Rushing to sign an administrative consent order may affect your insurance coverage
 Aug. 23, 2013

Regulatory agencies try to resolve environmental cleanups through administrative consent orders - a resolution short of a lawsuit. When a manufacturer, as a potentially responsible party or ("PRP"), is suspected of releasing contaminants into the soil or groundwater, the Environmental Protection Agency, ("EPA"), the Department of Toxic Substances Control, ("DTSC"), and the Regional Water Quality Control Board, ("RWQCB"), will frequently press a PRP to sign a cleanup order which amounts to a PRPs acceptance of full responsibility for any past, ongoing, and future release, all investigatory costs, and remediation.

The timing of a consent order may precede any formal acceptance of coverage by a PRP's comprehensive general liability policy carrier, presuming the policy lacks a pollution exclusion, and that the release meets the policy's definition. A PRP may waive coverage by signing a consent order before a carrier accepts coverage for the release. Why? A carrier may avoid coverage by alleging that an administrative action does not meet the policy's definition of a "suit," and that the "damages" the PRP agreed to pay by signing a consent order are not policy defined "damages." California cases come down in favor of a PRP and a carrier depending on the circumstances - which suggests a particular strategy in type of timing issue.

Is an Administrative Action a "Suit"?
Insurance policies provide the policy holder with a defense when a "suit" that relates to a covered risk occurs. Cases generically define a "suit" to mean a complaint, or lawsuit, that immediately jeopardizes the insured's rights. See, Aetna Ca. & Sur. Co., Inc. v. Pintlar Corp., 948 F.2d 1507, 1717, (9th Cir. 1991). Although a comprehensive general liability policy does not specifically cover a contamination claim, the "comprehensive" level of coverage can be deemed broad enough to provide a PRP a defense against a release of contamination tied to the property's usage, presuming that the policy lacks a pollution exclusion. When the EPA, DTSC, or RWQCB pursued a PRP through an administrative action and consent order, the insurance coverage issue is whether the administrative order constitutes a "suit," the equivalent of a lawsuit. Again, cases bracket this issue.

The Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co. 18 Cal.4th 857 (1998) decision defined a "suit" to be limited to a lawsuit. This decision stated that if a policy defined a "suit" to be a lawsuit, complaint, or action, then only those specific events would constitute a "suit.” Under this decision as an example, an administrative consent order would not be a "suit," and a PRPs execution of such could waive insurance coverage.

The California Supreme Court examined this issue in 2010 in Ameron Intern. Corp v. Ins. Co. of the State of Pennsylvania (2010) 50 Cal.4th 1370. The Court ruled that an insurance company could not deny coverage on grounds that a federal administrative action was not a “suit”. The Court ruled that although there was no lawsuit filed, and no court judge assigned to the matter, there was an administrative law judge that conducted a 22 day trial, examining witnesses and evidence, in the same manner as a formal court would. So, if an administrative action looks and acts like a lawsuit then that meets a policy's "suit" definition, meaning that an insurance carrier should pay for a defense.

Are cleanup costs incurred in an administrative action policy defined "damages"? A PRP wants an insurance paid defense to a "suit," and wants the carrier to pay for any covered contamination cleanup costs. Whether environmental cleanup costs are "damages" depends on the type of policy and policy language. On a commercial general liability policy, cases hold that policy defined "damages" are limited to court-ordered money damages, which would exclude from coverage damages a PRP voluntarily incurs when agreeing to an EPA, DTSC, or RWQCB cleanup orders-executed before the filing of any lawsuit.

Coverage strategies when dealing with administrative proceedings
When representing a manufacturer facing an administrative action while still trying to secure insurance coverage, the execution of a consent order could doom the manufacturer's chances of obtaining an insurance paid defense and environmental cleanup cost reimbursement. If there is potential coverage pending, I recommend encouraging the EPA, DTSC, or RWQCB to file a lawsuit that may meet a manufacturer's policy "suit" and "damage" definitions. A manufacturer and administrative agency both share a common interest in securing insurance company participation in any cleanup, so EPA, DTSC, or RWQCB pressure should not be limited to the quick execution of a consent agreement that may lack foresight. A release may also travel offsite in the soil and/or groundwater, raising the prospect that a neighboring landowner[s] may also file suit to recover damages arising from a release. If testing data suggests that as a strong likelihood, then a manufacturer should be especially careful about jeopardizing insurance coverage by signing a consent order before the filing of a lawsuit.

Thierry R. Montoya is a Shareholder with AlvaradoSmith, APC representing manufacturers statewide in EPA, DTSC, AQMC, and Regional Board environmental matters in state and federal courts, in administrative courts on violation notices, and in all courts on environmental crimes. Thierry can be reached at: 714.852.6862,


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