Oregon Pollution Insurance Law Update: ADR Expenses Fall Within Insurer’s Duty to Defend

An Oregon district court has ruled that, under Oregon law, legal expenses for participating in alternative dispute resolution (“ADR”) fall within the scope of defense costs for which an insurer is liable under its duty to defend a claim for payment of response costs under CERCLA. The opinion was issued by District Court Judge Garr M. King in the case of Ash Grove Cement Co. v. Liberty Mutual Ins. Co.[1]

Background Facts

Ash Grove Cement Company operates facilities on the Willamette River in Portland, Oregon, in an area that comprises part of the Portland Harbor federal Superfund site. EPA added the Portland Harbor Site to the National Priorities List in 2000.

In November 2006, Ash Grove received a letter from a group of companies called the “Lower Willamette Group” who were participating in the remedial investigation for the Portland Harbor site. The letter stated that Ash Grove had been “identified as a [PRP] with respect to liability for response costs and damages at the site.”[2] On January 18, 2008, the EPA sent Ash Grove a letter seeking information pursuant to CERCLA Section 104(e).[3] Shortly after receiving EPA’s 104(e) letter, Ash Grove received a letter from the Portland Harbor Natural Resources Trustee Council, stating that the Council had identified Ash Grove as an “entity that may potentially be liable for response costs under … CERCLA.”[4]

On January 11, 2008, Ash Grove received notice of and an invitation to participate in an allocation process being conducted by a third-party neutral, involving 70 other parties. EPA did not convene the process, but it compensates the neutral and conditions approval of any settlement on the parties’ reimbursing EPA for the neutral’s costs.

Ash Grove notified its comprehensive general liability insurers of the letters and, in May 2009, sought reimbursement of the legal costs it had incurred responding to EPA’s 104(e) letter. When Ash Grove first sent copies of the 104(e) letters to its carriers, it did not ask the carriers to take any action and did not ask for a defense at that time. However, on May 27, 2008, Ash Grove wrote to one of its carriers to explain the history of the Lower Willamette Group letter and stated that the carriers were responsible for Ash Grove’s costs of responding to the 104(e) request.[5] Ash Grove sent a similar letter to another carrier in November 2008.[6] These letters were the first notice that Ash Grove had given to its carriers that it believed that they were liable for defense costs associated with the Portland Harbor site.

The carriers responded by asserting that, because no suit had been filed against Ash Grove, the insurers were under no obligation to defend.[7] After the carriers refused Ash Grove’s request for reimbursement, Ash Grove initiated a declaratory judgment action in Oregon state court, which was removed by the insurers to federal court in February 2009.

In a previous ruling in the case, Judge King held that the insurers’ duty to defend was triggered by EPA’s request for information under CERCLA § 104(e). The rationale of that decision was that a 104(e) letter was “not merely a request that Ash Grove provide information, it contains a threat of legal action and substantial penalties for failure to comply with the request.” As a result, the court held that the 104(e) letter was “equivalent to ‘suit seeking damages’ under Ash Grove’s policies, triggering the insurers’ duty to defend.”[8]

The ADR process took place after Ash Grove forwarded the 104(e) letters to its carriers, but before it sought reimbursement for the costs of responding to the 104(e) letters. The question of whether the ADR costs fell within the scope of the insurers’ duty to defend was presented on cross-motions for summary judgment.

Insurers’ Defenses of Failure to Tender and Voluntary Payment

In addition to arguing against their having any responsibility for payment of Ash Grove’s ADR costs, the insurers also maintained that Ash Grove had not formally tendered a claim for purposes of their defense duty until it first requested reimbursement of the 104(e) response costs. Ash Grove took the position that the claim was tendered when it first forwarded the 104(e) letters to the carriers. Ash Grove maintained that, once the 104(e) letters had been forwarded, the carriers were under a duty to investigate whether coverage existed, unless Ash Grove specifically asked the carriers not to defend it.

The court concluded that Oregon law does not define “what conduct is necessary to tender a claim or suit.”[9] Accordingly, the court looked to the language of the policies, which stated that: “the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage … and may make such investigation and settlement of any claim or suit as it deems expedient.…”[10] In addition to this language, the court noted that the Oregon legislature had identified an insurer’s failure to “adopt and implement reasonable standards for prompt investigation of claims” as an unfair claim settlement practice.[11] Given this language, the court stated that it could not determine as a matter of law that the insurers’ duty to defend was not triggered when Ash Grove first forwarded the 104(e) letters.

The insurers also argued that Ash Grove had violated the policies’ “voluntary payment” condition, relieving the carriers of an obligation to reimburse any expenses Ash Grove incurred prior to the date of tender because they were voluntary payments. Ash Grove responded that the voluntary payment condition was waived when the carriers refused to accept their duty to defend, citing Oregon case law finding a waiver of a voluntary payment condition by an insurer who failed to respond to a tender of defense.[12] The court held that the existence of factual issues precluded summary judgment and left the waiver issue for trial.

Alternative Dispute Resolution Costs as Part of a Carrier’s Defense Obligation

The insurers also asked the court to find that their defense obligation was limited to the costs Ash Grove incurred in responding to the 104(e) letters, and that their defense duty did not extend to the costs of Ash Grove’s participation in the ADR process. The carriers claimed that Ash Grove was under no obligation to accept what was simply an invitation to participate in the ADR process. While the insurers acknowledged that participation “may be a prudent business decision,” they maintained that the costs of doing so were not defense costs.

Ash Grove argued that Oregon law identifies “activities broader than those in typical civil litigation” as defense costs. It maintained that the 104(e) process was part of a “compulsory administrative process” and that the ADR process was “intertwined with the 104(e) request and focused on Ash Grove’s liability.”[13]

According to Ash Grove, the ADR process was “essential to limiting its liability because it can advocate for a lower allocation prior to EPA issuing a unilateral order which is nearly impossible to challenge” and that EPA will not negotiate resolutions outside the ADR process.[14] For more on the implications of EPA unilateral administrative orders and due process concerns under CERCLA, see S. Jones, DC Circuit Set to Consider the Constitutionality of CERCLA UAOs – Again, Marten Law Environmental News (March 25, 2010).

Judge King held that, based on the fact that Oregon’s statutory definition of a “suit” included administrative proceedings initiated by EPA and Oregon’s Department of Environmental Quality, the ADR process “might be a reasonable and necessary defense cost.”[15] According to the court, “Ash Grove must take part in the ADR process to have any chance of influencing its ultimate responsibility for cleanup costs at the Site. This is in spite of the fact that participation in the ADR process is completely voluntary.” The court noted that Oregon statutory law contains a rebuttable presumption that costs of “preliminary assessments, remedial investigations, risk assessments and other necessary investigations … are defense costs payable by the insurer.”[16] The court rejected the insurers’ argument that the ADR costs were not defense costs as a matter of law, and invited Ash Grove to present evidence as to what portions or all of the ADR process are reasonable and necessary defense costs.

Conclusion

Inclusion of ADR costs as “reasonable and necessary” defense costs is a logical extension of the reasoning that a 104(e) letter triggers an insurer’s duty to defend, even in the absence of formal litigation. Based on Oregon’s definition of “suit” as including administrative processes and the court’s view that the ADR process was “intertwined” with the 104(e) process, an insurer’s duty to defend can encompass the ADR process, if an insured can present evidence that participation in the process was a practical necessity for any party attempting to reduce its ultimate allocation of responsibility at a Superfund site.

For more information, contact Steve Jones or any member of Marten Law’s Environmental Litigation practice group.