pediatrician and the hospital for negligence.  The plaintiff settled with the pediatrician prior to trial for $1 million, but the trial court denied the pediatrician’s application for a determination of a good faith settlement under section 877, stating that the settlement was grossly disproportionate to the pediatrician’s expected share of liability under a reasonable person standard. However, the plaintiff and the pediatrician proceeded with the settlement anyway.  At trial, the jury found the pediatrician 55% at fault, the hospital 40% at fault, and the plaintiff’s parents 5% at fault and awarded the plaintiff approximately $15 million in damages.  The trial court found the hospital jointly and severally liable for 95% of the damages, minus the $1 million already paid to the plaintiff in settlement. The hospital appealed, claiming that since the settlement had not been found to be in good faith under section 877, the settlement released it from liability as well under the common law release rule. The Court of Appeals reluctantly agreed with the hospital, on the basis that the California Supreme Court had never affirmatively abandoned the common law release rule in full.

The California Supreme Court granted the plaintiff’s petition for review and held, in this landmark decision, that the common law release rule is no longer to be followed in California. The Court’s decision focused on the harsh results that application of the rule can cause. For instance, in the case at hand, application of the rule meant the plaintiff would recover only 1/15th of his total awarded damages. The Court found the abolition of the rule to be in keeping with the legislative intent behind section 877’s enactment, which was to ameliorate the harshness and inequity of the common law release rule.

Abandoning the rule necessitated that the Court decide how to apportion liability among joint tortfeasors when the apportionment standard under Code of Civil Procedure section 877 does not apply because a trial court has determined that a tortfeasor’s settlement has not been made in good faith. The Court adopted the “setoff-with contribution” approach for this apportionment scenario. Under the “setoff-with contribution” approach, the money paid to the plaintiff in settlement is credited against the damages assessed against the nonsettling tortfeasors, the nonsettling tortfeasors pay that remaining amount to the plaintiff, and the nonsettling tortfeasors are then entitled to seek contribution from the settling tortfeasor for any damages in excess of their equitable share.  The Court found this approach to be appropriate because it does not change the respective positions of the parties and is fully consistent with the concepts of comparative fault and joint and several liability.

The California Supreme Court’s abandonment of the common law release rule and adoption of the “setoff-with-contribution” approach makes conditioning the effectiveness of any proposed pre-trial settlement on the obtaining of a good faith determination from the presiding court of critical importance for settling defendants. Where a proposed settlement is not determined to have been made in good faith by the trial court, but the settling defendant nonetheless proceeds with its settlement, that defendant bears the risk of a contribution action brought by joint tortfeasors who are assessed excess damages at trial.  The abandonment of the common law release rule perhaps does the least for nonsettling joint tortfeasors, who have no control over another defendant’s settlement. If a defendant and plaintiff decide to settle without the court’s good faith determination, the nonsettling tortfeasor is not released from liability, but must instead pay upfront all awarded damages that were not covered by the settlement and only then may file a contribution action against the settling defendant for its remaining share, exposed to the risk that the settling defendant may lack the financial ability to reimburse the nonsettling tortfeasor in this later contribution action.  On the other hand, plaintiffs fare well in the abandonment of the rule. Regardless of whether a settlement is in good faith or not, plaintiffs are able to recover the full amount of awarded damages, minus what they have already received in settlement, from nonsettling joint tortfeasors.

State of California v. Continental Insurance: California Supreme Court Ruling Paves the Way for “Stacking” Multiple Insurance Policy Limits in Response to Certain Environmental Cleanup Claims

Posted by in Environmental Litigation, Insurance & Liability, Remediation on August 30, 2012

by Clare Bienvenu & John D. Edgcomb

On August 9, 2012, in State of California v. Continental Insurance, S170506, the California Supreme Court applied the “all sums-with-stacking” rule to allow the State of California to “stack” the policy limits of several successive insurance policies to recover for continuous environmental property damage incurred over a twelve year period. This ruling, which was based on the plain language of the commercial general liability (CGL) policies involved, allows the State of California to recover the aggregate amount of the individual policy limits up to the entire amount of the property damage, instead of limiting the State’s recovery to the pro rata allocation scheme proposed by the insurers.

The case arose out of the court-mandated cleanup of the Stringfellow Acid Pits waste site in Riverside County, a waste disposal site designed and operated by the State from 1956 to 1972. Several different factors in the location and design of the site caused continuous groundwater contamination from 1964 through 1976, which the State estimates will cost as much as $700 million to clean up. The State sued each of the insurers that issued a CGL policy covering the site during the twelve-year period of groundwater contamination for indemnity.

This case involves, and the ruling directly affects, a particular kind of property damage referred to as a “long-tail” injury.  A “long-tail” injury is continuous and progressive property damage that is not attributable to one identifiable cause but, rather, to a continuing series of events. For that reason, identifying which insurance policy is responsible for covering a “long-tail” loss is difficult, if not impossible.  Such “long-tail” claims regularly arise in the context of environmental damage, products liability, and toxic tort actions. Thus, the Supreme Court’s decision will have significant ramifications in the litigation of such claims when based on insurance policies that contain similar language to the CGL policies at issue here.

The language of all of the CGL policies in Continental Insurance required the insurers to pay “all sums which the insured shall become obligated to pay . . . for damages . . . because of injury to or destruction of property” and limited the insurers’ liability to a specified dollar amount of the “ultimate net loss [of] each occurrence.” The court analyzed its prior decisions in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, and Aerojet-General Corp. v. Transport indemnity Co. (1997) 17 Cal.4th 38, and found them to stand for the principle that where a policy contains such “all sums” language, and there is a continuous loss, any portion of which occurs during the policy period, an insurer’s indemnity obligations extend beyond the expiration of the policy period up until the point where the continuous loss terminates. The court pointed out that the plain language of the CGL policies in the case at hand did not restrict the insurer’s liability to sums expended or damage incurred solely “during the policy period,” and, thus, the Montrose and Aerojet principle applied. Therefore, since all of the CGL policies covered the risk of environmental damage to the Stringfellow site at some point during the continuous groundwater contamination, each insurer’s indemnity obligations were triggered as to the entirety of the damage, up to each policy’s limits.

After finding that the “all sums” language of the policies allowed each of the policies to cover up to the amount of the entire property damage, the court went on to find that the language of the CGL policies at issue did not limit “stacking” of the coverages. “Stacking” means that where several policies are triggered by one occurrence, each policy can satisfy the claim up to the full limits of that policy, and these policy limits can be “stacked” across several policy periods to cover the entire continuous loss. The court found the “all-sums-with-stacking” rule to be in keeping with its previous decisions in Montrose and Aerojet, as well as permitted by the insurance policy language involved – specifically, the insurance policies did not prohibit “stacking.” This, in effect, allowed the State to “stack” insurance coverage from the different policy periods during which the damage occurred creating coverage limits equal to the sum of all of the limits of the purchased insurance policies. The court opined that the “all-sums-with-stacking” rule is particularly appropriate to the “uniquely progressive nature of long-tail injuries that cause progressive damage throughout multiple policy periods.” Cont’l.  Ins. at 15.

The Supreme Court’s decision has definitive implications for the litigation of future “long-tail” claims, including environmental cleanup claims, arising under past insurance policies that contain the “all sums” language and that do not prohibit “stacking”: principally, the “all-sums-with-stacking” rule will apply to permit the insured to recover the full extent of each policy that was in force when some part of the continuous property damage occurred and to “stack” those policy limits up to the amount of the entire property damage.  The decision likely will affect future California insurance policies by encouraging insurers to incorporate policy language defeating the “all-sums-with-stacking” rule.  Future insureds should be watchful for policy language prohibiting stacking, limiting indemnity, and specifying pro rata coverage allocation rules.

Statutory Contribution and Indemnity Claims Brought Under HSAA Are Barred By Good Faith Settlement Determination Pursuant To CCP §§ 877 and 877.6

Posted by in Insurance & Liability on April 5, 2010

 

On March 20, 2010, the Court of Appeal of the State of California, Fourth Appellate District, filed an opinion holding that a trial court’s determination of a good faith settlement under California Code of Civil Procedure (“CCP”) sections 877 and 877.6 bars claims for contribution and indemnity brought under Health and Safety Code section 25363, a provision of the Carpenter-Presley-Tanner Hazardous Substance Account Act (“HSAA”).  Fullerton Redevelopment Agency v. Southern California Gas Company, No. G041781, 2010 Cal. App. LEXIS 437 (Cal. App. 4th Dist. Mar. 30, 2010).

CCP §§ 877 and 877.6 permit a party to shield itself from claims for contribution and indemnity by a joint tortfeasor when the party enters a good faith settlement.  On the other hand, the HSAA authorizes the California Department of Toxic Substances Control (“DTSC”) to order potentially responsible parties (“PRPs”) to clean up property with hazardous substances, and then grants the PRPs who incur clean up costs the right to seek contribution and indemnity from others who are liable.  The Court in Fullerton held that CCP §§ 877 and 877.6 bars HSAA contribution and indemnity claims based on the plain language of the two statutes, but also offered analysis of related case law concerning good faith settlements and the barring of related indemnity and contribution claims.

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