Texas Supreme Court Holds That an EPA Administrative Demand Is a “Suit”

June 30, 2015

On Friday, May 26, 2015, a closely divided Texas Supreme Court issued McGinnes Industrial Maintenance Corp. v. The Phoenix Insurance Co., No. 14-0465, (Tex., June 26, 2015), holding that a demand letter from the EPA to a potentially responsible party (“PRP”) under CERCLA and administrative proceedings under CERCLA constitute a “suit” that triggers an insurer’s obligations under a CGL policy.

The facts in McGinnes are straightforward and, with very little tweaking, could describe hundreds of Superfund sites and thousands of PRPs. In the 1960s, McGinnes dumped pulp and paper mill waste sludge into disposal pits along the San Jacinto River near Houston, Texas. The EPA began investigating the site in 2005, and in 2007 sent a “section 104(e) letter” demanding 32 categories of information from McGinnes concerning its activities at the San Jacinto River site. The section 104(e) letter threatened McGinnes with penalties of up to $32,500 per day if it did not comply. Ultimately, in 2009, the EPA demanded that McGinnes was responsible for cleaning up the site and that it pay $378,863.61. The EPA requested that McGinnes make a good faith offer to resolve its liability. McGinnes declined to do so and the EPA issued an administrative order directing McGinnes to conduct a remedial investigation and feasibility study at the site. (Id., slip op. at 5-6.)

McGinnes tendered this dispute to its insurers for the period of time it conducted operations at the site, including Phoenix and Travelers. (These policies were issued before 1970, when the insurance industry incorporated the “sudden and accidental” pollution exclusion into CGL policies.) McGinnes’ insurers denied coverage, asserting that the EPA administrative proceedings did not constitute a “suit” triggering obligations under the policies. The policies did not define “suit.” (Id., slip op. at 7-8.)

A majority of the Texas Supreme Court held that without further definition, the word “suit” in these policies included the EPA proceedings for three reasons: (1) The process created by CERCLA, which did not exist when the policies were written, gave the EPA authority to conduct on its own what otherwise would have amounted to pretrial proceedings, but without having to initiate a court action until the end of the process. Id., slip op. at 8-10. (2) The EPA proceeding sought covered “damages” under the policies. Id., slip op. at 11-12. The Court stated, “To interpret the policies as covering the damages incurred as a result of pollution cleanup proceedings without giving the Insurers the right and duty to defend those proceedings creates perverse incentives and consequences for insurers and insureds alike.” (3) Thirteen of the sixteen state supreme appellate courts considering the issue have found that the EPA proceedings were “suits.” The results in state intermediate appellate courts and federal courts were similarly “lopsided.” Id., slip op. at 12-13. Therefore, said the majority, the policies provided coverage.

With this opinion, and despite dissenters’ claims that this interpretation of “suit” rewrote the policies, Texas becomes the latest jurisdiction to hold that an EPA administrative proceeding constitutes a suit for purposes of a CGL policy. McGinnes is important in the environmental sphere, and in any situation where Congress or a legislature creates a quasi-judicial process for resolution of disputes that otherwise would be heard in a civil lawsuit. But McGinnes is not a panacea for policyholders with environmental claims in Texas. Texas remains firmly among those jurisdictions holding that the “absolute pollution exclusion” incorporated into CGL policies after 1984-85 really is absolute.

That said, McGinnes will have an impact where a policy is not so limited and in other jurisdictions that have not considered or are wavering on this point. It also is a reminder that a better way to solve problems such as these (at least going forward) is during policy negotiations. Taking the time to consult with knowledgeable legal and insurance professionals in advance can help avoid many problems later.

If you have questions about the issues covered in this alert, you may contact Thomas B. Alleman ( or 248-698-7830), or your relationship attorney.

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