CGL Policy Does Not Cover Regulatory Liability for Response Costs, Fourth Circuit Rules

April 30, 2011 | Insurance Coverage

Portions of property owned by Industrial Enterprises, Inc., in Baltimore, Maryland, had been used as landfills from the 1940s through the 1970s. In 1999, the U.S. Environmental Protection Agency proposed to include Industrial’s property, and neighboring properties, in a Superfund Site for cleanup. As part of its process, the EPA sent Industrial a letter notifying it that it was potentially liable for environmental damage at the site.

Industrial forwarded the EPA’s letter to Penn America Insurance Company, which had issued Industrial a comprehensive general liability insurance policy. Industrial asked Penn America to approve Industrial’s retention of defense counsel and to reimburse it for the costs of defense. Penn America denied coverage, stating that the claim did not give rise to a “potentiality of coverage under the ‘sudden and accidental’ language of the pollution exclusion.”

Industrial entered into a settlement agreement with other potentially responsible parties and it contributed $750,000 to a coalition fund. After the coalition reached a settlement with the EPA, Industrial sued Penn America seeking a judgment that the CGL policy it had issued provided coverage for Industrial’s response costs, including its attorney’s fees and its $750,000 contribution to the fund. The district court found that the CGL policy potentially covered Industrial’s liability to the EPA and therefore that Penn America had a duty to provide a defense.

The issue reached the U.S. Court of Appeals for the Fourth Circuit, which reversed the district court’s decision. The circuit court held that the EPA’s demand to Industrial did not create potential liability for damage to the federal government’s property, but rather created regulatory liability for response costs. Because the EPA was exercising its jurisdiction over surface waters within the United States to protect “the public health, welfare, and the environment,” the federal agency was functioning as a regulator, not a property owner, the Fourth Circuit reasoned. Therefore, the circuit court concluded, Penn America had no duty to provide a defense or to pay the costs of a defense with respect to that liability.

The case is Industrial Enterprises, Inc. v. Penn America Ins. Co., No. 09-2346 / 2397 (4th Cir. March 18, 2011).

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