Arizona Rules on Meaning of “Suit” and Lack of Coverage for Stigma-Related Damages
Insurance Coverage Litigation Law Alert 12/12/12 Jeffrey O. Davis, Sarah R. Anchors
In an important ruling for businesses facing government-ordered clean-ups, the Arizona Court of Appeals ruled that an insurer was required to defend its insured against an order by the Arizona Department of Environmental Quality ("ADEQ") to remediate pollution. Nucor Corp. v. Employers Ins. Co. of Wausau, 1 CA-CV 10-0174, 1 CA-CV 10-0454 (Ariz. Ct. App. Div. 1 Nov. 23, 2012). ADEQ sent Nucor, an electronics manufacturing company, a letter identifying it as a "potentially responsible party" ("PRP") and directing it to take remedial action to clean up trichloroethylene-contamination. Wausau, the insurer, refused to provide Nucor a defense in the ADEQ proceeding because the policies, it argued, only covered "suits", and the ADEQ administrative enforcement action was not a "suit". The trial court rejected this argument and the court of appeals agreed that the term "suit" encompassed the PRP action.
In reaching this conclusion, the court noted conflicting decisions and dictionary definitions on the issue, and therefore turned to the goals, social policy and the transaction as a whole to clarify the meaning of "suit". The broader definition of "suit" meant "the attempt to gain an end by a legal process." The PRP letter met this standard. It required Nucor to create and implement a remediation plan, and imposed daily fines and potential treble and punitive damages for failure to do so. Unlike a garden variety demand letter, the court found the PRP letter itself was analogous to a civil complaint because it imposed liability. The reasonable expectations doctrine －coverage should be based on what a reasonable insured would expect rather than "formalistic rituals " －further supported the court's reasoning. In that regard, the court noted that the insurer could have, but did not, limit the policy language to specifically exclude defense of an administrative action.
It should be noted, however, that Nucor was not a complete win for the insured. While the settlement with ADEQ was awaiting approval, two class actions were filed against Nucor, which were then consolidated. Wausau provided a defense to Nucor under a reservation of rights. Nucor settled with a class alleging stigma damages and demanded Wausau indemnify it for the settlement amount. The court affirmed the trial court ruling that Wausau's policies did not cover the stigma claims. The Wausau policies required indemnification to Nucor for all amounts it became "legally obligated to pay as damages because of property damage", and defined "property damage" as "[p]hysical injury to or destruction of tangible property . . . including the loss of use thereof . . ." The property damage claims were dismissed; consequently, the settlement was only for diminution in the value of plaintiffs' real property. Sidestepping the question of whether actual damage to the subject property is necessary to trigger coverage, the court found that the settlement of the stigma claims was "too unrelated to property damage to require indemnity . . . ." The class included persons whose property was not directly impacted by the contamination but nevertheless claimed that the contamination would make it more difficult to sell their homes. The court cited a Fourth Circuit case that likewise found that the stigma damages alleged were in essence a claim that the defendant's negligence interfered with the plaintiffs' ability to contract with third parties to sell their homes. The court's ruling on this issue leaves a number of open questions, most notably what qualifies as "too unrelated" for purposes of triggering insurance.
Finally, the court addressed issues related to contribution among insurers, which typically affects policyholders where there are carriers who have settled or are insolvent. The court held that contribution among insurers was proper because the policies covered the same party, the same interest in the same property and against the same casualty. Wausau did not have to have actually paid the claim or have provided a complete defense in order to be indemnified. Furthermore, Wausau for years was the only carrier to defend Nucor at all in the class actions, and therefore paid more than its fair share. The court found that Wausau's denial of defense in the ADEQ proceeding did not defeat its right to contribution. Nor did Nucor's settlement with other carriers (Travelers and Hartford) extinguish the right because the right is an equitable one, between insurers, and separate from Nucor's contractual relationships with the insurers. Otherwise, an insurer could "'settle for a limited amount' with the insured to avoid a contribution claim from an insurer who was not a party to such agreement and who paid significant and disproportionate defense costs." Opinion ¶ 43 (citation omitted).
The court did not address how this ruling would be impacted by the typical provisions requiring the insured to indemnify a settling insurer for whatever that insurer is required to pay in contribution. Unfortunately for policyholders, this omission may make settlements between insureds and less than all insurers more difficult since neither insurer nor the insured will know exactly where they stand in terms of future contribution claims in that scenario. Until that issue is resolved, insureds should be aware that any settlement with less than all carriers, will when coupled with indemnification, have the likely effect of putting them in the shoes of the settling carrier for purposes of taking on that carrier's share of the underlying risk.
On the other hand, the appellate court reversed the lower court decision that Nucor was responsible for a pro rata share of defense costs allocable to an insurer who was insolvent by the time of the suit. Nucor had not chosen to forego insurance or be self-insured during those years. Therefore, the insurers' rights to equitable contribution did not extend to contribution from Nucor during those years the insolvent insurer was on the risk. This means, essentially, that in cases with multiple triggered policies, other insurers, not the insured, must assume the share of the risk that is allocable to an insolvent carrier.
 The court's ruling on this issue is not entirely clear. There is little indication of what qualifies as "too unrelated" and potentially puts an insured in the position of having to guess whether a settlement of stigma-related claims will remove coverage for a property damage claim.