The Intersection of Subrogation and Environmental Law — The Ninth Circuit’s Tyranny of Logic over Common Sense

In a decision that exalts casuistry over common sense, the Ninth Circuit recently held that an insurer who reimbursed $2.4 million in CERCLA response costs to its policyholder had no subrogation rights against the potentially responsible parties that actually caused the contamination in the first place.  That holding turns upside down the most basic principles of insurance law.

Chubb Custom Insurance Company v. Space Systems/Loral involved an assisted-living facility which was built on a former manufacturing facility that had been operated and allegedly contaminated with VOCs by Ford.  After buying the property, the owner of the assisted-living facility, Taube-Koret, was ordered by California regulators to clean up the contamination, which it did.  Taube-Koret was reimbursed by Chubb for the cleanup costs and Chubb in turn pursued its subrogation rights against Ford.  The trial court, focusing on Section 112(c) of CERCLA, which expressly addresses subrogation (albeit mostly the subrogation rights of the Superfund), held that Chubb had not complied with the requirements of that section and thus had no subrogation rights.  While affirming, the Ninth Circuit went on to hold that Congress by including Section 112 had intended to displace the traditional subrogation rights that an insurer might equitably have under Section 107 of CERCLA.  The dissent pointedly noted that this was not a sensible result as it allowed the polluting party to pay nothing, thereby violating the bedrock CERCLA principle that the polluter should pay.

The Chubb decision is not only bad news for insurers, who count on the availability of subrogation to minimize the ultimate cost of environmental insurance; the decision is probably also bad news for policyholders.  First, insurers are likely to increase premiums for environmental coverage.  Second, in settling environmental claims, insurers are now likely to require policyholders to agree to participate more directly in asserting claims against other PRPs for the benefit of the insurer.

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