Duty to Defend Under Model Toxic Control Act Is Triggered When Government Agency Communicates an “Explicit or Implicit” Threat of Consequences

An appellate court in Washington has ruled that the duty of an insurer to defend its insured in connection with potential liability under the state’s Model Toxics Control Act (“MTCA”), which imposes strict liability on the owner or operator of contaminated property, is triggered if a government agency communicates an explicit or implicit threat of immediate and severe consequences by reason of the contamination. 

The Case

In 2005, Gull Industries, Inc., which owned a gas station in Sedro-Woolley, Washington, that it leased to Hayes and Mary Johnson, notified the Washington Department of Ecology (“DOE”) that there had been a release of petroleum product at the station. The DOE sent Gull a letter acknowledging Gull’s notice of the suspected contamination.

In 2009, Gull tendered its claims for defense and indemnification for the costs of the cleanup at the station to its insurance carrier, which did not accept the tender. In March 2010, Gull tendered its claims as an additional insured under a policy the Johnsons had obtained; that insurance company also did not accept Gull’s tender.

Gull then sued the insurers, asserting claims for declaratory judgment, breach of contract, breach of fiduciary duty, and bad faith relating to the Sedro-Woolley site.

The insurers moved for partial summary judgment, arguing, in part, that they had no duty to defend. Gull opposed the motion, asserting that the duty to defend was triggered because it faced strict liability for environmental cleanup costs under the MTCA.

The trial court ruled in favor of the carriers, concluding that they had no duty to defend Gull. Gull appealed.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court ruled that the undefined policy term “suit” was ambiguous in the environmental liability context and “may include administrative enforcement acts that are the functional equivalent of a suit.” The appellate court, however, rejected Gull’s contention that liability under the MTCA alone, without any direct enforcement action by the DOE, was the functional equivalent of a “suit” for the purposes of the duty to defend. Instead, the appellate court held that an agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a “suit.”

In this case, the appellate court explained, the only communication Gull received was a letter from the DOE acknowledging receipt of Gull’s notice that the property was contaminated and that it intended to pursue an independent voluntary cleanup. The appellate court added that the DOE letter also advised Gull to “be aware that there are requirements in state law which must be adhered to.” The appellate court observed that the DOE letter did not advise of any consequences that might attach to the failure to adhere to those requirements, that it expressly indicated that the DOE had not determined that Gull was a potentially liable person, and that it did not imply that the DOE had “formally reviewed and approved of the remedial action” planned by Gull. Simply put, the appellate court ruled, the DOE letter did not present an express or implied threat of immediate and severe consequences by reason of the contamination.

Therefore, the appellate court concluded, Gull had not met its burden on summary judgment to establish there was the functional equivalent of a “suit” in this case, triggering the duty to defend.

The case is Gull Industries, Inc. v. State Farm Fire and Cas. Co., 326 P.3d 782 (Wash Ct. App. 2014).