No Double Recovery: Another Court Decides Collateral Source Rule Does Not Apply in CERCLA Cases

Another district court – the third in the past year – has held that damages that a potentially responsible party (“PRP”) can recover from other PRPs must be reduced by the amount of any response costs paid by its insurers. The decision by the U.S. District Court for the District of Nevada is grounded in § 114 of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA").[1] Basic Management Inc. v. United States (“BMI”).[2] CERCLA § 114 precludes any person from recovering compensation under state or federal law for the same response costs that were recovered under CERCLA. Plaintiffs had recovered over $20 million from their insurers, but sought to have the court apply the so-called “collateral source rule,” and allow them to proceed with a contribution action against other PRPs. The court rejected the argument. The District of Nevada is the first court in the Ninth Circuit’s jurisdiction to address the issue.

Factual Background

BMI involves the BMI Complex, a contaminated site in Henderson, Nevada. The United States owned the complex from 1941 until 1949, and used it for military purposes to produce magnesium, chlorine, and caustic soda. [3] In 1941, Atlantic Richfield Company’s (“ARCO”) predecessor in interest, the Anaconda Copper Mining Company, took over construction and operation of the magnesium plant at the complex. Anaconda personnel were responsible for the design, construction, operation, and maintenance of the plant.[4] Basic Management, Inc. ("BMI") purchased most of the complex property in 1952. Between 1953 and 1962, the U.S. Navy used part of the complex to operate an ammonium perchlorate plant. BMI acquired the remainder of the property in 1962.[5] In the 1980s, a variety of hazardous substances, including volatile and semivolatile organic compounds, pesticides, polychlorinated biphenyls, dioxins and difurans, metals, perchlorate, radionuclides, and asbestos were discovered at the complex. Between 1991 and 2006, the State of Nevada Division of Environmental Protection (“NDEP”) investigated the site and entered into a series of agreements with former owners and operators of the complex to facilitate cleanup. In 2006, BMI and other PRPs entered into a final agreement with NDEP under which BMI incurred over $22 million in response costs. The current owners (BMI, Basic Remediation Company, and Basic Environmental Company (collectively, “Plaintiffs”)) purchased two insurance policies issued in 1999 and 2002 by American International Specialty Lines Insurance Company (“AISLIC”) covering soil and groundwater contamination at the BMI Complex. Other PRPs paid the policy premiums.[6] Under the policies, investigation and remediation costs at the BMI Complex were pre-funded and capped. Invoices for Plaintiffs' cleanup costs were submitted directly to AISLIC, and AISLIC paid the vendors directly. As of February 2008, all claims submitted to AISLIC under those policies had been paid, totaling approximately $22 million.

In 2002, Plaintiffs filed a CERCLA action against the United States, ARCO, and Combined Reduction Company seeking contribution and recovery of response costs incurred to remediate the complex, as well as declaratory relief with respect to future costs.[7] A flurry of motions ensued and, in its February 25, 2008 opinion, the BMI court decided six motions for summary judgment.[8]

Statutory Background

CERCLA § 113(f) provides that "[a]ny person may seek contribution from any other person who is liable or potentially liable under [§ 107(a)].[9] The four classes of PRPs are: (1) current owners and operators of the facility; (2) past owners and operators of the facility at the time of disposal; (3) arrangers; and (4) transporters.[10] PRPs are liable for, among other things, "necessary costs of response incurred by any other person consistent with the national contingency plan [(“NCP”)]."[11] To prevail in a private cost recovery action, plaintiffs must establish that: (1) the site on which the hazardous substances are contained is a "facility"; (2) a "release" or "threatened release" of any "hazardous substance" from the facility occurred; (3) such "release" or "threatened release" caused plaintiffs to incur response costs that were "necessary" and "consistent with the [NCP]"; and (4) defendant is one of the four classes of persons subject to liability.[12] CERCLA § 114 provides that any person who receives compensation for removal costs, damages, or claims under CERCLA cannot recover the same costs, damages, or claims under any other state or federal law. Similarly, any person who receives compensation for removal costs, damages, or claims under a state or federal law other than CERCLA cannot recover the same costs, damages, or claims under CERCLA.[13]

Analysis in BMI

ARCO’s Operator and Arranger Liability at the BMI Complex

Plaintiffs claimed that ARCO, through its predecessor Anaconda, was liable as an operator and arranger. Plaintiffs argued that ARCO was directly liable for Anaconda’s actions due to Anaconda’s assertion of direct control over and management of the complex. Plaintiffs also argued that ARCO was derivatively liable under a veil piercing theory. ARCO contested liability on both theories, but conceded that if Anaconda was found liable as an operator or arranger, it would not contest liability as a successor.[14]

To determine whether ARCO had operator liability, the court applied United States v. Bestfoods.[15] Under Bestfoods, a parent corporation is directly liable as an operator for its own actions if it manages, directs, or conducts “operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations."[16] Accordingly, "[t]he critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under the accepted norms of parental oversight of a subsidiary's facility."[17] Applying this test to the acts of Anaconda and its predecessor in interest, the court found that their managers, directors, and employees were involved in building, engineering design, and daily operations of the BMI Complex, as well as the design and funding of its waste management and disposal systems. The court determined that this involvement exceeded “the norms of parental supervision of a subsidiary,” and held ARCO directly liable as an operator.[18]

Because BMI was not a “traditional” arranger liability case, to determine whether ARCO was also liable as an arranger, the court applied the test set forth by the Ninth Circuit in United States v. Shell Oil Company for “broader” arranger liability.[19] Under this test, for arranger liability to attach a person must: “(1) own or possess waste and arrange for its disposal; or (2) have the authority to control and to exercise some actual control over the disposal of waste."[20] The court found that “[ARCO], through its predecessor Anaconda, possessed waste[,] arranged for its disposal[,] and had the authority to control and exercised some actual control over disposal of the waste.”[21] The court held ARCO liable as an arranger also.[22]

The United States’ Former Owner and Arranger Liability at the BMI Complex

Plaintiffs contended that the United States was liable under CERCLA at the BMI Complex as a past owner and an arranger, pointing to the United States’ World War II magnesium plant operations and post-war involvement with the ammonium perchlorate facility.[23] The United States conceded its ownership of the complex during the relevant time period.[24] Analyzing arranger liability under the broader theory, the court found that the United States: (1) “had the authority to control and exercise some actual control over the disposal of waste at the BMI Complex”; (2) “owned the raw materials, the process materials, the products and by-products, and the wastes, before, during and after processing”; (3) “contracted for the building of the complex including waste disposal facilities;” and (4) “knew and approved of the waste disposal activities at the facility.”[25] Accordingly, the court held the United States liable as an arranger also.[26]

The Relevance of Insurance Payments to the Definitions of “Incur” and “Response Costs”

Despite the finding of liability as an arranger, the United States argued that Plaintiffs failed to incur response costs within the meaning of CERCLA because an insurer paid the majority of Plaintiffs’ costs. The court noted that such payment did not somehow shift CERCLA liability to the insurers and absolve Plaintiffs of liability. The court determined, however, that the statutory term “‘incur’ should include the requirement that a [PRP] has or will actually incur the specific cost for which it seeks contribution. Otherwise, they are only obtaining a contribution windfall for a cost which they will never incur or have to pay. While it is true that Plaintiffs could have paid for the costs themselves and submitted those claims to AISLIC for reimbursement under the insurance polices, the fact remains that AISLIC pays the vendors directly and is obligated to do into the future.”[27] Applying this standard, the court found that Plaintiffs had incurred liability for the cleanup, but had not incurred “the specific costs directly paid by or reimbursable by the insurer.”[28] The court did find that the costs incurred at the BMI Complex “for investigating, characterizing, and remediating the contamination,” to the extent that they were actually incurred by Plaintiffs, qualify as CERCLA response costs.[29]

A “Necessary” Cleanup Action Need Not be the Least Expensive Alternative

The United States also challenged Plaintiffs’ alleged response costs as not “necessary” within the meaning of the statute because Plaintiffs chose the most expensive of three alternative cleanup options for the site. The court found “no authority supporting the United States' argument that the term ‘necessary’ requires that the least expensive clean-up option be used for the site,” and rejected the United States’ argument that a “cost effective” cleanup means the least expensive option. Rather, the court determined that “‘cost-effective’ must refer to the most cost[-]effective method for alleviating the threat to human health and the environment in the specific location, surroundings and likely uses for the land.”[30] Thus, “[g]iven the site's location in Henderson, Nevada, and its proximity to residential developments,” the court found it “reasonable to conclude that the more expensive excavation option to meet a higher cleanup standard was necessary to address the threat to human health and the environment.”[31]

The Court’s Refusal to Apply the Collateral Source Rule in the Context of CERCLA

After deciding that both ARCO and the United States were liable under CERCLA, the court addressed whether Plaintiffs could recover its response costs from Defendants in the BMI action. The court decided that, because Plaintiffs’ insurers were billed directly and paid for almost all response costs, permitting Plaintiffs to recover those costs again would constitute a double recovery, which CERCLA § 114 prohibits.[32]

Plaintiffs argued that they should not be precluded from recovering their costs from Defendants “simply because they had the foresight to purchase insurance.”[33] In support, Plaintiffs alleged that the collateral source rule precludes Defendants from offsetting their CERCLA liability with any insurance monies received by Plaintiffs.[34] The collateral source rule provides that, “if an injured party received some compensation for injuries from an outside source, independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor.”[35] The court found no authority supporting application of the rule in a CERCLA context. Relying largely on the opinion in Vine Street, LLC v. Keeling,[36] the BMI court declined to allow recovery under the collateral source rule in BMI’s contribution action. It held that Plaintiffs in CERCLA contribution actions can only recover from other PRPs costs expended beyond their share of responsibility. Because almost all of Plaintiffs’ costs were paid directly by insurers, the court determined that “[a]llowing Plaintiffs to recover those costs ‘again’ from Defendants would in essence allow Plaintiffs to profit from their own and prior contamination … simply because they are in the subsequent chain of title. The purpose of the [c]ontribution element of CERCLA was to reallocate the remedial cost to those who were ultimately responsible for the pollution, not to provide a windfall recovery for parties who happen to be in the chain of title. That is undoubtedly the reason for the addition of the prohibition against double recovery in [CERCLA].”[37] The court held that “[t]he field has been preempted by the federal statutory mandate of CERCLA § 114. Equity and common sense further dictate that Plaintiffs cannot recover the remediation costs paid for by their insurance policies.”[38]

Conclusion

Every federal district court that has addressed the applicability of the collateral source rule in a CERCLA case has concluded that the rule does not apply.[39] Still, a federal court of appeals has yet to address the issue. If insurance proceeds are not definitively allocated to response costs, courts interpreting relevant state law will not necessarily offset response cost recovery under CERCLA by the amount of those proceeds.[40] If a plaintiff settles with its insurer before pursuing a non-settling PRP, the settlement credit issue will typically turn largely on state insurance law. Thus, practitioners should consult state coverage law in determining how to structure settlements that may come into play in subsequent CERCLA cost recovery actions.

The BMI opinion is also noteworthy because of its determination that the United States is liable as a past owner and arranger at the BMI Complex. As previously discussed in the Environmental News, absent a broadly worded contract and extensive actual involvement, a majority of courts have refused to hold the United States liable as an arranger or operator under CERCLA based on its wartime activities related to hazardous waste.[41] Thus, the opinion provides useful guidance on the type and scope of activities that satisfy the evidentiary standard necessary to establish federal arranger liability, even under the deferential standard often afforded to the United States.

For more information, contact Jessica Ferrell or any member of Marten Law Group’s Waste Cleanup practice group.