Hazen Paper Co. v. United States Fidelity & Guaranty Co.
555 N.E.2d 576, 407 Mass. 689, 20 Envtl. L. Rep. (Envtl. Law Inst.) 21457 (1990)
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Rule of Law:
Under a standard comprehensive general liability policy, a government agency's letter identifying an insured as a 'potentially responsible party' for environmental contamination is the functional equivalent of a 'suit' that triggers the insurer's duty to defend. Furthermore, government-mandated environmental cleanup costs constitute 'damages' under such a policy.
Facts:
- From 1976 to 1979, Hazen Paper Company (Hazen) sent solvents to the Re-Solve, Inc. hazardous waste facility for recycling.
- In 1983, the United States Environmental Protection Agency (EPA) sent a letter to Hazen identifying it as a 'potentially responsible party' (PRP) under federal environmental law for the release of hazardous substances at the Re-Solve site.
- The EPA letter stated that actual releases of hazardous substances were occurring and that the government had already incurred cleanup costs for which it would seek reimbursement.
- The letter demanded Hazen's 'voluntary' involvement in cleanup measures and reimbursement, warned of criminal penalties for failing to provide requested information, and stated that non-response would be considered a refusal to cooperate.
- In 1986, the Massachusetts Department of Environmental Quality Engineering (DEQE) sent a separate letter to Hazen seeking reimbursement for the cost of removing 115 drums of hazardous material from the same site.
Procedural Posture:
- Hazen Paper Company filed an action against its insurer, United States Fidelity and Guaranty Company (USF&G), in the Massachusetts Superior Court (a state trial court).
- On cross-motions for summary judgment, the Superior Court judge ruled in favor of Hazen, declaring that USF&G had a duty to defend and indemnify Hazen.
- A single justice of the Appeals Court (an intermediate appellate court) granted USF&G's motion for an interlocutory appeal of the summary judgment order.
- The Supreme Judicial Court of Massachusetts (the state's highest court) then granted direct appellate review to both parties.
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Issue:
Under a comprehensive general liability insurance policy, does an EPA letter identifying the insured as a potentially responsible party and demanding payment for environmental cleanup costs constitute a 'suit' seeking 'damages,' thereby triggering the insurer's duty to defend?
Opinions:
Majority - Wilkins, J.
Yes, the EPA letter constitutes a 'suit' seeking 'damages' that triggers the insurer's duty to defend, although the separate DEQE claim does not. The term 'suit' in an insurance policy is not limited to a formal court complaint; it can include administrative actions that are the functional equivalent of a lawsuit. The EPA's PRP letter was not a mere request for voluntary action but a coercive demand with severe consequences for non-cooperation, as liability under the environmental statute is strict and defenses are limited. The insured's opportunity to protect its interests could be lost long before a formal lawsuit, making the PRP letter substantially equivalent to the commencement of litigation. However, the DEQE letter, which only alleged a threat of release, did not rise to this level. On the second point, government-mandated environmental cleanup costs qualify as 'damages' under the policy. The term 'damages' is ambiguous and must be interpreted from the perspective of a reasonable policyholder, who would expect coverage for costs legally incurred to remedy property damage caused by pollution. The court rejects a narrow, technical interpretation that would distinguish between legal 'damages' and equitable relief like cleanup orders.
Analysis:
This decision significantly broadened the scope of an insurer's duty to defend under standard CGL policies in the context of environmental law. By defining an EPA PRP letter as the 'functional equivalent of a suit,' the court forces insurers to engage at an early, critical administrative stage rather than waiting for formal litigation. The court's interpretation of 'damages' to include environmental response costs aligns Massachusetts with the majority of jurisdictions, confirming that CGL policies provide coverage for massive statutory environmental liabilities. This precedent increases financial protection for policyholders facing environmental claims but also expands the potential exposure of insurance carriers for pollution-related liabilities.
