Periconi, LLC

Supreme Court Declines to Weigh in on CERCLA Subrogation Case

Sometimes the Supreme Court's silence can be just as powerful as a decision. Or as James Joyce said about "absence" - it's the "highest form of presence."

The effect of the Court's declining to grant certiorari in the case of Chubb Custom Insurance Company v. Space Systems is that the Ninth Circuit's decision holding subrogation - the legal process by which one party (here, the insurer) is substituted for, and succeeds to the rights of, another (here, the insured) - not available to insurers in CERCLA cases is now essentially the law of the land.

Under CERCLA, there are three ways that a potentially responsible party ("PRP") can be made to pay for remediation of the contamination: (1) a party can bring an action to recover its response costs, under § 107(a); (2) a party can bring an action seeking recovery in contribution for some of its response costs, under § 113(f); and (3) a party such as an insurer or the government can seek reimbursement of monies paid to a "claimant" from other PRPs in subrogation, under § 112(c)(2). Though liability under CERCLA is strict, joint and several, recovery under each separate scheme is limited to appropriate circumstances.

The recent Chubb decision strictly construed the language of CERCLA §§ 107(a) and 112(c)(2), holding that the circumstances in which an insurance company can recover payments made to its insured for an environmental cleanup are limited. In this case, Taube-Koret purchased a contaminated property, and became a CERCLA PRP. It performed all necessary remedial action at this property, and incurred $2.4 million in response costs in doing so. Chubb fully reimbursed these costs under Taube-Koret's environmental insurance policy. Chubb then brought a subrogation action to recover these response costs from other PRPs, but the court found no CERCLA remedy available to Chubb.

On appeal to the Ninth Circuit, the court upheld the District Court's ruling that Chubb had no standing to bring a CERCLA § 107(a) cost recovery claim, as it did not personally incur "costs of response" in remediating the polluted site. Though Chubb had reimbursed Taube-Koret, these insurance payments were not "costs of response" compensable under the statute. Chubb's costs were not incurred due to its CERCLA liability, but rather were paid due to a contractual responsibility under the insurance policy.

The court also determined that Chubb could not assert a subrogation claim under CERCLA § 112(c) because Taube-Koret was itself not a "claimant." That is, Taube-Koret had not made a demand for damages from the Superfund or from any other PRP, as required by the statute. Through subrogation, an insurer takes the place of its insured to seek compensation from third parties. This is a derivative right, and cannot be greater in the subrogor than the subrogee. Since Taube-Koret had made no claim, Chubb was unable to stand in its place to sue other PRPs.

This result has significant implications for both the legal and insurance industries.

In the legal realm, we should expect courts to strictly construe the language of CERCLA, and by extension, the other federal environmental statutes - despite the fact that this may lead to results contrary to the "polluter pays" aims of these statutes. These statutes are complex, and each word carries considerable weight. Though Chubb did, in effect, pay for an environmental cleanup, without exactly following the language of the statute it was unable to receive compensation from the responsible parties.

Since insurers will not be able to access CERCLA remedies without precisely following the statutory guidelines, they may become wary of issuing environmental policies that cover hazardous substance contamination and cleanup. This could lead to higher insurance premiums for those involved in environmentally sensitive work. At the least, we can expect to see stricter drafting in the language of insurance policies, such as affirmative obligations on an insured to make claims of the type Taube-Koret failed to do.

Periconi, LLC has been involved in several matters involving substantial insurance claims for environmental remediation costs. We invite you to seek our advice on these matters early on when contemplating a site cleanup where insurance recovery is possible.

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