Opinion ID: 1992368
Heading Depth: 1
Heading Rank: 7

Heading: The Duty to Defend Question.

Text: As to this issue the policy language provides: [The insurer] shall have the right and duty to defend any suit against the insured seeking damages on account of. . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent and may make such investigation and settlement of any claim or suit as [it] deems expedient.... (Emphasis added.) The federal district court has asked us whether, based on this language, the insurer had any duty to defend A.Y. McDonald during the proceedings before the EPA. More specifically, that court has asked whether the proceedings before the EPA constituted a suit. We have already decided adversely to the defendants the predicate to a duty to defend: any action against the insured seeking damages on account of property damage. Our remaining task is to interpret the meaning of the term suit. In determining a duty to defend issue, we follow certain well-defined principles. An insurer's duty to defend is separate from its duty to indemnify; the duty to defend is broader than the duty to indemnify. First Newton Nat'l Bank v. General Cas. Co., 426 N.W.2d 618, 630 (Iowa 1988); McAndrews v. Farm Bureau Mut. Ins. Co., 349 N.W.2d 117, 119 (Iowa 1984). The duty to defend arises whenever there is potential or possible liability to indemnify the insured based on the facts appearing at the outset of the case. First Newton Nat'l Bank, 426 N.W.2d at 623. In other words, the duty to defend rests solely on whether the petition contains any allegations that arguably or potentially bring the action within the policy coverage. 7C J. Appleman, Insurance Law and Practice § 4684 at 83-85 (Berdal ed. 1979). If any claim alleged against the insured can rationally be said to fall within such coverage, the insurer must defend the entire action. First Newton Nat'l Bank, 426 N.W.2d at 630. In case of doubt as to whether the petition alleges a claim that is covered by the policy, the doubt is resolved in favor of the insured. Id. at 628. The defendants and the amici who join them on this issue point out that the EPA has filed no action against A.Y. McDonald in a court of law. Until that happens, they argue, a duty to defend a suit against the insured seeking damages has not yet been triggered. The policies do not define suit. So we apply the same principles of interpretation we applied in interpreting damages. The dictionary gives suit a meaning the defendants seek: an action or process in a court for the recovery of a right or claim. Webster's Third New International Dictionary 2286 (P. Gove ed. 1961). It also gives the word a second, broader meaning: the attempt to gain an end by a legal process. Id. Adopting the broader meaning, some courts have rejected the argument that the duty to defend arises only after the insured is the subject of a court action. [9] On the other hand, several courts have opted for the first meaning: an action or process in a court for the recovery of a right or claim. [10] Because we see an ambiguity in the meaning of the term suit, we join the majority of courts that adopt the broader meaning of the term. We hold that a suit under the policies here includes any attempt to gain an end by legal process. See Webster's Third New International Dictionary 2286 (P.Gove ed. 1961); C.D. Spangler Constr. Co., 326 N.C. at 154, 388 S.E.2d at 570. We agree with the following: [T]he EPA processes for the enforcement of obligations to aid in the cleaning up of environmental pollution have moved away from the use of lawsuits toward the use of agency demands for participation in remedial action. Those requests are dangerous for the alleged polluter to ignore because they often result in dispositive, extrajudicial solutions. The consequences of the receipt of [an] EPA [demand] letter [are] so substantially equivalent to the commencement of a lawsuit that a duty to defend [arises] immediately. Hazen Paper Co., 407 Mass. at 695-96, 555 N.E.2d at 581. The EPA demand letter is not the same as a conventional demand letter based on a personal injury claim. The identification of an insured as a potentially responsible party (PRP) has more serious consequences than a demand letter in a personal injury case. For example, the insured can be fined for failure to cooperate in the EPA's process of cleanup. In addition, if the EPA ultimately recovers the costs of cleanup, the insured's failure to settle before any legal action by the EPA could increase the amount of recovery against the insured. Id. at 696, 555 N.E.2d at 581. The insured's obligation to respond positively to the [EPA's demand] letter [is] strong. The prospects of avoiding financial responsibility [are] minimal because liability is not based on fault. [See CERCLA, 42 U.S.C.] § 9607(a) (1982 & Supp.V.1987) and the available defenses are very limited. [See CERCLA, 42 U.S.C.] § 9607(b). Moreover, the risk to which [the insured is] exposed [is] substantial because, as a practical matter, its liability is joint and several. Early involvement in the settlement discussions is thus often crucial to protect one's interests. Any court action by EPA is limited to the administrative record [ see CERCLA, 42 U.S.C.] § 9613(j)(1) (1982 & Supp. V 1987), and judicial review considers only whether the EPA decision was arbitrary and capricious or otherwise not in accordance with law. [See CERCLA, 42 U.S.C.] § 9613(j)(2). Thus participation in the development of that record can be crucial. Settlement of EPA claims against potentially responsible parties, with protection against claims for contribution, is a desired goal. [See CERCLA, 42 U.S.C.] §§ 9613(f)(2), 9622(d). The situation [is] such that the opportunity to protect [the insured's] interests could well [be] lost, long before any lawsuit would be brought. It would be naive to characterize [an] EPA [demand] letter as a request for voluntary action. [The insured has] no practical choice other than to respond actively to the letter. Id. at 696-97, 555 N.E.2d at 581-82 (some citations omitted). Here the EPA's actions went far beyond a PRP demand letter. The EPA served A.Y. McDonald with a complaint, compliance order, and notice of opportunity for hearing. A.Y. McDonald was involved in a hearing and an appeal. A final decision found A.Y. McDonald guilty of certain violations of the RCRA, imposed a civil penalty, and ordered A.Y. McDonald to take remedial action. About a month later the EPA secured a consent order from A.Y. McDonald in which the company was required to take substantial remedial action. That consent decree order was filed in the United States district court. These actions went far beyond those found to constitute a suit in the cases cited. In our view these actions easily fit our adopted definition of suit: any attempt to gain an end by legal process. The administrative process pursued by the EPA which culminated in the consent order filed in federal district court was an attempt on the part of the government to gain an end by legal process. Cf. C.D. Spangler Constr. Co., 326 N.C. at 154, 388 S.E.2d at 570 (compliance orders issued by state environmental protection agency held to constitute an attempt on the part of the state to gain an end by legal process and therefore covered by the term suit in a CGL policy).