On June 26, 2015, the Texas Supreme Court held that enforcement proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA)—including the issuance of a “PRP letter” notifying the recipient that it is a potentially responsible party—constitute a “suit” subject to the duty to defend under standard commercial general liability insurance policies, joining the substantial majority of courts that have considered the issue. McGinnes Indus. Maint. Corp. v. Phoenix Ins. Co., No. 14-0465 (Tex. June 26, 2015).

While acknowledging that “‘suit’ commonly refers to a proceeding in court,” the court held that the enactment of CERCLA effectively redefined the term to include suit-like activities by the U.S. Environmental Protection Agency (EPA) such as requests for information, invitations to settle, the issuance of administrative orders, and the imposition of sanctions. Slip Op. at 8-9. Reasoning that the intent of CERCLA was not to impact insurance but instead to “streamline” cleanup of contaminated sites, the court held that these suit-like activities “are the suit itself, only conducted outside a courtroom.” Id. at 9.

The court also noted that of the 16 state high courts to have previously considered the issue, only three have come to the contrary conclusion (California, Illinois, and Maine). Id. at 11-12. The last such decision, California’s, was in 1998, and since then seven state high courts have ruled in favor of insureds. Id. at 12. Texas’s decision is in line with this clear trend.

The Texas Supreme Court’s ruling confirms the benefits of an insurer’s duty to defend under historic CGL policies, where defense costs typically do not reduce policy limits, to policyholders confronting
environmental liabilities. This is a key issue for policyholders facing environmental liabilities, as it impacts an insured’s ability to negotiate with EPA and state environmental agencies to resolve cleanups without jeopardizing potential insurance recoveries.