Type: Law Bulletins
Date: 06/29/2018

Washington Federal Court Rules Site Characterization Costs Under Consent Agreement Are Not "Defense Costs"

In Travelers Indemnity Co. v. City of Richland, No. 4:17-CV-5200, Dkt. 27 (E.D. Wash. May 30, 2018), the City entered into an Agreed Order with the Washington Department of Ecology (“DOE”) where it agreed to undertake a Remedial Investigation/Feasibility Study (“RI/FS”) to delineate the contamination emanating from its municipal landfill and assess potential remediation strategies.

Under Washington law, when a settlement agreement with an environmental agency resolves liability, the cleanup costs constitute “damages,” for insurance purposes because “[w]hen a particular claim is settled, it is no longer being defended.” Teck Metals, Ltd. V. Certain Underwriters at Lloyd’s, 735 F. Supp. 2d 1260, 1266-67 (E. D. Wash. 2010). Applying this reasoning, the Eastern District of Washington held that the insurer’s duty to defend its policyholder ends when the insured agrees to perform site characterization, and therefore, the costs to perform an RI/FS are indemnification costs rather than defense costs. The Court reasoned that in agreeing to perform the RI/FS with the DOE, “the Agreed Order settled the question of whether [the City] would perform the RI/FS.” As such, the City was no longer adverse to the DOE, at least with respect to this issue.

The classification of costs as indemnification or defense costs can dramatically impact how a remediation will progress.

It is typical for an agency to request that site characterization studies and analysis, such as RI/FS, be performed to determine the nature and extent of any contamination and assess the feasible methods for performing the remediation. These investigations are often costly. If these costs are “defense costs,” they are borne by the insurer, and are generally paid as they are incurred, possibly subject to a reservation of rights.

Under City of Richland, however, the investigation costs are borne, at least upfront, by the insured. Instead of undertaking these costly studies for which it oftentimes cannot afford, the insured would be forced to either first seek a coverage determination from the insurer to pay for the costs as indemnification costs, or initiate litigation against the agency disputing its liability (and its duty to conduct the investigation in the first place). Either will result in an increase in litigation and will significantly slow down remediation.

Many jurisdictions take the opposite approach and hold that RI/FS costs are indeed defense costs. See, e.g., Wells Cargo, Inc. v. Trans. Ins., No. 1:08-CV-00491-BLW, 2011 WL 5080143, at *5 (D. Idaho Oct. 26, 2011) (“RI/FS costs generally are defense costs.”); Aerojet Gen. Corp. v. Transp. Indem. Co., 948 P.2d 909, 925 (Cal. 1997) (finding that site investigative costs qualify as “defense costs”); Am. Bumper & Mfg. v. Harford Fire Ins., 550 N.W.2d 475, 486 (Mich. 1996) (“[W]e hold that site investigation costs incurred during the RI/FS are defense costs rather than indemnification costs . . . .”). This rule is the far better approach as costs of investigating a site are often incurred before there is sufficient information to determine whether the responsible party should actually be liable and because it results in funds being available to actually move forward with investigating and remediating contamination.

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