The Limits of Subrogation unde...

The Limits of Subrogation under CERCLA – Ninth Circuit Ruling Remains the Precedent

By Kirk Tracy

On January 13, 2014, the Supreme Court denied cert on the Ninth Circuit ruling in Chubb Custom Insurance Co. v. Space Systems/Loral, Inc.[1] This denial leaves the Ninth Circuit’s ruling on subrogation claims under CERCLA as the guiding light on the issue of subrogation and CERCLA’s “tripartite” system of recovering environmental remediation costs.[2]

In Chubb, a Campus for Jewish Life (Taube-Koret) purchased property that had been contaminated by previous owners and then proceeded voluntarily, and in coordination with the regional water board, to clean up the contamination, incurring cleanup costs along the way.[3] Taube-Koret, the insured, then sought reimbursement from its insurer, Chubb Custom Insurance Co. (“Chubb”), without first seeking any contribution to the cleanup costs from other potentially responsible parties (“PRPs”).[4] Taube-Koret’s policy with Chubb “insures Taube-Koret against the risk of liability and provides for environmental cleanup costs it could potentially incur on its property.”[5] Chubb paid Taube-Koret for its costs, and then filed a civil action seeking contribution from other PRPs under CERCLA (sections 107(a) and 112(c)) and various state law claims, in part on a theory of subrogation.[6]

The Ninth Circuit ultimately rejected Chubb’s CERCLA claims, holding that Chubb had “no standing to bring suit under CERCLA section 107(a) because it did not incur any ‘costs of response’ related to the removal or remediation of a polluted site, and because the common law principle of subrogation does not apply to section 107(a); [and] Chubb cannot bring a subrogation claim under section 112(c) because it did not allege that Taube–Koret was a ‘claimant.’”[7]

CERCLA’S TRIPARTITE SYSTEM FOR RECOVERING REMEDIATION AND RESPONSE COSTS

CERCLA provides three basic methods for recovering environmental cleanup costs.  This “tripartite remedial scheme” is established “to enable the government and private parties to pursue in a court of law: (1) cost-recovery actions under [CERCLA] section 107(a), (2) contribution actions under section 113(f)(1), and (3) subrogation actions under section 112(c)(2).”[8] The first two of these methods are commonly understood amongst environmental litigators, but the third method (subrogation) has seen less of the limelight.  The Chubb decision involved a subrogation action under section 112(c)(2), as well as an insurer’s attempt to bring a subrogation claim under section 107(a) based on equitable and contract theories.

Subrogation is an equitable remedy which allows an insurer to “take the place of the insured to pursue recovery from third-party tortfeasors responsible for the insured’s loss.”[9] CERCLA section 112(c) provides two separate subrogation remedies: (1) the federal government may seek reimbursement of monies paid to claimants out of the Hazardous Substance Trust (“Superfund”)[10]; or (2) “[a]ny person, including the Fund, who pays compensation pursuant to [CERCLA] to any claimant for damages or costs resulting from a release of a hazardous substance shall be subrogated to all rights, claims, and causes of action for such damages and costs of removal that the claimant has under this chapter or any other law.”[11]

SUBROGATION IS NOT PERMITTED UNDER SECTION 107(a)

The Ninth Circuit held that a subrogation remedy does not exist under section 107(a), finding a clear intent by Congress to limit CERCLA remedies to those statutorily defined.[12] Section 112 provides a subrogation remedy, but section 107(a) “does not authorize an insurer to recover insurance payments when it did not directly incur environmental response costs.”[13] Section 107(a) “permits a PRP to recover only the costs it has ‘incurred’ in cleaning up a site.”[14] Section 107(a) “plainly applies to a person who, through his or her own actions, becomes statutorily liable for, or is subject to” cleanup or remediation costs.[15] Thus, a party must have directly incurred costs for cleaning up a site, not simply reimbursed someone else or made payments under a settlement agreement.[16] In the case of reimbursing an insured, an insurer may seek contribution under section 113, but not cost recovery under 107(a).  Here, the court found that Chubb had only incurred reimbursement costs, not cleanup or remediation costs.[17] Taube-Koret may have sought contribution under section 107(a) for its cleanup efforts,[18] but Chubb had to turn to section 112 for a possible remedy.[19]

AN INSURED MUST BE A CLAIMANT FOR INSURER TO SEEK SUBROGATION

The Ninth Circuit held that Chubb’s statutory subrogation claim under CERCLA section 112(c) failed because Taube-Koret did not qualify as a “claimant.”[20] “[A]n insured must first make a claim to either the Superfund or a potentially liable party before an insurer can bring a subrogation action under section 112(c).”[21] Here, Chubb had not alleged that Taube-Koret made any written demand for payment of its response costs from any potentially liable parties.[22] Had Taube-Koret made such written demand, and therefore qualified as a “claimant,” Chubb could then have brought a subrogation claim under section 112(c)(2).[23]

Anyone who pays compensation for damages to any “claimant” is subrogated to the rights, claims, and causes of action the claimant has under CERCLA or any other law.[24] This would apply to an insurer paying compensation to an insured—the insurer “steps into the shoes” of the insured.  Under Chubb, a “claimant” is any person “who presents a written demand for reimbursement of monetary costs” from the Superfund or a potentially liable party.[25] If the insured has not, however, made a claim against the Superfund or any other responsible party, the insurer has no right to claim a subrogation remedy under CERCLA.[26] Thus, because Taube-Koret had not made a claim against any potentially responsible parties, Chubb did not have a valid CERCLA cause of action.  The precise requirements of what it takes to be a “claimant” remain unclear.

THE PRECISE FORM OF A WRITTEN CLAIM REMAINS UNDEFINED

The Ninth Circuit held that the term “claimant,” as defined in 42 U.S.C. § 9601(5) and applied to section 112(b), refers to “any person who presents a written demand for reimbursement of monetary costs . . . for a CERCLA violation.”[27] However, the Ninth Circuit “did not specify the precise form that a written claim for reimbursement must take.”[28] In Carolina Casualty, decided after Chubb, the United States District Court for the Eastern District of California dealt with a motion to dismiss on the grounds that the plaintiff insurance company had failed to state a claim for subrogation under section 112(b) because its insured had not made a “formal claim” under CERCLA.[29] The insured there had made demand and claim on the defendants for payment and reimbursement of expenses incurred, but the defendants claimed the form of that demand and claim was insufficient.  Relying on the Ninth Circuit’s holding in Chubb, the court held that, although 40 C.F.R. § 307.30(a) governs specific criteria for written demand against the Superfund, those criteria are inapplicable for claims against a PRP, and Chubb had not specified a precise form that is required for such a claim, nor is there any other controlling authority on the issue.[30] In ruling on the motion to dismiss, the court held that an allegation that the insured “sent a written demand for reimbursement to defendants suffices to show that [the insured] is a ‘claimant’ and that the plaintiff [insurer] may therefore seek subrogation under Section 112(c).”[31]

The precise requirements remain unclear for what qualifies as a “claim” against a PRP, which would therefore establish someone as a “claimant.”  It appears, however, that the threshold is low.

IMPACT TO INSURERS—A WARNING FROM THE DISSENT

The majority opinion in Chubb noted, “CERCLA does not bar an insurer from recouping insurance payments through subrogation, it prohibits a contractual assignment of liability.”[32] The court reasoned that allowing Chubb to proceed under section 107(a) would allow it to “reap the benefits of Taube-Koret’s rights without remaining liable under CERCLA for any future violation or continuing remediation.”[33] Instead, held the court, the “plain statutory language of section 107(a) and its interaction with section 112(c) . . . indicate that Congress did not contemplate equitable subrogation under section 107(a).”[34] The result leaves an insurer likely limited to a remedy only under section 112(c),[35] and only then if the insured is a “claimant” under CERCLA.

In dissent, Judge Gould argued that the “regime of law mandated by the majority is contrary to CERCLA’s intent to make polluters pay.”[36] In a case, as here, where the insured (Taube-Koret) voluntarily proceeds with a cleanup effort but then fails to make a proper claim on other PRPs before seeking reimbursement, the insurer (Chubb) may be left holding the bag if they reimburse the insured.  Judge Gould fears that, as a result, “[e]ither insurance premiums for an organization like Taube-Koret will go up dramatically, raising questions on feasibility of insurance, or the policies will condition payment on a prior claim by the insured against other contributors to the pollution.”[37] The end result may be the discouragement of timely cleanups.[38]

 

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[1] 134 S. Ct. 906 (Jan. 13, 2014).

[2] Chubb Custom Insurance Co. v. Space Systems/Loral, Inc., 710 F.3d 946 (9th Cir. 2013), cert. denied, 134 S. Ct. 906.

[3] Id. at 952.

[4] Id.

[5] Id. at 964.

[6] Id. at 952; 42 U.S.C. §§ 9607(a), 9612(c).

[7] Chubb, 710 F.3d at 952-53.

[8] Id. at 957.

[9] Id. at 957 (citing Intri-Plex Techs., Inc. v. Crest Group, Inc., 499 F.3d 1048, 1053 n.6 (9th Cir. 2007)).

[10] 42 U.S.C. § 9612(c)(1).

[11] § 9612(c)(2).

[12] Chubb, 710 F.3d at 960-61, 971.

[13] Id. at 971 (emphasis added).

[14] United States v. Atl. Research Corp., 551 U.S. 128, 139 (quoting 42 U.S.C. § 9607(a)(4)(B)).

[15] Chubb, 710 F3d at 961-62.

[16] Id. at 963-64.

[17] Id. at 964.

[18] Id.

[19] The court held that Chubb had no standing to sue under section 107(a) because it was not itself statutorily liable for response costs under CERCLA.  Id. at 965.  Had Chubb been contractually obligated to “directly pa[y] for response costs related to the removal and remediation activities,” rather than being obligated merely to reimburse Taube-Koret after the cleanup, Chubb may have had a claim under section 107(a).  Id. at 964 (citing Basic Management, inc. v. United States, 569 F. Supp. 2d 1106, 1120-23).

[20] Id. at 958-960.

[21] Id. at 971.  “[S]ubrogation rights vest once an insured makes a claim to either the Superfund or a potentially liable party.”  Id. at 960.  This requirement insures against an insured obtaining double recovery from the insurance company and any PRPs.  Id.

[22] Id. at 959.

[23] Id. For the sake of clarity, it should be noted that the court appears to have made a typo where it said “Applied to this case, the definition of claimant required Chubb to make a written demand . . . .”  Id. at 959 (emphasis added).  It seems the court meant to say Taube-Koret here, not Chubb.

[24] 42 U.S.C. § 9612(c)(2).

[25] Chubb, 710 F.3d at 958-59.

[26] Id. at 959.

[27] Id. at 959.

[28] Carolina Cas. Ins. Co. v. Oahu Air Conditioning Serv., Inc., No. 2:13–1378 WBS AC, 2014 WL 309557, at *3 (E.D. Cal. Jan. 28, 2014) (citing Chubb, 710 F.3d at 959).

[29] Id. at *3.

[30] Id. at *3.

[31] Id.

[32] Chubb, 710 F.3d at 971 (citing 42 U.S.C. § 9607(e)(1)).

[33] Id. at 971.

[34] Id. at 971-972.

[35] There may be a unique case where an insurer does have a claim under section 107(a) based on the terms of the insurance contract, as discussed in n.19, supra.

[36] Chubb, 710 F.3d at 976 (Gould, J., dissenting).

[37] Id. at 977.

[38] Id. at 977-78.