In a case that should draw the attention of any insurance company that provides an environmental policy, a U.S. appeals court ruled that Chubb Custom Insurance Company could not use CERCLA’s subrogation provision to recover an insurance payment made by Chubb to a client that remediated environmental contamination on a property.

According to the U.S. Court of Appeals for the 9th Circuit, Chubb’s client (the insured) would need to have been a claimant under CERCLA, that is, a person who demands compensation for damages or costs from the Superfund or a liable party resulting from a CERLCA violation.  This was not the case, said the 9th Circuit, because the insured did not make a CERCLA claim and instead received an insurance payment from Chubb.  According to the majority in a 2-to-1 decision, an insurance payment is not included within the meaning of “costs of response.”

$2.4 million insurance payment

The case involves several property purchases made in Palo Alto, California, by Taube-Koret Campus for Jewish Life (Taube Koret).  Soil on the properties was found to be contaminated with volatile organic compounds (VOCs).  The pollution was alleged to have been caused by the defendants, companies that owned and operated facilities on the adjacent land.  These companies included Space Systems/Loral, Inc. (formerly Ford Aerospace & Communications Corporation), Ford Motor Company, Sun Microsystems, Chevron Corporation, and Harman Stevenson Inc. 

Taube Koret remediated the property and obtained a $2.4 million policy payment from Chubb to cover the cost of cleanup. 

The core of Chubb’s complaint is that the defendants should be held jointly and severally liable for Taube-Koret’s response costs.  Initially, Chubb argued in the U.S. district court that three CERCLA provisions allowed Chubb to make a CERCLA claim to recover its payment to Taube-Koret.  The district court rule against Chubb, which then appealed to the 9th Circuit, using two of the three earlier claims.   Specifically, Chubb argued that it was entitled to subrogation claims under CERCLA Sections 107(a) and 112(c)(2).

Subrogation

Subrogation is a common law doctrine based in equity that permits an insurer to take the place of the insured to pursue recovery from a third party responsible for the insured’s loss.  As the party that pays the insured’s loss, the insurer (the subrogee) stands in for the insured (the subrogor), and succeeds to the insured’s rights and remedies.

The 9th Circuit notes that an important limit to the right of subrogation is that it is a purely derivative right—meaning that the subrogee succeeds to rights no greater than those of the subrogor.  The district court found and the 9th Circuit affirmed that Taube-Koret was not entitled to claimant status under CERCLA and the recovery rights that go with it because it did not incur response costs of its own in remediating the site; Taube-Koret’s only relevant expenses were the premiums it paid to Chubb for the insurance policy. 

“If Chubb reimbursed Taube-Koret for the response costs, it could then bring a subrogation claim under Section 112(c)(2),” states the majority. “Here, however, Chubb has not alleged that Taube-Koret has made such a demand on Defendants, the Superfund, or any other [potentially responsible party].  Chubb only alleges that Taube-Koret has made an insurance claim to Chubb. There is no indication that Section 112(c)(2) contemplates this meaning of claimant.”

“In essence,” the majority continued, “an insurer that is only obligated to reimburse the insured for cleanup costs does not itself incur response costs.”

No reliance on CERCLA
As an aside, the majority noted that there is no evidence that insurance companies rely on the availability of CERCLA remedies in issuing environmental insurance policies. Nor is there evidence that insurers depend on CERCLA recoveries to stay in business. “An insurer’s business and growth depends on the collection of premiums and the small likelihood of paying claims, rather than recovery through lawsuits,” the majority stated.

Click here for the 9th Circuit’s majority opinion in Chubb v. Space Systems/Loral, Inc. et al.