(Article from Insurance Law Alert, December 2020)
For more information, please visit the Insurance Law Alert Resource Center.
Addressing a matter of first impression under Pennsylvania law, a Pennsylvania court ruled that a Potentially Responsible Person (“PRP”) notification constitutes a “suit” for purposes of triggering an insurer’s duty to defend. The court also endorsed a “hybrid” approach to allocating remedial investigation (“RI”) and feasibility study (“FS”) expenses as indemnity or defense costs. Penn. Manuf. Assoc. Ins. Co. v. Johnson Matthey, Inc., 2020 WL 6788769 (Penn. Comm. Ct. Nov. 19, 2020).
In 2006, the Department of Environmental Protection (“DEP”) identified Johnson Matthey as a PRP for environmental contamination at a land site. Thereafter, Johnson Matthey entered into a consent order and agreement in which it agreed to undertake RI/FS actions. In 2010, the DEP added Johnson Matthey as a defendant in ongoing CERCLA litigation. Johnson Matthey and its insurer disputed two issues: (1) whether the insurer’s duty to defend was triggered by the 2006 PRP letter or by the 2010 addition of Johnson Matthey as a defendant to the lawsuit; and (2) whether the RI/FS costs are indemnity costs, subject to the policies’ liability limits, or defense costs.
The court noted that while Pennsylvania’s appellate courts have not yet addressed the question of whether an environmental agency proceeding prior to the filing of a complaint is a “suit” that triggers an insurer’s duty to defend, numerous other state and federal courts have concluded that PRP letters are the “functional equivalent” of suits. The court agreed with the reasoning in those decisions and held that the insurer’s duty to defend was triggered by the 2006 PRP letter. In so ruling, the court emphasized the legal consequences of a PRP letter, the adjudicative authority of administrative proceedings and the involuntary nature of compliance with such actions.
The court also noted that jurisdictions have taken various approaches to determine whether RI/FS costs should be considered defense or indemnity costs. Adopting a “hybrid” method that allocates costs between defense and indemnity, the court set forth the following standard:
[W]e presume that to the extent an expense is primarily attributable to an RI, which addresses the sources, scope, and extent of the contamination, it is a defense cost. The burden should be on the insurer, or any party disadvantaged by the presumption, to show that the insured has derived an unjust benefit from such an allocation . . . . Likewise, we presume that to the extent that an expense is primarily attributable to an FS, which comprises plans for selecting and implementing the remediation alternatives for the site, it is an indemnity cost. The burden should be on the insured, or any party disadvantaged by the presumption, to show that the insurer has derived an unjust benefit from such an allocation . . . .