The Supreme Court Revisits the Meaning of
Damages in a CGL Insurance Policy
By Jon G. Furlow
It is the hallmark of insurance litigation to quibble over the
meaning of words and phrases which to most seem at first glance to be
quite clear. But look hard enough (and glance at the size of the
policyholder's claim) and words can assume many meanings. Nowhere is
this more common than in insurance disputes over environmental
claims.
| In Hills and
WPS the Wisconsin Supreme Court revisits the School
District of Shorewood and City of Edgerton decisions
involving the meaning of the word "damages" in comprehensive general
liability insurance policies. |
The Wisconsin Supreme Court added another twist to the world of
environmental insurance in its recent decisions in General Casualty
Co. v. Hills 1 (Hills) and
Wisconsin Public Service Corporation v. Heritage Mutual Insurance
Co. 2 (WPS) that refined the
scope and meaning of the word "damages" in a standard form comprehensive
general liability (CGL) insurance policy. In cases that call into
question the continued vitality of the court's controversial decisions
in School District of Shorewood v. Wausau Insurance Companies
3 and City of Edgerton v. General
Casualty Co.,4 the court announced in
unanimous decisions that businesses which are liable to a nongovernment
party for costs to investigate and remediate contamination can look to
their CGL insurance policies for coverage to pay the losses. Along the
way, Chief Justice Abrahamson made it clear in her concurring opinion
that it was time to overrule Shorewood and recognize the
limited application of the City of Edgerton decision.
Hills and WPS provide some clear guidance that will
be useful when handling future environmental claims. But first, a review
of the policy language and the Shorewood and City of
Edgerton cases will put the recent decisions into context.
History: Insurance policies, Shorewood and
Edgerton
The decisions in Hills and WPS interpreted the
scope and meaning of the word "damages" - a word commonly used in the
insuring clause of standard form CGL insurance policies to describe what
the insurance company will pay. The typical CGL insuring clause
reads:
"The company will pay on behalf of the insured all sums which the
insured shall become legally obligated to pay as damages because of
- "A. bodily injury or
- "B. property damage
- "to which this insurance applies, caused by an occurrence, and the
company shall have the right and duty to defend any suit seeking
damages."
The meaning of the word "damages" is important in two respects: 1) in
order for the insurance company to become obligated to pay for defending
the claim against the policyholder, there must be a "suit seeking
damages"; and 2) regardless of whether there is a "suit seeking
damages," the insurance company still must indemnify the policyholder
for bodily injury and property damage if the policyholder is obligated
to pay "damages."
One would think that such an important word would have a clear
meaning. Not so.
In most cases, the word "damages" is not defined in insurance
policies. Thus, it is not surprising that insurance companies and
policyholders nationwide have bitterly disputed the meaning of this
undefined word, particularly in the context of environmental claims.
Across the nation, courts regularly decide disputes over the meaning of
this word. Clarity is not a hallmark of these decisions. And although
the trend seems to be that environmental costs are considered "damages,"
the courts are inconsistent: some find that environmental investigation
and response costs are "damages"5; others
conclude the opposite.6 The distinction is
important because the costs to defend environmental claims can be
enormous and the indemnity payments on them can reach into millions of
dollars in damages.
The Wisconsin Supreme Court joined the debate over the meaning of
"damages" in Shorewood, a case that did not involve an
environmental claim. In Shorewood a school district was sued
for declaratory and injunctive relief arising from racial segregation.
The school district sought to recover its costs of defense and indemnity
under its CGL insurance policies because the lawsuit against it was a
"suit seeking damages." At first the court agreed, issuing a four-three
opinion authored by now Chief Justice Abrahamson.7 Concluding that the word "damages" should not have
a technical meaning, but should be read broadly to accommodate the
reasonable expectations of a layperson who was purchasing the insurance,
the court determined that from "the viewpoint of the lay insured, the
term as thus defined could reasonably include all monetary relief
necessary to remedy a legal wrong."8
Put another way, so long as a claim is made against the policyholder
that requires it to pay money to remedy a legal wrong, there are
"damages" within the meaning of a CGL policy. This meant that the
Shorewood school district could recover its defense costs under its
insurance CGL policy, and the CGL policy would cover the costs of
complying with the injunction and paying the plaintiff's attorney fees,
which were authorized by statute. That decision, though, was short-lived
as the court completely reversed itself three months later on
rehearing.
In an opinion authored by Justice Callow (one of the original
dissenters), and over the dissent by Justice Abrahamson, the court held
on rehearing in Shorewood that the scope of the term "damages"
is more limited. Rather than extend to all monetary relief necessary to
remedy any legal wrong, the court decided that the term "damages" is
limited to compensation for past wrongs, not the costs of complying with
an injunctive decree which is preventive in nature.9 The original opinion by Justice Abrahamson was
withdrawn and replaced by Justice Callow's opinion.
As a result of Shorewood, the defense costs for a preventive
injunction action were not covered, nor were the prevailing party's
attorney fees covered, nor the costs of complying with the settlement
agreement from the litigation, such as costs for remedial education
programs. The Shorewood court also anticipated the problem of
environmental costs. The school district had argued that coverage for
environmental cleanup costs (permitted at the time by many courts
outside of Wisconsin) was analogous to coverage for remedying past
racial segregation. The court declined to address that issue. Noting
that the issue had never been addressed by a Wisconsin court, the
Shorewood court decided that "such an important issue should
not be decided in a cursory fashion by this court."10 However, in 1995 that issue did come before the
court in City of Edgerton.11
The policyholders in City of Edgerton owned a leaky
landfill. When the state and federal environmental agencies requested
information from the policyholders and requested, under threat of fines
and penalties, that the policyholders take remedial action at the
landfill, the policyholders looked to their insurance companies to
provide a defense under form CGL policies, claiming the letters from
government agencies were "a suit seeking damages." In a four-three
opinion, the supreme court in City of Edgerton reversed the
court of appeals and held that no defense was required because the
policyholder was not sued but only received coercive letters requiring
cleanup.
Since the policyholder in City of Edgerton was only seeking
a defense under the insurance policies, this ruling as to "suit" should
have ended the case. After all, for purposes of a defense (remember, no
"suit" is required in a request for indemnification), if you have no
"suit" there cannot be a "suit seeking damages" and, thus, whether
"damages" are sought is beside the point. But the City of
Edgerton court forged ahead and picked up where Shorewood
left off with the definition of "damages" in the context of an
environmental claim. Relying on Shorewood, the court defined
"damages" as "legal compensation for past wrongs or injuries and ...
generally pecuniary in nature," which excludes the costs of complying
with an injunction. According to the court, this meant that
environmental remediation and response costs were not "damages" because
such costs were equitable in nature, not designed as compensation for
past wrongs.12
In effect, this result in City of Edgerton applied the
Shorewood distinction between preventive injunctions and
compensatory remedies. In so doing, the only environmental costs that
qualified as "damages" were natural resource damages available under 42
U.S.C. section 9607(a)(4)(C), and presumably, any state equivalent.
Justice Abrahamson led the three dissenters, pointing in particular to
the court of appeals decision for analysis on both the suit and damages
issue.13 The result of City of
Edgerton was that insurance coverage was unavailable to a landfill
owner because the costs to investigate and remediate the landfill were
not "damages" but were injunctive relief. The practical implications
were sobering: insurance no longer was available to contribute to what
have become staggering costs of cleanup for contamination.
Then came Don Hills and Wisconsin Public Service.
Hills and WPS: The Practical Consequences of
Shorewood and City of Edgerton
Waste oil from Mr. Hills' business was sent for recycling to a site
in Minnesota known as the Arrowhead site. When the site became
contaminated, Arrowhead entered into a consent decree with the United
States Environmental Protection Agency (USEPA) to clean up the site.
Arrowhead then sued Hills, and hundreds of other parties, under state,
federal and common law for recovery of the response costs that Arrowhead
had incurred to remediate the site. Mr. Hills tendered the defense and
indemnity of the lawsuit to his insurance company, General Casualty Co.,
which had issued a series of "combination service station" and "garage"
insurance policies that covered suits seeking "damages." General
Casualty sued Hills, seeking a declaration that it had no duty to defend
or indemnify Hills because response costs were not damages. The circuit
court granted summary judgment for General Casualty based upon City
of Edgerton.
The context of WPS was different, but raised the same
question about the meaning of the term "damages" in an insurance policy.
The claim arose when Helmreich, an independent contractor working for
WPS, cut an underground fuel oil pipe while installing a gas
service line to a building owned by the Tomahawk School District. Under
order by the Wisconsin DNR, the contamination was investigated and
remediated with WPS paying the bills. WPS sued Helmreich's insurance
company, Heritage Mutual Insurance Co., for recovery of the costs it had
paid to remediate the contamination. Like General Casualty in
Hills, Heritage Mutual filed a summary judgment motion claiming
that according to City of Edgerton, investigation and
remediation costs were not "damages." The circuit court agreed,
dismissing the WPS case.
The circuit court decisions in Hills and WPS were
hardly remarkable given the supreme court's fresh decision in City
of Edgerton. After all, the insurance industry was reading City
of Edgerton to mean that costs of investigation and remediation of
contamination can never be "damages" as that term is used (but not
defined) in a CGL insurance policy. Still, the City of Edgerton
decision was not without its critics, including Hills and
WPS, which next stopped at the court of appeals to attempt the
impossible: distinguish this decision which the insurance industry was
convinced (and had convinced many) was indistinguishable. After all, how
could an unambiguous word like "damages" have multiple meanings?
What followed was the first significant departure from the broad
reading of the City of Edgerton decision. In opinions released
the same day, the court of appeals reversed the circuit courts in both
Hills andWPS. 14 As to
Hills, the court of appeals noted that unlike the landfill in
City of Edgerton, the contamination was not on property owned
or controlled by Hills. Although not explicitly stated, this
was important so as not to run afoul of the "owned property exclusion"
in the policy. The court of appeals then noted that Hills was
not being required to investigate or remediate, only to contribute to
the costs of that activity performed by the site owner. From this the
court of appeals concluded that the remedy sought was not injunctive
and, thus, falls outside of City of Edgerton.15
The reasoning in WPS was tied to different facts, but
reached the same coverage result. Unlike Hills, which sent
waste oil to the Arrowhead site, WPS was not a tortfeasor that
had caused the contamination. It simply was seeking reimbursement for
investigation and remediation costs it had paid as a result of the
negligence of its independent contractor, Helmreich, who cut the fuel
line. This was an easy case not only distinguishable from City of
Edgerton but controlled by Nischke v. Farmers & Merchants
Bank & Trust, 16 a case decided
after City of Edgerton. Nischke held that a landowner can
recover the costs of investigation and remediation as an element of
legal damages from the tortfeasor that caused the contamination. In
WPS the court of appeals rejected the claim by Heritage that
City of Edgerton automatically foreclosed recovery of
environmental investigation and remediation costs. Instead, the court of
appeals held (again noting that the policyholders in City of
Edgerton owned the land) that a landowner is entitled to recover
from the tortfeasor's insurer those costs incurred to repair third party
property "regardless of whether the government directed the
environmental cleanup."17
The Wisconsin Supreme Court: Back to the Drawing Board
Apart from the results, the most remarkable part of the court of
appeals' decisions in Hills and WPS was the clear
indication that City of Edgerton should not be read to
automatically foreclose recovery of environmental investigation and
response costs. But that raises a curious dilemma: If City of
Edgerton is to be believed, the word "damages" is unambiguous. How
could it mean environmental response costs in some cases, but not
others? Enter the Wisconsin Supreme Court. Consolidating both cases, and
hearing argument only on Hills, the Wisconsin Supreme Court
affirmed both cases in unanimous decisions. In Hills the
supreme court held that the suit against Hills seeks "damages" because
Arrowhead and others (parties other than the EPA or the DNR) were
seeking monetary relief for losses they incurred due to Hills' alleged
past contamination of their property.18 The
Hills decision was controlling in WPS where the court
held that WPS had coverage because WPS (not EPA or DNR) was seeking
recovery for damages that the insured, Helmreich, caused by
contaminating property that he does not own or control.
Both decisions focused closely on the particular facts of the
appeals, and did not stray into related questions or visit the broader
practical implications of the decisions. Yet it cannot go without notice
that the thunder of City of Edgerton was quieted. Now it seems
clear that costs to clean up contaminated property can be "damages" for
insurance purposes:
"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."19
The court noted that the classification of the action as equitable or
legal is not relevant to the determination of whether the remedy sought
constitutes "damages." The court also emphasized that its
interpretations are in accord with the insured's reasonable
expectations.
This seems simple enough, but maybe not. The court did not expressly
overrule City of Edgerton or Shorewood.. The court
actually restated the basic inquiry from those cases: "[W]e must
consider the nature of the relief being sought - whether it is remedial,
substitutionary relief that is intended to compensate for past wrongs,
or preventive and focusing on future conduct."20 The court then pointed out how Hills
and WPS were distinct from City of Edgerton and
Shorewood in three ways: 1) neither EPA nor DNR ordered Hills
to develop a remediation plan or incur remediation costs under state or
federal law; 2) the contamination was not on the Hills property and,
thus, not within the owned property exclusion; and 3) unlike Shorewood,
Hills was not sued to comply with an injunction. Yet, it is unclear how
these three distinctions could matter to the meaning of the term
"damages."
The first distinction is factually correct; but does it make a legal
difference? Accepting the explicit statement in Hills that the
focus is on the interpretation of the insurance policy, not on
environmental law, it should not matter whether it is a public agency or
private party that requires a policyholder to incur the costs to clean
up the contamination and thereby restore the environment. This is
particularly important in Wisconsin where the DNR is entrusted by the
Legislature to safeguard and protect the environment by directing the
parties responsible for the contamination to restore the
environment.21 It would be peculiar indeed
to tie the existence of coverage to the claimant's status. The only time
this should make a difference is when there is a specific policy
exclusion or term relating to claims by a government agency. This may
well be the reason for the court's distinction because, in the
WPS case, there was a pollution exclusion in the policy for
directives from a government agency.
The second distinction by the court, the owned property exclusion,
distinguishes City of Edgerton (recall the policyholder owned
the landfill), but it does not seem to impact upon the meaning of the
term "damages" in the CGL insuring clause. Rather, the owned property
exclusion is a typical policy exclusion that can in certain
circumstances prevent a policyholder from recovering under the CGL
policy for damage to property owned or occupied by the policyholder.
Whether the claim involves property owned or occupied by the
policyholder should not affect whether the claim seeks "damages."
Accordingly, while this second distinction sets Hills and
WPS apart from City of Edgerton, it does not directly
inform the "damages" question.
The court's third distinction based upon the injunctive relief
holding in Shorewood is accurate, but also is curious. The
court said in Hills that the form of action should not matter
so long as the nature of the remedy seeks compensation for past losses.
Yet, there can be little doubt that money spent to investigate and
remediate contamination (whether paid directly by the policyholder or
paid to a third party as reimbursement) has as its primary goal to
restore the soils and groundwater to their prior, uncontaminated
condition. Surely, this is a form of compensation for past losses,
whether the money spent is in response to an injunctive order or
otherwise. It would elevate form over substance to find there is
coverage when a policyholder like Mr. Hills is sued in a contribution
case to fund this cleanup, but then deny coverage when the policyholder
pays the money directly to put the same remedy in place at the direction
of a government agency.
The Remains of Shorewood and City of Edgerton
One could reasonably conclude that after WPS and
Hills, the City of Edgerton case means only that a
letter from a government agency is not a suit that entitles a
policyholder to a defense, and that a general liability policy with an
owned property exclusion does not cover investigation and remediation on
the policyholder's own property (however that might be defined).22 Any broader reading would seem to conflict with
the principles underlying Hills andWPS. As Chief
Justice Abrahamson suggested in her concurring opinion in
Hills, the "damages" discussion in City of Edgerton
was dictum anyway.
Deciding what remains of Shorewood is murky. Since it was
not overruled, Shorewood still would control in a suit for
declaratory and injunctive relief for racial segregation, where
plaintiffs requested attorney fees. But what if the school district had
filed a third party suit against another tortfeasor seeking monetary
contribution for the remedy? Without an injunction facing the
tortfeasor, the Hills decision suggests that the tortfeasor may
have coverage because there is a "suit seeking damages"; for example,
the defendants would be seeking pecuniary compensation (that is,
contribution to the pool of funds) to remedy the tortfeasor's past
wrongs. In fact, the tortfeasor might look to Hills and point
out that the absence of the injunction demonstrates that
Shorewood does not apply to the tortfeasor's case. Suddenly,
the form of the action would make a difference. This seems difficult to
justify.
Perhaps these problems are what led to Chief Justice Abrahamson's
observation in her concurring opinion that she would not leave
Shorewood and Edgerton to be overruled "in small
measures by debatable judicial distinctions," but would "embrace the
inevitable now by expressly overruling Shorewood and thereby
recognizing the limited application of the Edgerton decision on
damages."23
Clear Answers Given in Hills and WPS
So long as there are lawyers and insurance companies, questions will
continue over the application of insurance coverage to environmental
costs. There are, though, some reasonably clear answers when confronting
a question of whether a standard CGL policy provides coverage for
environmental costs:
- Receipt of a letter from the EPA or DNR requesting a party to
propose a remediation plan does not constitute a "suit." 24
- Claims for natural resource damages are covered as "damages" under
City of Edgerton. 25
- Claims for defense (and maybe indemnity) in private party lawsuits
seeking recovery for investigation and cleanup costs under state and
federal statute probably are covered. 26
- Claims by a private party against a tortfeasor's insurance company
for recovery of costs incurred by the private party to investigate and
remediate contamination caused by that tortfeasor likely are covered.
27
- Claims by a policyholder for coverage of claims by neighboring
landowners for loss of land value due to contamination should be a "suit
seeking damages."
The Future
There is little doubt that Hills and WPS provide
some clear guidance about the application of CGL policies to at least
some types of environmental claims. But judging by the discussion in the
opinions, and the concurring opinion of Chief Justice Abrahamson,
questions remain unanswered. It appears that there continue to be
differences among court members over the proper application of the word
"damages" to situations other than those presented by the facts of
Hills and WPS. Yet, through all of this, one well-worn
principle may guide the way in future cases: deciding the policy
interpretation in accord with the expectations of a reasonable person in
the position of the insured.
 |
Jon G. Furlow is a partner in the litigation group at the Madison
office of Michael Best & Friedrich. The firm was involved in
submitting amicus curiae briefs in both the City of Edgerton
and Hills cases. Furlow's practice involves complex commercial
disputes, with a focus on environmental litigation. He thanks his
colleagues Don Best and Cindy Smith for their assistance in preparing
this article.
|
This fundamental insurance principle was emphasized explicitly by the
court in Hills and WPS, and appears to have controlled
the results of the decisions. One is left to wonder, though, if this
principle will be swallowed up as courts in later cases work to apply
the fine distinctions made in Hills and WPS between
"preventive injunctions," "compensatory monetary relief," "pecuniary
losses," "remedial substitutionary relief" and so on. That would be the
type of mistake it appears Chief Justice Abrahamson wanted to avoid when
she called to overrule Shorewood and limit City of
Edgerton. It also is a mistake that takes a step away from the
focus on the reasonable policyholder. Policyholders do not carefully
weigh these legal distinctions when they have lunch with their insurance
representatives and purchase a CGL policy. They think they are buying a
comprehensive general liability policy. Nor is it reasonable to believe
that insurance executives contemplated and understood these fine
differences when they decided not to define the word "damages." After
all, if it was so clear that the word "damages" in the insuring clause
was not intended to cover costs associated with pollution claims, why
did the insurance industry add a separate pollution exclusion to the CGL
policy?
This does not mean that the words of a policy should not be given
meaning. But it does mean that the proper focus should be on how the
reasonable insured looks at those words, not what the insurer chooses
them to mean. The Wisconsin Supreme Court has reminded us of that in
Hills and WPS.
Endnotes
1 General Cas. Co. v.
Hills, No. 95-2261 (Wis. Apr. 22, 1997).
2 Wisconsin Pub. Serv. Corp. v.
Heritage Mut. Ins. Co., No. 95-2109 (Wis. Apr. 22, 1997).
3 School Dist. of Shorewood v.
Wausau Ins. Co., 170 Wis. 2d 347, 488 N.W.2d 82 (1992).
4 City of Edgerton v. General
Cas. Co., 184 Wis. 2d 750, 517 N.W.2d 463 (1994), cert. denied, 115
S. Ct. 1360, 2615 (1995).
5 E.g., Independent
Petrochemical Corp. v. Aetna Cas. & Sur. Co., 944 F.2d 940
(D.C. Cir. 1991), cert. denied, 112 S. Ct. 1777 (1992).
6 E.g., Continental Ins. v.
Northeastern Pharm. & Chem. Co., 842 F.2d 977 (8th Cir. 1988),
cert. denied sub nom, 488 U.S. 821 (1988).
7 School Dist. of Shorewood v.
Wausau Ins. Co., 168 Wis. 2d 390, 484 N.W.2d 314 (1992), withdrawn
on motion for reconsideration, 170 Wis. 2d 347, 488 N.W.2d 82
(1992).
8 Id. at 414, 484 N.W.2d
at 322.
9 School Dist. of Shorewood v.
Wausau Ins. Co., 170 Wis. 2d 347, 368, 488 N.W.2d 82 (1992).
10 Id. at 374.
11 Edgerton v. General Cas.
Co., 184 Wis. 2d 750, 517 N.W.2d 463 (1994).
12 Id. at 782-86.
13 Edgerton v. General Cas.
Co., 172 Wis. 2d 518, 493 N.W.2d 768 (Ct. App. 1992).
14 General Cas. Co. v.
Hills, 201 Wis. 2d 1, 548 N.W.2d 100 (Ct. App. 1996); Wisconsin
Pub. Serv. Corp. v. Heritage Mut. Ins. Co., 200 Wis. 2d 821, 548
N.W.2d 544 (Ct. App. 1996).
15 Hills, 201 Wis. 2d at
10-12, 548 N.W.2d at 103-04.
16 Nischke v. Farmers &
Merchants Bank & Trust, 187 Wis. 2d 96, 522 N.W.2d 542 (Ct.App.
1994).
17 Wisconsin Pub. Serv.
Corp., 200 Wis. 2d at 833, 548 N.W.2d at 548-49.
18 Hills, No. 95-2261,
slip op. at 17-18.
19 Id., slip op. at
13.
20 Id., slip op. at
12.
21 State v. Mauthe, 123
Wis. 2d 288, 302, 366 N.W.2d 871 (1985); Wisconsin's Env'l Decade v.
DNR., 115 Wis. 2d 381, 414, 340 N.W.2d 722 (1983).
22 See e.g. Robert E. Lee
& Assoc. Inc. v. Peters, 206 Wis. 2d 508, 526, 557 N.W.2d 457,
464 (Ct. App. 1996) (damages to groundwater under property not excluded
under owned property exclusion).
23 Hills, No. 95-2261
(Abrahamson, S., concurring).
24 Hills, No. 95-2261,
slip op. at 15.
25 Edgerton, 184 Wis. 2d
at 784-85, 517 N.W.2d at 478.
26 Hills, No.
95-2261.
27 Wisconsin Pub. Serv.,
No. 95-2109.
Wisconsin Lawyer
