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Edgerton Decision Overruled: Response Costs Under CERCLA Are Damages Under CGL Policy

Johnson Controls, Inc. v. Employers Insurance of Wausau, et al.
July 14, 2003

On Friday, July 11, 2003, the Wisconsin Supreme Court issued its decision in Johnson Controls, Inc. v. Employers Insurance of Wausau, et al., 2003 WI 108. In a lengthy opinion, the court overruled precedent to hold that costs incurred to clean up damaged property as a result of an insured’s liability under CERCLA are sums that an insurer is legally obligated to pay as damages under its CGL policy. In the 5-2 decision, the court also reversed previous case law by holding that a government-issued notice concerning environmental response costs under CERCLA constitutes the commencement of legal proceedings and triggers the insurer’s duty to defend.

Nature of the Case

This case originated in 1989 when Johnson Controls brought suit against Employers Insurance of Wausau ("Wausau") and many other insurance companies, seeking coverage for costs it incurred relating to the environmental cleanup of 21 contaminated landfill sites. While the case was pending, the Wisconsin Supreme Court held in City of Edgerton v. General Casualty Co., 184 Wis. 2d 750, 517 N.W.2d 463 (1994), that there was no insurance coverage provided for an insured who cleans up an environmentally contaminated site pursuant to CERCLA or its state counterparts. Following Edgerton, the circuit court granted Wausau’s and the other insurance companies’ motions for summary judgment and dismissed the case as to all sites.

Johnson Controls appealed, and in Johnson Controls I, the court of appeals divided the sites into four categories, listing the criteria for each, and whether the cleanup costs were covered as "damages." Only one of the four categories provided for insurance coverage, where a non-governmental entity seeks remediation costs in a suit for "damages" against the insured, who is at least partly responsible for the contamination but has not been directed by the government to remediate the site. On remand, the circuit court applied the Johnson Controls I categories and found that each of the 21 sites fell into categories without coverage.

Johnson Controls appealed again, and in Johnson Controls II—the opinion on review here—the court of appeals affirmed the circuit court’s application of undisputed facts to the categories set forth in Johnson Controls I.

The Opinion

Edgerton Decision Explicitly Overruled

Nine years ago, in Edgerton the Wisconsin Supreme Court held that cleanup and remediation costs under CERCLA did not constitute sums that the insured may become legally obligated to pay "as damages" within the indemnification provision of CGL policies. The court also held that a government notice or potentially responsible party (PRP) letter did not constitute a "suit" that would trigger an insurer’s duty to defend. Edgerton, however, is no longer the law in Wisconsin.

Today the problems created by the Edgerton decision have become so obvious and so acute that they cannot be ignored. The court is convinced that we did not correctly analyze the term "damages" in the standard CGL policy in relation to environmental cleanup costs under CERCLA. . . . The process of restoring consistency and coherence to the law must begin by overruling the Edgerton decision.
Johnson Controls, 2003 WI 108, ¶4.

In overruling Edgerton, the court noted its intent to "rectify the present confusion and arbitrariness surrounding CERCLA cost recovery actions in Wisconsin, while heading off some of the troubling issues still on the horizon." Id. at ¶112.

The resulting rule should be clear, comprehensive, and logical: The liability imposed under CERCLA against an insured who has contributed to the contamination of property is covered "as damages" if the costs to satisfy that liability are expended to remediate, or pay for the remediation of, the damaged property, provided that the costs are not excluded by some other provision of the policy.
Id.

Environmental Response Costs Under CERCLA Are "Damages"

Without hesitation, the court held that environmental response costs are damages within the terms of the CGL policy. "[T]he Edgerton decision was incorrect insofar as it relied on the too-confining, overly technical definition of "damages" in Shorewood and held that CERCLA response costs were not damages within the terms of the standard CGL policy." Id. at ¶71.

In overruling Edgerton, the court revisited its basis for Edgerton—the definition of "as damages" in School District of Shorewood v. Wausau Insurance Cos., 170 Wis. 2d 347, 488 N.W.2d 82 (1992). In Shorewood, two school districts sought liability insurance coverage under their CGL policies for their costs in complying with the terms of a settlement to correct alleged practices of racial segregation and discrimination. The Shorewood court held that such costs are not "damages" under a CGL policy because damages means "legal compensation for past wrongs or injuries." Id. at 368. The court also noted: "The term ‘damages’ does not encompass the cost of complying with an injunctive decree."

The Johnson Controls court now rejects Shorewood’s "overly restrictive definition of damages." 2003 WI 108, ¶38.

[I]f an equitable action is providing compensation for past wrongs—if it is "remedial in nature"—it cannot be lumped indiscriminately with a typical injunction, because it is serving a different purpose from a typical injunction.

Id. at ¶43.

With respect to CERCLA, the court held that Edgerton was erroneous because "it did not appreciate the nature of liability for environmental cleanup costs under CERCLA or how that liability would be understood by a reasonable insured." Id. at ¶45.

[T]he nature and relief in CERCLA response cost actions is not confined to future injuries; it includes "legal recompense for injuries sustained." . . . Thus, there is both a prospective and remedial element to an insured’s response cost liability. Because CERCLA proceedings seek the costs of repairing damaged property, rather than the cost of conforming one’s future conduct, the nature of relief is, at least in part, compensatory….The harm for which CERCLA liability attaches is based on past wrongs and injuries to property…and may be characterized as consequential damages flowing from the direct damage caused to the environment.

Id. at ¶48 (footnote omitted).

In addition to Shorewood, the court turned to its more recent decision in General Casualty Co. of Wisconsin v. Hills, 209 Wis. 2d 167, 561 N.W.2d 718 (1997), to demonstrate the infirmities in Edgerton. The Hills court distinguished Edgerton and held that when a third party sues an insured for reimbursement of CERCLA response costs, the insured is seeking coverage for legal damages to compensate the third party for past wrongs. Id at 181. Furthermore, the Hills court stated that, "It has long been the law of this state that the cost of repairing and restoring damaged property and water to its original condition is a proper measure of compensatory damages." Id.

In Johnson Controls, the court noted that, "Hills made a valiant attempt to coexist with Shorewood and Edgerton." 2003 WI 108, ¶59. Yet the distinction between Hills and Edgerton, namely, "whether the insured had ever been contacted in some manner by the government regarding the remediation of a site for which the insured was a potentially responsible party" is, according to the court, an "arbitrary" one. 2003 WI 108, ¶62. "We do not believe it is rational or equitable that an insured’s coverage should depend on the assiduousness of the government in contacting the insured as a potentially responsible party." Id. at ¶65.

It makes little sense in determining whether "damages" have occurred under the policy whether the party bringing a legal action for contribution to remediate damaged property is a governmental agency or some other entity. Certainly this distinction was not bargained for, nor is it manifested anywhere in the CGL policies. The nature of the relief sought against an insured for damage that it caused should not change based on the identity of the claimant in a CERCLA cost recovery action.
Id. at ¶64 (footnotes omitted).

Government-Issued Notice Triggers Duty To Defend

After determining that CERCLA response costs are "damages" under the CGL policies in question, the court turned to the other holding in Edgerton—receipt of a PRP letter from the EPA, or a similar letter from a state agency, does not constitute a "suit" for which an insurer has a duty to defend.

We conclude that insurers have a duty to defend an insured who receives a PRP letter from the EPA or an equivalent state agency seeking remediation or remediation costs, provided the insured has coverage for the claim under the CGL policy.
2003 WI 108, ¶92.

Noting that "the duty to defend is generally acknowledged to be broader than the insurance company’s duty to pay," the court looked specifically to CERCLA. Id. at ¶83. "The existence of a statutory system designed to forgo litigation, while achieving the same relief, minimizes the distinction between administrative claims and formal legal proceedings." Id. at ¶87. CERCLA imposes a "strong policy in favor of cooperative remediation over litigation" because it provides "significant incentives for prompt and full involvement from all contacted PRPs." Id. at ¶88. Furthermore, "[d]eliberate non-compliance for the purpose of obtaining a defense from the insurer is completely contrary to public policy." Id. at ¶90.

By their nature, the court concluded that PRP letters "are more analogous to a civil complaint than a traditional demand letter." Id. at ¶89. Accordingly, the PRP letters "alerted Johnson Controls that the EPA had begun a legal process to conclusively and legally determine the appropriate ‘response activities’ that liable parties must perform or pay for to abate the pollution at the sites in question." Id. at ¶89.

Stare Decisis

Once the court had concluded that Edgerton was wrongly decided, it acknowledged that "it is not sufficient for [it] merely to explain why we disagree with the Edgerton decision and reach a contrary conclusion." Id. at ¶93. "Overruling Edgerton requires a compelling justification." Id.

In the face of a pointed dissent, the court concluded that "the most damning factor weighing against our continued adherence to Edgerton is its failure to provide suitable direction and consistency to this area of the law." Id. at ¶106. According to the court’s majority, "Edgerton ‘has not produced the certainty that stare decisis contemplates’ in the context of CGL insurance coverage for CERCLA liability." Id. at ¶109 (quoted source omitted). Furthermore, the court noted that the "court of appeals has not been uniform in its interpretation and application of Edgerton and Hills." Id. at ¶110 (footnote omitted).

In addition, the majority returned to its previous explanation of how Edgerton had misapplied Wisconsin law and the interplay between Hills and Edgerton. "[T]he decision to overrule Edgerton is eased by the clear conclusion that Hills and Edgerton cannot be reconciled without generating the arbitrary and illogical distinctions discussed earlier in this opinion." Id. at ¶105.

The dissent, authored by Justice Jon P. Wilcox and joined by Justice Ann Walsh Bradley, criticized the majority’s reasons for departing from precedent and its failure "to consider several important reliance interests that further buttress adherence to stare decisis in this context." Id. at ¶162 (J. Wilcox, dissenting). The dissent noted that since Edgerton, the court has been presented with "numerous opportunities and requests to overturn the decision" and had consistently refused to do so. Id. at ¶134 (J. Wilcox, dissenting).

The Impact on Insurance Companies

The court’s decision in Johnson Controls overrules nearly ten years of precedent in Wisconsin. Without hesitation, the court reverses direction regarding its interpretation of CGL policies and more specifically, the "as damages" provision and whether a PRP letter triggers an insurer’s duty to defend.

The scope of the Johnson Controls opinion, however, must be considered in context. The court noted that the CGL policies interpreted were issued between 1954 and 1985, and have not been marketed since the Edgerton decision in 1994. The court also noted that since 1985, insurers revised their standard CGL policies to include absolute pollution exclusions. Id. at ¶¶11 and 117. The absolute pollution exclusion was not at issue or interpreted in the Johnson Controls decision.

The court’s slip opinion can be accessed on the Wisconsin Supreme Court’s web site at http://www.wicourts.gov/html/sc/01/01-1193.htm.

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