Insurers Cannot Use Subrogation to Recover Cleanup Costs Paid to an Insured From Other PRPs
The U.S. Supreme Court has written the last chapter in a years-long effort by an insurance company to recover money paid to an insured from other PRPs in a CERCLA case under a subrogation theory. In denying a petition for certiorari, the high Court declined to review a decision by the Ninth Circuit Court of Appeals that limited the rights of insurance companies to recover payments made for environmental cleanup costs under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42. U.S.C. §§ 9602-9675. Chubb Custom Insurance Company v. Space Systems/Loral, et al., 710 F.3d 946 (9th Cir. 2013), cert. denied, 82 U.S.L.W. 3241 (U.S. Jan. 13, 2014) (No. 13-412). In doing so, the Court confirmed the importance of applying strict rules of construction when assessing the scope of the “tripartite” scheme of statutory remedies (cost recovery, contribution, and subrogation) that are available under CERCLA, depending on relevant factual and legal circumstances.
CERCLA’s “Tripartite” Remedial Scheme
CERCLA is often viewed as providing just two types of compensatory remedies in environmental cleanup cases: cost recovery, pursuant to CERCLA section 107, and contribution, pursuant to CERCLA section 113. Under section 107(a)(4)(A)-(B), responsible parties can be held directly liable for environmental removal and remedial action costs incurred by the federal and state governments and Indian tribes, and for “any other necessary costs of response incurred by any other person consistent with the national contingency plan.” Under section 113(f), responsible parties also can be held liable for contribution for environmental response costs during or following a government abatement action brought pursuant to CERCLA section 106 or a direct cost recovery action brought under section 107(a).
In addition to cost recovery and contribution, CERCLA also contemplates a third type of compensatory remedy – the remedy of subrogation – that has been given relatively little attention over the years. CERCLA section 112(c) specifically establishes two separate subrogation remedies. The first allows the federal government to obtain reimbursement of monies paid to claimants out of the Hazardous Substance Trust (“Superfund,” or “Fund”) established pursuant to CERCLA section 111. The second allows “any person, including the Fund, who pays compensation pursuant to [CERCLA] to any claimant for damages or costs resulting from a release of a hazardous substance….” In both cases, the payment of money to claimants enables the paying party to acquire through subrogation certain rights the receiving party has to separately obtain reimbursement of environmental response costs on its own.
This third type of remedy – the remedy of subrogation – was the focus of the Ninth Circuit’s decision in Chubb v. Space Systems/Loral. It is what the court described there as the third component of the “tripartite remedial scheme” that Congress established “to enable the government and private parties pursue [actions for environmental response costs] in a court of law….” Chubb Custom Insurance Company, the plaintiff and appellant in the case, had argued that independent of any statutory subrogation remedies allowed under section 112, it also should be allowed as a matter of equity separate subrogation remedies as part of a direct cost recovery action brought under section 107(a). It was this specific argument (raising an issue of first impression in the federal courts) that the Ninth Circuit firmly rejected. Now with the imprimatur of the U.S. Supreme Court, the Ninth Circuit has made clear that the only compensatory remedies available under CERCLA are exclusively the ones that Congress expressly authorized by the plain language of the statute.
Subrogation in the Context of Environmental Insurance Claims
The concept of subrogation derives from the common law doctrine, based in equity, that gives an insurer the right to take the place of an insured to pursue recovery from third-party tortfeasors who are responsible for the insured’s loss – thus, “as the party who pays the insured’s loss, the insurer (the subrogee) ‘stands in the shoes’ of the insured (the subrogor) and succeeds to the insured’s rights and remedies.” CERCLA itself does not predicate the availability of subrogation rights on the existence of an insurance contract – indeed, the availability of subrogation to the United States (with respect to claims paid from the Superfund) has nothing in principle to do with insurance. However, because insurance is one way in which parties incurring environmental response costs can be compensated for their expense, payments by insurance companies can provide grounds for the assertion of a private party subrogation claim under CERCLA section 112(c)(2).
Chubb v. Space Systems/Loral involved a pollution legal liability (PLL) policy that a property owner (the Taube-Koret Campus for Jewish Life) had obtained from the Chubb Custom Insurance Company for the purpose of insuring against the potential cost of remediating contamination at a 47-acre site in Palo Alto, California. PLL policies generally are issued to cover insurable losses associated with unexpected environmental cleanups undertaken to address previously unknown contamination problems. In this case, the insured alleged that it had discovered and remediated previously unknown contamination that was attributable to earlier commercial and industrial operations at the site. The insured pursued an insurance claim against Chubb for the cost of the remediation and obtained a settlement of the claim from the insurance company. The insurance company then filed an action in federal court to recover the amount of the settlement from former alleged owners and operators at the site under CERCLA and ancillary provisions of state law.
The lawsuit was premised on two fundamental assertions of law. First, Chubb alleged that it was entitled to recover its settlement payment as a subrogee under CERCLA section 112(c)(2), even though Chubb’s insured had never pursued a CERCLA claim in its own right against any of the defendants or other potentially responsible parties. Second, Chubb alleged that it was entitled to recover its payment under the cost recovery provisions of CERCLA section 107(a), which it argued allowed it to pursue such a claims as a subrogee on equitable grounds. The district court rejected both of these assertions. After a series of motions challenging the sufficiency of Chubb’s initial pleadings, the district court dismissed the case with prejudice, finding that the allegations underlying Chubb’s CERCLA claims were inadequate to satisfy the plausibility standard for federal court pleadings articulated by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. It was this decision that Chubb appealed to the Ninth Circuit.
The Ninth Circuit Decision in Chubb v. Space Systems/Loral
In a 2-1 panel majority decision on March 15, 2013, the Ninth Circuit sustained the district court’s dismissal in Chubb v. Space Systems/Loral.
With respect first to section 112(c), the majority acknowledged that the “issue before us is whether … Taube-Koret is a ‘claimant’ under CERCLA.” To address that issue, the majority looked first to the express language of the statute, which (1) provides an explicit subrogation remedy to “[a]ny person … who pays compensation pursuant to this chapter [i.e., CERCLA] to any claimant for damages or costs resulting from a release of a hazardous substance,” and (2) defines “claimant” as “any person who presents a claim for compensation under this chapter.” The majority also noted the Ninth Circuit’s prior holding in State of Idaho v. Howmet Turbine, in which it observed that “‘claim’ consistently refers to a demand for reimbursement from the Superfund, except for its first appearance in the second sentence of section 112(a), where it refers more generally to a pre-claim/pre-action demand to the liable party.” Finally, the majority pointed to a part of CERCLA’s legislative history that indicated “[i]n all instances the claimant is required to first present his claim to the potentially liable person or person, if known, prior to pursuing any right under [section 112.]”
With this background, the majority concluded that “the definition of claimant required Chubb to make a written demand for payment for its response costs from potentially liable parties,” and that since Chubb had not alleged that Taube-Koret had made such a demand on defendants, the Superfund, or any other PRP, it could not pursue a subrogation claim under CERCLA section 112(c)(2). The majority also acknowledged this result meant that “[a]n insurer’s subrogation right under section 112(c)(2) may be narrower than under common law principles of equitable subrogation, but it is within Congress’s right to impose such limits.”
With respect to CERCLA section 107(a), the majority first conceded that “[w]e know of no controlling authority or persuasive circuit authority on the issue of whether section 107(a) authorizes a subrogated cost-recovery action.” It also stated that where common law principles (such as the common law principles governing the remedy of subrogation) are well established, “we presume that ‘Congress has legislated with the expectation that the principle will apply except when a statutory purpose to the contrary is evident.’” Nevertheless, the majority reasoned that “in this case, the presumption in favor of subrogation does not apply under CERCLA section 107(a) because there is clear congressional intent to the contrary, as evident from the statutory text of section 107(a); its interaction with section 112(c), which ‘speak[s] directly’ to the issue of subrogation …; and CERCLA’s overall statutory purpose.”
On that basis, the majority found that while “section 107(a) plainly applies to a person who, through his or her own actions becomes statutorily liable for, or is subject to, the costs related to the cleanup of hazardous substances … a subrogee – simply by stepping into the shoes of the insured via a reimbursement – cannot be liable for response costs under CERCLA, and thus cannot itself incur response costs.” It therefore held that “the express language of section 107(a), as interpreted by the Supreme Court and this circuit, is inconsistent with reading that provision as permitting a type of derivative incurment of response costs through subrogation;” consequently, Chubb “lacks standing to sue under section 107(a) because it has not itself become statutorily liable for response costs under CERCLA.”
Chubb sought reconsideration of the March 15, 2013, majority opinion by promptly filing a combined petition for panel rehearing and rehearing en banc. The petition was denied in both respects on July 3, 2013, and Chubb’s petition to the Supreme Court for issuance of a writ of certiorari followed shortly thereafter. Now with the denial of certiorari petition, the Ninth Circuit’s majority opinion is effectively established as an important nationwide precedent.
Reliance on Chubb v. Space Systems/Loral in Other Recent Federal Cases
At the same time Chubb v. Space Systems/Loral was on appeal, Chartis Specialty Insurance Company (a unit of American International Group Inc.) was litigating similar issues in a separate lawsuit against the United States, involving contamination problems at a former munitions manufacturing facility in Hollister, California. In Chartis Specialty Company, et al., v. United States, Chartis alleged that it not only had reimbursed its insured for environmental response costs the policyholder independently had incurred, but also that it had paid more than $30 million directly to remediation contractors in addition to policyholder reimbursements. On that basis, Chartis brought both a cost recover claim under CERCLA section 107 “on behalf of itself and as [its insured’s] contractual subrogee” and a statutory subrogation claim under section 112(c)(2).
As to Chartis’ section 107 claim, the district court relied on the Chubb decision to dismiss it in all respects, finding that payments made pursuant to contractual obligations in an insurance policy did not qualify as environmental response costs within the meaning of CERCLA, even when those payments are made directly to contractors instead of the policyholder. According to the court, the Ninth Circuit’s “core holding is that an insurer has not ‘incurred’ costs within the meaning of § 107(a) because it is not liable under CERCLA for remediation costs. Under this rule, the holding in Chubb applies with equal force to insurers who pay costs directly.” In contrast to Chartis’ section 107 claim, the district court declined to dismiss the company’s section 112(c)(2) claim, finding that Chartis had alleged that the insured made a sufficient prior demand against a potential responsible party (the United States) to qualify it as a “claimant” for purposes of the statute. In that context, the court rejected an argument that claims against responsible parties only count for section 112 purposes when asserted after receiving reimbursements from the insurer. The court found this reading of section 112 “overly harsh and not compelled by the holding in Chubb.”
The detailed analysis provided by the majority opinion of CERCLA’s complex scheme of administrative and judicial remedies in Chubb v. Space Systems/Loral, makes it likely that it will continue to be cited as one of the more definitive CERCLA decisions in recent years, and not just in the insurance context. As the Supreme Court’s denial of certiorari review makes clear, there is little room any longer to argue that the statute allows recourse to recover money spent on environmental cleanups based on equitable or other legal theories that go beyond the limited “tri-paritite” scheme Congress expressly authorized in CERCLA sections 107, 112, and 113.
For more information on the Ninth Circuit’s decision in Chubb v. Space Systems/Loral, please contact Kevin Haroff in the firm’s San Francisco office.
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