Our Practice Areas: Publications

Insurer Liability Under CERCLA:
No Good Deed Goes Unpunished

Thomas A. Packer and William J. Frimel

Originally appeared in the Environmental Claims Journal, Autumn 1996, p. 115-125, © 2000, John Wiley & Sons, Inc., www.aspenpub.com.

Wausau illustrates a set of circumstances under which an insurer may be subjected to individual liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The decision should serve as a cautionary note to the insurance industry to act prudently in handling remediation claims for insureds and participating in remediation to avoid becoming so involved in the cleanup that it could be subject to individual liability. Although each remediation project (or site) will present unique circumstances, there are certain recommendations which should be kept in mind by the insurer so that it can avoid independent liability while at the same time fulfill any duties it has to its insured.

Suppose a late-night fire destroys a policyholder's paint store. While the fire burns, solvents escape and contaminate the soil and groundwater at the site. Typically, coverage for the fire damage is routine. Less certain is the insurer's obligation to reimburse the policyholder for the costs of cleaning up the environmental damage. Even more uncertain is the carrier's proper role in cleaning up the site should environmental coverage be found. However, as environmental claims become more common, and insurance companies become increasingly experienced and sophisticated in handling them, insurers have assumed an ever greater role in authorizing, and even directing, the scope and method of cleanup without fully appreciating the possible consequences. While such actions have helped insurers control and mitigate the ever-increasing costs of cleanup, the government may claim, and has claimed in at least one instance, that these same actions also subject an insurer to liability as an "operator" or "arranger" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).

This article discusses how a carrier's efforts to facilitate the cleanup of an insured site may lead to liability under CERCLA. It then examines a recent example of an insurer being found liable under CERCLA and the arduous costs associated with such liability. Finally, it concludes by offering recommendations on how to avoid CERCLA liability altogether.

An analysis of an insurer's potential liability under CERCLA begins with the understanding that Congress enacted CERCLA with two primary purposes: (1) providing the federal government with the means to effectively control the spread of hazardous material and (2) to affix the ultimate cost of cleaning up hazardous sites to the parties responsible for the contamination. In order to accomplish its stated purposes, CERCLA defines the pool of potentially responsible parties (PRPs) as any private, public, business, or governmental entity, including individuals. CERCLA then imposes liability on any one of four classes of PRPs: (1) the current owners and operators of a contaminated property; (2) owners or operators of the property at the time of hazardous waste disposal; (3) persons who arrange for disposal or treatment of hazardous substances at the property; and (4) persons who accept hazardous substances for transport to disposal or treatment facilities.

Of particular concern to insurance companies are the second and third classes involving "owners and operators" and "persons who arrange." The increasing initiative of insurers to take a more active role in the cleanup of their policyholders' contaminated sites leads to conduct that potentially can result in the insurer being characterized as a PRP under CERCLA. As demonstrated below, it takes precious little to trigger PRP liability and the onerous consequences that accompany such a designation.

On its face, Employers Insurance of Wausau v. Browner, Carol M., Administrator, Environmental Protection Agency, et al., 52 F.3d 656 (7th Cir. 1995), certiorari denied, 116 S. Ct. 699 (1996), is a case focusing on procedural issues in which the court ruled that an insurer's challenge to its designation as a PRP was technically defective. However, the significance of Wausau is not its legal ruling, but its example of just how little it took to subject an insurer to liability as a PRP under CERCLA.

The Wausau Facts
After a fire struck the building of Group Eight Technology Inc., an insured of Employers Insurance of Wausau, the companies discussed the removal of fire debris. Among the debris were six electrical transformers containing polychlorinated biphenyls (PCBs). Tests revealed that the levels of PCB were acceptable so that the fluid from the transformers could be treated and recycled.

Without the participation of Wausau, Group Eight hired Sclafani Trucking Inc. to perform the demolition and debris-removal work. Sclafani discovered a seventh transformer but was told by Group Eight that it did not contain PCBs. Group Eight instructed Sclafani to dispose of the transformers and recycle the fluid.

Meanwhile, Wausau agreed to pay for the cost of demolition and the removal of transformer fluids under the policy. Unbeknownst to Wausau, Group Eight and Sclafani chose K&D Industries Services Inc. to assist in transporting the fluids from the fire property. Wausau only learned of K&D's involvement at a meeting in which K&D outlined for Wausau its proposed removal, transportation and disposal, or treatment of the transformer fluids. Wausau agreed to pay the estimated cost, and thereafter K&D drained, mixed, and removed 700 hundred gallons of fluid from all seven transformers. Upon receiving confirmation that the work had been performed, Wausau reimbursed Group Eight in accordance with the insurance policy.

It was subsequently discovered that the fluid from the seventh transformer contaminated the recycling facility and the Environmental Protection Agency (EPA) designated Wausau as one of the PRPs under CERCLA.

Procedural History in Wausau
Wausau, as a PRP, was ordered by EPA to carry out cleanup measures at the recycling site because it had "arranged for the disposal or transport for the disposal" of hazardous substances. Wausau was forced to choose between immediately challenging the cleanup order and its designation as a PRP, with the risk of stiff penalties should its challenge fail, or complying with the order and then seeking reimbursement of its costs after the cleanup. Without admitting responsibility, Wausau opted to comply with the cleanup order and challenge its designation as a PRP later. Although Wausau proceeded to clean up the PCBs at the site, it did not take steps to clean up different classes of contamination caused by others. Upon completing its portion of the cleanup, Wausau sought to recover approximately $2 million in cleanup costs. EPA refused to grant an administrative hearing regarding reimbursement on the ground that Wausau had not completely cleaned the site.

Having been denied an administrative hearing, Wausau sought judicial relief. EPA challenged Wausau's right to bring such an action because Wausau had not completed the cleanup. The court agreed with EPA, stating that a party cannot stop government-mandated cleanup efforts after remediating only the contaminants for which it is allegedly responsible. The court ruled that by stopping short of complete cleanup, Wausau forfeited its right to judicial review of its designation as a PRP and its right to reimbursement.

The legal ruling in Wausau is straightforward. A PRP that chooses to obey a cleanup order may not challenge its designation as a PRP or seek reimbursement of its costs, until it has complied, in total, with the cleanup order. The significance of Wausau to the insurance industry is that EPA's threshold for designating PRPs can be disturbingly low and that the consequences of such designation are onerous. As shown above, the purportedly culpable conduct in Wausau was nothing more than the routine handling of an environmental claim. Therein lies the lesson, and the threat, of Wausau.

Wausau shows how important it is to avoid PRP designation. Because the court refused to consider Wausau's challenge to its PRP designation, Wausau was forced to clean up the contamination generated by its insured, as well as contamination caused by others, regardless of policy limits. Wausau was also forced to expend the resources necessary to identify the scope of contamination and then conduct the cleanup. Finally, Wausau incurred the legal fees required to comply with the cleanup order and eventually challenge its designation before EPA and the courts. Should EPA name other insurers as PRPs, they too will be forced to choose between cleaning up the sites, regardless of cost or policy limits, or challenging its designation at the risk of incurring substantial penalties.

Federal case law provides a broad spectrum of factual scenarios under which entities and individuals may be liable as PRPs. Like the majority of federal courts that consider the propriety of an entity's or individual's designation as a PRP, the court in Kaiser Aluminum v. Catellus Development, 976 F.2d 1338 (9th Cir. 1982), began its analysis with the predisposition that "CERCLA is to be given a broad interpretation to accomplish its remedial goals." Just how broad an interpretation and the consequences for the insurance industry are discussed below.

Liability for Current Owners and Operators Only
Liability under CERCLA Section 9607(a)(l) is limited to current "owners and operators" of a "facility."¹ Because liability under this section turns on an insurer's current activity at the site, and whether that activity rises to the level of "operator" as defined by CERCLA and case law, an insurer may immediately eliminate any further liability under this section of CERCLA by stopping any culpable activity.²

Liability for Past Owners and Operators
A PRP is liable under CERCLA Section 9607(a)(2) if, "at the time of disposal of any hazardous substance [the PRP] owned or operated any facility at which such hazardous substances were disposed of." Although CERCLA attempts to define some of these terms, an insurer must look to federal case law to determine whether it is (1) an "operator" of (2) a "facility" at a time in which there is (3) "disposal" of (4) a "hazardous substance."

"Facility"
CERCLA Section 9601(9) defines "facility" as "any site or area where a hazardous substance has been deposited. . . ." Simply put, "facility" includes any place where hazardous substances come to be located. Thus, "to show that an area is a 'facility,' [a party] need only show that a hazardous substance has been placed there or has 'otherwise come to be located there."³ The majority of environmental claims will involve hazardous materials, and therefore, will involve facilities.

"Operator"
CERCLA Section 9601(20)(A) defines an owner or operator as "any person owning or operating such facility …" The Kaiser court stated, "The circularity of this definition renders it useless." In keeping with the broad "remedial" interpretation of CERCLA, the Kaiser court stated that "liability under section 9607(a)(2) attaches if (a party) had authority to control the cause of contamination at the time the hazardous substances were released into the environment."⁴ The court in Kaiser also found that "the most commonly adopted yardstick for determining whether a party is an owner-operator under CERCLA is the degree of control that the party is able to exert over the activity causing the pollution."⁵

Typically, an insurer will not have been in a position to control the initial pollution-causing activity. Rather, the insured or a third party will have caused the contamination. However, EPA may assert that cleanup efforts have only exacerbated the problem by spreading, expanding, or failing to mitigate the scope of contamination. If the carrier is found to have directed a cleanup process that aggravated the scope of contamination, it could be found to have had the "authority to control the cause of contamination" and be labeled an "operator."

At least two federal cases, although not involving insurers as parties, have ruled that a party does not have to be the one directly causing the additional contamination for PRP liability to attach. In United States v. Vertac Chemical Corp., 46 F.3d 803 (8th Cir. 1995), the court ruled that "operator liability may result from actual or substantial control exercised by one entity over the activities of another. Determining whether an entity has exerted such actual or substantial control requires a fact-intensive inquiry and consideration of the totality of circumstances." In Castlerock Estates, Inc. v. Estate of Markham, 871 F.Supp. 360 (N.D. Cal. 1994), the court stated, "[a]uthority to control is the standard that has been adopted by most courts" to fasten PRP liability. Therefore, the question for an insurer is whether it has exerted actual or substantial control over the activity causing the pollution.

Each claim will have its own nuances which tend to affect an insurer's status as operator. However, under Kaiser, Castlerock, and Vertac, if the insurer had the authority to control, make decisions, or implement actions regarding the cleanup process which results in actionable contamination, it may be liable as an "operator" under CERCLA.

"Disposal"
CERCLA Section 9601(29) defines "disposal" as "the discharge, deposit, injection, dumping, spilling, leaking, or placing of any ... hazardous waste into or on any land ... so that ... waste ... may enter the environment ... or be discharged into any ground waters."

The Kaiser court stated that:
... the term "disposal" should not be limited solely to the initial introduction of hazardous substances onto property. Rather, consistent with the overall remedial purpose of CERCLA, "disposal" should be read broadly to include the subsequent move[ment], disburs[all], or release[] [of such substances] during landfill excavations and filings.⁶

Kaiser's ruling that there can be a second "disposal" is troublesome for the insurance industry and any potential PRP. Although the PRP in Kaiser physically moved contaminated soil by grading and excavation, various cleanup efforts can spread contamination without physically handling contaminated soil or groundwater. Bioremediation efforts or the failure to mitigate the expansion of a contaminated area can likewise be activities construed as second disposals. Consequently, a carrier may be found to have caused a second disposal by merely authorizing or "controlling" activity that is found to have worsened the contamination.

CPC International, Inc. v. Aerojet-General Corp., 731 F.Supp. 783 (W.D. Mich. 1989), is an example of an operator causing a second disposal without actually physically moving the contaminated soil. In CPC, a party was required to operate purge wells to mitigate the impact of groundwater contamination. The party's failure to properly operate the purge wells resulted in an increase in the contamination of local groundwater. The court held that the well operator's failure "caused or contributed to the spread or migration of 'hazardous substances' and that this constitutes a 'disposal' and 'release' under the statute." Under this analysis, if a carrier's act, or failure to act, exacerbates the scope of contamination, such action or inaction can be a "disposal" under CERCLA.

Just how far the courts will take this line of thinking is unclear. Currently, there is a split between the district courts over the issue of whether the migration of pollutants can be disposal. While some courts hold that the migration of contamination can be a "disposal,"⁷ at least one California district court has specifically rejected this theory.⁸

"Hazardous Substances"
CERCLA Section 9601(14) defines "hazardous substance" in broad terms and sets forth a long list of substances that qualify as hazardous under CERCLA. It is important to note that CERCLA creates limited exceptions only for petroleum and pesticides. Although beyond the scope of this article and, therefore, not discussed in detail here, CERCLA's definition of hazardous substances specifically excludes "petroleum" and "any fraction thereof." CERCLA also excludes liability for "costs or damages resulting from the application of a pesticide product." Therefore, if the contamination at a particular facility is limited to gasoline or the application of pesticides, the element of "hazardous substances" may be lacking and CERCLA liability will not attach.

As shown above, the four elements necessary for liability under CERCLA Section 9607(a)(2) can be satisfied surprisingly quickly and easily. Upon receipt of a claim for environmental damage, the "facility" and "hazardous substances" elements are most likely already established. The carrier's subsequent involvement in the cleanup process will quickly determine whether its role as an insurer has been transformed to that of an "operator." In addition, to the extent cleanup efforts have exacerbated the contamination, a "disposal" will also exist. The combination of these four elements may trigger an insurer's separate liability under Section 9607(a)(2) and remove any limits on exposure despite policy limits.

Liability for Arranger -- Where Reality Ends, CERCLA Begins
CERCLA Section 9607(a)(3) creates strict liability for a third class of PRPs under CERCLA, commonly known as "arrangers," defined as

[a]ny person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility owned or operated by another party or entity and containing such hazardous substances.

Therefore, an insurer must determine whether it (1) "arranged for" the disposal or treatment of (or transport to dispose or treat) hazardous substances that (2) it "owned or possessed."

Although "CERCLA does not define 'arrange for,' courts have consistently construed this term broadly."⁹ Amcast Industrial Corp. v. Detrex Corp., 2 F.3d 746, 751 (7th Cir. 1993), states that "arranged for ... implies intentional actions," or that the PRP "intended" to dispose of hazardous substances. The term is so ill-defined that most courts simply accept that a party involved in the cleanup process has satisfied the "arranged for" requirement. As shown in Wausau, it takes very little for EPA to designate an insurer as an "arranger."

Once the court has accepted the "arranged for" requirement, it next determines whether the PRP "owned or possessed" hazardous sub-stances. While most insurers do not own contaminated soil, water, or other hazardous substances, federal case law holds that "control" is all that is necessary for an insurer to have "possessed" the hazardous substances.

In Vertac, "personal ownership or actual physical possession of hazardous substances ... [was not required] for liability under CERCLA section 9067(a)(3)." Rather, "it is the authority to control the handling and disposal of hazardous substances that is critical under the statutory scheme."¹⁰ The Vertac court went on to note that a party "constructively possessed the hazardous substances at issue because he, 'actually knew about, had immediate supervision over, and was directly responsible for arranging for the transportation and disposal of the ... hazardous substances.'"

Similar to liability under Section 9067(a)(2) above, and as shown in Wausau, liability under Section 9067(a)(3) can attach with surprising ease. So long as a PRP "intentionally acted" to "dispose" of hazardous substances, it will be found to have "arranged for" disposal. Moreover, if the PRP appears to have directed any of the cleanup activity, it may be found to have "possessed" the hazardous substances. Consequently, it is critical that an insurer avoid any appearance that suggests control over the cleanup process.

Liability for Transporters
CERCLA Section 9607(a)(4) only imposes liability on transporters of hazardous substances. Because insurers do not typically transport hazardous substances, this portion of CERCLA is not an issue that most carriers need to address.

In light of the case law discussed above, an insurer should take all necessary steps to avoid any conduct that suggests any degree of control over the cleanup process. While each claim will have its own nuances, typical indications of control may include: (1) direct billing to the carrier by cleanup contractors; (2) direct communication between the cleanup contractors and the insurer; (3) the insurer's designation as the primary contact for issues surrounding the cleanup; and (4) direct interaction between the insurer and government agencies overseeing the cleanup. While this list is not exhaustive, it does illustrate the more common practices that can play a role in transforming a carrier's function from insurer to PRP. Generally, any conduct that suggests an indicia of control over the cleanup process may subject a carrier to CERCLA liability.

The following provides a number of specific recommendations to avoid CERCLA liability when handling an environmental claim. It is not exhaustive, but it demonstrates how the insurer may best reach the ultimate goal of satisfying its obligations under the policy while avoiding CERCLA liability.

1. Contracts with Vendors and Contractors: The carrier should avoid directly contracting with the vendors or contractors operating at the site. Such a contractual relationship may indicate a degree of control over the site and the ability to direct the course of cleanup. Accordingly, the insured should be the party that contracts with those providing cleanup services or supplies. This leaves the insured legally responsible for the payment and control of the work performed at the site and helps reduce any actual or perceived control by the carrier. Moreover, the insurer may reasonably request that the insured negotiate a provision within a cleanup contract that calls for the environmental contractor to indemnify the insured and its insurer for any liability arising out of the work done at the site, as well as being listed along with the insured on any additional insured amendments to the contractor's policy.

2. Direct Billing: Insurers should not accept direct billing from any party providing cleanup services at the site. All invoices for cleanup services and supplies should be submitted directly to the insured for consideration. The insured may then submit the invoice to the insurer for payment. Again, this keeps ultimate authority with the insured and avoids the appearance that the insurer controls the parties cleaning up the site.

3. Communication with Vendors, Environmental Contractors. and the Government: If the insurer is not operating the site, there should be no need for it to directly communicate with the cleanup vendors, contractors, or governmental agencies overseeing the projeCt. The insured should be the primary contact for such entities. In turn, the insured may raise issues of concern with the carrier at its discretion. However, by avoiding the role of liaison between those conducting (or monitoring) the cleanup and the insured, the carrier prevents the appearance or consequence of control over the site.

This is not to say that the carrier should ignore the site and purposefully remain uninformed. The carrier may properly receive copies of correspondence and reports regarding the cleanup at the site, as well as monitor the issues and parties involved in cleanup. However, when the insured acts as the primary contact for all communication from governmental agencies and environmental contractors, the carrier adds a level of distance between itself and the site, thus helping to avoid the appearance of control.

4. Independent Consultant: A popular and effective option for the insurer is to retain its own consultant to oversee site cleanup. However, it must be made clear to all parties involved in the cleanup process that the consultant does not control or direct the remediation process. There is nothing wrong with a consultant reviewing and analyzing the cleanup progress and reporting its findings to both the insurer and insured. Moreover, the consultant may comment on, making clear not to control, the appropriateness of cleanup methods and progress. Any disputes over the progress or cost of the cleanup should initially be brought to the attention of the insured and resolved by the insured and those performing the remediation work. These consultant costs should not be charged against policy limits.

5. Communicate with the Insured: Although obvious, it bears reiterating. The better informed the insured, the less likely the insurer will become involved, or need to become involved, in the cleanup process. All parties have an interest in a quick and efficient cleanup. If the insured is promptly advised about the scope of available coverage, the insurer's need or inclination to involve itself in areas of control over the site will diminish considerably.

The cost of defending and indemnifying an insured for environ-mental cleanup can be costly. However, as Wausau shows, if an insurer becomes too proactive in the cleanup process, the cost can be staggering. Accordingly, it is important for insurers to understand Wausau, its rationale, and the precedent that made the ruling possible. Equally important is an insurer's attention to the recommendations above. Only then can an insurer balance its obligations to its insureds while simultaneously avoiding the onerous consequences of being named a PRP.

Thomas A. Packer is a partner in the firm of Gordon & Rees, which has offices in San Francisco and San Diego. He is a member of the Environmental and Chemical Exposure Committee of the Defense Research Institute, the American Agricultural Law Association, the Northern California Association of Defense Counsel, and the California and Oregon Bars. His practice includes environmental, toxic tort, and product liability litigation.