The United States Supreme Court recently refused to review a 9th U.S. Circuit Court of Appeals decision barring an insurer’s attempt to seek recovery of insurance payments made to a policy holder in a Superfund cost recovery action. Chubb Custom Ins. Co. v. Space Sys./Loral LLC, U.S., cert. denied 1/13/14. In Chubb Custom Ins. Co. v. Space Sys./Loral LLC, 710 F. 3d. 946 (9th Cir. 2013), Chubb Custom Insurance Company (“Chubb”) filed a subrogation suit against defendants seeking recovery of insurance payments it made to its insured for environmental cleanup costs. Defendants were potentially responsible parties (“PRPs”) who had contaminated the insured’s property. Chubb asserted its claim under two sections of the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”). Affirming the district court’s ruling, the 9th Circuit held that Chubb had no standing to file suit under CERCLA section 107(a) because it did not incur any response costs. Additionally, Chubb could not file suit under section 112(c) because it did not allege that the insured was a claimant, as required.

The 9th Circuit’s analysis started with a brief discussion of the relevant portions of CERCLA. Section 107(a) allows the government and private parties to seek cost-recovery actions in court, while section 112(c) allows for subrogation actions. The court noted that the common law doctrine of subrogation is “purely derivative,” and the subrogee has no greater rights than the subroger. 

Analysis continued with statutory interpretation of section 112(c)(2). It states that a person who compensates a claimant for damages or costs resulting from the release of a hazardous substance shall be subrogated. Under the statute, a claimant is “a person who presents a claim for compensation,” and a claim is “a demand in writing for a certain amount of money.” The 9th Circuit reasoned that in order for Chubb to seek repayment, the insured had to first make a demand on defendants, the Superfund or any other PRP. This action would have made the insured a claimant and Chubb could have then brought a subrogation claim under section 112(c). Instead, Chubb only claimed that its insured made an insurance claim, and Chubb paid money under the policy. The court concluded that given the language in the statute, Congress had no intention of expanding the term “claimant” to include such a situation.

The 9th Circuit then examined the language in section 107(a) and determined it did not allow for a subrogation claim. The section states that PRPs are liable for “necessary costs of response incurred.” Response means “remove, removal, remedy, and remedial action,” and all of these terms mean the “cleanup or removal of hazardous substances.” Noting that “incur” is not defined under the statute, the 9th Circuit applied the dictionary meaning of “to acquire or come into” or “become liable or subject to as a result of one’s action,” or “to bring upon oneself.” Applying these definitions, the 9th Circuit concluded that section 107(a) applies to a person who meets the following criteria:

Through his or her own actions becomes statutorily liable for, or is subject to, the costs related to the cleanup of hazardous substances or the permanent remediation of a release or threatened release of hazardous substances into the environment in a manner consistent with the national contingency plan.  

As such, Chubb was never liable for response costs under CERCLA. Chubb argued that because it reimbursed its insured, it then became subrogated to the insured’s right to pursue a 107(a) claim. The 9th Circuit did not agree, determining that a subrogee cannot be liable for response costs under CERCLA and therefore it cannot itself incur response costs as required under the statute. Chubb was never statutorily liable for the insured’s response costs under CERCLA. Instead, it was only contractually responsible based on the terms in its insurance policy.

After considering the two sections separately, the 9th Circuit then examined how the two coincide. Although section 112(c) allowed Chubb to file a subrogation action, Chubb still had to comply with statutory requirements, including the requirement that there be a claimant. The 9th Circuit then noted that construing section 107(a) as Chubb argued would eviscerate section 112(c) because section 107(a) does not include the claimant requirement. This means an insured would more than likely pursue a 107(a) subrogation claim, rather than a 112(c) claim.

Insurance companies are still allowed to bring subrogation claims concerning environmental matters under CERCLA. This decision from the 9th Circuit means an insurance company can only bring a subrogation claim under section 112(c) after the insured has made a claim to either the Superfund or a PRP. Also, section 107(a) does not allow an insurer to bring a subrogation claim to recoup insurance payments if the insurer did not directly incur environmental response costs. In short, subrogation rights will not be extended in such a manner as to create a new right or to create more rights.

This ruling also has significant meaning to insureds. Given the 9th Circuit’s rulings, an insured may have some leverage when it comes to working with its insurer to pay environmental cleanup costs. Essentially, because the insurer can only bring a claim after the insured has done so, the insurer is more likely to cooperate with the insured.

Taft’s Environmental group has significant experience in Superfund cost recovery actions and all matters concerning CERCLA. For more information, please contact Tammara D. Porter or any other member of Taft’s Environmental group.