Aon Environmental

Aon Environmental

Alabama Supreme Court holds a “PRP” Letter is a “Suit”

By Claire Juliana of Aon Risk Solutions

Claire Juliana - Aon Environmental

In a case of first impression for the State of Alabama, the Supreme Court of that State responded affirmatively to the question certified by the federal court as:

Under Alabama law, is a 'Potentially Responsible Party' ('PRP') letter from the Environmental Protection Agency ('EPA'), in accordance with the Comprehensive Environmental Response Compensation and Liability Act ('CERCLA') provisions, sufficient to satisfy the 'suit' requirement under a liability policy of insurance?

Travelers Cas. & Sur. Co. v. Ala. Gas Corp., 2012 Ala. LEXIS 174 (December 28, 2012). In so doing, the State of Alabama joins a majority of Supreme Courts that have held that PRP letters satisfy the “suit” requirement in a standard commercial general liability policy.1

In that case, the policyholder, as successor in interest to a company which had conducted manufactured gas plant operations at the subject site until March of 1952, received an “information request” from the EPA on October 8, 2008, which advised the policyholder, in pertinent part that, as part of the EPA’s assessment of liability related to the site: “[the agency] may pursue an Administrative Order on Consent (AOC) with [the PRPs] to carry out the time-critical removal action and provide reimbursement for past costs.” The policyholder tendered this to its insurer and sought a defense but was advised that the EPA's assertions did not rise to the level of a “formal claim” and as such it was unable to state a coverage position until “such a claim or lawsuit is received”. Thereafter, the policyholder received a formal Notice of Potential Liability and Offer to Negotiate from the EPA (the “PRP Letter”) and a draft administrative order on consent. Again, the policyholder tendered the PRP Letter to its insurer and demanded a defense. When the insurer persisted in its position that none of the communications from the EPA constituted a “suit” such as to trigger any potential defense obligations at the time, the policyholder initiated a declaratory judgment action in federal court, which, was then certified to the Supreme Court of the State of Alabama.

In reaching its conclusion, the Court noted that although this was a matter of first impression for the State of Alabama, a significant number of supreme courts in other states had addressed the issue, and the majority had determined that a PRP letter does in fact constitute a “suit”. The Court devoted a considerable portion of its opinion summarizing the relevant states’ positions (principally, Michigan, Massachusetts, Nebraska) as persuasively supporting its view that PRP letters should be considered the functional equivalent of a “suit”. Indeed, the Court noted, the authority vested in the EPA is very nearly absolute and “[g]iven the severe penalties for failure to cooperate and other enforcement tools available to the EPA, a decision by the EPA to designate an insured as a PRP cannot on any practical level be understood as anything less than the initiation of a ‘legal action’ constituting a ‘suit’ within the contemplation of the insurance contract at issue.”

1The courts that constitute the majority to which Alabama is now included are: Nebraska, Connecticut, Kentucky, Wisconsin, Colorado, Vermont, Minnesota, Michigan, New Hampshire, and Massachusetts.