Edgerton Overruled in Wisconsin
September, 2003
The Wisconsin Supreme Court recently issued a landmark opinion in Johnson Controls v. Employers Ins. Co. of Wausau, 665 N.W.2d 257 (Wis. 2003), re-opening a window to insurance coverage that it had shut nine years ago. In Johnson Controls, the court overruled its 1994 decision in City of Edgerton v. General Casualty Co. of Wisconsin. Edgerton held that comprehensive general liability (CGL) policies do not cover Superfund cleanup costs, and that an insured’s receipt of a potentially responsible party (PRP) letter from the government does not trigger the insurer’s duty to defend. Johnson Controls is the culmination of insureds’ nearly decade long efforts to limit or reverse Edgerton’s holdings on environmental insurance issues.
Facts
Nine years ago, the Wisconsin Supreme Court considered its first case dealing with the insurance issues raised by CERCLA. In City of Edgerton v. General Casualty Co. of Wisconsin, 517 N.W.2d 463 (Wisc. 1994), cert. denied, 514 U.S. 1017 (1995), the court was asked to interpret key terms in the standard CGL policy in relation to CERCLA environmental damages claims. A divided court decided that letters issued by the EPA or the Wisconsin DNR which requested or directed an insured to participate in the cleanup of contaminated property did not constitute a “suit” sufficient to trigger the insured’s duty to defend. The court also held that cleanup and remediation costs under CERCLA did not constitute “sums that the insured may become legally obligated to pay as damages” within the indemnification provisions of CGL policies.
Johnson Controls involved a CGL policy coverage dispute between Johnson Controls and more than 30 of its general liability insurance carriers. The CGL policy language at issue in Johnson Controls is similar to that analyzed in Edgerton, providing coverage for sums the insured shall be legally obligated to pay “as damages” and defense for “suits seeking damages.” All of the CGL policies were pre-1986. Johnson Controls brought suit against its liability insurers seeking a declaratory judgment and coverage for various costs relating to the environmental cleanup of 21 property sites. The sites are located in 16 different states where Johnson Controls faced liability under CERCLA. A majority of the sites are lead smelting plants where Johnson Controls delivered used lead acid batteries and plant scrap for recycling.
For eight sites, Johnson Controls sought coverage for cleanup costs that it incurred in complying with a pre-suit demand from a federal agency, a state agency, or a non-governmental third-party to remediate the sites in accordance with CERCLA. Three of these eight sites were owned and operated by Johnson Controls. For 11 sites, Johnson Controls was either sued or settled prior to suit for part of the costs of cleanup performed by another party. Johnson Controls claimed that in six of these eleven cases, its first notice of any environmental problem was a lawsuit or a demand from a government agency for money to pay costs for cleanup activities that had already been performed by other parties. At the remaining two sites, the coverage issues became moot because Johnson Controls ultimately incurred no liability or costs.
Johnson Controls alleged that in every instance it promptly notified its applicable CGL insurers of the CERCLA liability claims being made. In every case, the insurers refused to defend or indemnify Johnson Controls, stating that the CGL policies did not cover the costs imposed under CERCLA.
Analysis
CERCLA Remediation Costs Are “Damages”
The Wisconsin Supreme Court stated that “the problems created by the Edgerton decision have become so obvious and so acute that they cannot be ignored.” The court admitted that it did not correctly analyze the term “damages” in the standard CGL policy in relation to environmental cleanup costs, creating an unworkable interpretation of the insurer’s duty to defend in the specialized context of CERCLA letters and orders. “The process of restoring consistency and coherence to the law must begin by overruling Edgerton,” the court wrote. The court explained Edgerton was faulty as a matter of law for four different reasons.
First, Edgerton was “too quick to embrace the strict dichotomy between legal damages and equitable actions.” (Legal damages seeking compensation for past harm and equitable actions seeking action through an injunction.) The court stated that Edgerton’s five-page discussion of damages relied too heavily on prior decisions and on the key sentence that “the term damages does not encompass the cost of complying with an injunctive decree.” The Edgerton court constructed its analysis to conform to this faulty principle.
Second, Edgerton misapplied prior decisions' holdings regarding the scope of the “as damages” limitation in CGL policies because it did not appreciate the nature of liability for environmental cleanup costs under CERCLA or how that liability would be understood by a reasonable insured. The Edgerton majority concluded that response costs under CERCLA were equitable relief and, as such, were not designed to compensate aggrieved parties for past wrongs and did not fall within the policy coverage. The Johnson Controls court noted that the remedies available under environmental laws are unique and distinguishable from the remedies that were at issue in the case law relied upon by Edgerton. “Because CERCLA serves dual purposes and provides multiple avenues for achieving these purposes, the operation of the statute and its legal obligations will be confused if one attempts to fit the nature of the liability imposed into a strict equitable/legal damages dichotomy.” Edgerton failed to realize that the relief sought under CERCLA both compensates for past harm done to the environment while being protective of human health and the environment because of the future benefit from remediation.
The third purported deficiency in Edgerton is the court’s extensive quotation from Professor Dan Dobbs, “a noted authority on remedies.” The quotations were taken from the 1973 edition of Dobbs Handbook on the Law of Remedies. In this version, Dobbs’ proposed that response costs are not legal damages. In the 1993 revision of his treatise, he reached the opposite conclusion. According to the Johnson Controls court, Professor Dobbs revision severely weakens Edgerton’s basis for construing the “as damages” language exempting CERCLA response costs based on their remedial nature. Indeed, the Edgerton dissent had quoted from the 1993 version and the Edgerton majority never rebutted the dissent’s use of Dobbs.
Fourth, the court contrasted Edgerton with its later holding on environmental insurance coverage in General Casualty Co. v. Hills, 561 N.W.2d 718 (Wisc. 1997). Hills recognized that there was a century of precedent in Wisconsin establishing “that the cost of repairing and restoring damaged property and water to its original condition is a proper measure of compensatory damages.” The Hills court cited a number of cases and authorities to support this proposition and the Edgerton court simply did not address this body of law. Further, the court noted that Hills, unlike Edgerton, “faithfully applied long-standing principles of Wisconsin insurance contract law and factored into its calculus the reasonable expectations of an insured.” The Johnson Controls court stated that “the CGL policy was designed to protect an insured against liability for negligent acts resulting in damage to third parties.” Additionally, the court determined that to a reasonable insured, it makes no difference whether the entity seeking remediation by or cleanup costs from the insured is a private party or the government.
A PRP Letter Qualifies As A “Suit”
In addition to reversing Edgerton’s “damages” holding, the court also reversed Edgerton’s conclusion that a letter from a federal or state regulatory agency seeking cleanup from a potentially responsible party is not a “suit” triggering an insurer’s duty to defend. The court stated that a PRP letter is “so adversarial that it constitutes the functional equivalent of a suit and triggers the insurer’s duty to defend.” In the absence of such a conclusion, the court noted that the insured has a “perverse incentive” not to cooperate with remedial actions until the EPA or a state agency files a civil action in court to force compliance with CERCLA. The court concluded that insurers have a duty to defend an insured who receives a PRP letter from the EPA or an equivalent state agency seeking remediation or remediation costs, provided the insured has coverage for the claim under the CGL policy.
Learning Point:
Damages include CERCLA response costs in any form. These response costs are covered “damages” under a CGL policy, subject to other policy defenses that might be available. Additionally, a PRP letter is a “suit” triggering the insurer’s duty to defend its insured. It is analogous to a civil action filed in court given the serious consequences that may result from an insurer’s failure to cooperate with the government following receipt of such a letter.
Although this decision is obviously favorable to insureds with environmental claims in Wisconsin, there are limitations to coverage under Johnson Controls. First, the decision is only applicable to CGL policies issued prior to 1986 because policies issued after 1986 have a different pollution exclusion (the absolute pollution exclusion). The absolute pollution exclusion has been strictly adhered to by the Wisconsin Supreme Court. Second, there may be other policy exclusions or conditions which preclude coverage. Finally, CGL policies will not provide coverage for the costs of complying with nonremedial environmental regulations.
Back to CM Report of Recent Decisions (2003v3) 2003 Volume 3 Table of Contents
