Case Briefs

Because Burlington Northern increases the likelihood of allocations over findings of joint-and-several liability, a PRP wishing to seek coverage should take care to keeps its insurers up to date on any possible settlement of the environmental matters, particularly with regard to the PRP's share of liability.

Donald R. McMinn, a member of this newsletter's Board of Editors and a partner at Hollingsworth LLP, contributed this month's case brief.

The Supreme Court's Decision In Burlington Northern & Santa Fe Railway Co. v. United States

Insureds and their insurers can take comfort in the Supreme Court's recent decision in Burlington Northern & Santa Fe Railway Co. v. United States , 129 S. Ct. 1870 (2009), a case involving the interpretation of “arranger” liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and issues surrounding inter-party allocation of CERCLA liability.

Good News for Insured and Insurer

The issue before the Supreme Court in Burlington Northern was whether a manufacturer's or supplier's sale of a product is sufficient to hold that entity liable under 42 U.S.C. ' 9607 (a) (3) for having “arranged” for the disposal of hazardous substances where it was foreseeable, even if not desired, that the sale might be accompanied by undesired releases of the product. Shell Oil Company sold packaged and bulk pesticides to Brown & Bryant, Inc., an agricultural chemical distributor. During the course of the deliveries and transfers involved in the bulk sales, spills resulted in environmental contamination. Shell was aware of the spills and took steps to try to minimize their occurrence, including, for example, by providing Brown & Bryant with training manuals and discounts for taking safety precautions. Id. at 1880. The United States prevailed at the Ninth Circuit, which used a foreseeability approach to find that Shell was an arranger for purposes of the statute. Burlington Northern, 129 S. Ct. at 1877, 1880. In so doing, the Court rejected the Governments' arguments that CERCLA liability attaches whenever an entity “engage[s] in legitimate sales of hazardous substances knowing that some disposal may occur as a collateral consequence of the sale itself.” Id. at 1879-80.

The Court reasoned that CERCLA's directive that the entity must have “arranged” for disposal of hazardous substances means that liability will follow where the entity took “action directed to a specific purpose,” viz. the disposal of hazardous substances. Id. at 1879. Making this determination requires a “fact intensive and case specific” examination of whether the entity at issue has “take[n] intentional steps to dispose of a hazardous substance.” Id. An entity's knowledge that its product may be leaked or spilled “is insufficient to prove that an entity 'planned for' the disposal.'” Id. at 1880. Where the selling entity has taken steps to reduce the likelihood of leaks or spills, “mere knowledge that spills and leaks continued to occur is unsufficient grounds” for finding the entity “'arranged for'” disposal. Id. As a result of this decision, manufacturers and suppliers should be less likely to face CERCLA liability, which redounds to the benefit of those entities' insurers.

The decision, however, is also interesting for the implications of the new standard. In situations where an entity is pursued as an “arranger,” the entity is alleged to have intended to dispose of hazardous substances. Should liability be imposed, it presumably will have been found that the entity actually had such intentions. CERCLA cases may now require more probing discovery into an entity's relationship with those to whom it sells in an effort to establish that the entity was “tak[ing] intentional steps to dispose of a hazardous substance” in connection with the sales. Id. at 1879. Insureds should expect their insurers to be quite interested in discovery from the underlying litigation because of its potential applicability to various defenses, including those concerning whether there is an “occurrence” for purposes of various Comprehensive/Commercial General Liability (“CGL”) policies or other fortuity defenses. In this regard, Burlington Northern illustrates the continuing vitality of the California Supreme Court's concern for the “two-front war” insureds may face if coverage litigation occurs while the underlying matter for which coverage is sought remains pending. See Montrose Chem. Corp. v. Super. Ct. , 25 Cal. App. 4th 902, 907-08, 31 Cal. Rptr. 2d 38, 41 (1994) (discussing hazards to insured of simultaneously litigating liability and coverage proceedings).

Some CGL insurers may seek to leverage the Burlington Northern decision by arguing that any “arranger” defendant is, by necessity, ousted of both defense and indemnity coverage. The argument will turn on the definition of “occurrence,” which most CGL policies define as an “accident ' which results in ' property damage neither expected nor intended from the standpoint of the insured.” e.g., Susan J. Miller and Philip Lefabvre, Miller's Standard Insurance Policies Annotated (4th ed. 1995) at 451.3 (1973 form CGL policy). Such insurers will point to Burlington Northern's statements that an entity is an arranger “when it takes intentional steps to dispose of a hazardous substance,” Id., and argue that the finding of “arranger” liability requires the existence of intentional action by the insured that precludes the resulting property damage from being within the scope of a covered occurrence.

An Important Distinction

Insurers advancing this argument must demonstrate an important distinction. The intentionality at issue in the CERCLA proceeding is the disposal, e.g., the spill or release of the product. The intentionality of the spill or release, however, is not what is relevant to coverage. To defeat coverage, it is not enough for the insurer to prove that the insured intentionally released or spilled a product that, ostensibly, has a market value and a beneficial use. Instead, the insurer must establish that the insured intentionally caused or expected property damage to result from the release or spill. In City of Johnstown v. Bankers Standard Insurance Co , 877 F.2d 1146 (2d Cir. 1989), for example, the defendant carriers denied coverage to a landfill operator on expected/intended grounds based on notice to the operator that the landfill was believed to be leaking contaminants into the groundwater. The Second Circuit rejected that argument, holding that recovery would be barred “only if the insured intended the damages, or if it [could] be said that the damages were, in a broader sense, 'intended' by the insured because the insured knew that the damages would flow directly and immediately from its intentional act.” Id. at 1150 (citations omitted). The court also determined that warnings of possible damage were not sufficient in themselves to show that the policyholder had expected or intended the damage in question. Id. at 1152. See also, e.g., Chem. Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co. , 89 F.3d 976 (3d Cir.) (requiring subjective knowledge by insured before exclusion will apply), cert. denied, 519 U.S. 994 (1996); Travelers Indem. Co. v. PCR Inc. , 889 So. 2d 779 (Fla. 2004) (same), answer to certified question conformed to 410 F.3d 677 (11th Cir. 2005). Thus, if the insured reasonably believed that the release of product would be environmentally harmless (e.g., product would vaporize rather than saturate the ground and contaminate groundwater) the insured's coverage should remain.

Burlington Northern's Allocation Decision

The second major holding of Burlington Northern appears to grant trial courts somewhat greater latitude when deciding to make inter-party allocations rather than simply holding all Potentially Responsible Parties (“PRP's”) jointly and severally liable for remediation costs. This decision is less of a clear win for insureds and their insurers. The benefit of an increased likelihood of an allocation depends on the individual facts of a proceeding. Some PRPs might face a more manageable liability under a joint and several approach (those entities with large and identifiable contributions to sites) while others, whose participation is de minimis, would prefer an allocation recognizing their small part in the remediation of a site.

Because Burlington Northern increases the likelihood of allocations over findings of joint-and-several liability, a PRP wishing to seek coverage should take care to keeps its insurers up to date on any possible settlement of the environmental matters, particularly with regard to the PRP's share of liability.

Donald R. McMinn, a member of this newsletter's Board of Editors and a partner at Hollingsworth LLP, contributed this month's case brief.