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In Texas, Insurer’s Duty to Defend Against Suits Finally Clarified

Most standard commercial general liability insurance (CGL) policies assign to the insurer a duty to defend any “suit” brought against the insured that seeks damages that may be covered under the policy. Until recently, Texas case law was unsettled as to what the word “suit” included. At minimum, a suit could include civil actions filed in court, and all of the Texas courts accepted that narrow definition. But arguably, a suit could include other proceedings such as administrative processes initiated by receipt of a potentially responsible party (PRP) letter sent by a governmental agency such as the EPA. On June 26, 2015, in a decision favorable for Texas policyholders, the Texas Supreme Court held that the term “suit” includes administrative enforcement actions by the Environmental Protection Agency under the Comprehensive Response, Compensation, and Liability Act of 1980 (CERCLA). In McGinnes Industrial Maintenance Corp. v. The Phoenix Ins. Co., No.14-0465, policyholder McGinnes had received a PRP demand letter from the EPA in regard to environmental contamination at a site in Texas, requesting over $300,000 to pay for cleanup costs. After not receiving a response from McGinnes, the EPA took administrative action, ordering McGinnes to obtain a feasibility study investigating potential remedies to the contamination. The letter also warned of penalties and punitive damages for willful refusal to comply with the order. McGinnes tapped his insurers, The Phoenix Insurance Company (Phoenix) and Travelers Insurance (Travelers), to defend against the EPA proceedings pursuant to a CGL insurance policy. Phoenix and Travelers refused, arguing that neither the demand letter nor the order constituted a “suit” under the policy. McGinnes sued his insurers in federal district court seeking a declaratory judgment that the insurers had a duty to defend. The court issued a partial summary judgment finding no duty to defend, and certified its order for interlocutory appeal. The Texas Supreme Court ultimately addressed the issue, finding that the letter or order was a “suit” within the meaning of a CGL policy, reasoning that (1) EPA proceedings under CERCLA were the functional equivalent of a suit, (2) cleanup costs under CERCLA are damages covered by standard CGL policies, and (3) most courts that have interpreted the term “suit” have construed the term broadly to benefit policyholders. The ruling brings Texas into alignment with at least 13 other states on the issue, and provides substantial assurance to CGL policyholders in Texas facing similar EPA actions.

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