Legal Costs for Criminal Defense of Pollution Claims Not “Clean-up Costs”

The District Court for the Southern District of Texas, applying Texas law, held that an insurer had no duty to indemnify its policyholder under a pollution liability policy for legal fees incurred in a criminal matter stemming from pollution.  No environmental laws required the policyholder to incur criminal defense expenses related to a criminal indictment.

Waste Management, Inc. (“WMI”) and Waste Management Hawaii, Inc. (“WMH”) (collectively “Waste Management”) filed suit against its insurer AIG Specialty Insurance Company (“AIG”) regarding the duty to defend and duty to indemnify Waste Management under a Pollution Legal Liability Select Policy.

Rainstorms hit Oahu in December 2010 and January 2011, leading to flooding in the Waimanalo Gulch Sanitary Landfill.  Waste from the landfill, including syringes, blood vials, catheters, and other medical waste, flowed into the Pacific Ocean and washed up on nearby beaches.  The landfill was operated by WMH.  The United States Environmental Protection Agency (“EPA”) issued an Administrative Order on Consent for Removal Action (“AOC”).  The AOC ordered WMH to take certain actions and produce information to the EPA in order to respond to the pollution event.  A few months later, the United States Department of Justice (“DOJ”) began a grand jury investigation into the pollution from the landfill.  In August 2011, the EPA notified WMH “that the response work set forth in the AOC is completed to the satisfaction of EPA.”

In December 2011, Waste Management gave its first notice of a potential claim to AIG.  In 2013 WMH and the DOJ entered a tolling agreement for civil claims under the Clean Water Act.  Later that year, the DOJ notified Waste Management that “[i]t is our position that this case is appropriately resolved with a criminal resolution, including felony offenses” and offered a plea agreement.  In April 2014 WMH and two WMH employees were indicted.  AIG denied coverage for “any criminal proceedings, criminal fines, or criminal penalties …, including legal fees incurred in connection with the U.S. Attorney General’s grand jury investigation.”

The issue before the District Court was whether AIG had a duty to indemnify Waste Management for at least $12 million in legal expenses incurred in response to the criminal investigation and indictment proceedings.  The District court previously granted summary judgment in favor of AIG on the duty to defend.

In support of its position, Waste Management purported to distinguish between “legal expenses incurred in the defense and investigation of Claims” and “legal expenses incurred for the investigation of the contamination.”  According to Waste Management, when legal expense is incurred for investigation of contamination, the policy treats the expense as “Clean-Up Costs” in its own right, subject to the duty to indemnify.  Under Waste Management’s theory, it characterizes the invoices that it received from its own lawyers as a “written demand alleging responsibility on the part of [Waste Management] and seeking a remedy.”

Waste Management’s theory failed for several reasons.  First, Waste Management did not allege in its complaint that its legal invoices themselves were a “Claim” for “Clean-Up Costs” giving rise to a duty to indemnify.

Second, according to the court, Waste Management’s legal bills are not “Clean-up Costs” because Waste Management incurred legal expenses in order to defend against criminal proceedings, not to investigate contamination as required by environmental laws.  The policy defines “Clean-Up Costs” to include legal expenses when those expenses are incurred for the “investigation … of … contamination,” and when that investigation is required by environmental laws.  Waste Management argued that the policy can be interpreted to cover legal expenses when those expenses are necessary in light of potential perils imposed by environmental laws.  The court found that “Waste Management’s efforts to fit a square peg in a round hole, however, cannot overcome the plain language of the Insurance Policy.”  The legal bills were not incurred as part of a legally required investigation of contamination, and therefore, they were not “Clean-Up Costs.”

Third, Waste Management’s theory failed to identify a “Claim.”  A “Claim” is defined by the policy as “a written demand received by the Insured alleging liability or responsibility and seeking a remedy on the part of the Insured for Loss….”  Waste Management cannot rely on the invoices from its lawyers seeking payment as a “Claim.”  Waste Management, Inc. v. AIG Specialty Ins. Co. f/k/a Chartis Specialty Ins. Co., 4:16-CV-03676 (S.D. Tex. Aug. 27, 2019).