A little help from the court: the recent Cooper vs. Aviall decision may help insurers with environmental liability claims, but the claims won't go away and adjusters need to know the nuances of the ruling.

Key Points

* Cooper vs. Aviall prevents some recoveries of environmental contamination cleanup costs under the Superfund statutes.

* Some observers predicts a severe slowing of new claims for recovery by claimants pursuing voluntary cleanups.

* The impact likely will be more complex with varying activities resulting from claims in different states and different federal circuits.

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On Dec. 13, 2004, the Supreme Court made its much-anticipated ruling in Cooper Industries Inc. vs. Aviall Services Inc. In short, the court ruled that a suit seeking to recover environmental contamination cleanup costs under Section 113(f)(1) of the federal Superfund statutes is not available to a private party who undertakes a voluntary cleanup without suit having first been filed against it under Sections 106 or 107 (typically claims asserted by the U.S. Environmental Protection Agency or a state).Across the country, environmental attorneys and the media quickly digested the court's decision, and soon thereafter newspaper headlines and articles declared the likely end to the common practice of companies initiating voluntary cleanups of contaminated sites and pursuing recovery of their costs from other potentially responsible parties under the statutes, officially known as the Comprehensive Environmental Response, Compensation and Liability Act or CERCLA. This issue is far from decided, however; rather, it is just heating up, and is significant to insurance claims examiners overseeing such cases.

The underlying case concerned the contamination of four aircraft engine maintenance yards in Texas that Aviall Services Inc. purchased from Cooper Industries Inc. in 1981. Aviall operated the sites for several years, and discovered that both it and Cooper had contaminated the sites. Aviall notified the Texas Natural Resource Conservation Commission of the contamination. The state directed that the sites be cleaned up, but did not undertake legal or administrative action against Aviall. Thereafter, Aviall initiated a voluntary cleanup of the environmental contamination, incurring significant costs in the process.

Aviall brought an action against Cooper in the District Court for the Northern District of Texas to recover its costs. Aviall's initial complaint sought cost recovery for the cleanup under CERCLA Section 107, in addition to a claim for contribution under CERCLA Section 113(f)(1). Aviall later amended the complaint to combine its two CERCLA claims into a single joint claim that, pursuant to Section 113(f)(1), sought contribution from Cooper as a potentially responsible party under Section 107(a). The District court held that Aviall had abandoned its Section 107 claim, and that relief was not available to Aviall under Section 113(f)(1), because it had not first been sued under Sections 106 or 107. The 5th Circuit reversed and held that Section l13(f)(1) allows a potentially responsible party to obtain contribution from other potentially responsible parties, regardless of whether the first party has been sued under Sections 106 or 107.

Supreme Court's Decision

Justice Clarence Thomas delivered the opinion of the court that Avian has no Section 113(13(1) claim because it was never subject to a civil action under Sections 106 or 107(a).The court dismissed Aviall's argument that the underlying policy of CERCLA seeks to promote voluntary cleanups, and relied instead on a strict reading of the statutory language of Section 113(f)(1) and Section 113 as a whole: "Given the clear meaning of the text, there is no need to resolve this dispute or to consult the purpose of CERCLA at all."

The court's decision was narrow in scope and only addressed the singular issue of whether a private party can maintain a claim under Section 113(f)(1) for contribution without being sued under Sections 106 or 107(a). The court declined to address two key issues, which both the majority and dissenting justices agree are likely to require further adjudication. These issues are addressed below.

First, the court declined to determine whether Aviall may recover costs under Section 107(a)(4)(B) even though it is a potentially responsible party. The lower courts had not considered Aviall's Section 107 claim. The court stated that the relationship between Sections 107 and 113 is a significant issue in its own right, and beyond the scope of the briefing of the question presented to the court. The court noted that eight of the federal circuit courts do not allow Section 107(a) claims unless brought by the government or an "innocent" party. The court noted decisions in the 1st, 2nd, 3rd, 4th, 6th, 9th, 10th, and 11th circuits. An innocent party is one that either is not a potentially responsible party or qualifies for a defense from CERCLA liability. There is some disagreement among the circuits as to which defenses are available. The court left open the question whether Aviall may pursue a Section 107 cost recovery action for some form of liability other than joint and several.

Second, the court declined to address whether Aviall has an implied right to contribution (as opposed to a right to joint and several cost recovery) under Section 107. The court saved for another day the question of whether any judicially implied right of contribution survived the passage of the Superfund Amendments and Reauthorization Act of 1986.

The dissent believed that deferring these two issues for further consideration by the courts below was unnecessary. The dissent opined that in Key Tronic Corp. vs. United States the court already recognized, in regards to CERCLA, that "[t]he statute now expressly authorizes a cause of action for contribution and impliedly authorizes a similar and somewhat overlapping remedy in Section 107."

Environmental Liability Claims

Motions. In pending litigation, an insurance company claims representative or claims examiner should consider insisting that defense counsel analyze whether the plaintiff is pursuing contribution from potentially responsible parties for costs incurred in a voluntary cleanup and, where appropriate, file motions to dismiss or other dispositive motions to test the current viability of those CERCLA claims. Where the plaintiff is arguably a potentially responsible party itself and the litigation is pending in any of the eight federal circuits that only recognize a Section 107 claim for government or innocent potentially responsible parties, this strategy is all the more appropriate. If the plaintiff's sole federal claim is a CERCLA Section 113 action and that claim is successfully challenged, the federal court could exercise its discretion to remand the case to state court, citing a lack of federal court jurisdiction. The plaintiff would then be left with significantly less procedural and substantive ammunition than would otherwise be available with its CERCLA claims intact. For example, few state law causes of action parallel the strict liability standard available under CERCLA.

Settlement Leverage. Depending on the posture of the pending litigation, a claims examiner also may want to consider a more tactical use of the Cooper decision. Specifically, in cases where the parties have made significant progress toward a favorable settlement, one should consider instructing defense counsel to prepare a letter to the claimant setting forth the Cooper-based arguments, as opposed to incurring the expense of preparing a motion. In doing so, one still may employ the leverage created by the Cooper decision to negotiate the remainder of the settlement, without necessarily incurring the costs of full motion practice.

Litigation Phasing. In cases where a motion is appropriate but unsuccessful due to factual disputes concerning whether the plaintiff is an innocent potentially responsible party or not, defense counsel should consider asking the court to phase the trial proceedings and, if early enough, to phase discovery as well, so that the court may first decide this issue alone. If defense counsel can prove to the court in the first phase that the plaintiff is not an innocent potentially responsible party, and thus not entitled to a Section 107 claim, the plaintiff would then be left with no CERCLA case, and potentially only state-based claims, at which time the court could then properly consider remanding the case to state court. Although the decision in Cooper will not impact any claims brought under the Resource Conservation and Recovery Act, that act does not allow for recovery of costs and thus is not as attractive to plaintiffs as a CERCLA claim.

Impact on Future Claims

Based on the Cooper decision, the number of new claims by claimants pursuing voluntary cleanups should slow over the next year or two. Several of the commentators, thus far, appear to be predicting a more severe impact in terms of future claims; such predictions need to be qualified. There are three distinct categories of future voluntary cleanup claimants and each will have a different impact on this analysis.

First, there will be claimants who are aware of a contamination problem but who yet have not incurred significant investigative or cleanup costs. This is the category most likely to slow down substantially in future claims activity. Claimants in this category face a dilemma. On the one hand, they may choose to defer incurring any investigative or remedial costs until either a claim is filed against them that creates a right to contribution under Section 113(f)(1) or they reach an administrative settlement with the government that triggers the right to contribution under Section 113(f)(3)(B). In any event, the Cooper decision likely will require greater governmental involvement in cleanup projects, to protect the ability to obtain cost recovery from other potentially responsible parties. Waiting for federal and state authorities to initiate enforcement actions could lead to extensive delays, however, as such agencies may not be prepared for an onslaught of new cases. On the other hand, claimants may be under business pressure (due to acquisition, estate planning or borrowing needs) to assess and liquidate contingent liabilities. As explained below, for those who decide to take action, there are still viable theories aside from CERCLA Section 113.

Second, there will be voluntary cleanup claimants who already have incurred substantial site investigation and cleanup costs. As for this category of claimants, the Cooper decision should not eliminate, but instead merely slow future claims from arising. Because they already have incurred substantial costs and options exist to support recovery other than CERCLA Section 113, these claimants most likely will proceed to take legal action to seek recovery from potentially responsible parties. The Cooper decision, while providing reason to pause, is hardly reason to stop a claimant from seeking recovery of substantial monies it already has spent. For instance, there are many legal theories under which the claimant may file suit, depending on the circumstances:

* Resource Conservation and Recovery Act;

* State statutes that are CERCLA counterparts, such as California's Carpenter-Presley-Tanner Hazardous Substance Account Act;

* Public and private nuisance;

* Trespass;

* Negligence and/or negligence per se;

* Fraud;

* Contractual indemnity/breach of contract; and

* Equitable contribution.

Third, there will be voluntary cleanup claimants whose sites are located within the eight most-affected federal circuits. The impact from the Cooper decision is most pronounced in these circuits that hold a Section 107 claim may only be maintained by a government entity or an innocent potentially responsible party. If the claimant is a potentially responsible party itself, the claimant may not maintain a Section 107 action in those eight circuits. In the three circuits, 5th, 7th, and 8th, that do not recognize this rule, the voluntary cleanup claimant, though a potentially responsible party itself, should survive a Cooper-based challenge by reverting to its Section 107 claim.

Considering all three categories mentioned above, the most likely slowdown in claims will come from claimants who intended to perform a voluntary cleanup, but who have not already incurred significant expense, and claimants whose site is located in one of the eight federal circuits mentioned above.

Friendly Government Lawsuits

While proving collusive behavior is difficult, it still is important to recognize that you may be dealing with a "friendly" lawsuit or settlement involving the government and claimant. A logical reaction to the Cooper decision will he for private parties, especially those who already have incurred substantial expenses, to invite a government enforcement action or administrative settlement pursuant to Section 113(f)(3)(B). However, this may not be so easy. The government agency may be overburdened in general or a particular site may not be a high enough priority to justify overcoming the bureaucratic hurdles associated with initiating legal or formal administrative proceedings. Such friendly actions may be difficult to obtain from the U.S. EPA under the direction of the Bush administration. Other lead state environmental agencies, however, may be more willing to File suit so as to trigger and encourage private potentially responsible party efforts to collect money to remediate particular sites.

Future Action

One clear and express purpose in the policy underlying CERCLA was to encourage private parties to clean up contaminated sites voluntarily and recover their costs. The strict constructionist approach of the court in Cooper, however, ignored public policy considerations in light of what appeared to the court to be the express and clear language of CERCLA. Nonetheless, there may be a movement in Congress to amend CERCLA to counter this decision and provide for clear language that will allow private parties to engage in voluntary cleanups. Such encouragement would necessarily require such parties to be able to seek contribution costs from potentially responsible parties. Yet, while courts have often criticized CERCLA for its confusing language, Congress has not seen fit to correct its defects. Additionally, recent amendments of CERCLA have tended to limit, rather than expand, CERCLA's scope. It will nonetheless be an interesting political debate among Congress, the U.S. EPA, the Bush administration, and other interested parties as to whether the ability to engage in voluntary cleanups and recover those costs should be clarified. Many large businesses will be on both sides of this issue, some advocating to allow such voluntary cleanups, some opposing such voluntary cleanups, thus preventing it from being viewed strictly as a pro- vs. anti-business matter.

The Supreme Court is likely to weigh in again on the interplay between CERCLA Sections 107 and 113, and whether a potentially responsible party that is not a governmental entity or an innocent party may nonetheless use Section 107(a)(4)(B) to recover costs. There already are significant discrepancies among the circuits as to who qualifies as an innocent potentially responsible party. The court in Cooper withheld judgment on these issues but noted the probable necessity to adjudicate them in the future. This issue should be the subject of intense debate and scrutiny throughout the federal courts and could reappear quite quickly on the Supreme Court's docket.