The Law

Legal Spotlight

A look at the latest decisions impacting the industry, including an EPA proceeding that was defined as a lawsuit and whether a hunting club’s insurer must pay for a shooting injury.
By: | August 31, 2015 • 5 min read

EPA Process Is Equivalent to a Lawsuit

In the 1960s, McGinnes Industrial Waste Corp. dumped pulp and paper mill waste sludge into disposal pits near the San Jacinto River in Pasadena, Texas.

In 2007, after a two-year investigation, the Environmental Protection Agency notified McGinnes’ parent company (and McGinnes itself in 2008) that it was a “potentially responsible party” (PRP) for cleaning up contamination at the site.

R9-1-15p14_LegalSpotlight.inddIn 2009, the EPA demanded that McGinnes pay $378,864 to clean up the site, and required McGinnes to make a “good faith offer” to settle with the EPA within 60 days. It also warned of potential civil penalties and punitive damages for failure to comply.

McGinnes, which had commercial general liability policies from Phoenix Insurance Co. and Travelers Indemnity Co., requested a defense in the EPA proceedings. The insurers refused, claiming the proceedings were not a “suit” under the policy.

After McGinnes sued the insurers in federal district court seeking a declaration that the insurers were obligated to defend the company, the court granted a partial summary judgment to the insurers. The Supreme Court of Texas then received a certified question from the U.S. 5th Circuit Court of Appeals on whether the EPA’s demands constituted a “suit,” which would trigger a duty to defend.

In a 5-4 decision on June 26, the Texas high court majority ruled that the demands did constitute a suit. It ruled the EPA’s proceedings under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) mirrored the proceedings of a lawsuit. It noted the insurance policy was written before CERCLA became law.

The Texas high court also noted that 13 other states have sided with insureds in similar cases.

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A blistering dissent written by Justice Jeffery Boyd and joined by three other justices, said the court’s ruling had rewritten the insurance policy and superimposed new definitions on its wording “because it seems like a good thing to do here (and on top of that, everyone else is doing it). My law professors (and my momma) taught me better.”

The ruling allows McGinnes to pursue the insurers for defense costs and fines.

Scorecard: The insurance companies may be responsible for more than $2 million in costs and fines related to the EPA proceedings.

Takeaway: Of the 16 times the definition of “suit” in regard to EPA proceedings has come to court, only California, Illinois and Maine have ruled in favor of the insurance companies.

Intervention Rejected for Insurers

In 2009, CE Design filed a class-action lawsuit in the U.S. District Court for the Northern District of Illinois, Eastern Division, alleging King Supply Co. sent unsolicited fax advertisements that violated the Telephone Consumer Protection Act (TCPA).

King had been issued commercial general liability and commercial umbrella policies by Valley Forge Insurance Co., National Fire Insurance Co. of Hartford and Continental Casualty Co., all of which declaimed any obligation to defend or indemnify King. The policies, they said, exempted liability under the TCPA.

R9-1-15p14_LegalSpotlight.inddIn September 2011, in the federal court action, CE Design and King agreed to settle the case for $20 million, the limit of the insurance policies, with $200,000 of that amount to be paid by King.

At that point, the insurers filed a state court action in Texas, which was King’s principal place of business, disclaiming coverage. That suit was dismissed for lack of jurisdiction, but a similar suit was filed in Illinois, where a state court ruled the policies did not cover King’s liability. CE Design is appealing that decision.

In federal court, when the settlement agreement was presented for approval in January 2012, the insurers sought to intervene in the case. The district court denied the motion as untimely. On appeal by the insurers, the U.S. 7th Circuit Court of Appeals agreed with the district court.

The court ruled that while the insurers were correct to worry that King would “[sell] them down the river by failing to defend against class counsel’s $20 million money grab,” they said that the insurers “should have begun worrying when the suit was filed rather than almost three years later.”

“The insurers should have foreseen the danger of such a settlement from the outset,” according to the June 29 opinion, saying the move to intervene as the settlement was set for approval was “so gratuitous an extension of a multi-year litigation [that it] should not be encouraged.”

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Scorecard: Pending the appeal of the state case that found in the insurers’ favor, this ruling requires insurers pay the $20 million settlement, minus the $200,000 from King.

Takeaway: The case does not resolve the issue of when insurance companies can intervene in such cases. The district court said it would have rejected a request for intervention even in 2009 after the insurers denied coverage.

Insurer Need Not Pay for Shooting Injury

On Jan. 3, 2013, Timothy Johnson was participating in a deer hunt on the property of the Northumberland Hunt Club in Richmond County, Va.

When he was about 75 yards away from a nearby highway, Johnson fired a shot at a deer, which struck Danny Ray Marks Jr. in the head as he was driving by. Marks sued the hunt club and Johnson, alleging negligence.

R9-1-15p14_LegalSpotlight.inddScottsdale Insurance Co., which insured the club under a general liability policy, denied coverage to Johnson. The policy, it said, covered club members “only with respect to their liability of [the club’s] activities or activities they perform on your behalf.”

After a lower court agreed with the insurance company’s denial of coverage, Marks appealed to the U.S. 4th Circuit Court of Appeals, which affirmed the decision.

It ruled the policy did not cover members’ personal activities, such as deer hunting, in connection with the club but would be triggered only in “situations involving a member’s alleged vicarious liability for the activities of the club as an entity.”

Scorecard: Scottsdale was not responsible to defend or indemnify the hunting club in the litigation.

Takeaway: The policy only covered club members arising from official actions undertaken on behalf of the club, not for personal recreational activities.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]