A Houston federal judge recently examined what it means for a claim to be asserted against the insured in the context of a pollution incident, and looked closely at the often multifarious structure of governmental enforcement proceedings against polluters to determine what constitutes a “claim” for purposes of the duty to defend under a pollution policy.  Waste Mgm’t, Inc. v. AIG Specialty Ins. Co., 4:16-CV-03676, 2019 WL 1409661 (S.D. Tex. Mar. 28, 2019) (slip op.) involved a highly publicized 2011 pollution incident that occurred when a heavy rainstorm flooded a landfill in Hawaii, resulting in medical waste being washed into the Pacific, which then washed up on nearby beaches.  The incident resulted in several enforcement actions against Waste Management.

First, the EPA issued an Administrative Order on Consent (“AOC”) in January 2011 requiring certain cleanup actions. Those actions were completed by August 2011, and the EPA declared itself satisfied by the remediation. In December 2011, having entered into a tolling agreement with the Department of Justice (“DOJ”) for possible civil claims under the Clean Water Act, Waste Management first notified AIG of a potential claim, advising it was not yet sure if the claim would exceed its $5 million self-insured retention. Critically, at that time, all work required by the AOC had been completed, and there was no demand for further cleanup work or monetary damages. 

Then, in 2013, the DOJ elected to pursue criminal action against Waste Management. In April 2014, Waste Management and two of its employees were indicted for knowing violations of the Clean Water Act. (The DOJ later pursued civil action against Waste Management as well, but coverage for the civil action was not disputed and was not part of this coverage lawsuit.)

Waste Management tendered the criminal indictment to AIG and demanded a defense in the criminal action, which AIG declined, leading to this examination of AIG’s duty to defend the criminal suit. At the center of the dispute is whether the criminal indictment is a “claim” within the meaning of the policy, and whether the AOC and the criminal indictment together are a single “claim.” The policy defined “claim” as “a written demand… seeking a remedy on the part of the Insured for Loss…”  “Loss” was further defined to include monetary awards or settlements of compensatory damages, punitive damages where allowed by law, and civil fines, but the policy expressly excluded criminal fines or penalties.

The court quickly concluded that the AOC could not be a claim because by the time AIG got notice of it, there was nothing to defend, the work having been completed and the EPA having agreed it was completed.  The court also concluded the criminal indictment was not a claim because it did not seek a remedy for “Loss” – rather, it charged the insured with crimes and sought criminal convictions. Waste Management argued the entire series of enforcement actions should be considered one claim because they all arose out of the same nexus of facts and the various actions against the insured merely represented different legal theories of recovery, but the court rejected this argument as not in compliance with the Texas eight-corners rule, which prohibits looking outside the four corners of the particular pleading against the insured.  The court stated,

“It is one thing for a court to look at the factual allegations rather than the legal theories or causes of action pleaded in a complaint; it is a different matter for a court to weld together multiple different administrative, criminal, and potential civil proceedings into a single purported ‘claim’ for purposes of the eight-corners rule. Such a practice would turn the eight-corners rule into a twelve- or sixteen-corners rule, a rule that has not been adopted by the Supreme Court of Texas.”

Waste Management also argued the criminal indictment left open and unstated the possibility that the DOJ would seek further remedies that might constitute “Loss,” and the potential for these additional remedies triggered the duty to defend.   Here, the court criticized the frequent misuse by insureds of the word “potentially” in the “potentially covered claim” standard. Quoting the Fifth Circuit’s opinion in Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589 (5th Cir. 2011), the court pointed out that while the claim alleged against the insured need only be “potentially” covered to trigger a duty to defend, the claim itself must be actually alleged and found on the face of the pleading, not merely “potential.”  On cross motions for summary judgment, the court ruled entirely in the AIG’s favor and dismissed the case.

Jump to Page

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.