04.16.13

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Ninth Circuit Cuts Into Subrogation Rights Under CERCLA

PRACTICE GROUPS

A recent decision from the Ninth Circuit Court of Appeals makes it more challenging for insurers to assert subrogation rights to recoup costs paid to policyholders for environmental cleanup.1    In Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., et al., __F.3d__, 2013 WL 1093071 (9th Cir. 2013), the Ninth Circuit held that insurers can no longer make subrogation claims under Section 107 of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA).  Subrogation claims can only be made under state law and CERCLA Section 112(c)(2).  This decision has big practical implications for both insurers and policyholders, including property owners and developers.

Ninth Circuit Decision in Chubb v. Space Systems

Chubb paid its insured $2.4 million under an environmental insurance policy for costs to cleanup property intended to be developed as a community center and assisted living facility.  Chubb sought a subrogation recovery against the companies alleged to have contaminated the property.  Chubb cited Sections 107 and 112(c)(2) of CERCLA for its right to subrogation.  Chubb’s complaint was dismissed multiple times by the district court for missing the pleading mark set out by Twombly and Iqbal.  See The Pleading Threshold in Environmental Cleanup Cases (Twombly, Iqbal, and What to Do).

On appeal, the Ninth Circuit barred Chubb’s subrogation claim under CERCLA’s cost recovery provision, Section 107, because Chubb did not, itself, become statutorily liable for response costs by simply reimbursing the policyholder for their costs.  Since Chubb had no statutory liability, if more costs were incurred, the policyholder would be the one left holding the bag.  The court further justified its decision as deterring insurance companies from filing baseless suits against third parties in the hopes of getting a windfall—premium payments and settlement money.

The court ruled that subrogation claims can only be made under state law and Section 112(c)(2), which requires a policyholder first to make a demand against the Superfund or other potentially responsible parties (PRPs) before an insurer can sue a PRP for subrogation.  Requiring the policyholder first to make a claim before an insurer’s subrogation right ripens, the court reasoned, prevents the policyholder from scoring an improper double recovery from its insurer and other PRPs.

Implications and Practice Tips

An insurer’s right to subrogation is still protected under CERCLA; there are, however, some added steps and considerations for both the insurer and policyholder to keep in mind:

1.    Heightened Cooperation by Policyholders.  Insurers may want to ask policyholders to take more active roles in making claims against other PRPs.  How they do that may be constrained under Washington insurance law.  Insurers may also revise their future pollution policies to condition insurance payments on whether the policyholder first pursues claims against other PRPs.  This could potentially slow down cleanup as claims are being litigated.

2.    Higher Pleading Standard for Subrogation Claims.   Subrogation complaints will have to make explicit reference to the policyholder having made a claim against the Superfund or against other PRPs, or risk being thrown out.  Refer to our previous newsletter, The Pleading Threshold in Environmental Cleanup Cases (Twombly, Iqbal, and What to Do), for more tips about pleading claims in Superfund cases.

3.    Increased Environmental Insurance Premiums.  Insurers may be forced to hike premiums on environmental insurance policies to make up for the higher risk of not being able to recoup costs from other polluters.

4.    Further Bar of the Collateral Source Rule.  One of the rationales for the Ninth Circuit decision is CERCLA’s bar on double recovery.  Under the collateral source rule, a staple of tort law, an injured party can recover damages from a defendant regardless of payments already received from another source, such as insurance.  The Chubb decision is another reminder that federal courts have frequently rejected the application of the collateral source rule in CERCLA cases as contrary to CERCLA’s bar on double recovery.  Prudent policyholders, and insurers, will want to plan around these issues.

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1Subrogation in environmental cleanup cases allows an insurer to step into the shoes of its insured to recover amounts paid under a policy from other polluters.

If you have any questions about this newsletter, please contact the author listed above or the Riddell attorney with whom you normally consult.

The Riddell Williams Environmental and Natural Resources Group has played a key part in addressing some of the region’s most challenging environmental issues. Our group’s clients include utilities, international pulp and paper manufacturers, petroleum companies, regional energy companies, airlines and airfreight carriers, steel manufacturers, waste management companies, technology businesses, real estate development partnerships, private landowners and some of the state’s leading environmental groups.

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