A federal appeals court in California has ruled against Chubb Custom Insurance Co. in the insurer's effort to recover $2.4 million it paid to a policyholder to cover clean-up costs stemming from pollutants released on its property.
The U.S. Court of Appeals for the Ninth Circuit determined that Chubb lacked standing to file its lawsuit against the property's former owners because the policyholder, and not Chubb, incurred the cost of the cleanup. The Ninth Circuit's opinion, which upheld a lower court's decision, limits the ability of insurers to recover damages under the Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as Superfund.
The underlying case stems from pollutants released on a 47-acre parcel of land near Palo Alto, Calif. The property was originally used by Ford Aerospace & Communications Corp., to manufacture satellite communications equipment. Between 1959 and 1990, Ford allegedly released hazardous organic compounds on to the property, which Taube Koret Campus for Jewish Life later had to pay millions of dollars to clean up.
In 2008, Chubb paid Taube Koret $2.4 million under a policy issued by the insurer to cover the cost of the cleanup. Chubb then filed suit against the previous owners of the property to recover the cost of the claim. The former property owners included Ford Motor Co., as the parent company of Space Systems. Chubb also sued other subsequent property owners, including Sun Microsystems, Chevron Corp. and the owner of a KFC franchise.
However, the Ninth Circuit found that under the federal Superfund statute, Chubb had exceeded its subrogation authority when it sued for damages incurred by its policyholder. Subrogation is the legal term for situations in which one party takes over the recovery rights of another against third-party defendants.
"Our decision here does not mean insurers cannot bring subrogation claims in environmental matters. On the contrary, insurers' subrogation rights remain intact under CERCLA," Judge Milan Smith Jr. wrote on behalf of the majority. "The right to subrogation under CERCLA, however, is not an unbridled right."
John Nevius, who participated in the case on behalf of United Policyholders, told Best's News Service the case "shows insurers what the boundaries are" when it comes to seeking subrogation under the Superfund statute.
"There are traditional avenues of subrogation available to insurers under CERCLA," said Nevius, who leads Anderson Kill & Olick's environmental practice in New York. "They don't need to create new avenues or go outside what the existing avenues are. They have to act in cooperation with the policyholder."
A spokesman for Chubb declined to comment on the case. Should Chubb seek to challenge the Ninth Circuit decision, the insurer would have to petition the U.S. Supreme Court for review.
Most Chubb Group of Insurance Cos. subsidiaries rated by A.M. Best currently have Best's Financial Strength Ratings of A++ (Superior).
Insurers have not fared well in recent environmental cases decided by state and federal courts in California.
In August, the California Supreme Court handed down a landmark decision in a case that granted policyholders the ability to stack coverage limits on long-tail environmental claims covering multiple years, while also forcing insurers to cover "all sums" up to the policy limits for each year.