Posted on June 16, 2022 by Thomas M. Hnasko
In my last blog, I noted that there is no case law under CERCLA analyzing whether an insurer may rely upon the absolute pollution exclusion to avoid the duty to defend where a complaint for cost recovery alleges joint and several liability against the insured under Section 107 of CERCLA. This includes liability for the costs of response necessary to abate hazardous substances which may have emanated from property other than that owned or occupied by the insured. Under the first prong of so-called absolute pollution exclusion, the insurer is not obligated to defend or cover losses for release of pollutants “at or from any premises owned by the insured.” However, the precise language of the exclusion does not appear to fit the allegation that the insured could be deemed liable under Section 107 for releases from property not owned or occupied by the insured.
The United States District Court for the District of New Mexico faced this precise question in Chisholm’s Village Plaza, LLC v. Travelers Insurance, Co., et al, No. 2:20-CV-00920-JB-KRS. The Chisolm’s case concerned two insurers’ failure to defend Chisholm’s Village Plaza, LLC (“Chisolm’s”), their insured, in the underlying CERCLA case of City of Las Cruces, et al v. United States of America, et al, No. 2:17-CV-00809-JCH-JBW, federal district court for the District of New Mexico. In that case, the responsible party sought contribution from Chisholm’s under Section 113 and also sought payment for all response costs under Section 107 for the entire contamination plume, which was caused by unrelated third parties. Chisholm’s tendered a claim for defense and indemnity benefits to its insurers in August 2019, but both insurers refused coverage and failed to provide a defense to Chisholm’s under a reservation of rights. Neither defendant instituted a declaratory judgment action to determine coverage or their respective duties to defend Chisholm’s.
At oral argument on Chisholm’s motion for summary judgment, the attorney of record (as it happens, the author) asserted that the insurers had ignored the allegations of the underlying complaint, which sought to impose liability on Chisholm’s not only for the discharge of hazard substances from its property, but also for hazardous substances discharged by other co-defendants from other properties. This Section 107 joint and several liability claim went far beyond imposing liability for releases from the insured’s property and thus triggered the duty to defend the entire complaint based on the long-standing principle that a potential for coverage for one claim invokes a duty to defend all claims. The district court agreed, holding that the insurers had no basis to invoke the exclusion predicated upon discharges or releases of pollutants from locations other than the premises owned or occupied by the insured.
Despite this ruling, one of the carriers escaped its duty to defend based on the Court’s finding that, under the second prong of the pollution exclusion, the request for reimbursement of costs arose out of a “request, demand, or order that any insured or others…respond to…the effects of pollutants.” The other insurer, however, was not so fortunate. The policy issued by that insurer included an exception to the exclusion, which provided that the second prong would be inapplicable if the insured demonstrated that it would face potential liability under other laws or regulations unrelated to the request or demand that the insured or others respond to the effects of pollutants. In the current circumstances, Chisholm’s established the potential for other liability because of the existence of a public nuisance statute in New Mexico, which imposed liability on Chisholm’s separate and apart from any liability asserted under CERCLA. As a result, the Court ruled that there was no basis for the second insurer to deny its duty to defend.
With respect to the second insurer, the case now proceeds to the second phase, which includes the extra-contractual claims asserted by Chisholm’s for the insurer’s failure to investigate or otherwise treat the interests of the insured on an equal footing with its own.
Regardless of the outcome of the second phase, this case represents an important exception to the first prong of the absolute pollution exclusion that CERCLA practitioners should keep in mind when evaluating potential insurer liability and the duty defend.