Opinion ID: 1974373
Heading Depth: 2
Heading Rank: 1

Heading: Are CERCLA Response Costs Damages?

Text: [7] ś 31. We first address whether CERCLA response costs are sums which the insured shall become legally obligated to pay as damages. To answer this question, we must comprehend the nature of environmental response costs as understood by a reasonable insured faced with CERCLA liability. [16] ś 32. The insurers contend that, when the government seeks cleanup costs under the authority of CERCLA (or similar state regulation), the government is seeking relief in the form of (a) restitution through a cost-recovery action, [17] or (b) injunction through administrative order. [18] Because the insurers argue that both forms of relief are equitable, that is, not legal damages, coverage is excluded. ś 33. Johnson Controls takes the opposite position. It contends that response costs are damages from the perspective of an ordinary insured because the law imposes costs on the insured to remediate property that the insured previously damaged. These response costs should thus be covered. ś 34. When this issue was first addressed in Edgerton, a majority of the court concluded that CERCLA response costs do not constitute damages under standard CGL policies. Edgerton, 184 Wis. 2d at 782. The Edgerton majority looked primarily to School District of Shorewood, 170 Wis. 2d 347, for guidance in interpreting the as damages language in the insureds' CGL policies. ś 35. In Shorewood, two school districts sought liability insurance coverage under their CGL policies for their costs in defending an action for declaratory and injunctive relief and their costs in complying with the terms of a subsequent settlement to correct alleged practices of illegal segregation and racial discrimination in education. Id. at 356-62. [19] The court noted that: The apparent goal of the plaintiffs in the underlying action was the desegregation of the Milwaukee area school system. The amended complaint sought only declaratory and injunctive relief whose purpose was to eliminate the remaining vestiges of segregation in the school districts and schools in the Milwaukee metropolitan area. The amended complaint did not seek to presently compensate the victims of past discrimination. Therefore, no damages were sought in the underlying action. Id. at 371. ś 36. The Shorewood court recognized that the types of costs being sought were largely to indemnify the school district for future public expenditures. To explain why such costs did not fall within our traditional concept of damages, the court concluded that the term damages, when used in CGL insurance policies, unambiguously means legal damagesâ that is, legal compensation for past wrongs or injuriesâ which are generally pecuniary in nature. Id. at 368. Then the court added: The term `damages' does not encompass the cost of complying with an injunctive decree. Id. ś 37. This last sentence was critical. Citing Black's Law Dictionary, Professor Dan Dobbs' Handbook on the Law of Remedies (1973), Pure Milk Products Cooperative v. National Farmers Organization ( Pure Milk II ), 90 Wis. 2d 781, 280 N.W.2d 691 (1979), and Milliken v. Bradley ( Milliken II ), 433 U.S. 267 (1977), the court hammered the distinction between compensation for past wrongs and injunctive relief that looks to the future. An injunction looks to the future conduct of the parties and is preventive in nature. Damages, on the other hand, are remedial in nature, not preventive. The remedy of injunction is only available if the plaintiff can establish that a continuing or anticipated injurious act is not adequately compensable in damages. Shorewood, 170 Wis. 2d at 370 (citing Pure Milk II, 90 Wis. 2d at 800). ś 38. In retrospect, the rationale for the Shorewood decision was too broadly stated, and we reject its overly restrictive definition of damages. ś 39. Succeeding courts should have noticed that the Shorewood court's key sentenceâ The term `damages' does not encompass the cost of complying with an injunctive decreeâ was inconsistent with the language of authorities quoted in the opinion. [8] ś 40. For instance, Shorewood cited Dobbs, Handbook on the Law of Remedies, for the proposition that judicial remedies fall into four major categories: damage remedies, restitutionary remedies, coercive remedies (such as injunctions that are backed by the court's contempt power), and declaratory remedies. Shorewood, 170 Wis. 2d at 368 (citing Dobbs, supra, § 1.1 at 1 (1973)). The court then summarized the law: This classification scheme is based on the nature and purpose of the relief awarded. . . . A classification based on the form of the action, as either equitable or legal, is irrelevant.  Id. at 369 (emphasis added). The substance of Dobbs' 1973 treatise is that if the purpose of a remedy is to compensate a party for some loss, the purpose of the remedy overshadows the form of the action. ś 41. We note that Justice Abrahamson cited the same Dobbs treatise and the exact same page in the original Shorewood opinion, writing that Although the main purpose of `damages' at law is generally viewed as compensatory, the damages remedy is not wholly compensatory. At the same time, mandatory injunctive relief may also be `compensatory' in nature. Shorewood I, 168 Wis. 2d at 416 (citing Dobbs, Handbook on the Law of Remedies § 1.1, at 1 (1973)). ś 42. Shorewood also quoted from Pure Milk II: [A]n injunction is designed to prevent injury, not to compensate for past wrongs, and [] an injunction may issue merely upon proof of a sufficient threat of future irreparable injury. Shorewood, 170 Wis. 2d at 370 (quoting Pure Milk II, 90 Wis. 2d at 802) (emphasis added). But Pure Milk II also explained that: The injunction is a preventive order looking to the future conduct of the parties. To obtain an injunction, a plaintiff must show a sufficient probability that future conduct of the defendant will violate a right of and will injure the plaintiff. To invoke the remedy of injunction the plaintiff must moreover establish that the injury is irreparable, i.e. not adequately compensable in damages. Pure Milk II, 90 Wis. 2d at 800 (citations omitted) (emphasis added). [9] ś 43. A careful reading of these authorities suggests that if an equitable action is providing compensation for past wrongsâ if it is remedial in natureâ it cannot be lumped indiscriminately with a typical injunction, because it is serving a different purpose from a typical injunction. [10] ś 44. The Edgerton opinion was too quick to embrace the strict dichotomy between legal damages and equitable actions set out in Shorewood. The Edgerton court's five-page discussion of damages relied heavily on Shorewood 's key sentence that The term `damages' does not encompass the cost of complying with an injunctive decree, and it constructed its analysis to conform to that faulty principle. Edgerton, 184 Wis. 2d at 783 (quoting Shorewood, 170 Wis. 2d at 368). ś 45. Edgerton made a second mistake. It misapplied Shorewood 's holding regarding the scope of the as damages limitation in CGL policies because it did not appreciate the nature of liability for environmental cleanup costs under CERCLA or how that liability would be understood by a reasonable insured. The Edgerton majority summarily concluded that response costs under CERCLA were equitable relief similar to the school districts' settlement in Shorewood, Edgerton, 184 Wis. 2d at 785, [20] and, as such, were not designed to compensate aggrieved parties for past wrongs and did not fall within the policy coverage. Id. The majority reasoned that response costs were designed to deter future contamination by means of an injunctive action, while providing for remediation and cleanup of the affected site[s]. Id. (emphasis added). ś 46. The distinction between legal and equitable remedies relied upon in Shorewood has very limited applicability to CERCLA. Because CERCLA serves dual purposes and provides multiple avenues for achieving these purposes, the operation of the statute and its legal obligations will be confused if one attempts to fit the nature of the liability imposed into a strict equitable/legal damages dichotomy. See John A. Mathias, Jr., et al. Insurance Coverage Disputes § 9.02[1], at 9-18 (1996 & Supp. 2003). ś 47. CERCLA attempts to promptly remediate polluted sites to bring land back to its original uncontaminated condition. However, CERCLA also imposes liability. [21] The costs of accomplishing remediation efforts are expressly expected to be borne by the parties responsible for the polluted condition of the land. [22] The only reason Johnson Controls had to expend money for the sites named in its complaint, either to clean up the properties directly or to reimburse others who had remediated the properties, was because its liability under CERCLA had been established, based on its contribution, in some form, to the pollution of the properties. ś 48. Under this system, the nature of relief in CERCLA response cost actions is not confined to future injuries; it includes legal recompense for injuries sustained. See Shorewood, 170 Wis. 2d at 372. [23] Thus, there is both a prospective and remedial element to an insured's response cost liability. Because CERCLA proceedings seek the costs of repairing damaged property, rather than the cost of conforming one's future conduct, the nature of relief is, at least in part, compensatory. See Boeing Co. v. Aetna Cas. & Sur. Co., 784 P.2d 507, 511 (Wash. 1990). The harm for which CERCLA liability attaches is based on past wrongs and injuries to property, Shorewood, 170 Wis. 2d at 368, and may be characterized as consequential damages flowing from the direct damage caused to the environment. See Minn. Mining & Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 182 (Minn. 1990). ś 49. The availability of cost recovery actions under Section 107 of CERCLA shows that a responsible party's liability under CERCLA is adequately compensable as damages. In fact, a government injunction to an insured to remediate contaminated property is an alternative to a monetary damages action for injury to the property. [24] Under CERCLA, injunctive relief may be available even though legal or restitutive remedies are adequate. See AIU Ins. Co. v. Superior Court, 799 P.2d 1253, 1277 (Cal. 1990). This option is one of several factors that distinguish CERCLA remedies from the traditional injunctions described in Shorewood. ś 50. CERCLA does not regulate prospective conduct in the traditional sense that governments regulate commercial behavior. See New York v. Shore Realty Corp., 759 F.2d 1032, 1041 (2d Cir. 1985) (CERCLA is not a regulatory standard-setting statute such as the Clean Air Act.). Rather, it seeks to impose strict liability on corporations and other entities for damages to property done in the past. None of the costs at issue in this case appear to have been incurred by Johnson Controls to improve the cleanliness of ongoing processing or to comply with government regulations requiring business practices conforming to some standard. [25] Therefore, an injunction in this context is materially distinguishable from a traditional injunction, such as the one at issue in Shorewood. ś 51. It is true that the protection of human health and welfare is a future benefit from remediating damaged property. However, shifting the focus from remediating past damages to preventing future injury from contamination does not change the remedial nature of CERCLA response costs for completed past actions. ś 52. The Edgerton opinion points to 42 U.S.C. § 9607(a), paragraphs (A) and (C), to justify its conclusion that response costs are not damages, asserting that response costs are, by definition, considered to be equitable relief and reflect a congressional intent to differentiate between cleanup or response costs under 42 U.S.C. sec. 9607(a)(4)(A) and damages for injury, destruction, or the loss of natural resources under 42 U.S.C. sec. 9607(a)(4)(C). Edgerton, 184 Wis. 2d at 784. This conclusion was then, and is now, disputed by other courts. [26] ś 53. In § 9607(a), CERCLA outlines four kinds of liability, one of which speaks of damages. However, while the four kinds of liability are not congruent, that does not mean they do not overlap, nor does it mean that a reasonable insured would expect coverage for one government response to environmental damage but not for another. In any event, Edgerton implies that any government involvement with the insured precludes coverage, whether the coverage is sought as damages under (A) or (C) of § 9607(a)(4). ś 54. In Shorewood, the court acknowledged that the school districts had cited many cases which have held that environmental cleanup costs under [CERCLA] constitute `damages' under the terms of insurance policies. Shorewood, 170 Wis. 2d at 372-73. It went on to say that courts around the country do not uniformly agree that clean-up costs under CERCLA constitute `damages' under the terms of insurance policies. Id. at 373. Then, significantly, the court said: The issue of whether clean-up costs constitute damages under the terms of an insurance contract has never been addressed by a Wisconsin court. Such an important issue should not be decided in a cursory fashion by this court. Therefore, we decline to adopt or apply the analogy posited by the school districts. Id. at 374 (emphasis added). Unfortunately, the Edgerton court treated CERCLA response costs as though the issue had been decided in Shorewood, when it had not. ś 55. There is a third deficiency in the Edgerton opinion. Shorewood quoted extensively from Professor Dan Dobbs, a noted authority on remedies. Shorewood, 170 Wis. 2d at 368-69. The quotations were taken from the 1973 edition of Dobbs' Handbook on the Law of Remedies. In the 1993 revision of his treatise, Professor Dobbs directly addresses the issue of response costs in environmental damages actions and concludes: Response costs recoverable [under CERCLA] are analogous to repair costs and consequential damages that a private landowner-plaintiff might recover in similar situations. . . . Such items [of response costs] are closely analogous to common law consequential damages. . . . Response costs are very high, but in spite of the terminology, they closely resemble familiar common law types of damages. Dan B. Dobbs, Law of Remedies § 5.2(5), at 727 (1993). ś 56. Professor Dobbs then made clear that there is no fundamental distinction between response costs (sought under 42 U.S.C. § 9607(a)(4)(A)-(B)) and natural resource damages (sought under § 9607(a)(4)(C)) as to their classification as damages. The normal terminology of the law would probably treat the recovery for natural resource damages and also the recovery of response costs as damages. Both compensate for loss incurred. It often happens, however, compensation and restitution turn out to yield the same dollar amount. That might be the case with response costs. . . . . . . [I]t is important to characterize a liability as restitutionary only if restitution differs in amount from damages or if there is no substantive basis for recovery as damages. Under [CERCLA], there is a substantive basis for recovery of response costs, which are not otherwise characterized by the statute. The amount to be recovered does not differ according to the characterization as restitution or damages. Attempts to characterize the recovery of response costs as either restitution or damages do not seem helpful. Usually the attempt is made only to determine whether an insurance policy covers liability for release of hazardous substance. It is doubtful that the term damages in an insurance policy carries with it any such inchoate set of distinctions and the question whether response costs are covered by the policy probably cannot turn on proposed definitions of those costs as restitution without distorting the remedial concepts involved. Id. at 729-30 (footnote omitted) (emphasis added). The explanation offered by Professor Dobbs severely weakens Edgerton 's basis for construing the as damages language as exempting CERCLA response costs based on their remedial nature. The dissent in Edgerton quoted from the 1993 treatise. Edgerton, 184 Wis. 2d at 792-93 (Abrahamson, J., dissenting). The majority opinion never rebutted the dissent's use of Dobbs or acknowledged that one of the main props of the Shorewood opinion had been removed. ś 57. There is a fourth problem with Edgerton, as was revealed in Hills. The court stated in Hills that, It has long been the law of this state that the cost of repairing and restoring damaged property and water to its original condition is a proper measure of compensatory damages. Hills, 209 Wis. 2d at 181 (emphasis added). The court cited a number of cases and authorities to support this proposition. [27] The Edgerton opinion simply did not address this body of law. ś 58. This brings us to Hills. In Hills, we concluded that, when a third party sues an insured for reimbursement of the third party's response costs under CERCLA and the insured then seeks liability insurance coverage, the insured is seeking coverage for legal damages to compensate the third party for past wrongs. Id. at 181. ś 59. Hills made a valiant attempt to coexist with Shorewood and Edgerton. It explained why principles of Wisconsin law on remedies afforded coverage to Hills. The court said that the third party seeking contribution from the insured was not seeking a remedy based on the insured's failure to take corrective action or failure to aid in the prospective remediation of the property. Rather, the fundamental remedy Arrowhead [third party] seeks from Hills [insured] is compensatory damages for the past injuries he allegedly inflicted on the Arrowhead site. Id. at 182 (emphasis added). In truth, this language simply relabeled the contribution to response costs as compensatory damages for past injuries. [11-13] ś 60. Although Hills purported to sustain the rule of Edgerton, it effectively obliterated its intellectual foundation. To find coverage under the same CGL policies that were at issue in Edgerton, Hills concluded that the nature of the relief sought in the cost recovery action was not merely equitable relief. [28] Furthermore, Hills, unlike Edgerton, faithfully applied long-standing principles of Wisconsin insurance contract law and factored into its calculus the reasonable expectations of an insured. It recognized that The CGL policy was designed to protect an insured against liability for negligent acts resulting in damage to third parties. Id. at 183-84 (quoting Arnold P. Anderson, Wisconsin Insurance Law § 5.14, at 136 (3d ed. 1990 & Supp. 1997)). [29] ś 61. The basic differences between the Edgerton facts and the Hills facts are as follows: (1) Edgerton owned the contaminated property, Hills did not; (2) Edgerton cleaned up the damaged property, Hills was asked to contribute to government cleanup costs; (3) Edgerton was contacted directly by government, Hills was not; (4) Hills was brought into a formal lawsuit, Edgerton was not. The principal distinction between the Hills category of cases and the court of appeals' fourth category is that there was contact between the government and the insured before the insured was sued by a third party. ś 62. This distinction is arbitrary. If we were to honor this distinction, coverage for CERCLA response cost liability would turn on the fortuity of whether the insured had ever been contacted in some manner by the government regarding the remediation of a site for which the insured was a potentially responsible party. In short, government contact would mean loss of coverage. ś 63. If we were to conclude that this distinction is indefensibly arbitrary and contrary to the expectation of a reasonable insured, we would realize that the principal distinction between the third category and the fourth category is that the government files suit for compensation instead of a private party. This again is fortuitous and not what a reasonable insured would expect. ś 64. It makes little sense in determining whether damages have occurred under the policy whether the party bringing a legal action for contribution to remediate damaged property is a governmental agency or some other entity. [30] Certainly this distinction was not bargained for, nor is it manifested anywhere in the CGL policies. The nature of the relief sought against an insured for damage that it caused should not change based on the identity of the claimant in a CERCLA cost recovery action. [31] ś 65. Perhaps the best example of the arbitrariness of these distinctions is illustrated by Hills. The defendants in the underlying action in Hills, who were sued by the EPA for declaratory relief and recovery of response costs, would be precluded from coverage under a standard CGL policy if they were governed by Edgerton. They would fall into the court of appeals' category three. Meanwhile, Hills and the hundreds of other potentially responsible parties (PRPs) who were impleaded by these original defendants would receive coverage, despite the fact that the third-party complaint against them sought contribution for the same CERCLA response costs. We do not believe it is rational or equitable that an insured's coverage should depend upon the assiduousness of the government in contracting the insured as a potentially responsible party. In a cost recovery action under CERCLA, the EPA is not required to sue all PRPs, nor is it required to locate or contact all PRPs at earlier stages in the remediation process. See William T. Stuart, Comment, City of Edgerton: Creating a Friendlier Forum for Insurance Companies, 80 Marq. L. Rev. 853, 873 (1997). [32] ś 66. The interplay between Hills and Edgerton has created an exceedingly tenuous situation. We have no doubt that the court of appeals, in creating categories three and four, was attempting quite admirably to reconcile the Hills and Edgerton holdings. [33] It did so by constructing a system that did not create perverse incentives for insureds to purposefully refuse to respond to a government remediation directive, allow the pollution to go unremediated, and wait to be sued before undertaking cleanup actions, so that coverage would result. But the court's four-category schema exposed how arbitrary the distinctions are. The only sensible conclusion is that CERCLA response costs for which a party becomes liable, in whatever from that liability is pursued, are damages for that party's liability for prior damage to property and must be indemnified. ś 67. An especially disconcerting result of the nearly decade-old Edgerton line of cases is that the categorization scheme for determining liability coverage is now well removed from the language of the insurance contract. [34] The source of this problem can be traced to Edgerton 's failure to comport with the broad language of Johnson Controls' CGL policy and with the reasonable expectations of the insured. ś 68. As stated in Hills, CGL polices are expected to cover liabilities incurred because of prior damage to property. Hills, 209 Wis. 2d at 183-84. We fail to see how the policy language signals clear limitations to the coverage afforded for these liabilities. As was well explained by the court of appeals in its decision in Edgerton: [O]nce property damage is found as a result of environmental contamination, cleanup costs should be recoverable as sums that the insured was liable to pay as the result of property damage. In this context the argument concerning the historical separation of damages and equity is not convincing . . . the insured ought to be able to rely on the common sense expectation that property damage within the meaning of the policy includes a claim which results in causing him to pay sums of money because his acts or omissions affected adversely third parties. While such claims might be characterized as seeking equitable relief the [cleanup] costs are essentially compensatory damages for injury to common property and for that reason the insured has a duty to defend. . . . [T]he short answer is that from the standpoint of the insured damages are being sought for injury to property. It is that contractual understanding rather than some artificial and highly technical meaning of damages which ought to control. City of Edgerton v. Gen. Cas. Co. of Wis., 172 Wis. 2d 518, 543, 493 N.W.2d 768 (Ct. App. 1992) (quoting Upjohn Co. v. Aetna Cas. & Sur. Co., 768 F. Supp 1186, 1199-1200 (W.D. Mich. 1990)). ś 69. By determining that CERCLA response costs are recoverable under these CGL policies, we are not rendering the as damages phrase a mere surplusage. Edgerton, 184 Wis. 2d at 784 (citing Shorewood, 170 Wis. 2d at 369-70). On the contrary, the language of these CGL policies still precludes coverage for costs that the insured would pay in order to comply with general government regulations or prospective conduct. See, e.g., A.Y. McDonald Indus., Inc. v. Ins. Co. of N. Am., 475 N.W.2d 607, 625-26 (Iowa 1991); Bausch & Lomb Inc. v. Utica Mut. Ins. Co., 625 A.2d 1021, 1033 (Md. 1993); Minnesota Mining, 457 N.W.2d 175, 180 n.4; see also Wis. Power & Light Co. v. Century Indem. Co., 130 F.3d 787, 791 (7th Cir. 1997) (A claim for damages must be distinguished from a demand for compliance with a legal duty.). ś 70. In deciding the Edgerton case, the court relied on two federal decisions to hold that CERCLA response costs are not damages under CGL policies. Edgerton, 184 Wis. 2d at 784 (citing Maryland Cas. Co. v. Armco, Inc., 822 F.2d 1348, 1352 (4th Cir. 1987) (applying Maryland law), cert. denied, 484 U.S. 1008 (1988), and Cont'l Ins. v. Northeastern Pharm. & Chem. Co., 842 F.2d 977 (8th Cir. 1988) ( NEPACCO ) (applying Missouri law), cert. denied sub nom. Missouri v. Cont'l Ins. Cos., 488 U.S. 821 (1988)). The Armco and NEPACCO decisions have since been rejected by the highest courts of the states whose laws the decisions were attempting to apply. See Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505, 512 (Mo. 1997); Bausch & Lomb Inc. v. Utica Mut. Ins. Co., 625 A.2d 1021 (Md. 1993). [35] This fact is not dispositive, but it erodes the credibility of the original Edgerton decision. ś 71. We conclude that the Edgerton decision was incorrect insofar as it relied on the too-confining, overly technical definition of damages in Shorewood and held that CERCLA response costs were not damages within the terms of the standard CGL policy.